M.

ESCAPE FROM TAXATION

1. HENG TONG TEXTILES v. CIR

G.R. No. L-19737; 26 August 1968 - Al-jowder

Facts:

In 1952 the then Collector of Internal Revenue assessed against the petitioner
deficiency sales taxes and surcharges for the year 1949 and the first four months of
1950 in the aggregate sum of P89,123.58. The deficiency taxes in question were
assessed on importations of textiles from abroad. The goods were withdrawn from
Customs by Pan-Asiatic Commercial Co., Inc., which paid, in the name of the
petitioner, the corresponding advance sales tax under section 183(b) of the Internal
Revenue Code. The assessment for the deficiency, however, was made against the
petitioner, Heng Tong Textiles Co., Inc. (now Philip Manufacturing Corporation) on
the ground that it was the real importer of the goods and did not pay the taxes due
on the basis of the gross selling prices thereof.

The CTA found the petitioner the importer of the goods for the following reasons:

1. Heng Tong Textiles Co., Inc. and Pan-Asiatic Commercial were sister corporations;
2. The commercial documents covering the importations (shipping documents,
insurance papers, and records of payment of the advance sales tax in the Bureau of
Customs) were all in the name of the petitioner;
3. In connection with advance sales tax aforesaid, Pan-Asiatic Asiatic Commercial
wrote the petitioner a letter showing a list giving a breakdown of petitioner’s 5%
Sales Tax request; and
4. There is both documentary and testimonial evidence that Pan-Asiatic Commercial
acted merely as indenter. During the taxable year 1949, Heng Tong Textiles Co., Inc.
placed through Pan-Asiatic Commercial Co., Inc., orders for importations of textiles
from the United States in the sum of P2,190,948.66.

Petitioner avers that the importation papers were placed in the name of the
petitioner only for purposes of accommodation, that is, to introduce the petitioner
to textile suppliers abroad and that the petitioner was not in a financial position to
make the importations in question, valued at over a million pesos, since its paid-up
capital was only P30,000.00.

Issue:

Whether or not the petitioner was guilty of fraud so as to warrant the imposition of a
penalty of 50% on the deficiency.
Ruling:

No. The circumstances show nothing but a private arrangement between the
petitioner and Pan-Asiatic Commercial, which in no way affected the role of the
petitioner as the importer as far as the Government and its right to collect the taxes
were concerned. Pan-Asiatic Commercial might have furnished the necessary
financing for the importations in question, but that did not militate against the
petitioner's being the importer; nor did the idea of building up its reputation among
textile suppliers abroad render it necessary for the withdrawal of the goods from
customs and the payment of the advance sales tax to be made in the petitioner's
name, these being purely local operations, or for Pan-Asiatic Commercial to affirm, in
the private communication sent by it to the petitioner, that the latter was the one
that ordered the goods from the United States.

The Court perceived the entire set-up as an arrangement through which the
sales taxes due could be minimized, by having Pan-Asiatic Commercial, as indorsee
of the goods, withdraw the same from Customs upon payment of the advance sales
tax and then execute a sale thereof to Heng Tong Textiles at cost, or at a negligible
profit. According to the CTA, the goods were made to appear as having thus been
sold so that no sales tax was paid by petitioner upon the sales of such goods and
neither, was any sales tax paid on the supposed sales of said goods by the Pan-
Asiatic Commercial to the petitioner as the sales were made apparently at cost. This
is so because during the period in question, the sales tax on sales of imported
articles was based on the gross selling price thereof, the advance sales tax paid
upon removal of the goods from the customhouse being credited against the tax on
the actual gross selling price paid by the importer.

The arrangement resorted to does not by itself alone justify the penalty imposed.
Section 183 (a), paragraph 3, of the Internal Revenue Code, as amended by
Republic Act No. 253, speaks of willful neglect to file the return or willful making of a
false or fraudulent return. An attempt to minimize one's tax does not necessarily
constitute fraud. It is a settled principle that a taxpayer may diminish his liability by
any means which the law permits. The intention to minimize taxes, when used in the
context of fraud, must be proved to exist by clear and convincing evidence
amounting to more than mere preponderance, and cannot, be justified by mere
speculation. This is because fraud is never lightly presumed.

Scheme to exempt from tax, 35 % to 5%

 2. CIR v. ESTATE OF TODA
G.R. No. 147188; 14 September 2004 - Escalante

Facts:

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

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

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

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

Issues:

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

Ruling:

1. Yes. Tax evasion is a scheme not sanctioned by law and when it is availed of, it
subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion
connotes the integration of three factors:

(a) the end to be achieved, i.e., the payment of less than that known by the taxpayer
to be legally due, or the non-payment of tax when it is shown that a tax is due;
(b) an accompanying state of mind which is described as being “evil,” in “bad faith,”
“willfull,” or “deliberate and not accidental”; and
(c) a course of action or failure of action which is unlawful.

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

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

It is important to note that a corporation has a juridical personality distinct and

separate from the persons owning or composing it. Thus, the owners or stockholders
of a corporation may not generally be made to answer for the liabilities of a
corporation and vice versa. However, there are certain instances in which personal
liability may arise. Personal liability of a corporate director, trustee, or officer along
with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or
gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages
to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate
action.
 3. YUTIVO SONS v. CTA;
G.R. No. L-13203; 28 January 1961 - Buenaflor

Facts:

Yutivo Sons Hardware Co. is a domestic corporation engaged in the importation and
sale of hardware supplies and equipment. It bought a number of cars and trucks
from General Motors Overseas Corporation (GM), an American corporation licensed
to do business in the Philippines. As an importer, GM paid sales tax prescribed by
sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo.
Said tax being collected only once on original sales, Yutivo paid no further sales tax
on its sales to the public.

Southern Motors, Inc. (SM) was organized to engage in the business of selling cars,
trucks and spare parts. Its shares were subscribed in five equal proportions by the
descendants of the founders of Yutivo. When GM withdrew from the Philippines, the
cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which, in
turn, sold them to the public in the Visayas and Mindanao.

GM appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo
continued its previous arrangement of selling exclusively to SM. In the same way
that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer,
paid sales tax on the basis of its selling price to SM, and since such sales tax, as
already stated, is collected only once on original sales, SM paid no sales tax on its
sales to the public.

Yutivo was investigated by the CIR and was assessed deficiency sales tax plus
surcharge. The CIR claimed that the taxable sales were the retail sales by SM to the
public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM
and Yutivo were one and the same corporation, the former being the subsidiary of
the latter.

The CTA ruled in favor of CIR and ruled that the creation of SM is for Yutivo to evade
taxes, as it is owned and controlled by Yutivo and is a mere subsidiary, branch,
adjunct conduit, instrumentality or alter ego of the latter.

Issues:

Whether or not CTA erred in disregarding the corporate personality of SM in order

to arrive at the true tax liability of Yutivo.
Whether or not there is tax evasion in this case.

Ruling:
1. Yes. A corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, when the notion of
legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons, or, in
the case of two corporations, merge them into one. When the corporation is the
mere alter ego or business conduit of a person, it may be disregarded.

SC ruled here that CTA was not justified in finding that SM was organized to defraud
the Government. SM was organized in June 1946, from that date until June 30, 1947,
GM was the importer of the cars and trucks sold to Yutivo, which in turn was sold to
SM. GM, as importer, was the one solely liable for sales taxes. Neither Yutivo nor SM
was subject to the sales taxes. Yutivo’s liability arose only until July 1, 1947 when it
became the importer. Hence, there was no tax to evade. However, the court agrees
with the CTA that SM was actually owned and controlled by petitioner in
consideration of various circumstances indicate that Yutivo treated SM merely as its
department or adjunct:

a. The founders of the corporation are closely related to each other by blood and
affinity;
b. The object and purpose of the business is the same; both are engaged in sale of
vehicles, spare parts, hardware supplies and equipment;
c. The accounting system maintained by Yutivo shows that it maintained high degree
of control over SM accounts;
d. Several correspondences have reference to Yutivo as the head office of SM. SM
may even freely use forms or stationery of Yutivo;
e. All cash collections of SM’s branches are remitted directly to Yutivo;
f. The controlling majority of the Board of Directors of Yutivo is also the controlling
majority of SM;
g. The principal officers of both corporations are identical. Both corporations have a
common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo’s
president, Yu Khe Thai;
h. Yutivo, financed principally the business of SM and actually extended all the credit
to the latter not only in the form of starting capital but also in the form of credits
extended for the cars and vehicles allegedly sold by Yutivo to SM;

Hence, SM being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax
Appeals correctly disregarded the technical defense of separate corporate entity in
order to arrive at the true tax liability of Yutivo.
2. No. SM was not organized purposely as a tax evasion device. The intention to
minimize taxes, when used in the context of fraud, must be proven by clear and
convincing evidence amounting to more than mere preponderance. It cannot be
justified by mere speculation. This is because fraud is never lightly to be presumed.

Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion. Tax evasion connotes fraud
through the use of pretenses and forbidden devices to lessen or defeat taxes.

Mere understatement of tax in itself does not prove fraud. A taxpayer has the legal
right to decrease the amount of what otherwise would be his taxes or altogether
avoid them by means which the law permits. Any legal means used by the taxpayer
to reduce taxes are all right. Therefore, a man may perform an act that he honestly
believes to be sufficient to exempt him from taxes. He does not incur fraud thereby
even if the act is thereafter found to be insufficient.

In the case at bar, when GM was the importer and Yutivo, the wholesaler, of the cars
and trucks, the sales tax was paid only once and on the original sales by the former
and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might
have, therefore, honestly believed that the payment by it, as importer, of the sales
tax was enough as in the case of GM. Consequently, in filing its return on the basis of
its sales to SM and not on those by the latter to the public, it cannot be said that
Yutivo deliberately made a false return for the purpose of defrauding the
government of its revenues which will justify the imposition of the surcharge
penalty.
Where no element of fraud is present and proven in this case, the imposition of the
50% surcharge on the deficiency sales tax is improper. The circumstance that the
sales made by the taxpayer's subsidiary should be considered as sales of the
taxpayer does not necessarily establish fraud nor the willful filing of a false or
fraudulent return.

The decision of the Court of Tax Appeals under review is modified. Petitioner to pay
the sum of P820, 549.91, plus 25% surcharge thereon for late payment.

4. REPUBLIC v. GONZALES
 G.R. No. L-17962; 30 1965 - Bura-ay

Facts:

The defendant-appellant, Blas Gonzales, has been a private concessionaire in the

U.S. Military Base at Clark Field, Angeles City: He was engaged in the manufacture of
furniture and, per agreement with base authorities, supplied them with his
manufactured articles.

The appellant filed his income tax returns for the years 1946 and 1947, respectively.
He declared a net income of P9,352.84 and income tax liability of P111.17 while for
the year 1947, he declared as net income the amount of P16,829.10 and a tax
liability therefore in the sum of P1,395.95. In the above two returns, he declared the
sums of P80,459.75 and P1,707,355.57 as his total sales for the said two years,
respectively, or an aggregate sales of P1,787,848.32 for both years.

Upon investigation, the Bureau of Internal Revenue discovered that for the years
1946 and 1947, the appellant had been paid a total of P2,199,920.50 for furniture
delivered by him to the base authorities. The appellant does not deny the above
amount which, for the record, was furnished by the Purchasing Officer of the Clark
Field Air Base on the Bureau of Internal Revenue's representation.

Compared against the sales figure provided by the base authorities, therefore, the
amount of P1,787,848.32 declared by the appellant as his total sales for the two tax
years in question was short or under declared by some P412,072.18.

Issue:

Whether or not a concessionaire in an American Air Base is not subject to Philippine

tax laws pursuant to the US – Philippine Military Bases Agreement.
Whether or not defendant-appellant (Blas Gonzales) committed a fraudulent act;

Ruling:

No, a concessionaire is subject to Philippine tax.

The appellant ascribes several errors to the decision of the lower court, the more
fundamental of which is the claim that as a concessionaire in an American Air Base,
he is not subject to Philippine tax laws pursuant to the United States-Philippine
Military Bases Agreement.

The provision relied upon by the appellant plainly contemplates limiting the
exemption from the licenses, fees and taxes enumerated therein to the right to
establish Government agencies, including concessions, and to the merchandise or
services sold or dispensed by such agencies. The income tax, which is certainly not
on the right to establish agencies or on the merchandise or services sold or
dispensed thereby, but on the owner or operator of such agencies, is logically
excluded. The payment by the latter of the income tax is perfectly content with and
would not frustrate the obvious objective of the agreement, namely, to enable the
members of the United States Military Forces and authorized civilian personnel and
their families to procure merchandise or services within the bases at reduced prices.
This construction is unmistakably borne out by the fact that, in dealing particularly
with the matter of income tax, the Military Bases Agreement provides as follows:

INTERNAL REVENUE TAX EXEMPTION

1. No member of the United States armed forces, except Filipino citizens, serving in
the Philippines in connection with the bases and residing in the Philippines by reason
only of such services, or his dependents, shall be liable to pay income tax in the
Philippines except in respect of income derived from Philippine sources.

2. No national of the United State serving or employed in the Philippines in

connection with the maintenance, operation or defense of the bases and residing in
the Philippines by reason only of such employment, or his spouse, and minor
children and dependent parents of either spouses, shall be liable to pay income tax
in the Philippines except in respect of income derived from Philippine source or
sources than the United States source.

3. No persons referred to in paragraphs 1 and 2 of this article shall be liable to pay

the Government or local authorities of the Philippines any poll or residence tax, or
any import or export duty, or any other tax on personal property imported for his
own use; provided that privately owned vehicles shall be subject to the payment of
the following only, when certified as being used for military purposes by appropriate
United States authorities, the normal license plate and registration fees.

4. No national of the United States, or corporation organized under the laws of the
United States, resident in the United States, shall be liable to pay income tax in the
Philippines in respect to any profits derived under a contract made in the United
States in connection with the construction, maintenance, operation and defense of
the bases, or any tax in the nature of a license in respect of any service or work for
the United States in connection with the construction, maintenance, operation and
defense of the bases.

None of the above-quoted covenants shields a concessionaire, like the appellant,

from the payment of the income tax. For one thing, even the exemption in favor of
members of the United States Armed Forces and nationals of the United States does
not include income derived from Philippine sources.

As rightly argued by the Solicitor General's office, fraud is a state of mind, it need not
be proved by direct evidence but may be inferred from the circumstances of the
case. The failure of the appellant to declare for taxation purposes his true and actual
income derived from his furniture business at the Clark Field Air Base for two
consecutive years is an indication of his fraudulent intent to cheat the Government
of its due taxes.
The substantial undeclaration of income in the income tax returns of the appellant
for four consecutive years, coupled with his intentional overstatement of deductions
made the imposition of the fraud penalty proper. (Eugenio Perez v. Court of Tax
Appeals and Collector of Internal Revenue, G. R. No. L-10507, May 30, 1958.)

5. PEOPLE v. KINTANAR
C.T.A. E.B. No. 006; affirmed by the SC in G.R. No. 196340 - Cabahug

Facts:

The State filed a complaint against Gloria Kintanar for Violation of Section
255 of RA 8424.

The State alleged that Kintanar was engaged in the business and earning
income as a distributor of Forever Living Products Philippines with an obligation
under the law to file for the income tax return for the taxable year 2000 - 2001.
However, she failed to file her ITR. The State further alleged that despite notices and
demands for her to file her ITR, she willfully ignored them.

Kintanar asserted that she had filed her ITR with the help of an accountant
whom her husband had hired; who was tasked by her husband to handle the filing
and payment of their tax obligations; thus, there was no voluntary, intentional,
deliberate, or malicious failure to file a return on her part.

CTA found Kintanar guilty of such a violation. CTA En Banc affirmed.

Issue:

Whether or not Kintanar was guilty of not filing and paying her ITR.

Ruling:

Yes. The elements of Violation of Section 255 of the NIRC of 1997, as

amended, for failure to make or file a return, are, as follows: 1) The accused is a
person required to make or file a return; 2) The accused failed to make or file the
return at the time required by law; and 3) That failure to make or file the return was
willful.

As proven by the prosecution, all the aforementioned elements are present

in this case.

As regards the first element, the prosecution has established that petitioner
is duty bound to make or file a return pursuant to Section 51 of the NIRC of 1997, as
amended in relation to Section 74. Considering that petitioner earned a substantial
mcome, as distributor/independent contractor of FLPPI; she is, therefore, required
to make or file her annual income tax return, pursuant to the aforequoted
provisions.
As regards the second element, the testimonial and documentary evidence adduced
by the prosecution shows that petitioner failed to make or file her ITRs for taxable
years 2000 and 2001.

As regards the third element of "willfulness", the prosecution has sufficiently

proven beyond reasonable doubt that the petitioner deliberately failed to make or
file a return.

Willful in the tax crimes statutes means voluntary, intentional violation of a

known legal duty, and bad faith or bad purpose need not be shown.

An act or omission is "willfully" done if done voluntarily and intentionally and

with specific intent to do something the law forbids, or with specific intent to fail to
do something the law requires to be done; that is, with bad purpose to either
disobey or disregard the law. A willful act may be described as one done
intentionally, knowingly and purposely, without justifiable excuse.

Petitioner cannot find solace on her claim that her husband hired an
accountant, who was tasked to handle the filing and payment of their tax
obligations. This allegation was a bare testimony of the petitioner's husband, and
yields nothing, but mere uncorroborated statements. Mere allegations are definitely
not evidence (Coronel vs Court of Appeals, 263 SCRA 35); thus, it cannot be used as
basis for a court's decision.

Furthermore, the Court finds no affirmative acts on the part of the petitioner
to make sure that her obligation to file her ITRs had been fully complied with.
Petitioner testified that she did not even know how much was her tax obligation, nor
did she bother to inquire or determine the facts surrounding the filing of her ITRs.
Such neglect or omission, as aptly found by the Former Second Division, is
tantamount to "deliberate ignorance" or "conscious avoidance".

6. PEOPLE OF THE PHILIPPINES vs. JUDY ANNE SANTOS y LUMAGUI

C.T.A. CRIM. CASE NO. O-012. January 16, 2013 - Cabaobao
Facts:
The accused, Judy Anne Santos y Lumagui, is charged in an Information, for violation
of Section 255 of the 1997 National Internal Revenue Code. The accused feloniously
file a false and fraudulent income tax return for taxable year 2002 by indicating
therein a gross income of P8,033,332.70, when in truth and in fact her correct
income for taxable year 2002 is P16,396,234.70.
The prosecution submitted the Annual Income Tax Return for the taxable year 2002,
filed on April 15, 2003. The return shows the name of accused, with a signature
above the printed name
Judy Anne Santos testified that she started in the industry at a young age of eight (8)
years old in; that, at the age of twelve (12), she had engaged the services of Mr.
Alfonso Lorenzo, as her Manager, thus, she has entrusted all her transactions, i.e.,
contract negotiations, contract signing, handling of fees, etc., to him, who at the
time was also the manager of her older brother, Jeffrey Santos, likewise, an actor.
She admitted, however, the absence of a written contract on the engagement of her
Manager, out of trust and confidence to the latter, whom she considered a member
of her family. She testified as well that out of that trust and confidence on her
Manager, she had signed contracts without reading the same, since her Manager
assured her that he already made a read through of it. She testified further that in
the handling of fees, the checks were sometimes issued in her name, but most of the
time, the same were issued in the name of her Manager, and that it was her
Manager who received the same on her behalf, with the understanding that her
Manager is entitled to a portion of her fees as his commission. With the above set-
up, she claims that she has no knowledge of how much she was earning per project.
She denied the allegations on the Information against her that she willfully filed a
false and fraudulent Income Tax Return for the taxable year 2002. She also denied
having received any BIR Forms No. 2307 issued to her, nor made aware of the
issuance of the same. She further denied the signature appearing on top of the name
"Judy Anne Santos" in the Income Tax Return for taxable year 2002, presented by
the prosecution. She counters that since she started working, it is her Manager who
is in charge of filing the relevant returns and paying the corresponding taxes, which
makes her Manager the custodian of her records. She testified further that her
Manager hired an accountant, Ms. Conchita Padua, for the preparation of her
Financial Statements and Income Tax Returns.
Issue:
Whether the accused committed tax evasion.
Ruling:
No.
The Section 255 of the 1997 National Internal Revenue Code ("NIRC"), as amended,
enumerates the following offenses:
a. Willful failure to pay tax;
b. Willful failure to make a return
c. Willful failure to keep any record;
d. Willful failure to supply correct and accurate information;
e. Willful failure to withhold or remit taxes withheld; or
f. Willful failure to refund excess taxes withheld on compensation.
One of the offenses above-enumerated is willful failure to supply correct and
accurate information, which is being attributed to the accused. And in accordance
with Section 255, the essential elements of the said offense are as follows:
1) That a person is required to supply correct and accurate information;
2) That there is failure to supply correct and accurate information at the time or
times required by law or rules and regulations; and
3) That such failure to supply correct and accurate information is done willfully.

Every Filipino citizen residing in the Philippines is required not only to file an income
tax return on income from all sources, on or before the fifteenth (15th) day of April
of each year, covering the income for the preceding taxable year, but also to supply
correct and accurate information thereof. Further, even under the creditable tax
system, the income recipient is still required to file an income tax return, and to
report the income and/or pay the difference between the tax withheld and the tax
due on the income.
For the subject taxable year 2002, the accused admitted that she entered into
contracts for her engagement as a professional entertainer, movie actress and
product endorser. Furthermore, there is no dispute that she is a resident Filipino
citizen. With this, accused is required to file an income tax return for all her income
from all sources.
The prosecution then presented the Annual ITR (BIR Form No. 1701) of the accused
for the taxable year 2002 and Certificates of Creditable Tax Withheld at Source (BIR
Form No. 2307) issued by ABS-CBN Broadcasting Corporation to the accused.
A comparison of the ITR of the accused and the Certificates of Creditable Tax
Withheld at Source issued by ABS-CBN Broadcasting Corporation proves that the
accused, earning her professional income as an entertainer is required to file an
income tax return, as she did, and that accused apparently supplied correct and
accurate information thereof.
However, from the foregoing, the prosecution was able to show that from the
declared Gross Taxable Professional Income of the accused the aggregate amount of
P16,396,234.70, or a gross underdeclaration of P8,362,902.00.
Thus, the prosecution was able to prove the element of failure to supply correct and
accurate information at the time required by law.
Tax evasion connotes the integration of three factors: (1) the end to be achieved,
i.e., the payment of less than that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due; (2) an accompanying state of
mind which is described as being "evil," in "bad faith," "willful," or "deliberate and
not accidental"; and (3) a course of action or failure of action which is unlawful.
The willful neglect to file the required tax return or the fraudulent intent to evade
the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed. The fraud contemplated by law is actual and
constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal
right.
Applying the foregoing in the case at bench, the element of willful failure to supply
correct and accurate information must be fully established as a positive act or state
of mind; it cannot be presumed nor attributed to mere inadvertent or negligent acts.
Based on the records of the case, the accused testified that as early as the age of
twelve (12) years old, she had engaged the services of Mr. Alfonso Lorenzo, without
any written contract, considering that the same was also the Manager of her older
brother, and that she has considered him a family member. Further, she maintains
that the set-up of their Manager-Talent relationship is that the former shall handle
all her transactions, and that out of trust on her Manager, she had signed contracts
upon his mere assurances, even without reading the same, and that her fees, were
most of the time, issued in the name of her Manager, who collects the same, and
thus, she has no knowledge of how much she was earning per project.
In addition, she denied the signature appearing on top of the name "Judy Anne
Santos" in the ITR for taxable year 2002, presented by the prosecution, and that
while she admitted the signatures appearing in the Affidavits, as well as, those
appearing on the contracts presented by the prosecution, she claims that she was
never given a chance by her Manager and her then counsel to read the contents of
the same.
Her testimony was supported by Conchita Padua, Certified Public Accountant, hired
as an external auditor by a representative of the Manager of the accused. She
testified that all the working papers were provided by the Manager of the accused.
From the above exposition of facts, we cannot but emphatically reiterate the well-
established doctrine that fraud cannot be presumed but must be proven. As a
corollary thereto, we can also state that fraudulent intent could not be deduced
from mistakes however frequent they may be, especially if such mistakes emanate
from erroneous entries or erroneous classification of items in accounting methods
utilized for determination of tax liabilities.
The lower court's conclusion regarding the existence of fraudulent intent to evade
payment of taxes was based merely on a presumption and not on evidence
establishing a willful filing of false and fraudulent returns so as to warrant the
imposition of the fraud penalty. The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal
right. Negligence, whether slight or gross, is not equivalent to the fraud with intent
to evade the tax contemplated by the law. It must amount to intentional wrong-
doing with the sole object of avoiding the tax. It necessarily follows that a mere
mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making
entries in the returns and in the assessment, respectively, under the inventory
method of determining tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the respondent as made in good faith.
As earlier discussed, the prosecution was able to prove that the accused failed to
supply correct and accurate information in her ITR for the year 2002 for her failure
declare her other income payments received from other sources. However, it is well-
settled that mere understatement of a tax is not itself proof of fraud for the purpose
of tax evasion.
Based on the records of the case, the accused denied the signature appearing on top
of the name "Judy Anne Santos" in the ITR for taxable year 2002, presented by the
prosecution, and that the Certified Public Accountant, who's participation is limited
to the preparation of the Financial Statements attached to the return, likewise,
denied signing the return on behalf of the accused. Further, the working papers, i.e.,
the Balance Sheet and Income Statement, as well as the value-added tax returns,
Income Tax Return for year 2002, quarterly tax return, schedule of input taxes and
creditable tax certificates, were all provided by the Manager of the accused.
The Court, therefore, finds the records bereft of any evidence to establish the key
element of willfulness on the part of the accused to supply the correct and accurate
information on her subject return.
The burden of proof is on the prosecution to prove beyond reasonable doubt that
accused willfully failed to supply correct and accurate information.
The Court, however, only finds the accused negligent; and such is not enough to
convict her in the case at bench.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to
evade the tax contemplated by the law. Fraud must amount to intentional wrong-
doing with the sole object of avoiding the tax.
The Court also notes the intention of the accused to settle the case were it not for
the opposition of her Manager and then counsel, which negates any motive of the
accused to commit fraud.
In all criminal cases, mere speculations cannot substitute for proof in establishing the
guilt of the accused. Indeed, suspicion no matter how strong must never sway
judgment. Where there is reasonable doubt, the accused must be acquitted even
though their innocence may not have been established. The Constitution presumes a
person innocent until proven guilty by proof beyond reasonable doubt. When guilt is
not proven with moral certainty, it has been our policy of long standing that the
presumption of innocence must be favored, and exoneration granted as a matter of
right.
In sum, the Court finds the failure of the prosecution to establish the guilt of the
accused beyond the required reasonable doubt.

N. EXEMPTION FROM TAXATION

1. CATHOLIC CHURCH v. HASTINGS

G.R. No. 1974; 15 March 1906 - Deximo

Facts:

In the year 1901 the assessor and collector of the city of Manila imposed a
tax upon the residence of the Roman Catholic archbishop of Manila, overruling the
claim that it was exempt from taxation by virtue of the foregoing statute.This
residence is 80-100 meters away from the Cathedral Church and serves as the actual
residence of the Archbishop.
The appellant relied on the cardinal rule of American jurisprudence that exemption
from taxation not being favored, must be strictly construed against the property
owner. This rule rests upon abundant authority.
Hastings said that residence of the Archbishop is not exempt from church tax
because of three reasons: that the property is not parsonage, that it is not adjacent
to the cathedral; and that the exemption privilege is already exhausted by its
allowance to the parsonage of the adjoining chapel.

Issue:
Whether or not the residence of the archbishop is tax exempt
Ruling:

Yes, the residence is tax exempt and what was paid under protest in the
amount of more than $1600.00 was improperly collected. It must be returned to the
plaintiff, the Roman Catholic Apostolic Church in the Philippines.
The understanding of the appellant is that the Parsonage is the Casa Parroquial
version of Spain; and if we allow this interpretation like we adopt the Spanish
version, it will not also include the Protestant Clergymen or the Jewish Rabbis or the
Roman Catholic Priests not living in the parish houses, or not having the parochial
status. For that reason, the Supreme Court said it is wrong to adopt the Spanish
version.
According to testimony, the relations of an Archibishop to his Cathedral are pastoral
in nature. Also, that he is the ecclesiastical dignitary, properly having a resident
tributary to it so it is proper for the Archbishop to have a residence near the
Cathedral.
Moreover, the word “adjacent” does not mean “contiguous” but according to the
Supreme Court it should interpret to mean “close or nearby”. Basing on the
evidence, the location of the residence of the Archbishop has been chosen as the
fittest available site for the purpose. Moreover, based on the evidence too, that the
Cathedral and the residence here stand on an integral lot and there is only one (1)
lot involved.
It can be said that the purpose of the Archbishop residence is for religious purposes
and incidental to the maintenance of the Cathedral and the church here in the
Philippines.

2. ESSO STANDARD v. ACTING COMMISSIONER

G.R. No. L-21841; 28 October 1966 - Escalante

Facts:

In CTA Case No. 1251, ESSO then filed a return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of several of its oil wells.
Also claimed as ordinary and necessary expenses in the same return was the amount
of P340,822.04, representing margin fees it had paid to the Central Bank on its profit
remittances to its New York head office. On August 5, 1964, the CIR granted a tax
credit of P221,033.00 only, disallowing the claimed deduction for the margin fees
paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the
period from April 18,1961-April 18, 1964, for a total of P434,232.92. The deficiency
arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the
Central Bank on its profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax
credit of P221,033.00 representing its overpayment on its income tax for 1959 and
paying under protest the additional amount of P213,201.92. On August 13, 1964, it
claimed the refund of P39,787.94 as overpayment on the interest on its deficiency
income tax. It argued that the 18% interest should have been imposed not on the
total deficiency of P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the
entire amount of the deficiency tax. The CIR also denied the claims of ESSO for
refund of the overpayment of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses. ESSO appealed to the CTA and sought the refund of
P102,246.00 for 1959, contending that the margin fees were deductible from gross
income either as a tax or as an ordinary and necessary business expense. It also
claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were not
legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.

Issue:

Whether or not the margin fees are taxes.

Ruling:

No. A margin levy on foreign exchange is a form of exchange control or restriction

designed to discourage imports and encourage exports, and ultimately, 'curtail any
excessive demand upon the international reserve' in order to stabilize the currency.
Originally adopted to cope with balance of payment pressures, exchange restrictions
have come to serve various purposes, such as limiting nonessential imports,
protecting domestic industry and when combined with the use of multiple currency
rates providing a source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their economic
development programs. The different measures of exchange control or restriction
cover different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the case of
the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For a member nation is not
supposed to alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin levy is part of the
rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to state
that We have already held the contrary for the reason that a tax is levied to provide
revenue for government operations, while the proceeds of the margin fee are
applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central

Bank, the same idea was expressed, though in connection with a different levy,
through Justice J.B.L. Reyes: Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for
the purpose of providing revenue for government operations, while the proceeds of
the 20% retention, as we have seen, are applied to strengthen the Central Bank's
international reserve. We conclude then that the margin fee was imposed by the
State in the exercise of its police power and not the power of taxation.
Facts:

In CTA Case No. 1251, ESSO then filed a return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of several of its oil wells.
Also claimed as ordinary and necessary expenses in the same return was the amount
of P340,822.04, representing margin fees it had paid to the Central Bank on its profit
remittances to its New York head office. On August 5, 1964, the CIR granted a tax
credit of P221,033.00 only, disallowing the claimed deduction for the margin fees
paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the
period from April 18,1961-April 18, 1964, for a total of P434,232.92. The deficiency
arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the
Central Bank on its profit remittances to its New York head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax
credit of P221,033.00 representing its overpayment on its income tax for 1959 and
paying under protest the additional amount of P213,201.92. On August 13, 1964, it
claimed the refund of P39,787.94 as overpayment on the interest on its deficiency
income tax. It argued that the 18% interest should have been imposed not on the
total deficiency of P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the
entire amount of the deficiency tax. The CIR also denied the claims of ESSO for
refund of the overpayment of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses. ESSO appealed to the CTA and sought the refund of
P102,246.00 for 1959, contending that the margin fees were deductible from gross
income either as a tax or as an ordinary and necessary business expense. It also
claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were not
legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
Issue:

Whether or not the margin fees are taxes.

Ruling:

No. A margin levy on foreign exchange is a form of exchange control or restriction

designed to discourage imports and encourage exports, and ultimately, 'curtail any
excessive demand upon the international reserve' in order to stabilize the currency.
Originally adopted to cope with balance of payment pressures, exchange restrictions
have come to serve various purposes, such as limiting nonessential imports,
protecting domestic industry and when combined with the use of multiple currency
rates providing a source of revenue to the government, and are in many developing
countries regarded as a more or less inevitable concomitant of their economic
development programs. The different measures of exchange control or restriction
cover different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the case of
the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing the par value of the
peso as fixed in the Bretton Woods Agreement Act. For a member nation is not
supposed to alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin levy is part of the
rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to state
that We have already held the contrary for the reason that a tax is levied to provide
revenue for government operations, while the proceeds of the margin fee are
applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central

Bank, the same idea was expressed, though in connection with a different levy,
through Justice J.B.L. Reyes: Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for
the purpose of providing revenue for government operations, while the proceeds of
the 20% retention, as we have seen, are applied to strengthen the Central Bank's
international reserve. We conclude then that the margin fee was imposed by the
State in the exercise of its police power and not the power of taxation.

3. ASIATIC PETROLEUM v. LLANES;

G.R. No. 25386; 20 October 1926 - Espejon

Facts:
 The plaintiff, Asiatec Petroleum Co.,Ltd is a private company engaged in oil
exploration and has been leasing the reclaimed area consisting of one half hectare
underwater land of Cebu known as “Shell Island ''. While the Defendant-appellant, A.
Llanes is a provincial treasurer of the Province of Cebu.
The contract of lease recites that the lease is made pursuant to the provisions of Act
No. 1654 of the Philippine Commission, as amended by Act No. 2570 of the
Philippine Legislature; but an examination of the contents of Act No. 1654 shows
that the lease in question was made pursuant to sections 5 and 6 of Act No. 1654,
since these sections alone relate particularly to the lease of land underwater.
Asiatec built a concrete and cement foundation, protected by retaining walls of the
same material and some improvements such as oil tanks, wharf, warehouse, pump
house, and sheds, together with an office and residence building and coolie quarters.
Thereafter, the Province of Cebu made an assessment against it with respect both to
the land and improvements thereon for the years 1923 to 1925, in view of Act 1654.
The plaintiff claimed that the said island is property of the government, hence,
lessee is not liable for the tax assessed against it with respect to the land which is the
subject of the lease pursuant to Section 344 of the Administrative Code , which
exempts from local taxation property owned by the United States of America or by
the Government of the Philippine Islands.
Thus plaintiff contends that they are entitled recovery of tax paid amounting to the
sum of P3,523.02 as the under water land and improvements therein belongs to the
Government , hence, exempt from taxation.
However, under Section 4 of Act No. 1654 declares that all lands leased under the
preceding sections of the Act and all improvements on such lands shall be subject to
local taxation against the lessees.
Likewise, section 113 of Act No. 2874 speaks that all the lands granted by virtue of
this Act, except homesteads, shall be subject to the ordinary taxes which shall be
paid by the grantee even though the title remains in the Government.

Issue:
Whether or not the plaintiff is entitled to recovery of paid taxes amounting
to P3,523.02 on the basis that the land under lessee contract, including its
improvements are Government property.
Ruling :
No. The court ruled that the lessee is not taxable in respect to the land which
is the subject of the lease, it is subject to taxation with respect to the improvements.
The appealed judgment must therefore be modified by reducing the recovery to the
amount paid upon the land, namely, P2,270.88; and this refund must, under section
1579 of the Administrative Code, be made without interest.
The improvements consist of oil tanks, wharf, warehouse, pump house, and
sheds, together with an office and residence building and coolie quarters, are not
public improvements, but, are of a private nature, constructed for the use of the
lessee in conducting its business as a purveyor of coal oil. Said improvements belong
to the lessee and will remain its property until the termination of the lease, when,
under subsection (c) of section 6 of Act No. 1654, the title to the same will vest in the
Government of the Philippine Islands.
 Finally, exemptions from taxation are highly disfavored in law; and he who
claims an exemption must be able to justify his claim by the clearest grant of organic
or statute law. An exemption from the common burden cannot be permitted to exist
upon vague implication

4. MERALCO v. VERA;
G,R. L-29987; 22 October 1975 - Flores

Facts:

Meralco is the holder of a franchise to construct, maintain, and operate an electric

light, heat, and power system in the City of Manila and its suburbs. In 1962 and
1963, Meralco imported and received from abroad copper wires, transformers, and
insulators for use in the operation of its business. The Collector of Customs, as
deputy of the Commissioner of Internal Revenue, levied and collected a
compensating tax. Meralco claimed for refund for the said years, but such claims
were either not acted upon or denied by the Commissioner.

Meralco’s claim for exemption from the compensating tax on poles, wires,
transformers and insulators purchased by it from abroad was based on a provision
from its franchise, to wit:

PARAGRAPH 9. The grantee shall be liable to pay the same taxes upon its real estate,
buildings, plant (not including poles, wires, transformers, and insulators), machinery,
and personal property as other persons are or may be hereafter by law to pay.
Inconsideration of Part Two of the franchise herein granted, to wit, the right to build
and maintain in the City of Manila and its suburbs a plant for the conveying and
furnishing of electric current for light, heat, and power, and to charge for the same,
the grantee shall pay to the City of Manila a five per centum of the gross earnings
received form its business under this franchise in the City and its suburbs: PROVIDED,
That two and one-half per centum of the gross earnings received from the business
of the line to Malabon shall be paid to the Province of Rizal. Said percentage shall be
due and payable at the times stated in paragraph nineteen of Part One hereof, and
after an audit, like that provided in paragraph twenty of Part One hereof, and shall
be in lieu of all taxes and assessments of whatsoever nature, and by whatsoever
authority upon the privileges, earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee, from which taxes and assessments the
grantee is hereby expressly exempted.

It argued that the such provision in plain and unambiguous terms makes two
references to the exemption of the articles in question from all taxes except the
franchise tax. Thus, after prescribing in the opening sentence that "the grantee shall
be liable to pay the said taxes upon its real estate buildings, plant (not including
poles, wires, transformers and insulators), machinery and personal property as other
persons are or may be hereinafter required by law to pay," it specifically provides
that the percentage tax payable by petitioner as fixed therein "shall be in lieu of all
taxes and assessments of whatsoever nature, and by whatsoever authority upon the
privileges, earnings, income, franchise, and poles, wires, transformers and insulators
of the grantee from which taxes and assessments the grantee is hereby expressly
exempted." Meralco further states that while provision does not specifically mention
the compensating tax for the obvious reason that the original franchise was an
earlier enactment, the words "in lieu of all taxes and assessments of whatsoever
nature and by whatsoever authority" are broad and sweeping enough to include the
compensating tax.

Issue:

Whether or not Meralco is exempt from payment of a compensating tax on poles,

wires, transformers and insulators imported by it for use in the operation of its
electric light, heat, and power system.

Ruling:

Meralco is not exempt from paying the compensation tax provided for in Section 190
of the Tax Code, the purpose of which is to “place casual importers, who are not
merchants on equal footing with established merchants who pay sales tax on articles
imported by them.” Meralco’s claim for exemption from payment of the
compensating tax is not clear or expressed, contrary to the rule that “exemptions
from taxation are highly disfavored in law, and he who claims exemption must be
able to justify his claim by the clearest grant of organic or statute law.” Tax
exemptions are strictly construed against the taxpayer, they being highly disfavored
and may almost be said to be “odious to the law.” When exemption is claimed, it
must be shown indubitably to exist, for every presumption is against it, and a well
founded doubt is fatal to the claim.

One who claims to be exempt from the payment of a particular tax must do so under
clear and unmistakable terms found in the statute. Tax exemptions are strictly
construed against the taxpayer, they being highly disfavored and may almost be said
"to be odious to the law." He who claims an exemption must be able to print to
some positive provision of law creating the right; it cannot be allowed to exist upon a
mere vague implication or inference.3 The right of taxation will not beheld to have
been surrendered unless the intention to surrender is manifested by words too plain
to be mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the
state cannot strip itself of the most essential power of taxation by doubtful words; it
cannot, by ambiguous language, be deprived of this highest attribute of sovereignty
(Erie Railway Co. vs. Commonwealth of Pennsylvania, 21 Wallace 492, 499). So, when
exemption is claimed, it must be shown indubitably to exist, for every presumption is
against it, and a well founded doubt is fatal to the claim (Farrington vs. Tennessee &
County of Shelby, 95 U.S. 679, 686)

Petitioner's submission that its right to exemption is supported by the "plain and
unambiguous" term of paragraph 9 of its franchise is positively without basis. The
Court do not see such provision of its petitioner's franchise, on the assumption that
it does exist as worded, what may be considered as "plain and unambiguous terms"
declaring MERALCO exempt from paying a compensating tax on its imports of poles,
wires, transformers, and insulators. What MERALCO really wants to do, but which
cannot under the principles enumerated earlier, is to infer and imply that there is
such an exemption from the following phrase.

Note that what the above provision exempts petitioner from, is the payment of
property, tax on its poles, wires, transformers, and insulators; it does not exempt it
from payment of taxes like the one in question which, by mere necessity or
consequence alone, fall upon property. The ending clause providing in effect that the
percentage tax imposed upon petitioner shall be in lieu of "all taxes and assessments
of what and by whatsoever authority" cannot be said to have granted it exemption
from payment of compensating tax.

It is a well settled rule or principle in taxation that a compensating tax is not a

property tax but is an excise tax. Generally stated, an excise tax is one that is
imposed on the performance of an act, the engaging in an occupation, or the
enjoyment of a privilege. A tax upon property because of its ownership its a direct
tax, whereas one levied upon property because of its use is an excise duty.
(Manufacturer's Trust Co. vs. United States, Ct. Cl., 32 F. Supp. 289, 296) Thus, where
a tax which is not on the property as such, is upon certain kinds of property, having
reference to their origin and their intended use, that is an excise tax.

5. LUZON STEVEDORING v. CTA; G.R. No. L-30232; 29 July 1988 - Fortajada

Facts:
Luzon Stevedoring Corporation (petitioner-appellant) for the repair and
maintenance of its tugboats, imported various engine parts and other equipment for
which it paid, under protest, the assessed compensating tax. Unable to secure a tax
refund from the Commissioner of Internal Revenue, it filed a Petition for Review with
the Court of Tax Appeals.

Petitioner contended that tugboats are included in the term cargo vessel
under the tax exemption provisions of Section 190 of the Revenue Code, as amended
by Republic Act. No. 3176. Respondents countered that petitioner-appellant’s
"tugboats" are not "cargo vessel" because they are neither designed nor used for
carrying and/or transporting persons or goods by themselves but are mainly
employed for towing and pulling purposes, and, therefore, not within the purview of
the aforesaid law.

The Court of Tax Appeals denied the various claims for tax refund. Petitioner-
appellant filed a Motion for Reconsideration but the same was denied. Hence, the
instant petition.

Issue:
 Whether or not petitioner’s tugboats can be interpreted to be included in the
term “cargo vessels” for purposes of the tax exemption provided for in Section 190
of the National Internal Revenue Code, as amended by Republic Act No. 3176.

Ruling:
No. The Supreme Court laid down the rule that "as the power of taxation is a
high prerogative of sovereignty, the relinquishment is never presumed and any
reduction or diminution thereof with respect to its mode or its rate, must be strictly
construed, and the same must be coached in clear and unmistakable terms in order
that it may be applied." More specifically stated, the general rule is that any claim for
exemption from the tax statute should be strictly construed against the taxpayer.
As correctly analyzed by the Court of Tax Appeals, in order that the
importations in question may be declared exempt from the compensating tax, it is
indispensable that the requirements of the amendatory law be complied with,
namely: (1) the engines and spare parts must be used by the importer himself as a
passenger and/or cargo vessel; and (2) the said passenger and/or cargo vessel must
be used in coastwise or oceangoing navigation.

As pointed out by the Court of Tax Appeals, the amendatory provisions of

Republic Act No. 3176 limit tax exemption from the compensating tax to imported
items to be used by the importer himself as operator of passenger and/or cargo
vessel.

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as

follows:

"A tugboat is a strongly built, powerful steam or power vessel, used for towing and,
now, also used for attendance on vessel. (Webster New International Dictionary, 2nd
Ed.)

"A tugboat is a diesel or steam power vessel designed primarily for moving large
ships to and from piers for towing barges and lighters in harbors, rivers and canals.
(Encyclopedia International Grolier, Vol. 18, p. 256).

" A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law
Dictionary.)" (Rollo, p. 24).

On analysis of petitioner-appellant's transactions, the Court of Tax Appeals

found that no evidence was adduced by petitioner-appellant that tugboats are
passenger and/or cargo vessels used in the shipping industry as an independent
business. On the contrary, petitioner-appellant's own evidence supports the view
that it is engaged as a stevedore, that is, the work of unloading and loading of a
vessel in port; and towing of barges containing cargoes is a part of petitioner's
undertaking as a stevedore. In fact, even its trade name is indicative that its sole and
principal business is stevedoring and lighterage, taxed under Section 191 of the
National Internal Revenue Code as a contractor, and not an entity which transports
passengers or freight for hire which is taxed under Section 192 of the same Code as a
common carrier by water.

Thus, the corporation’s tugboats do not fall under the categories of

passenger or cargo vessels to avail of the exemption from compensation tax in
Section 190 of the Tax Code. It may be further noted that the amendment of Section
190 of Republic Act of 3176 was intended to provide incentives and inducements to
bolster the shipping industry and not in the business of stevedoring, in which the
corporation is engaged in.

6. MARLI PLYWOOD v. ARAÑAS; G.R. No. L-14930; 30 September 1960 - Galido

Facts:

Marli Plywood and Veneer corporation, holder of a certificate of exemption as a new

and necessary industry (plywood manufacturing business), seeks the review of the
decision of the Court of Tax Appeals denying its petition for refund of the sum of
P4,774.58 paid by it to the respondent Collector of Internal Revenue as
compensating tax in connection with its importation of a "Yanmar" marine diesel
engine and air compressor.

There is no disagreement between the parties as to the fact that petitioner's

plywood-manufacturing business, having been declared a new and necessary
industry, was exempted from payment of certain internal revenue taxes. The tax-
exemption certificate issued by the Secretary of Finance in favor of petitioner,
among others, provides:

“The exemption herein intended refers to the following taxes directly payable by you
in respect to the above-mentioned industry:

The compensating tax on machinery and equipment to be used exclusively in the

new and necessary industry.”

The machinery involved herein were actually installed in the boat "Marli II,"
belonging to petitioner, used exclusively to transport its manufactured product from
its factory and to bring, in its return trips, fuels and stocks for use in the factory.

Petitioner contends that upon these undisputed facts the imported machineries
come within the exemption because marketing of the finished products is essential
to the exemption of plywood-manufacturing.

Issue: Whether or not the imported machineries come within the exemption.

Ruling: NO.
The exemption (which should be interpreted strictly as all exceptions) clearly refers
only "machinery and equipment to be used exclusively in the new and necessary
industry," not merely in connection therewith. The industry exempted is the
manufacture of plywood. As far as this business is concerned, it is fully accomplished
with the turning out or production of the finished articles. With or without
petitioner's owning any transportation facility, the tax-exempt industry could be
operated. As a matter of fact, the transportation activity commenced only in 1956
although petitioner was already in the business since 1953. In other words, the
operation of the transportation, while it may bring convenience and economy to the
petitioner, is not indispensable to, or forms a part of the business of, manufacturing
plywood. This is certainly not the use or purpose for which the exemption was
granted. For the privilege to be availed of, it must be shown that the imported
machinery or equipment is directly necessary, not merely incidental, to the
operation of the industry itself.

7. E. RODRIGUEZ v. COLLECTOR;
G.R. No. L-23041; 31 July 1969 - Ganados

Facts: The case involves a decision assailed by petitioner E. Rodriguez, Inc. whereby
the CTA held the latter liable for deficiency income tax in the sum of P63,880.00 for
the year 1950 and affirmed by CIR.

On July 17, 1948, Congress enacted Republic Act No. 333, pursuant to which the
Republic of the Philippines sued the petitioner, among four other defendants, in Civil
Case No. Q-54 of the Court of First Instance of Quezon City, for the expropriation of
about 1,360,000 square meters of land owned by it and situated within the area
delimited for the new capital city site.

Following the issuance of the above-mentioned decision, however, a series of

negotiations were had between petitioner and the Government, represented by the
Capital City Planning Commission, after which, the said parties entered into a
compromise agreement under date of May 11, 1950.

Pursuant to the terms thereof, the Government paid to petitioner the sum of
P1,238,204.00, of which P625,315.90 were in Government Bonds.

On March 1, 1951, petitioner filed its income tax return for the year 1950, showing
on the face thereof a loss of P17,982.06. In said return, petitioner did not include the
sum of P625,315.90 received by it from the government in the form of bonds in
payment of its expropriated properties, in the belief that the said amount was free
or exempt from taxation. When this return was later examined by an agent of the
Bureau of Internal Revenue, the Collector of said bureau assessed against petitioner
a deficiency income tax of P63,880.00.
Issue: Whether or not the profit realized from the payment of the purchase price of
its (petitioner's) expropriated property is be tax-exempt under Republic Act No. 333.
- NO.

Ruling: The pertinent provisions of law involved are found in Section 9 of the Act
above mentioned which reads as follows:

SEC. 9. The President of the Philippines is authorized to issue, in the name and behalf
of the Republic of the Philippines, bonds in an amount of twenty million pesos, the
proceeds of which shall be used as a revolving fund for the acquisition of private
estates, the subdivision of the area, and the construction of streets, bridges,
waterworks, sewerage and other municipal improvements in the Capital City of the
Philippines.

Said bonds shall be exempt from taxation by the Government of the Republic of the
Philippines or by any political or municipal subdivisions thereof, which fact shall be
stated upon their face, in accordance with this Act, under which the said bonds are
issued.

It has been the constant and uniform holding of this Court that exemption from
taxation is not favored and is never presumed; in fact, if it is granted, the grant must
be strictly construed against the taxpayer. Affirmatively put, the law requires courts
to frown on alleged exemptions from taxation, hence, an exempting provision in a
legislative enactment should be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority.

The above rules should be applied to the case at bar where the law invoked (Section
9 of Republic Act No. 333) does not make any reference whatsoever to exemption of
income derived from sale of expropriated property thereunder unlike under Republic
Act No. 1400 where relative to the price paid by the Government for any agricultural
land acquired for resale to tenants there is an express declaration that the same
"shall not be considered as income of the landowner concerned for purposes of the
income tax."

Nor are We convinced by the argument that the particular provision of Republic Act
No. 333 relied upon which grants exemption on bonds issued thereunder for
purposes of inducement to private landowners within the new capital site to part
away with their properties in favor of the Government other than for cash should be
taken to mean that said property owners need not pay income tax on their income
derived from the sale of such properties. The pertinent Congressional Record of the
proceedings held during the consideration of the bill which later became Republic
Act No. 333, does not show that Congress had intended to exempt said property
owners from the payment of income tax on the proceeds of the sale of their
properties when the same is paid in government bonds issued under the said law.

Likewise even were We to assume for the sake of argument, that the Capital City
Planning Commission and other officials of the government did make some
assurance or promise to herein petitioner that the portion of the price of its
expropriated property paid in tax-exempt government bonds would not be made
subject to income tax payment, such assurance or promise, made without statutory
sanction, cannot bind the Government. The same amounts to a surrender of the
State's power to require payment of income tax, which in this case is not explicitly
granted by Republic Act No. 333. It is a well-known rule that erroneous application
and enforcement of the law by public officers do not block subsequent correct
application of the statute, and that the Government is never estopped by mistake or
error on the part of its agents.

In the present circumstances, the Collector of Internal Revenue is right in assessing

against petitioner the deficiency income tax in question, consonant with the
proposition that income from expropriation proceedings is income from sales or
exchange and therefore taxable.

8. SMART COMMUNICATIONS v. CITY OF DAVAO

G.R. No. 155491; 16 September 2008 & 21 July 2009 - Ibrahim

FACTS:
Smart Communications Inc. (Smart) filed a special civil action for declaratory relief
for the ascertainment of its rights and obligations under the Tax Code of the City of
Davao, which imposes a franchise tax on businesses enjoying a franchise within the
territorial jurisdiction of Davao.
Section 1, Article 10 thereof, the pertinent portion of which reads:
Notwithstanding any exemption granted by any law or other special law, there is
hereby imposed a tax on businesses enjoying a franchise, at a rate of seventy-five
percent (75%) of one percent (1%) of the gross annual receipts for the preceding
calendar year based on the income or receipts realized within the territorial
jurisdiction of Davao City.
Smart avers that its telecenter in Davao City is exempt from payment of franchise tax
to the City on the ground that its power to impose franchise tax is subject to
statutory limitations such as the “in lieu of all taxes” clause found in Section 9 of
Republic Act No. 7294.
Smart is of the view that the only taxes it may be made to bear under its franchise
are the national franchise tax (now VAT), income tax, and real property tax. It claims
exemption from the local franchise tax because the “in lieu of taxes” clause in its
franchise does not distinguish between national and local taxes.
Smart also says that the “in lieu of all taxes” clause partakes of the nature of a tax
exclusion and not a tax exemption. A tax exemption means that the taxpayer does
not pay any tax at all. Smart pays VAT, income tax, and real property tax. Thus, what
it enjoys is more accurately a tax exclusion.
On the other hand, the City of Davao contested the tax exemption claimed by smart
invoking the power granted by the Constitution to local government units which
empowers them to create their own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as the Congress may provide.
The RTC rendered a Decision denying the petition. Smart in its instant motion for
reconsideration raised the following grounds:
The “in lieu of all taxes” clause in Smart’s franchise, RA No. 7294 covers local taxes
the rule of strict construction against tax exemptions is not applicable;
The “in lieu of all taxes” clause is no rendered ineffective by the Expanded VAT Law;
and
Section 23 of RA 7925 includes a tax exemption.
Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue.
Section 9. Tax provisions. - The grantee, its successors or assigns shall be liable to pay
the same taxes on their real estate buildings and personal property, exclusive of this
franchise, as other persons or corporations which are now or hereafter may be
required by law to pay. In addition thereto, the grantee, its successors or assigns
shall apy a franchise tax equivalent to three percent (3%) of all gross receipts of the
business transacted under this franchise by the grantee, its successors or assigns and
the said percentage shall be in lieu of all taxes on this franchise or earnings thereof;
Provided, that the grantee, its successors or assigns shall continue to be liable for
income taxes payable under Title II of the NIRC pursuant to Sec. 2 of EO No. 72
unless the latter enactment is amended or repealed, in which case the amendment
of repeal shall be applicable thereto. Xxx
Section 23 of RA No. 7925, otherwise known as the most favored treatment clause
or equality clause, contains the word “exemption,” viz.:
Section 23. Equality of Treatment in the Telecommunications Industry - Any
advantage, favor, privilege, exemption, or immunity granted under existing
franchises, or may hereafter be granted, shall ipso facto become part of previously
granted telecommunications franchises and shall be accorded immediately and
unconditionally to the grantees of such franchises: Provided, however, that the
foregoing shall neither apply to nor affect provisions of telecommunications
franchises concerning territory severed by the franchise, the life span of the
franchise, or the type of the service authorized by the franchise.
The imposition of a local franchise tax on Smart would violate the constitutional
prohibition against impairment of the obligation of contracts.

ISSUE:
Whether or not Smart is exempt from paying franchise tax imposed by the City of
Davao.
RULING: NO
The uncertainty in the “in lieu of all taxes” clause in R.A. No. 7294 on whether Smart
is exempted from both local or national franchise tax must be construed strictly
against Smart which claims the exemption. Smart has the burden of proving that,
aside from the imposed 3% franchise tax, Congress intended it to be exempted from
all kinds of franchise taxes – whether local or national. However, Smart failed in this
regard.
Tax exemptions are never presumed and are strictly construed against the taxpayer
and liberally in favor of the taxing authority. They can only be given force when the
grant is clear and categorical. The surrender of the power to tax, when claimed, must
be clearly shown by a language that will admit of no reasonable construction
consistent with the reservation of the power. If the intention of the legislature is
open to doubt, then the intention of the legislature must be resolved in favor of the
State.
The “in lieu of all taxes” clause in Smart’s franchise refers only to taxes, other than
income tax, imposed under the National Internal Revenue Code. If Congress
intended the “in lieu of all taxes” clause in Smart’s franchise to also apply to local
taxes, it should have categorically stated that the exemption applies to both local
and national taxes; otherwise, the exemption claimed should be strictly construed
against the taxpayer and liberally in favor of the taxing authority.. The clear intent is
for the “in lieu of all taxes” clause to apply only to taxes under the National Internal
Revenue Code and not to local taxes.
However, the franchise tax that the City of Davao may impose must comply with
Republic Act No. 7160. Thus, the local franchise tax that may be imposed by the City
must not exceed 50% of 1% of the gross annual receipts for the preceding calendar
year based on the income on receipts realized within the territorial jurisdiction of
Davao.
The Court also clarified the meaning of the word “exemption” in Section 23 of RA No.
7925: that the word “exemption” as used in the statute refers or pertains merely to
an exemption from regulatory or reporting requirements of the Department of
Transportation and Communication or the National Transmission Corporation and
not to an exemption from the grantee’s tax liability.

9. CIR v. PLDT;
G.R. No. 140230; 15 December 2005 - Jara

FACTS:

PLDT is a grantee of a franchise under Republic Act No. 7082 for the purpose
of operating and maintaining a telecommunications system in the Philippines. For
such operation, PLDT imported equipment, machineries and other spare parts on
separate dates, the taxes therein were duly paid (compensating tax, advance sales
tax and internal revenue tax, VAT).

PLDT then sought a confirmatory ruling on its tax exemption based on RA No.
7082 from BIR. BIR then confirmed that PLDT shall only be subjected to 3% franchise
tax on their gross receipts which shall be in lieu of all taxes on its franchise or
earnings. The BIR stated that the provision under RA No. 7082 which provides “in
lieu of all taxes” is a clear exemption from all taxes, including those taxes made by
virtue of the importation activities.

With this, PLDT sought to claim for a tax credit/refund for the taxes they paid,
specifically the VAT, compensating taxes, advance sales taxes and other taxes it had
been paying in connection with its importation of various equipment, machineries
and spare parts.

The CTA ruled in favor of PLDT, ordering the refund in favor of PLDT.
ISSUE:

Whether or not the grant of 3% franchise tax to PLDT in lieu of all taxes on
the franchise or earnings exempts the latter from paying the VAT, compensating tax
and advance sales tax on importations.

RULING:

No. Tax exemption represents a loss of revenue to the government and must,
therefore, not rest on vague inference. When claimed, it must be strictly construed
against the taxpayer who must prove that he falls under the exception.

The phrase “in lieu of all taxes” provided under RA No. 7082 refers to
exemption from “direct taxes'' and not indirect taxes, such as VAT, compensating
taxes and advance sales tax. Direct taxes are those that are extracted from the very
person who, it is intended or desired, should pay them. Indirect taxes are those that
are demanded, in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to someone else.

The Court explained that the clause “in lieu of all taxes” was clearly followed
by a limiting or qualifying clause “on this franchise or earnings thereof”, indicating
that the exemption should be understood to be applicable only to taxes imposed
directly on PLDT as taxes pertaining to PLDT’s franchise or earning are its direct
liability. Consequently, indirect taxes which are the subject of this case are deemed
outside the purview of the “in lieu” provision.

The Court further put emphasis on prohibiting from adhering with the
appellate court’s interpretation of the law that the “in lieu of all taxes” clause
encompasses the totality of all taxes collectible under the Revenue Code.
Considering that the immediately following limiting clause - “on this franchise and its
earnings” would render the statement as nothing more than a pure jargon bereft of
effect and meaning. Under the principle of redendo singula singulus, each word or
phrase must be given its proper connection in order to give it proper force and
effect, rendering none of them useless.

In this case, the Court held that PLDT failed to show that RA No. 7082 operates in
granting PLDT blanket exemption from payment of indirect taxes.PLDT’s payment of
internal revenue taxes on its importations in question, is effectively claiming
exemption from taxes not falling under the category of direct taxes.

10. MACEDA v. MACARAIG; G.R. No. 88291; 31 May 1991 - Lalaquil

FACTS:
Commonwealth Act 120 created National Power Corporation (NPC) as a public
corporation to undertake the development of hydraulic power and the production of
power from other sources. RA 358 granted NPC tax and duty exemption privileges.
RA 6395 revised the charter of the NPC, tasking it to carry out the policy of national
electrification and provided in detail NPC’s tax exemptions. PD 380 specified that
NPC’s exemption includes all taxes, etc. imposed “directly or indirectly.” PD 938
dated May 27, 1976 further amended the aforesaid provision by integrating the tax
exemption in general terms under one paragraph.

The petitioner seeks to nullify certain decisions, orders, rulings, and resolutions of
respondents Executive Secretary, Secretary of Finance, Commissioner of Internal
Revenue, Commissioner of Customs and the Fiscal Incentives Review Board (FIRB) for
exempting the National Power Corporation (NPC) from indirect tax and duties.

ISSUE:

Whether or not NPC has ceased to enjoy indirect tax and duty exemption with the
enactment of PD 938 on May 27, 1976 which amended PD 380 issued on January 11,
1974;

Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored
NPC's tax exemption privilege effective June 11, 1984 to June 30, 1985 and FIRB
Resolution No. 1-86 dated January 7, 1986 restoring NPC's tax exemption privilege
effective July 1, 1985 included the restoration of indirect tax exemption to NPC; and

Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June
24, 1987 which restored NPC's tax exemption privilege effective March 10, 1987; and
if said Resolution was validly issued, the nature and extent of the tax exemption
privilege restored to NPC.

RULING:

I
No, NPC is still exempt from indirect tax and duty exemption.

NPC is a non-profit public corporation created for the general good and welfare, and
wholly owned by the government of the Republic of the Philippines. From the very
beginning of the corporation’s existence, NPC enjoyed preferential tax treatment “to
enable the corporation to pay the indebtedness and obligation” and effective
implementation of the policy enunciated in Section 1 of RA 6395.

Subsequently, P.D. No. 380, made even more specific the details of the exemption of
NPC to cover, among others, both direct and indirect taxes on all petroleum products
used in its operation. Presidential Decree No. 938 amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts NPC from "all forms
of taxes, duties, fees, imposts, as well as costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any court or administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to
give NPC all the tax exemptions it has been enjoying before. The rationale for this
exemption is that being non-profit the NPC "shall devote all its returns from its
capital investment as well as excess revenues from its operation, for expansion. To
enable the Corporation to pay the indebtedness and obligations and in furtherance
and effective implementation of the policy enunciated in Section one of this Act.”
The NPC is a government instrumentality with the enormous task of undertaking
development of hydroelectric generation of power and production of electricity from
other sources, as well as the transmission of electric power on a nationwide basis, to
improve the quality of life of the people pursuant to the State policy embodied in
Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax
exemption of NPC from all forms of taxes including indirect taxes as provided for
under R.A. No. 6895 and P.D. No. 380 if it is to attain its goals.
II
Yes, both resolutions included the restoration of indirect tax exemption to
NPC.
Under P.D. No. 938 the tax exemption of NPC was integrated under Section 13
defining the same in general terms to cover "all forms of taxes, duties, fees, imposts,
etc." which, as hereinabove discussed, logically includes exemption from indirect
taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931
was passed, on the authority of which FIRB Resolution Nos. 10-85 and 1-86 were
issued.
In the light of the foregoing, the issue must consequently be resolved in the
affirmative, that is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB
Resolution No. 1-86 dated January 7, 1986 which restored NPC's tax exemption
privileges included the restoration of the indirect tax exemption of the NPC on
petroleum products it used.
III
Yes. The Court finds that FIRB resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987, is valid and
effective.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977
was of the view that the powers conferred upon the FIRB by Sections 2(a), (b), (c),
and (d) of Executive Order No. 93 constitute undue delegation of legislative power
and is therefore unconstitutional. However, he was overruled by the respondent
Executive Secretary in a letter to the Secretary of Finance dated March 30, 1989. The
Executive Secretary, by authority of the President, has the power to modify, alter or
reverse the construction of a statute given by a department secretary.
A reading of Section 3 of said law shows that it set the policy to be the greater
national interest. The standards of the delegated power are also clearly provided for.
The observation of petitioner that the approval of the President was not even
required in said Executive Order of the tax exemption privilege approved by the FIRB
unlike in previous similar issuances, is not well-taken. On the contrary, under Section
l(f) of Executive Order No. 93, aforestated, such tax and duty exemptions extended
by the FIRB must be approved by the President. In this case, FIRB Resolution No. 17-
87 was approved by the respondent Executive Secretary, by authority of the
President, on October 15, 1987.
The legislative authority could not or is not expected to state all the detailed
situations wherein the tax exemption privileges of persons or entities would be
restored. The task may be assigned to an administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity
of the statute. Such presumption can be overturned if its invalidity is proved beyond
reasonable doubt. Otherwise, a liberal interpretation in favor of constitutionality of
legislation should be adopted.
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative
power to the FIRB. And as above discussed, the tax exemption privilege that was
restored to NPC by FIRB Resolution No. 17-87 of June 1987 includes exemption from
indirect taxes and duties on petroleum products used in its operation.

O. TAX ASSUMPTION

MITSUBISHI CORPORATION vs CIR

G.R. NO 175772; 05 June 2017 - Leal
FACTS:
On June 11, 1987, the governments of Japan and the Philippines executed an
Exchange of Notes, whereby the former agreed to extend a loan amounting to
¥40,400,000,000 to the latter through the then Overseas Economic Cooperation
Fund (OECF, now Japan Bank for International Cooperation) for the implementation
of the Calaca II Coal-Fired Thermal Power Plant Project (Project). In Paragraph 5 (2)
of the Exchange of Notes, the Philippine Government, by itself or through its
executing agency, undertook to assume all taxes imposed by the Philippines on
Japanese contractors engaged in the Project.
Consequently, the OECF and the Philippine Government entered into a Loan
Agreement dated September 25, 1987 for ¥40,400,000,000. Due to the need for
additional funding for the Project, they also executed Loan Agreement No. PH-P141
dated December 20, 1994 for ¥5,513,000,000.
Meanwhile, on June 21, 1991, the National Power Corporation (NPC), as the
executing government agency, entered into a contract with Mitsubishi Corporation
(i.e., petitioner's head office in Japan) for the engineering, supply, construction,
installation, testing, and commissioning of a steam generator, auxiliaries, and
associated civil works for the Project. The Contract's foreign currency portion was
funded by the OECF loans.
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year that ended
on March 31, 1998 with the Bureau of Internal Revenue (BIR). Petitioner included in
its income tax due the amount of P44,288,712.00, representing income from the
OECF-funded portion of the Project. On the same day, petitioner also filed its
Monthly Remittance Return of Income Taxes Withheld and remitted P8,324,100.00
as BPRT for branch profits remitted to its head office in Japan out of its income for
the fiscal year that ended on March 31, 1998
On June 30, 2000, petitioner filed with the respondent Commissioner on Internal
Revenue (CIR) an administrative claim for refund of P52,612,812.00, representing
the erroneously paid amounts of P44,288,712.00 as income tax and P8,324,100.00 as
BPRT corresponding to the OECF-funded portion of the Project.Petitioner anchored
its claim for refund on BIR Ruling No. DA-407-98 dated September 7, 1998.
CTA Division granted the refund but such a ruling was reversed by the CTA En Banc.

ISSUE:
WON Petitioner is entitled to a refund by virtue of the Tax Assumption provision
under the exchange of notes.

RULING:
Yes, the petitioner is entitled to a refund.
In this case, it is fairly apparent that the subject taxes in the amount of
P52,612,812.00 was erroneously collected from the petitioner, considering that the
obligation to pay the same had already been assumed by the Philippine Government
by virtue of its Exchange of Notes with the Japanese Government. In Abaya v.
Ebdane, it was ruled that exchange of notes is considered as an executive
agreement, which is binding on the State even without Senate concurrence.
An "exchange of notes" is a record of a routine agreement that has many similarities
with the private law contract. The agreement consists of the exchange of two
documents, each of the parties being in the possession of the one signed by the
representative of the other. Under the usual procedure, the accepting State repeats
the text of the offering State to record its assent. The signatories of the letters may
be government Ministers, diplomats or departmental heads. The technique of
exchange of notes is frequently resorted to, either because of its speedy procedure,
or, sometimes, to avoid the process of legislative approval.

Paragraph 5 (2) of the Exchange of Notes provides for a tax assumption provision
whereby:
(2) The Government of the Republic of the Philippines will, itself or through its
executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in
the Republic of the Philippines on Japanese firms and nationals operating as
suppliers, contractors or consultants on and/or in connection with any income that
may accrue from the supply of products of Japan and services of Japanese nationals
to be provided under the Loan.

To "assume" means "to take on, become bound as another is bound, or put oneself
in place of another as to an obligation or liability." This means that the obligation or
liability remains, although the same is merely passed on to a different person. In this
light, the concept of an assumption is therefore different from an exemption, the
latter being the "freedom from a duty, liability or other requirement" or "a privilege
given to a judgment debtor by law, allowing the debtor to retain a certain property
without liability.
As explicitly worded, the Philippine Government, through its executing agencies (i.e.,
NPC in this case) particularly assumed "all fiscal levies or taxes imposed in the
Republic of the Philippines on Japanese firms and nationals operating as suppliers,
contractors or consultants on and/or in connection with any income that may accrue
from the supply of products of Japan and services of Japanese nationals to be
provided under the [OECF] Loan." The Philippine Government's assumption of "all
fiscal levies and taxes," which includes the subject taxes, is clearly a form of
concession given to Japanese suppliers, contractors or consultants in consideration
of the OECF Loan, which proceeds were used for the implementation of the Project.
As part of this, NPC entered into the June 21, 1991 Contract with Mitsubishi
Corporation (i.e., petitioner's head office in Japan) for the engineering, supply,
construction, installation, testing, and commissioning of a steam generator,
auxiliaries, and associated civil works for the Project, which foreign currency portion
was funded by the OECF loans.Thus, in line with the tax assumption provision under
the Exchange of Notes, Article VIII (B) (1) of the Contract states that NPC shall pay
any and all forms of taxes that are directly imposable under the Contract.
Petitioner included in its income tax due the amount of ₱44,288,712.00,
representing income from the OECF-funded portion of the Project, and further
remitted ₱8,324,100.00 as BPRT for branch profits remitted to its head office in
Japan out of its income for the fiscal year that ended on March 31, 1998.45 These
taxes clearly fall within the ambit of the tax assumption provision under the
Exchange of Notes, which was further fleshed out in the Contract. Hence, it is the
Philippine Government, through the NPC, which should shoulder the payment of the
same.
It bears stressing that the CIR had already acknowledged, through its administrative
issuances, that Japanese contractors involved in the Project are not liable for the
subject taxes. In RMC No. 42-99, the CIR interpreted the effect of the tax assumption
clause in the Exchange of Notes on petitioner's tax liability, to wit:
The foregoing provisions of the Exchange of Notes mean that the Japanese
contractors or nationals engaged in EOCF-funded projects in the Philippines shall not
be required to shoulder all fiscal levies or taxes associated with the project.xxx
xxxSince the executing government agencies are mandated to assume the payment
of [income taxes] under the Exchange of Notes, the said Japanese firms or nationals
need not pay taxes due thereunder.

The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement to
tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-2005 provides:
“Japanese contractors and nationals engaged in OECF funded projects in the
Philippines shall not be required to shoulder the fiscal levies or taxes associated with
the project. Thus, the concerned Japanese contractors are entitled to claim for the
refund of all taxes paid and shouldered by them relative to the conduct of the
Project.
You are, therefore, directed to expedite/ prioritize the processing of the claims for
refund of Japanese contractors and nationals so [as] not to delay and jeopardize the
release of the funds for OECF funded projects.”
Therefore, considering that petitioner paid the subject taxes in the aggregate
amount of ₱52,612,812.00, which it was not required to pay, the BIR erroneously
collected such amount. Accordingly, the petitioner is entitled to its refund.