Constitutional provisions that indirectly affect taxation

G.R. No. 118233 December 10, 1999

ANTONIO Z. REYES, ELISEO P. OCAMPO and EDITHA ARCIAGA-SANTOS, petitioners, vs. COURT OF APPEALS, HON.
SECRETARY OF JUSTICE FRANKLIN DRILON and MAYOR JINGGOY ESTRADA (JOSE EJERCITO) OF THE MUNICIPALITY OF
SAN JUAN, METRO MANILA, respondents

SUMMARY

Sangguniang Bayan of San Juan, Metro Manila issued several ordinances imposing taxes on certain businesses. The petitioners
assailed such ordinances contending that they were promulgated without public hearing thus depriving them due process of law.
Initially the complaint was filed with the DOJ but the same was dismissed for having been filed out of time.

SC ruled that, pursuant to the LGC, municipal tax ordinance empowers a local gov’t. unit to impose taxes. any delay in
implementing tax measures would be to the detriment of the public and it is for this reason that protests over tax ordinances are
required to be done within certain time frames

SC also held that public hearing is required prior the enactment of tax ordinance, but it is incumbent upon the petitioner to prove
that there was indeed no public hearing conducted, and in this case, the petitioner failed to prove that there was no public hearing
conducted.

NOTE: R.A. 7160 = Local Government Code.

FACTS

● The Sangguniang Bayan of San Juan, Metro Manila implemented several tax ordinances, as follows:
○ No. 87 = 50% of 1% of the gross receipt on business of printing and publication
○ No. 91 = 50% of 1% of the total consideration on the sale of real property
○ No. 95 = 50% of 1% for social housing tax
○ No. 100 = imposing new rates of business taxes
○ No. 101 = levying an annual "Ad Valorem" tax on real property and an additional tax accruing to the special education
fund

● May 21, 1993 = petitioners filed an appeal with the DOJ assailing the constitutionality of these tax ordinances allegedly
because they were promulgated without previous public hearings thereby constituting deprivation of property without
due process of law

● Secretary of Justice (Drilon) dismissed the appeal for having been filed out of time. ng Section 187, R.A. No. 7160.
○ More than 30days had passed since the effectivity of the ordinances.

● CA = affirmed Drilon’s decision. Hence, this petition.

ISSUE

WON the lack of mandatory public hearings prior to enacting Municipal Ordinance Nos. 87, 91, 95, 100 and 101 render them void
on the ground of deprivation of property without due process (YES, it is required, but it is incumbent upon the petitioner to
prove that there was indeed no public hearing conducted)

RULING

● In Figurres vs. Court of Appeals, it was ruled that:

○ public hearings are required to be conducted prior to the enactment of an ordinance imposing real property
taxes. R.A. No. 7160, Sec. 186, provides that an ordinance levying taxes, fees, or charges "shall not be enacted
without any prior public hearing conducted for the purpose.

○ HOWEVER, in this case, the petitioners failed to present evidence that no public hearings were conducted prior the
enactment of ordinances.
 ○ In presumption of validity in favor of an ordinance, their constitutionality or legality should be upheld in the
absence of evidences showing that procedure prescribed by law was not observed in their enactment

○ lack of a public hearings is a negative allegation essential to petitioner's cause of action. Hence, as petitioner is the
party asserting it, she has the burden of proof.

● (Application in this case) Petitioners have not proved in the case before us that the Sangguniang Bayan of San Juan
failed to conduct the required public hearings before the enactment of Ordinance Nos. 87, 91, 95, 100 and 101.

● Although the Sanggunian had the control of records or the better means of proof regarding the facts alleged, petitioner as not
relieved from the burden of proving their averments

● Proof that public hearings were not held falls on petitioner' shoulders. For failing to discharge that burden, their
petition was properly dismissed

● it is a general rule that the regularity of the enactment of an officially promulgated statute or ordinance may not be impeached
by parol evidence or oral testimony either of individual officers and members, or of strangers who may be interested in
nullifying legislative action

**Constitutionality of Section 187 of R.A. 7160 (LGC))**

● the constitutionality of an act of Congress will not be passed upon by the Court unless at the first opportunity that question is
properly raised and presented in an appropriate case, and is necessary to a determination of the case, particularly where the
issue of constitutionality is the very lis mota presented
● The constitutional validity of a statutory provision should not be entertained by the Court where it was not specifically raised
below, insisted upon, and adequately argued

● Moreover, we find no genuine necessity to dwell on the issue of constitutional invalidity of Section 187 in relation to issue of
valid enactment of the subject ordinances, as shown in the foregoing discussion

**Issue on the Prescription of appeal**

● Sec. 187 of R.A. 7160 requires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must file
his appeal to the Secretary of Justice, within 30 days from effectivity thereof
● In case the Secretary decides the appeals, a period also of 30 days is allowed for an aggrieved party to go to court. But if the
Secretary does not act thereon, after the lapse of 60 days, a party could already proceed to seek relief in court
● Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial
functions

● A municipal tax ordinance empowers a local government unit to impose taxes.

● The power to tax is the most effective instrument to raise needed revenues to finance and support the myriad
activities of local government units for the delivery of basic services essential to the promotion of the general welfare and
enhancement of peace, progress, and prosperity of the people

● Consequently, any delay in implementing tax measures would be to the detriment of the public.
● It is for this reason that protests over tax ordinances are required to be done within certain time frames .
● In the instant case, it is our view that the failure of petitioners to appeal to the Secretary of Justice within 30 days as required
by Sec. 187 of R.A. 7160 is fatal to their cause

● WHEREFORE, the present petition is DISMISSED for lack of merit and the assailed decision of the Court of Appeals is
AFFIRMED. No pronouncement as to costs. SO ORDERED.
Constitutional provisions that indirectly affect taxation
G.R. No. 131359 May 5, 1999
MANILA ELECTRIC COMPANY, petitioner, vs. PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial
Treasurer of Laguna, respondents

SUMMARY

Province of Laguna issued an ordinance imposing tax on businesses enjoying a franchise. MERALCO initially complied but later on
asked for a tax refund. When the latter’s claim was denied, it filed a complaint, alleging that it is already paying with the national
government, citing PD 551 and that the ordinance is violative of the non-impairment clause.

SC ruled that Local gov’t do not have inherent power to tax, but such power can be delegated to them. And upon the effectivity of
the LGC, the Local gov’ts were now empowered to impose tax. It also held that Tax Exemptions contained in special franchises are
far from being Contractual in Nature and is beyond the purview of the non-impairment clause.

FACTS

● Certain municipalities of the Province of Laguna, including, Biñan, Sta. Rosa, San Pedro, Luisiana, Calauan and Cabuyao,
issued resolutions granting franchise in favor of MERALCO for the supply of electric light, heat and power within their
concerned areas

● Jan 19, 1983 = National Electrification Administration likewise granted a franchise to MERALCO

● Sept 12, 1991 = R.A. 7160 or the Local Gov’t. Code was enacted to take effect on 01 January 1992 enjoining local
government units to create their own sources of revenue and to levy taxes, fees and charges, subject to the limitations
expressed therein, consistent with the basic policy of local autonomy.

● Pursuant to the LGC, province of Laguna enacted Provincial Ordinance No. 01-92
○ tax on businesses enjoying a franchise, at a rate of 50% of 1% of the gross annual receipts

● On the basis of the ordinance, the Provincial Treasurer sent a demand letter to MERALCO for the corresponding tax payment

● MERALCO paid the tax (P19,520.628.42). But a claim for refund was thereafter sent by MERALCO claiming that the franchise
tax it had paid and continued to pay to the National Government pursuant to P.D. 551 already included the franchise tax
imposed by the Provincial Tax Ordinance
○ Later on, it further alleged that the ordinance was violative of the non-impairment clause of the constitution

● The Claim for refund was denied, thus, MERALCO filed with the RTC a complaint for refund

● RTC = dismissed the complaint

ISSUES

● WON Local Gov’ts have inherent power to tax (NO, but such power can be delegated to them)
● WON the LGC amended the PD 551 (YES, the LGC effectively withdrawn tax exemptions or incentives enjoyed by
certain entities)
● WON the imposition of a franchise tax under Provincial Ordinance No. 01-92, is violative of the non-impairment clause (NO,
Tax Exemptions contained in special franchises are far from being Contractual in Nature)

RULING

**Constitutional Provisions**

● local governments do not have the inherent power to tax except to the extent that such power might be delegated to them
either by the basic law or by statute
 ● Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local
government units

○ Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and
accountable local government structure instituted through a system of decentralization with effective mechanisms
of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities,
and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and
functions, and duties of local officials, and all other matters relating to the organization and operation of the local units

○ Sec. 5. Each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments

● The 1987 Constitution has a counterpart provision in the 1973 Constitution

● Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and local government units instead
derived their tax powers under a limited statutory authority

● Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist although Congress may provide statutory limitations and guidelines
● The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly
granting them general and broad tax powers

● Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional
● the legislature must still see to it that
○ (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions
○ (b) each local government unit will have its fair share of available resources
○ (c) the resources of the national government will not be unduly disturbed; and
○ (d) local taxation will be fair, uniform, and just

**Local Government Code**

● The LGC has incorporated and adopted, by and large, the provisions of the now repealed Local Tax Code
● The 1991 Code explicitly authorizes provincial governments, notwithstanding " any exemption granted by any law or
other special law, . . . (to) impose a tax on businesses enjoying a franchise. (SECTION 137)

● Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers to local government
units, the Local Government Code has effectively withdrawn under Section 193 thereof, tax exemptions or incentives
theretofore enjoyed by certain entities
○ Sec. 193. Withdrawal of Tax Exemption Privileges

● The Code, in addition, contains a general repealing clause in its Section 534
○ Sec. 534. Repealing Clause. —
○ (f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed
or modified accordingly

● upon the effectivity of the Local Government Code all exemptions except only as provided therein can no longer be
invoked by MERALCO to disclaim liability for the local tax

**Tax Exemptions far from being Contractual in Nature**

● While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of
contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being
strictly contractual in nature
● Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly
be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its
 cloak of authority and waives its governmental immunity

● These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A
franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the
Constitution

● WHEREFORE, the instant petition is hereby DISMISSED. No costs. SO ORDERED.

Tax as distinguished from other forms of exactions
2. Toll

Diaz v. Secretary of Finance and CIR, G.R. No. 193007, July 19, 2011

FACTS:
● Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief1 assailing the validity
of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway
operators.
● Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of tollways in
stopping the BIR action.
● Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of
"sale of services" that are subject to VAT; that a toll fee is a "user’s tax," not a sale of services; that to impose VAT on
toll fees would amount to a tax on public service
● Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is tantamount to taxing a tax.21 Actually,
petitioners base this argument on the following discussion in Manila International Airport Authority (MIAA) v. Court of Appeals
● The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations,
except where the law provides otherwise; that the Court should seek the meaning and intent of the law from the words used in
the statute

ISSUE: Whether or not toll fees are taxes? (NO)

HELD:
● Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must also pertain to tollway fees.
But the main issue in the MIAA case was whether or not Parañaque City could sell airport lands and buildings under MIAA
administration at public auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the national
government, the Court held that the City could not proceed with the auction sale.
● the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that tollway fees are user’s tax,
but to make the point that airport lands and buildings are properties of public dominion and that the collection of terminal fees
for their use does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected
by the BIR and do not go to the general coffers of the government.
● It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from motorists, for the
construction and maintenance of certain roadways. The tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is not the case here. What the government seeks to tax here are
fees collected from tollways that are constructed, maintained, and operated by private tollway operators at their own expense
under the build, operate, and transfer scheme that the government has adopted for expressways.Except for a fraction given to
the government, the toll fees essentially end up as earnings of the tollway operators.
● In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under
the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on
the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although
toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated
as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either
the government or private individuals or entities, as an attribute of ownership
● Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In
indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the
VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is
transferred is not the seller’s liability but merely the burden of the VAT.
● Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105
of the Code, VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In
other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts
the burden of VAT to the tollway user as part of the toll fees.
● VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a "user’s tax." VAT is assessed against the
tollway operator’s gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden
to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the tollways

VILLANUEVA VS. CITY OF ILOILO

FACTS:

PREVIOUS CASE: City of Iloilo vs. Remedios Sian Villanueva and Eusebio Villanueva, L-12695, March 23, 1959,

On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as follows: (1)
tenement house P25.00 annually; (2) tenement house, partly or wholly engaged in or dedicated to business P24.00 per apartment; (3)
tenement house, partly or wholly engaged in business in any other streets, P12.00 per apartment. The validity and constitutionality
of this ordinance were challenged by the spouses Eusebio Villanueva and Remedios Sian Villanueva, owners of four tenement
houses containing 34 apartments.

SC: declared the ordinance ultra vires, "it not appearing that the power to tax owners of tenement houses is one among those clearly
and expressly granted to the City of Iloilo by its Charter."

PRESENT CASE:

RA 2246 otherwise known as the Local Autonomy Act was passed, pertinent provisions:

"SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and municipal dis-tricts shall
have authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising
privileges in chartered cities, municipalites or municipal districts by requiring them to secure licenses at rates fixed by the municipal
board or city council of the city, . . . to regulate and impose reasonable fees for services rendered in connection with any
business, profession or occupation being conducted within the city, municipality or municipal district and otherwise to levy for
public purposes, just and uniform taxes, licenses or fees;

On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of Republic Act 2264, ( Local
Autonomy Act) it had acquired the authority or power to enact an ordinance similar to that previously declared by this Court as
ultra vires, enacted Ordinance 11 series of 1960 :

"AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE BUSINESS OF OPERATING
TENEMENT HOUSES

"Section 1.—A municipal license tax is hereby imposed on tenement houses in accordance with the schedule of payment herein
provided.

"Section 2.—Tenement house as contemplated in this ordinance shall mean any building or dwelling for renting space divided into
separate apartments' or accessorias.

"Section 5.—Any person found violating this ordinance shall be punished with a fine not exceeding Two Hundred Pesos (P200.00) or
an imprisonment of not more than six (6) months or both at the discretion of the Court. (OMISSIONS SUPPLIED)

In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five tenement houses,aggregately
containing 43 apartments, while the other appellees and the same Remedios S. Villanueva are ownersof ten apartments. Each of
the appellees' apartments hasa door leading to a street and is rented by either a Filipinoor Chinese merchant. The first floor is utilized
as a store,while the second floor is used as a dwelling of the ownerof the store.

By virtue of the ordinance , the appellant City collected from spouses Eusebio Villanueva and Remedios S. Villanueva, for the
years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva,
for the years 1960- 1964, the sum of P1,317.00. Eusebio Villanueva has likewise been paying real estate taxes on his property.

On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended complaint, respectively, against the
City of Iloilo, praying that Ordinance 11, be declared "invalid for being beyond the powers of the Municipal Council of the City
of Iloilo to enact, and unconstitutional for being violative of the rule as to uniformity of taxation and for depriving said
plaintiffs of the equal protection clause of the Constitution," and that the City be ordered to refund the amounts collected from
them under the said ordinance.

CFI: declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License Tax On Persons Engaged In
The Business Of Operating Tenement Houses," and ordering the City to refund to the plaintiffs-appellees the sums of money collected
from them under the said ordinance. On the grounds that (a) "Republic Act 2264 does not empower cities to impose apartment taxes,"
(b) the same is "oppressive and unreasonable," for the reason that it penalizes owners of tenement houses who fail to pay the tax, (c) it
constitutes "not only double taxation, but treble at that," and (d) it violates the rule of uniformity of taxation.

ISSUES: WON ORDINANCE 11 IS VALID?

RULING: YES.

RA 2264 confer on local governments broad taxing authority which extends to almost "everything, excepting those which are mentioned
therein," provided that the tax so levied is "for public purposes, just and uniform," and does not transgress any constitutional provision
or is not repugnant to a controlling statute.

Thus, when a tax, levied under the authority of a city or municipal ordinance, is not within the exceptions and limitations the same
comes within the ambit of the general rule, pursuant to the rules of expressio unius est exclusio alterius, and exceptio firmat regulum in
casibus non excepti.
True nature of the tax:

The appellees strongly maintain that it is a "property tax" or "real estate tax," and not a "tax on persons engaged in any
occupation or business or exercising privileges," or a license tax, or a privilege tax, or an excise tax. section 1 thereof states that a
"municipal license tax is hereby imposed on tenement houses." It is the phraseology of section 1 on which the appellees base their
contention that the tax involved is a real estate tax which, according to them, makes the ordinance ultra vires as it imposes a levy
"in excess of the one per centum real estate tax allowable under Sec. 38 of the Iloilo City Charter, Com. Act 158."

The tax in question is not a real estate tax.

A real estate tax is a direct tax on the ownership of lands and buildings or other improvements thereon, and is payable regardless of
whether the property is used or not. The tax is usually single or indivisible, although the land and building or improvements erected
thereon are assessed separately, except when the land and building or improvements belong the separate owners. It is a fixed
proportion

the property taxed, and requires, intervention of assessors. It is collected or payable at appointed times, a superior lien on and is enf
orceable against the property.

The tax imposed by the ordinance is not a tax on the land on which the tenement houses are erected, although both land and tenement
houses may belong to the same owner. The tax is not a fixed proportion of the assessed value of the tenement houses, and does not
require the intervention of assessors or appraisers. It is not payable at a designated time or date, and is not enf orceable against the
tenement houses either by sale or distraint. Clearly, therefore, the tax in question is not a real estate tax.

it is plain from the context of the ordinance that the intention is to impose a license tax on the operation of tenement houses, which is a
form of business or calling. The ordinance, in both its title and body, particularly sections 1 and 3 thereof, designates the tax imposed
as a "municipal license tax" which, by itself, means an "imposition or exaction on thee right to use or dispose of property, to pursue a
business, occupation, or calling, or to exercise a privilege."

The subject-matter of the ordinance is tenement houses whose nature and essence are expressly set f orth in section 2 which
defines a tenement house as "any building or dwelling for renting space divided into separate apartments or accessorias."

In City of Iloilo v. Villanueva, et al., L-12695, March 23, 1959, the Supreme Court adopted the definition of a "tenement house" as "any
house or building, or portion thereof, which is rented, leased, or hired out to be occupied, or is occupied, as the home or residence of
three families or more living independently of each other and doing their cooking in the premises, or by more than two families upon
any floor, so living and cooking, but having a common right in the halls, stairways, yards, water-closets, or privies, or some of them."
Tenement houses, being necessarily offered for rent or lease by their very nature and essence, therefore constitute a distinct form
of business or calling, similar to the hotel or motel business, or the operation of lodging houses or boarding houses. Tenement
houses constitute a distinct class of property.

This is why in the previous case, it was declared by SC that ordinance 86 ultra vires, because, although the municipal board of Iloilo
City is empowered, under sec. 21, par. j, of its Charter, "to tax, fix the license fee for, and regulate hotels, restaurants, refreshment
parlors, cafes, lodging houses, boarding houses, livery garages, public warehouses, pawnshops, theaters, cinematographs," tenement
houses, which constitute a different business enterprise,19 are not mentioned in the aforestated section of the City Charter of
Iloilo.

In the present case, the imposition by the ordinance of a license tax on persons engaged in the business of operating
tenement houses finds authority in section 2 of the Local Autonomy Act which provides that chartered cities have the authority to
imposed municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges within their
respective territories, and "otherwise to levy for public purposes, just and uniform taxes, licenses, or fees."
G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents.

Facts:

· On August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities, amounting to P123,821.982.52 for
the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992.

· Philex protested the demand for payment stating that it has pending claims for VAT input credit/refund for the taxes it
paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Hence, these claims for tax credit/refund
should be applied against the tax liabilities

· However, BIR found no merit in the position of Philex, since the said claims were not yet determined with certainty.
Therefore, no legal compensation can take place.

· Philex raised the issue to the CA.

· Offsetting was made, as to the Tax credit issued by the BIR amounting to P13,144,313.88 effectively lowered the latter's
tax obligation to P110,677,688.52.

The Court of Tax Appeals:

Ordered Philex to pay the remaining balance of P110,677,688.52 stating the reason that for legal compensation to take place,
both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been
determined. In the instant case, the claims of the Petitioner for VAT refund are still pending litigation, and still has to be
determined by this Court

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is
not a debt or contract."

CA: Affirmed the Decision of the CTA

A few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund for taxable
year 1989 to 1991 but also for 1992 and 1994.

Philex’s Contention:

The grant of its VAT input credit/refund should, ipso jure, off-set its excise tax liabilities since both had already become "due
and demandable, as well as fully liquidated;" hence, legal compensation can properly take place.

Issue:

WON Legal Compensation can properly take place- NO

Ruling:

The Court see no merit in this contention

In several instances prior to the instant case, the court have already made the pronouncement that 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. The court find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, the court held that taxes cannot be subject to set-
off or compensation.

We have consistently ruled that 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.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, which
reiterated that:

. . . 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.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of
Appeals dated April 8, 1996 is hereby AFFIRMED.

Kinds of Taxes

G.R. No. 167679 July 22, 2015

ING BANK N.V., engaged in banking operations in the Philippines as ING BANK N.V. MANILA BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

NOTE: Full text is 14 pages long.

FACTS:
● Petitioner ING Bank is the duly authorized Philippine branch of Internationale Nederlanden Bank, a foreign corporation
incorporated in the Netherlands.
● In Jan. 2000, Petitioner received a FAN dated Dec. 13, 1999.
● The FAN covered several tax deficiencies of the Petitioner for the years 1996 and 1997.
● These deficiencies were Deficiency Income Tax, Deficiency Withholding Tax on Compensation, Deficiency Onshore Tax,
Deficiency Branch Profit Remittance Tax, Deficiency DST, Compromise Penalties, and Deficiency Final Tax.
● Petitioner paid the Compromise Penalty for 1996, Deficiency DST for 1997, and the Deficiency Final Tax for 1997.
● However, Petitioner protested the remaining tax deficiencies amounting to Php 672M.
● Petitioner thereafter filed a Petition for Review before the CTA, seeking the cancellation of the deficiency tax assessments for
1996 and 1997.
● CTA - cancelled and withdrew the 1996 and 1997 Deficiency Income Tax, and 1996 and 1997 Deficiency Branch Profit
Remittance Tax. However, it upheld the 1996 and 1997 Deficiency Withholding Tax on Compensation, 1996 Deficiency
Onshore Tax, and 1996 and 1997 Deficiency DST on special savings accounts. These amounted to Php 240M.
● CTA - Dismissed Petitioner’s appeal for lack of merit. Decision was promulgated April 5, 2005. Petitioner thereafter filed its
Petition for Review before the SC.
● Petitioner filed a Manifestation informing the Court that it availed of the tax amnesty authorized and granted under RA 9480
which covered all national internal revenue taxes for the taxable year 2005 and prior years.
● Petitioner further stated that it filed before the BIR its Notice of Availment of Tax Amnesty under RA 9480, along with its (a)
SALN as of Dec. 2005; (b) Tax Amnesty Returns for the taxable year 2005 and prior years (BIR Form 2116); and (c) Tax
Amnesty Payment form for the taxable year 2005 and prior years (BIR Form 0617), showing payment of the amnesty tax
amounting to Php 500k.
● Petitioner prayed that the Court take note of the availment of the tax amnesty and confirm its entitlement to the immunities and
privileges under RA 9480.

On tax amnesty availment

● Petitioner’s contention: it is qualified to avail of the tax amnesty under Section 5 of R.A. No. 9480 and not disqualified under
Section 8 of the same act
● Respondent’s contention:
○ Petitioner is not qualified because both the CTA En Banc and 2nd Division confirmed the liability of petitioner for
deficiency documentary stamp taxes, onshore taxes, and withholding taxes
○ BIR RMC No. 19-2008 specifically excludes from the coverage of tax amnesty under RA 9480 the cases ruled by any
court, even without finality, in favor of the BIR prior to amnesty availment of the taxpayer
○ Petitioner cannot presume that its application will be granted. CIR is of the position that Petitioner’s application for tax
amnesty is still subject to its evaluation and that the CIR is empowered to exercise its sound discretion over the
implementation of the tax amnesty.
● Petitioner’s contention:
○ RA 9480 and its IRR only excludes “tax cases subject of final and executory judgment by the courts.”
○ there is nothing in RA 9480 that gives CIR the discretion to rescind or erase the legal effects of its availment of tax
amnesty.

On withholding tax on compensation

● Petitioner’s contention:
○ The portion of the disallowed bonuses for the respective years 1996 and 1997, were actually payments for
reimbursements of representation, travel and entertainment expenses of its officers. These expenses according to
the petitioner are not considered compensation of employees and likewise not subject to withholding tax.
○ The bonus accruals in 1996 and 1997 were not yet subject to withholding tax because these bonuses were actually
distributed only in the succeeding years of their accrual (i.e., in 1997 and 1998) when the amounts were finally
determined.
● Respondent’s contention: petitioner’s act of claiming the subject bonuses as deductible expenses in its taxable income
although it has not yet withheld and remitted the corresponding withholding tax to the BIR contravened Section 29(j) of the
1997 NIRC, as amended; that "subject bonuses should also be disallowed as deductible expenses of petitioner."

NOTE: No mention of ‘kinds of taxes’, even though this case was listed down under said topic. Instead, I identified all issues raised in
the case.

ISSUE/S:
(1) WON petitioner ING Bank may validly avail itself of the tax amnesty granted by R.A. No. 9480 [YES]
 (2) WON petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses for the taxable years 1996 and 1997
[YES]

RULING: Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty program under R.A. No. 9480,
otherwise known as the 2007 Tax Amnesty Act. Thus, the provision in BIR Revenue Memo. Circ. No. 19-2008 excepting "issues and
cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" from the
benefits of the law is illegal, invalid, and null and void. The duty to withhold the tax on compensation arises upon its accrual.

(1) Both R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring that "tax cases subject of final and executory
judgment by the courts" are the ones excepted from the benefits of the law.

In fact, we have already pointed out the erroneous interpretation of the law in PH Banking Corp. v. CIR, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in favor of the BIR prior
to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically
clear that the exceptions to the tax amnesty program include "tax cases subject of final and executory judgment by
the courts." The present case has not become final and executory when Metrobank availed of the tax amnesty
program.

Moreover, in the fairly recent case of LG Electronics PH v. CIR, we confirmed that only cases that involve final and executory
judgments are excluded from the tax amnesty program as explicitly provided under Section 8 of R.A. No. 9480. Thus,
petitioner ING Bank is not disqualified from availing itself of the tax amnesty under the law during the pendency of its appeal
before this court.

(2) The documentary stamp tax and onshore income tax are covered by the tax amnesty program under R.A. No. 9480 and its
IRR. Moreover, as to the deficiency tax on onshore interest income, it is worthy to state that petitioner ING Bank was
assessed by respondent CIR, not as a withholding agent, but as one that was directly liable for the tax on onshore interest
income and failed to pay the same.

In order to prove that the discrepancy in the accrued bonuses represents reimbursement of expenses, petitioner availed of the
services of an independent CPA pursuant to CTA Circular No. 1-95, as amended. As a consequence, Mr. Ruben Rubio was
commissioned by the court to verify the accuracy of petitioner’s position and to check its supporting documents. An expense,
whether the same is paid or payable, "shall be allowed as a deduction only if it is shown that the tax required to be deducted
and withheld therefrom was paid to the BIR.

Under the NIRC, every form of compensation for personal services is subject to income tax and, consequently, to withholding
tax. The term "compensation" means all remunerations paid for services performed by an employee for his or her employer,
whether paid in cash or in kind, unless specifically excluded under Sections 32(B) and 78(A) of the 1997 NIRC. The name
designated to the remuneration for services is immaterial. Thus, "salaries, wages, emoluments and honoraria, bonuses,
allowances (such as transportation, representation, entertainment, and the like), [taxable] fringe benefits[,] pensions and
retirement pay, and other income of a similar nature constitute compensation income" that is taxable. Hence, petitioner ING
Bank is liable for the withholding tax on the bonuses since it claimed the same as expenses in the year they were accrued.

The tax on compensation income is withheld at source under the creditable withholding tax system wherein the tax withheld is
intended to equal or at least approximate the tax due of the payee on the said income. It was designed to enable (a) the
individual taxpayer to meet his or her income tax liability on compensation earned; and (b) the government to collect at source
the appropriate taxes on compensation. Taxes withheld are creditable in nature. Thus, the employee is still required to file an
income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income. For
over withholding, the employee is refunded. Therefore, absolute or exact accuracy in the determination of the amount of the
compensation income is not a prerequisite for the employer’s withholding obligation to arise.

It is true that the law and implementing regulations require the employer to deduct and pay the income tax on compensation
paid to its employees, either actually or constructively. The amount of any tax withheld/collected by the employer is a special
fund in trust for the Government of the Philippines. When the employer or other person required to deduct and withhold the tax
under this Chapter XI, Title II of the Tax Code has withheld and paid such tax to the Commissioner of Internal Revenue or to
any authorized collecting officer, then such employer or person shall be relieved of any liability to any person. (Emphasis
supplied)

Constructive payment of compensation is further defined in Sec. 25 of the Revenue Regulations No. 6-82:
 Compensation is constructively paid within the meaning of these regulations when it is credited to the account of or
set apart for an employee so that it may be drawn upon by him at any time although not then actually reduced to
possession. To constitute payment in such a case, the compensation must be credited or set apart for the employee
without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment
is to be made, and must be made available to him so that it may be drawn upon at any time, and its payment brought
within his control and disposition. (Emphasis supplied)

On the other hand, it is also true that under Section 45 of the 1997 NIRC, deductions from gross income are taken for the
taxable year in which "paid or accrued" or "paid or incurred" is dependent upon the method of accounting income and
expenses adopted by the taxpayer.

In CIR v. Isabela Cultural Corp., this court explained the accrual method of accounting, as against the cash method:
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses
not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so cannot deduct the same for the next year.

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to
actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.

For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such
a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted
when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy.1âwphi1 However, the test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy. "Accordingly, the term "reasonable accuracy" implies something less than anex act or
completely accurate amount.95 (Emphasis supplied, citations omitted)

Thus, if the taxpayer is on cash basis, the expense is deductible in the year it was paid, regardless of the year it was
incurred. If he is on the accrual method, he can deduct the expense upon accrual thereof. An item that is reasonably
ascertained as to amount and acknowledged to be due has "accrued"; actual payment is not essential to constitute "expense."

Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is already fixed; (2)
the amount can be determined with reasonable accuracy; and (3) it is already knowable or the taxpayer can reasonably be
expected to have known at the closing of its books for the taxable year.

The provision of Section 72 of the 1977 NIRC (Section 79 of the 1997 NIRC) regarding withholding on wages must be read
and construed in harmony with Section 29(j) of the 1977 NIRC (Section 34(K) of the 1997 NIRC) on deductions from gross
income. Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and withhold the
related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor’s/employer’s
books, whichever comes first.

Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its obligation to withhold
the related withholding tax due from the deductions for accrued bonuses arose at the time of accrual and not at the time of
actual payment.
Construction and Interpretation of Tax Laws

[G.R. No. L-9408. October 31, 1956.]

EMILIO Y. HILADO, Petitioner, v. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,
Respondents.

Emilio Y. Hilado in his own behalf.

Solicitor General Ambrosio Padilla, Assistant Solicitor General Ramon Avanceña and Solicitor Jose P. Alejandrofor
Respondents.

FACTS:

- On March 31, 1952, EMILIO Y. HILADO filed his income tax return for 1951 with the treasurer of Bacolod City wherein he
claimed, among other things, the amount of P12,837.65 as a deductible item from his gross income pursuant to General Circular No. V-
123 issued by the Collector of Internal Revenue.

- EMILIO Y. HILADO claimed in his 1951 income tax return the deduction as a loss consisting in a portion of his war damage
claim which had been duly approved by the Philippine War Damage Commission under the Philippine Rehabilitation Act of 1946 but
which was not paid and never has been paid pursuant to a notice served upon him by said Commission that said part of his claim will
not be paid until the United States Congress should make further appropriation. He claims that said amount of P12,837.65
represents a "business asset" within the meaning of said Act which he is entitled to deduct as a loss in his return for 1951.

- The Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which not only revoked
and declared void his general Circular No. V- 123 but laid down the rule that losses of property which occurred during the period
of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of
actual loss or destruction of said property.

- As a consequence, the amount of P12,837.65 was disallowed as a deduction from the gross income of petitioner for 1951.

- When the petition for reconsideration filed by petitioner was denied, he filed a petition for review with the Court of Tax Appeals
and eventually the supreme court which were both denied. EMILIO Y. HILADO now filed an appeal to that SC decision.

- In the previous ruling of the SC, the court stated that under the authority of section 338 of the National Internal Revenue Code
the Secretary of Finance, in the exercise of his administrative powers, caused the issuance of General Circular No. V-123 as an
implementation or interpretative regulation of section 30 of the same Code, under which the amount of P12,837.65 was allowed to be
deducted but such circular was found later to be wrong and was revoked by General Circular No. V-139. in line with this opinion
sought by the Secretary of Finance from the Secretary of Justice.
- It cannot be denied, that the Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or previous
rulings of his predecessor in office because the construction of a statute by those administering it is not binding on their successors if
thereafter the latter become satisfied that a different construction should be given.

ISSUE:

EMILIO Y. HILADO contends that General Circular No. V-139 cannot be given retroactive effect because that would affect and
obliterate the vested right acquired by petitioner under the previous circular.

RULING:

- The contention is untenable.

- A vested right cannot spring from a wrong interpretation.

- The court cited Ben Stocker, et al., 12 B. T. A., 1351.

"It seems too clear for serious argument that an administrative officer can not change a law enacted by Congress. A
regulation that is merely an interpretation of the statute when once determined to have been erroneous becomes
nullity. An erroneous construction of the law by the Treasury Department or the collector of internal revenue does not
preclude or estop the government from collecting a tax which is legally due.”

- Also under Article 2254, New Civil Code:

“No vested or acquired right can arise from acts or omissions which are against the law or which infringe upon the
rights of others."

Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.

Tax Exemptions and Exclusions

G.R. No. 166408 October 6, 2008

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners,

vs.

ABS-CBN BROADCASTING CORPORATION, respondent.

FACTS:

- City Government of Quezon City is primarily responsible for the imposition and collection of taxes within the territorial jurisdiction
of Quezon City. ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines
under R.A. No. 7966.

- ABS-CBN had been paying local franchise tax imposed by Quezon City.

- Under R.A. No. 7966, ABS-CBN shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the
radio/television business transacted under this franchise by the grantee, its successors or assigns, and the said percentage tax shall be
in lieu of all taxes on this franchise or earnings thereof.

- ABS-CBN now developed the opinion that it is not liable to pay the local franchise tax imposed by Quezon City.

- ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City.

- Failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City
seeking the declaration of nullity of the imposition of local franchise tax by the City Government of Quezon City for being
unconstitutional. It likewise prayed for the refund of local franchise tax

- Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been intended to prevail over
a constitutional mandate which ensures the viability and self-sufficiency of local government units. Further, that taxes
collectible by and payable to the local government were distinct from taxes collectible by and payable to the national
government, considering that the Constitution specifically declared that the taxes imposed by local government units "shall accrue
exclusively to the local governments."

- The City contended that the exemption claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress when the Local
Government Code (LGC) was passed.

- RTC rendered judgment declaring as invalid the imposition on and collection from ABS-CBN of local franchise tax paid and
ordered the refund of all payments made.

- The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied by the RTC. Thus,
appeal was made to the CA. CA dismissed the petition of Quezon City and its Treasurer. According to the appellate court, the
issues raised were purely legal questions cognizable only by the Supreme Court.

ISSUE:

- Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the respondent appellee (Section 8 of RA 7966)
serves to exempt it from the payment of the local franchise tax imposed by the petitioners-appellants

RULING:

- The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment of local franchise tax.

- Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of
Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any
exemption granted by any law or other special law, the City may impose a franchise tax. It must be noted that Section 137 of the LGC
does not prohibit grant of future exemptions.

- The case of City Government of Quezon City v. Bayan Telecommunications, Inc. sustained the power of Congress to grant
tax exemptions over and above the power of the local government's delegated power to tax.

- The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains the "in lieu of all taxes"
provision, Congress intended to exempt ABS-CBN from local franchise tax.

- Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax
exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.
- A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated,
taxation is the rule, exemption is the exception. 26 The burden of proof rests upon the party claiming the exemption to prove that it is
in fact covered by the exemption so claimed.

- The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of taxes ABS-
CBN is exempted from.

- It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. What is
clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But
whether the "in lieu of all taxes provision" would include exemption from local tax is not unequivocal.

- As adverted to earlier, the right to exemption from local franchise tax must be clearly established and cannot be made out of
inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision
should be construed against ABS-CBN.

- ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN miserably failed in this
regard.

- ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,30 Manila Railroad v. Rafferty,31 Philippine
Railway Co. v. Collector of Internal Revenue,32 and Visayan Electric Co. v. David33 to support its claim that that the "in lieu of all taxes"
clause includes exemption from all taxes.

- However, In the case under review, ABS-CBN's franchise did not embody an exemption similar to those in Carcar,
Manila Railroad, Philippine Railway, and Visayan Electric.

- The franchise failed to specify the taxing authority from whose jurisdiction the taxing power is withheld, whether municipal,
provincial, or national. In fine, since ABS-CBN failed to justify its claim for exemption from local franchise tax, by a grant expressed in
terms "too plain to be mistaken" its claim for exemption for local franchise tax must fail.
Construction and Interpretation of..

Tax Exemptions and Exclusions

Soriano v. Secretary of Finance, G.R. No. 184450, 2017

FACTS:

● On 17 June 2008, R.A. 9504 entitled “An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as
Amended, Otherwise Known as the National Internal Revenue Code of 1997,” was approved and signed into law by President
Arroyo.
● On 24 September 2008, the Bureau of Internal Revenue (BIR) issued RR 10-2008, dated 08 July 2008, implementing the
provisions of R.A. 9504.
● Petitioners assail the subject RR as an unauthorized departure from the legislative intent of R.A. 9504. The regulation
allegedly restricts the implementation of the minimum wage earners’ (MWE) income tax exemption only to the period starting
from 6 July 2008, instead of applying the exemption to the entire year 2008.
● They further challenge the BIR’s adoption of the prorated application of the new set of personal and additional exemptions for
taxable year 2008.
● They also contest the validity of the RR’s alleged imposition of a condition for the availment by MWEs of the exemption
provided by R.A. 9504. Supposedly, in the event they receive other benefits in excess of P30,000, they can no longer avail
themselves of that exemption.
● Petitioners contend that the law provides for the unconditional exemption of MWEs from income tax and, thus, pray that the
RR be nullified.

ISSUE:

whether the increased personal and additional exemptions provided by R.A. 9504 should be applied to the entire taxable year 2008 or
prorated, considering that R.A. 9504 took effect only on 6 July 2008. (APPLIED SA ENTIRE YEAR 2008)

whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only. (exempt for the entire 2008)

HELD:

First Issue

● In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to afford immediate tax relief to
individual taxpayers, particularly low-income compensation earners. Indeed, if R.A. 9504 was to take effect beginning taxable
year 2009 or half of the year 2008 only, then the intent of Congress to address the increase in the cost of living in 2008 would
have been negated.
● Therefore, following Umali, the test is whether the new set of personal and additional exemptions was available at the time of
the filing of the income tax return. In other words, while the status of the individual taxpayers is determined at the close of the
taxable year, their personal and additional exemptions - and consequently the computation of their taxable income - are
reckoned when the tax becomes due, and not while the income is being earned or received.

2nd Issue

● Umali v. Estanislao20 supports this Court's stance that R.A. 9504 should be applied on a full-year basis for the entire taxable
year 2008.21 In Umali, Congress enacted R.A. 7167 amending the 1977 National Internal Revenue Code (NIRC). The
amounts of basic personal and additional exemptions given to individual income taxpayers were adjusted to the poverty
threshold level. R.A. 7167 came into law on 30 January 1992. Controversy arose when the Commission of Internal Revenue
(CIR) promulgated RR 1-92 stating that the regulation shall take effect on compensation income earned beginning 1 January
1992. The issue posed was whether the increased personal and additional exemptions could be applied to compensation
income earned or received during calendar year 1991, given that R.A. 7167 came into law only on 30 January 1992, when
taxable year 1991 had already closed.
● This Court ruled in the affirmative, considering that the increased exemptions were already available on or before 15 April
1992, the date for the filing of individual income tax returns. Further, the law itself provided that the new set of personal and
additional exemptions would be immediately available upon its effectivity. While R.A. 7167 had not yet become effective during
calendar year 1991, the Court found that it was a piece of social legislation that was in part intended to alleviate the economic
 plight of the lower-income taxpayers. For that purpose, the new law provided for adjustments "to the poverty threshold level"
prevailing at the time of the enactment of the law.
● The MWE is exempt for the entire taxable year 2008. Clearly, Senator Escudero's assertion is that the legislative intent is to
make the MWE's tax exemption and the increased basic personal and additional exemptions available for the entire year
2008.
● Additionally, on the question of whether one who ceases to be an MWE may still be entitled to the personal and additional
exemptions, the answer must necessarily be yes. The MWE exemption is separate and distinct from the personal and
additional exemptions. One's status as an MWE does not preclude enjoyment of the personal and additional exemptions.
Thus, when one is an MWE during a part of the year and later earns higher than the minimum wage and becomes a non-
MWE, only earnings for that period when one is a non-MWE is subject to tax. It also necessarily follows that such an employee
is entitled to the personal and additional exemptions that any individual taxpayer with taxable gross income is entitled
● A different interpretation will actually render the MWE exemption a totally oppressive legislation. It would be a total absurdity to
disqualifY an MWE from enjoying as much as P150,00058 in personal and additional exemptions just because sometime in
the year, he or she ceases to be an MWE by earning a little more in wages. Laws cannot be interpreted with such absurd and
unjust outcome. It is axiomatic that the legislature is assumed to intend right and equity in the laws it passes.

R.A. 9504 must be liberally construed.

● We are mindful of the strict construction rule when it comes to the interpretation of tax exemption laws. The canon, however, is
tempered by several exceptions, one of which is when the taxpayer falls within the purview of the exemption by clear
legislative intent. In this situation, the rule of liberal interpretation applies in favor of the grantee and against the government.
● In this case, there is a clear legislative intent to exempt the minimum wage received by an MWE who earns additional income
on top of the minimum wage. As previously discussed, this intent can be seen from both the law and the deliberations.
Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of the taxpayers.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. SOLIDBANK CORPORATION, RESPONDENT. G.R. NO. 148191
NOVEMBER 25, 2003. (LONG DIGEST - 18 PAGES FULL CASE)

FACTS:

“For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax Returns reflecting gross receipts (pertaining
to 5% [Gross Receipts Tax] rate) in the total amount of P1,474,691,693.44 with corresponding gross receipts tax payments in the
sum of P73,734,584.60. (PERIOD COVERED JANUARY-DECEMBER 1994)

Respondent alleges that the total gross receipts in the amount of P1,474,691,693.44 included the sum of P350,807,875.15
representing gross receipts from passive income which was already subjected to 20% final withholding tax.

That in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, decided by CTA, wherein it was held that the 20%
final withholding tax on [a] bank’s interest income should not form part of its taxable gross receipts for purposes of computing the gross
receipts tax.
On June 19, 1997, on the strength of the aforementioned decision, respondent filed with the Bureau of Internal Revenue [BIR]
a letter-request for the refund or issuance of [a] tax credit certificate in the aggregate amount of P3,508,078.75, representing
allegedly overpaid gross receipts tax for year 1995.

“Without waiting for an action from the petitioner, respondent on the same day filed [a] petition for review with the Court of Tax
Appeals in order to toll the running of the two-year prescriptive period to judicially claim for the refund of any overpaid internal revenue
tax, pursuant to Section 230 [now 229] National Internal Revenue Code’]

CTA: ordered petitioner to refund in favor of respondent the reduced amount of P1,555,749.65 as overpaid [gross receipts tax] for the
year 1995 on the strength of its earlier pronouncement in Asian Bank Corporation vs. Commissioner of Internal Revenue

CA: The CA held that the 20% FWT on a bank’s interest income did not form part of the taxable gross receipts in computing the 5%
GRT, because the FWT was not actually received by the bank but was directly remitted to the government.

ISSUE: “Whether or not the 20% final withholding tax on [a] bank’s interest income forms part of the taxable gross receipts in computing
the 5% gross receipts tax.”

RULING:

Whether the 20% FWT Forms Part of the Taxable Gross Receipts

Petitioner claims that although the 20% FWT on respondent’s interest income was not actually received by respondent
because it was remitted directly to the government, the fact that the amount redounded to the bank’s benefit makes it part of
the taxable gross receipts in computing the 5% GRT.

We agree with petitioner. In fact, the same issue has been raised recently in China Banking Corporation v. CA, where this Court held
that the amount of interest income withheld in payment of the 20% FWT forms part of gross receipts in computing for the GRT
on banks.

The FWT and the GRT: Two Different Taxes

Two types of taxes are involved in the present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an
income tax. As a bank, petitioner is covered by both taxes.

A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. It is not subject to
withholding.

An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a taxable year. It is subject to
withholding.

In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the payor, a separate entity, acts as
no more than an agent of the government for the collection of the tax in order to ensure its payment.

Constructive Receipt Versus Actual Receipt,

Applying Section 7 of Revenue Regulations (RR) No. 17-84, petitioner contends that there is constructive receipt of the
interest on deposits and yield on deposit substitutes.

Respondent, however, claims that even if there is, it is Section 4(e) of RR 12-80 that nevertheless governs the situation.

Section 7 of RR 17-84 states:Nature and Treatment of Interest on Deposits and Yield on DepositSubstitutes.—

‘(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in
accordance with these regulations need not be included in the gross income in computing the depositor’s/investor’s income tax liability
in accordance with the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended.

Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the gross receipts of banks, non-bank financial
intermediaries; financing companies, and other non-bank financial intermediaries not performing quasi-banking activities shall be based
on all items of income actually received.
Respondent argues : since there is no actual receipt, the FWT is not to be included in the tax base for computing the GRT. no
pecuniary benefit or advantage accruing to the bank from the FWT, because the income is subjected to a tax burden immediately upon
receipt through the withholding process. only items of income actually received should be included in its gross receipts. It claims that
since the amount had already been withheld at source, it did not have actual receipt thereof.

By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in Articles 531 and 532 of our
Civil Code.

Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal
formalities established therefor. The withholding process is one such act. There may not be actual receipt of the income withheld;
however, as provided for in Article 532, possession by any person without any power whatsoever shall be considered as acquired when
ratified by the person in whose name the act of possession is executed.

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

There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit
substitutes that are subjected to FWT are indeed—for legal purposes— tantamount to delivery, receipt or remittance. Besides,
respondent itself admits that its income is subjected to a tax burden immediately upon “receipt,” although it claims that it derives no
pecuniary benefit or advantage through the withholding process. There being constructive receipt of such income—part of which is
withheld—RR 17-84 applies, and that income is included as part of the tax base upon which the GRT is imposed.

RR 12-80 Superseded by RR 17-84

effect of the revenue regulations on interest income constructively received:

Generally, rules and regulations issued by administrative or executive officers pursuant to the procedure or authority conferred by law
upon the administrative agency have the force and effect, or partake of the nature, of a statute.—The reason is that statutes express
the policies, purposes, objectives, remedies and sanctions intended by the legislature in general terms. The details and manner
of carrying them out are oftentimes left to the administrative agency entrusted with their enforcement. In the present case, it is the
finance secretary who promulgates the revenue regulations, upon recommendation of the BIR commissioner. (delegated power)

A revenue regulation is binding on the courts as long as the procedure fixed for its promulgation is followed. provided that its
scope is within the statutory authority or standard granted by the legislature. Specifically, the regulation must (1) be germane to
the object and purpose of the law; (2) not contradict, but conform to, the standards the law prescribes; and (3) be issued for
the sole purpose of carrying into effect the general provisions of our tax laws.

In the present case, there is no question about the regularity in the performance of official duty. What needs to be determined is
whether RR 12-80 has been repealed by RR 17-84.

A repeal may be express or implied. It is express when there is a declaration in a regulation—usually in its repealing clause—that
another regulation, identified by its number or title, is repealed. All others are implied repeals. An example of the latter is a general
provision that predicates the intended repeal on a substantial conflict between the existing and the prior regulations.

As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that are inconsistent with the provisions of the said
RR are thereby repealed. This declaration proceeds on the premise that RR 17-84 clearly reveals such an intention on the part of the
Department of Finance. Otherwise, later RRs are to be construed as a continuation of, and not a substitute for, earlier RRs;

There are two well-settled categories of implied repeals: (1) in case the provisions are in irreconcilable conflict, the later regulation, to
the extent of the conflict, constitutes an implied repeal of an earlier one; and (2) if the later regulation covers the whole subject of an
earlier one and is clearly intended as a substitute, it will similarly operate as a repeal of the earlier one. The unaffected provisions or
portions of the earlier regulation remain in force, while its omitted portions are deemed repealed. An exception therein that is amended
by its subsequent elimination shall now cease to be so and instead be included within the scope of the general rule.

Section 4(e) of the earlier RR 12-80 provides that only items of income actually received shall be included in the tax base for
computing the GRT, but Section 7(c) of the later RR 17-84 makes no such distinction and provides that all interests earned
shall be included. RR 12-80 is superseded by the later rule, because Section 4(e) thereof is not restated in RR 17-84. Clearly
therefore, last provision was impliedly repealed when the later regulations took effect.
shall interest income constructively received still be included in the tax base for computing the GRT? YES.

Amounts earmarked do not form part of gross receipts, because, although delivered or received, these are by law or regulation
reserved for some person other than the taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are in
constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process.

Possession was indeed acquired, since it was ratified by the financial institutions

in whose name the act of possession had been executed. The money indeed belonged to the taxpayers; merely holding it in trust was
not enough.

The government subsequently becomes the owner of the money when the financial institutions pay the FWT to extinguish their
obligation to the government. It is ownership that determines whether interest income forms part of taxable gross receipts. Being
originally owned by these financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts.

Looking again into Sections 24(e)(l) and 119 of the Tax Code, we find that the first imposes an income tax; the second, a percentage
tax. The legislature clearly intended two different taxes. The FWT is a tax on passive income, while the GRT is on business. The
withholding of one is not equivalent to the payment of the other.

Under our tax system, the CTA acts as a highly specialized body specifically created for the purpose of reviewing tax cases, its findings
of fact will ordinarily not be reviewed, absent any showing of gross error or abuse on its part.

Tax refunds are in the nature of tax exemptions. Those who claim to be exempt from the payment of a particular tax must do so under
clear and unmistakable terms found in the statute. In the instant case, respondent has not been able to satisfactorily show that its FWT
on interest income is exempt from the GRT.

No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity in the tax collection effort of
the government and to assure its steady source of revenue even during an economic slump.
5. Non-retroactive application to Taxpayers – Sec. 246

• CIR v. Filinvest Development Corp., 654 SCRA 56, 2011

FACTS

● The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development
Corporation (FDC) is a holding company which also owned outstanding shares of Filinvest Land, Inc. (FLI).
● Both transferred in favor of the latter parcels of land intended to facilitate development of medium-rise residential and
commercial buildings, and in exchange, shares of stock of FLI were issued to FDC and FAI.
● As a result of the exchange, FLI’s ownership structure was changed.
● FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss should be recognized in the
aforesaid transfer of real properties.
● Acting on the request, the BIR issued Ruling No. S-34-046-97, finding that the exchange is among those contemplated under
Section 34 (c) (2) of the old National Internal Revenue Code (NIRC) which provides that "(n)o gain or loss shall be
recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a
result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said
corporation."
● With the BIRs reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by FLI, the latter,
together with FDC and FAI, complied with all the requirements imposed in the ruling.
● On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary
stamp taxes, plus interests and compromise penalties.
● The deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it executed
with FAI and FLI, on the dilution resulting from the Shareholders’ Agreement FDC executed with RHPL as well as the "arm’s-
length" interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates.
● On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes.
● The deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed
with FDC and FLI. Within the reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI filed
their respective requests for reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes
assessed by the BIR were bereft of factual and legal basis.
● In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest
within the aforesaid period, FDC and FAI filed a petition for review with the Court of Tax Appeals (CTA).
● The CTA went on to render the Decision which, with the exception of the deficiency income tax on the interest income FDC
supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and
documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997.
● Dissatisfied with the foregoing decision, FDC filed the petition for review before the CA.
● Upholding FDC's position, the CA's then Special Fifth Division granted the petition.
● With the denial of its partial motion for reconsideration of the same, the CIR also filed the petition for review docketed before
the CA.
● The foregoing petition was, however, denied due course and dismissed for lack of merit.

ISSUE
Whether the letters of instruction or cash vouchers extended by FDC to its affiliates are not deemed
loan agreements subject to DST under Section 180 of the NIRC. (YES)

RULING
 ● In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary
stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit
memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code.
● Applying the aforesaid provisions to the case at bench, the Court find that the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon
which documentary stamp taxes may be imposed.
● In keeping with the caveat attendant to every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer
are correct, the Court find that the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly
speaking, could be invoked only by ASB Development Corporation, the taxpayer who sought the same.
● In said ruling, the CIR opined that documents like those evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp tax, to wit: On the matter of whether or not the inter-office memo covering the advances
granted by an affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26
(Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary
stamp tax.
● Such being the case, said inter-office memo evidencing the lendings or borrowings which is neither a form of promissory note
nor a certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which are, more or less,
categorized as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax
Code of 1997, respectively.
● Rather, the inter-office memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds of the
corporate affiliates.

Non-retroactive application part:

● In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-99 dated 15
July 1999, which opined that inter-office memos evidencing lendings or borrowings extended by a corporation to its affiliates
are akin to promissory notes, hence, subject to documentary stamp taxes. In brushing aside the foregoing argument,
however, the CA applied Section 246 of the 1993 NIRC from which proceeds the settled principle that rulings, circulars, rules
and regulations promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the
taxpayers.
● Admittedly, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in
any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad
faith.
● Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing
principle on non-retroactivity of BIR rulings.
● The Court found both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal and cash vouchers evidencing the advances
FDC extended to its affiliates in 1996 and 1997. Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-
DST-97-00021-2000 issued for deficiency documentary stamp taxes due on the instructional letters as well as journal and
cash vouchers evidencing the advances FDC extended to its affiliates are declared valid

Double Taxation - with modes of eliminating double taxation

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

NOTE: Full text is 10 pages long.

FACTS:
● SC Johnson and Son (Respondent), a domestic corporation, entered into a license agreement with SC Johnson and Son,
USA, a non-resident foreign corporation based in the USA.
● The license agreement granted the respondent the right to use the trademark, patents and technology.
 ● For the use of such, respondent was obliged to pay royalties based on a percentage of net sales and subjected the same to
25% withholding tax on royalty payments which respondent paid P1,603,443.00, for the period covering July 1992 to May
1993.
● Johnson and Son, USA filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply.
● Respondent’s complaint: Royalties paid by the respondent is only subject to 10% withholding tax pursuant to Article 13
Paragraph 2 (b) (iii) of the RP-US Tax Treaty, in relation to Article 12 (2) (b) of the RP-West Germany Tax Treaty.
● Because the CIR did not act on said claim for refund, respondent filed a petition for review before the CTA, to claim a refund of
the overpaid withholding tax on royalty payments from July 1992 to May 1993.
● CTA - in favor of S.C. Johnson, ordered the CIR to issue a tax credit certificate (P963,266.00) representing overpaid
withholding tax on royalty payments (July, 1992 to May, 1993.)
● CIR - filed a petition for review with the CA.
● CA - affirmed the CTA ruling.
● Hence, an appeal on certiorari was filed to the SC.
● Petitioner’s contention: Under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation"
clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the US from sources
within the PH only if the circumstances of the resident of the US are similar to those of the resident of West Germany.
● Respondent’s comment: the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar
circumstances as those royalties subject to tax in other treaties; the phrase "paid under similar circumstances" does not refer
to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is
intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the
country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in
that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable;
● Petitioner’s Reply: even if the phrase "paid under similar circumstances" embodied in the most favored nation clause of the
RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence of a "matching credit"
provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and would be determinative
of the said clause's application.

NOTE: The main issue is quite irrelevant to the topic at hand, which is double taxation. However, it is purposely not omitted in case it is
still asked. I suggest you proceed discussing the court’s discussion on double taxation.

ISSUE: WON the CA erred in ruling that SC Johnson, USA, is entitled to the tax rate of 10% on royalties, as provided in the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty [YES]

RULING: The court agrees with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20% for the taxes
paid to the PH on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the
10% rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

In the case at bar, the state of source is the PH because the royalties are paid for the right to use property or rights located within the
PH. The US is the state of residence since the taxpayer is based there. Under the RP-US Tax Treaty, the state of residence and the
state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source.
Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the US
against the US tax, but such amount shall not exceed the limitations provided by US law for the taxable year. Under Article 13 thereof,
the Philippines may impose 1 of 3 rates — 25% of the gross amount of the royalties; 15% when the royalties are paid by a corporation
registered with the PH Board of Investments and engaged in preferred areas of activities; or the lowest rate of PH tax that may be
imposed on royalties of the same kind paid under similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10%
provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the
RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US
Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from
sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany
Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid
under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect
to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. At the same time, the
intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in
light of the purpose behind the most favored nation clause.

Purpose of a most favored nation clause:

It is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored"
among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most
favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another
tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case
royalty income, is the same as that in the tax treaty under which the taxpayer is liable.

ON DOUBLE TAXATION
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double
taxation.

Purpose of a tax treaty:

It is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double
taxation.

The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of
source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some
form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which could have been collected by the
Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed
upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit
would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on
the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another
country.

International Juridical Double Taxation

It is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods.

Rationale for doing away with double taxation:

To encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies.

Double taxation
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the
other contracting state and both states impose tax on that income or capital.

Methods of eliminating double taxation:

1) It sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes
of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other
items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state
of source is limited.
2) The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to
tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief
in order to avoid double taxation.

Methods of relief under the second method of eliminating double taxation:

1) EXEMPTION METHOD - focus is on the income or capital itself; the income or capital which is taxable in the state of source or
situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of
tax applicable to the taxpayer's remaining income or capital
2) CREDIT METHOD - focus is upon the tax; although the income or capital which is taxed in the state of source is still taxable in
the state of residence, the tax paid in the former is credited against the tax levied in the latter.

Rationale for reducing the tax rate in negotiating tax treaties:

So that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by
the other country.

ON TAX REFUNDS
Private respondent is claiming for a refund of the alleged overpayment of tax on royalties. But, the SC said there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under
the RP-West Germany Tax Treaty.

Tax refunds
Tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the exemption.

Burden of proof in tax exemption:

The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of
organic or statute law.

DISPOSITIVE: WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of
Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.

Doctrines in Taxation

Double Taxation – with modes of eliminating double taxation

Nursery Care Corporation v. Acevedo, G.R. No. 180651, 2014

FACTS:

● The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section 15 (Tax on Wholesalers,
Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila.
● At the same time, the City of Manila imposed additional taxes upon the petitioners pursuant to Section 21 ofthe Revenue Code
of Manila,4 as amended, as a condition for the renewal of their respective business licenses for the year 1999.
● To comply with the City of Manila’s assessment of taxes under Section 21, supra, the petitioners paid under protest.
● By letter dated March 1, 1999, the petitioners formally requested the Office of the City Treasurer for the tax credit or refund of
the local business taxes paid under protest.6 However, then City Treasurer Anthony Acevedo (Acevedo) denied the request
● the petitioners filed their respective petitions for certiorariin the Regional Trial Court (RTC) in Manila.
● RTC Ruling: petitioners’ prayer for the refund of the amounts paid by them under protest must, likewise, fail.
● CA Ruling: denied the petitioners’ appeal.
● The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself unconstitutional or invalid, its
enforcement against the petitioners constituted double taxation because the local business taxes under Section 15 and
Section 17 of the Revenue Code of Manila were already being paid by them. They contend that the proviso in Section 21
exempted all registered businesses in the City of Manila from paying the tax imposed under Section 21; and that the
exemption was more in accord with Section 143 of the Local Government Code, the law that vested in the municipal and city
governments the power to impose business taxes.
● The respondents counter, however, that double taxation did not occur from the imposition and collection of the tax pursuant to
Section 21 of the Revenue Code of Manila; that the taxes imposed pursuant to Section 21 were in the concept of indirect taxes
upon the consumers of the goods and services sold by a business establishment;35 and that the petitioners did not exhaust
their administrative remedies by first appealing to the Secretary of Justice to challenge the constitutionalityor legality of the tax
ordinance

ISSUE: WON there is double taxation (YES)

HELD:

● Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment.1âwphi1
Said exempting proviso was precisely included in said section so as to avoid double taxation.
● Double taxation means taxingthe same property twice when it should be taxed only once; that is, "taxing the same person
twice by the same jurisdictionfor the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once.
Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of
the same kind or character.
● Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter –
the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within
the City of Manila contribute tocity revenues; (3) by the same taxing authority – petitioner Cityof Manila; (4) within the same
taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year;
and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business.
● The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is
specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local
business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a
perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc.of liquors, distilled
spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no
longer subject the same manufacturers, etc.to a business tax under Section 143(h) of the same Code. Section 143(h) may be
imposed only on businesses that are subject to excise tax, VAT, or percentagetax under the NIRC, and that are "not otherwise
specified in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a local business tax
under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for
local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].
● Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the ManilaRevenue
Code for the fourth quarter of 2001, considering thatit had already been paying local business tax under Section 14 of the
same ordinance.
● Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed liable to pay business
taxes to the City of Manila; nevertheless, considering that the former has already paid these taxes under Section 14 of the
Manila Revenue Code, it is exempt from the same payments under Section 21 of the same code. Hence, payments made
under Section 21 must be refunded in favor of petitioner.
● the Court now holds that all the elements of double taxation concurred upon the Cityof Manila’s assessment on and collection
from the petitioners of taxes for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.
● Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods and services in the
course of trade or business based on a certain percentage ofhis gross sales or receipts in the preceding calendar year, while
Section 15 and Section 17 likewise imposed the tax on a person who sold goods and services in the course of trade or
business but only identified such person with particularity, namely, the wholesaler, distributor or dealer (Section 15), and the
retailer (Section 17), all the taxes – being imposed on the privilege of doing business in the City of Manila in order to make the
taxpayers contributeto the city’s revenues – were imposed on the same subject matter and for the same purpose.
● Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same jurisdiction in the
same taxing period (i.e., per calendar year).
● Thirdly, the taxes were all in the nature of local business taxes.