G.R. No.

L-21570             July 26, 1966

(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00

LIMPAN INVESTMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, ET Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00
AL., respondents.
Net income per investigation P27,746.00
Vicente L. San Luis for petitioner. Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B.
Rosete, Solicitor A. B. Afurong and Atty. V. G. Saldajeno for respondents. Tax due thereon P5,549.00

Less: Amount already assessed 657.00

REYES, J.B.L., J.:
Balance P4,892.00
Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax
Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent Commissioner of Add: 50% Surcharge 2,446.00
Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus 50%
surcharge and 1% monthly interest from June 30, 1959 to the date of payment, with cost. DEFICIENCY TAX DUE P7,338.00

90-AR-C-1196-58/57
The facts of this case are:
Net income per audited return P11,098.00
Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of leasing
real properties. It commenced actual business operations on July 1, 1955. Its principal stockholders are the Add: Unallowable deductions:
spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its
total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim. 1äwphï1.ñët Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00
which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.
Net income per investigation P109,126.00

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of Tax due thereon P22,555.00
P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of
P657.00 and P2,220.00. Less: Amount already assessed 2,220.00

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of
petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained
that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable
years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00
covering the same period. On the basis of these findings, respondent Commissioner of Internal Revenue
issued its letter-assessment and demand for payment of deficiency income tax and surcharge against
petitioner corporation, computed as follows:
90-AR-C-348-58/56
Net income per audited return P 3,287.81
Add: Unallowable deductions:
Undeclared Rental Receipt
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50
Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above
assessment but the latter denied said request and reiterated its original assessment and demand, plus 5%
surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation
filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above
assessment of respondent Commissioner of Internal Revenue. It disclaimed having received or collected the
amount of P20,199.00, as unreported rental income for 1956, or any part thereof, reasoning out that 'the
previous owners of the leased building has (have) to collect part of the total rentals in 1956 to apply to their
payment of rental in the land in the amount of P21,630.00" (par. 11, petition). It also denied having received or
collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that
part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its
president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same
over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in
court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control;
and that a sub-tenant paid P4,200.00 which ought not be declared as rental income.
Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of
its buildings in the above assessment are unfair and inaccurate.
Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis, who
admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax return and also
the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference
between this omitted income (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as
undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to establish that it did not
collect or receive the same because, in view of the refusal of some tenants to recognize the new owner,
Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo P.
Lim, as president of petitioner corporation, on the other, had verbally agreed in 1956 to turn over to petitioner
corporation six per cent (6%) of the value of all its properties, computed at P21,630.00, in exchange for
whatever rentals the Lims may collect from the tenants. And, with respect to the difference between the
admittedly undeclared sum of P29,350.00 and that found by respondent Commissioner as unreported rental
income, (P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner corporation did not
receive or collect the same but that its president, Isabelo P. Lim, collected part thereof and may have reported
the same in his own personal income tax return; that same Isabelo P. Lim collected P13,500.00, which he
turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals
(P10,800.00), over which the corporation had no actual or constructive control and which were withdrawn only
in 1958; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income in 1957.
With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner,
the same witness tried to establish that some of its buildings are old and out of style; hence, they are entitled
to higher rates of depreciation than those adopted by respondent in his assessment.
Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.
On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation
of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he
personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their
rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not
declared in the corresponding returns; and that in applying rates of depreciation to petitioner's buildings, he
adopted Bulletin "F" of the U.S. Federal Internal Revenue Service.
On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and demand for
deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this
Court.
Petitioner corporation pursues, the same theory advocated in the court below and assigns the following
alleged errors of the trial court in its brief, to wit:
I. The respondent Court erred in holding that the petitioner had an unreported rental income of
P20,199.00 for the year 1956.
II. The respondent Court erred in holding that the petitioner had an unreported rental income of
P81,690.00 for the year 1957.
III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00 claimed
by petitioner for the years 1956 and 1957 was excessive.
and prays that the appealed decision be reversed.
This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente G. Solis),
that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the
BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the amount
(P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for the year
1957, contrary to its original claim to the revenue authorities, it was incumbent upon it to establish the
remainder of its pretensions by clear and convincing evidence, that in the case is lacking.
With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the excuse
that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only later
transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation, so as to
justify the alleged verbal agreement whereby they would turn over to petitioner corporation six percent (6%) of
the value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they
may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only
unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Hence, the
first assigned error is without merit.
As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining
unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim
was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return
submitted in court to establish that the rental income which he allegedly collected and received in 1957 were
reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification
for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of
petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have
constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been
reported as rental income in said year, since it is income just the same regardless of its source.
On the third assigned error, suffice it to state that this Court has already held that "depreciation is a question
of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual
facts", and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary
or in abuse of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29,
1964), and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in
finding that petitioner claimed excessive depreciation in its returns. It appearing that the Tax Court applied
rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this
Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific
studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned
(M. Zamora vs. Collector of internal Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora vs.
Collector of Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-
15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-appellant,
Limpan Investment Corporation.

G.R. No. 172231             February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. ISABELA CULTURAL
CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the Court of
Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of Tax Appeals
(CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices for deficiency income
tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against respondent Isabela
Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment
Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive
of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31,
1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for the months
of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes due from
Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due
to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for
security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the said
notices. Hence, it brought the case to the CTA which held that the petition is premature because the final
notice of assessment cannot be considered as a final decision appealable to the tax court. This was reversed
by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax,
amounts to a final decision on the protested assessment and may therefore be questioned before the CTA.
This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210. 8 The case was thus
remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices
issued against ICC. It held that the claimed deductions for professional and security services were properly
claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to
ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not
declare the same as deduction for the said years as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found
that it was the BIR which made an overstatement of said income when it compounded the interest income
receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in
the contract providing for a compounded interest; nor of a circumstance, like delay in payment or breach of
contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for
security services as shown by the various payment orders and confirmation receipts it presented as evidence.
The dispositive portion of the CTA’s Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency
expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision, 10 holding that
although the professional services (legal and auditing services) were rendered to ICC in 1984 and 1985, the
cost of the services was not yet determinable at that time, hence, it could be considered as deductible
expenses only in 1986 when ICC received the billing statements for said services. It further ruled that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc., and that ICC properly
withheld and remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since
ICC is using the accrual method of accounting, the expenses for the professional services that accrued in
1984 and 1985, should have been declared as deductions from income during the said years and the failure of
ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. As to the alleged
deficiency interest income and failure to withhold expanded withholding tax assessment, petitioner invoked the
presumption that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses
for professional and security services from ICC’s gross income; and (2) held that ICC did not understate its
interest income from the promissory notes of Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it
must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent
papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45
of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall
be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of
accounting upon the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report income
and deductions.12 In the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves
in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense
is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability
be determined with reasonable accuracy. However, the test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its
basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it
must be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be
expected to have known, at the closing of its books for the taxable year. [16] Accrual method of
accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing
the accrual of an item of income or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must
be able to justify the same by the clearest grant of organic or statute law. An exemption from the common
burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes
partakes of the nature of a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The
expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in
connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been
its counsel since the 1960’s.19 From the nature of the claimed deductions and the span of time during which
the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as
well as the compensation for its legal services. The failure to determine the exact amount of the expense
during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to
the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have
inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of
accounting. For another, it could have reasonably determined the amount of legal and retainer fees owing to
its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the
burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden. As
to when the firm’s performance of its services in connection with the 1984 tax problems were completed, or
whether ICC exercised reasonable diligence to inquire about the amount of its liability, or whether it does or
does not possess the information necessary to compute the amount of said liability with reasonable accuracy,
are questions of fact which ICC never established. It simply relied on the defense of delayed billing by the firm
and the company, which under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year
1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present
evidence showing that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV &
Co. in the year 1985, it cannot determine the professional fees which said company would charge for its
services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional
services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order
No. 1-2000, they cannot be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC in
198620 and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc.,
we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and that only
simple interest computation and not a compounded one should have been applied by the BIR. There is indeed
no stipulation between the latter and ICC on the application of compounded interest. 21 Under Article 1959 of
the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax
from its claimed deductions for security services and remitted the same to the BIR is supported by payment
order and confirmation receipts.22 Hence, the Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax
should be cancelled and set aside but only insofar as the claimed deductions of ICC for security services. Said
Assessment is valid as to the BIR’s disallowance of ICC’s expenses for professional services. The Court of
Appeal’s cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for
deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of
Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-
1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for professional and
security services, is declared valid only insofar as the expenses for the professional fees of SGV & Co. and of
the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is
affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.

G.R. No. 167679               July 22, 2015

ING BANK N.V., engaged in banking operations in the Philippines as ING BANK N.V. MANILA 1996 (ST-WC-96-0175-99) 1,027,267.20 602,288.17 1,629,555.37
BRANCH, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. 1997 (ST-WC-97-0184-99) 2,505,925.25 968,042.36 3,473,967.61
Deficiency Onshore Tax
DECISION
1996 (ST-OT-96-0176-99) 8,267,437.54 4,847,209.95 13,114,647.49
Deficiency Branch Profit
LEONEN, J.:
Remittance Tax
1996 (ST-RT-96-0177-99) 39,215,700.00 22,992,218[.]63 62,207,918.63
Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty program under
Republic Act No. 9480,  otherwise known as the 2007 Tax Amnesty Act. Thus, the provision in BIR Revenue
1
1997 (ST-RT-97-0181-99) 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17
Memorandum Circular No. 19-2008 excepting "[i]ssues and cases which were ruled by any court (even Deficiency Documentary
without finality) in favor of the BIR prior to amnesty availment of the taxpayer" from the benefits of the law is Stamp Tax
illegal, invalid, and null and void.  The duty to withhold the tax on compensation arises upon its accrual.
2 1996 (ST-DST-96-0178-99 3,838,753.06 959,688.27 4,798,441.33
1997 (ST-DST-97-0181- 1,569,990.18 392,497.55 1,962,487.73
This is a Petition for Review  appealing the April 5, 2005 Decision  of the Court of Tax Appeals En Banc, which
3 4 99)
in turn affirmed the August 9, 2004 Decision  and November 12, 2004 Resolution  of the Court of Tax Appeals
5 6 1997 (ST-DST-97-0180- 186,997,288.84 46,749,322.21 233,746,611.05
Second Division. The August 9, 2004 Decision held petitioner ING Bank, N.V. Manila Branch (ING Bank) 99)
liable for (a) deficiency documentary stamp tax for the taxable years 1996 and 1997 in the total amount of Compromise Penalty
₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax for the taxable year 1996 in the total 1996 (ST-CP-96-0179-99) 1,000.00 1,000.00
amount of ₱997,333.89 inclusive of surcharges and interest; and (c) deficiency withholding tax on 1997 (ST-CP-97-0186-99) 1,000.00 1,000.00
compensation for the taxable years 1996 and 1997 in the total amount of ₱564,542.67 inclusive of interest.
The Resolution denied ING Bank’s Motion for Reconsideration. 7 Deficiency Final Tax
1997 (ST-FT-97-0183-99) 53,200.89 20,551.58 73,752.47
While this case was pending before this court, ING Bank filed a Manifestation and Motion  stating that it
8 TOTALS
availed itself of the government’s tax amnesty program under Republic Act No. 9480 with respect to its 490,514,844.13 54,830,688.21 127,307,159.31 672,652,691.65
deficiency documentary stamp tax and deficiency onshore tax liabilities.  What is at issue now is whether ING
9
============= ============ ============= =============
Bank is entitled to the immunities and privileges under Republic Act No. 9480,and whether the assessment for =
deficiency withholding tax on compensation is proper.
On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996 compromise penalty, 1997
ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign banking corporation deficiency documentary stamp tax and 1997 deficiency final tax in the respective amounts of ₱1,000.00,
incorporated in the Netherlands[,] is duly authorized by the Bangko Sentral ng Pilipinas to operate as a branch ₱1,000.00 and ₱75,013.25 [the original amount of ₱73,752.47 plus additional interest]."  ING Bank, however,
16

with full banking authority in the Philippines."

10
"protested [on the same day] the remaining ten (10) deficiency tax assessments in the total amount of
₱672,576,939.18." 17

On January 3, 2000, ING Bank received a Final Assessment Notice  dated December 3, 1999.  The Final
11 12

Assessment Notice also contained the Details of Assessment  and 13 Assessment Notices "issued by the
13
Enforcement Service of the Bureau of Internal Revenue through its Assistant Commissioner Percival T.
ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000. This case was
docketed as C.T.A. Case No. 6187.  The Petition was filed to seek "the cancellation and withdrawal of the
18

Salazar[.]"  The Final Assessment Notice covered the following deficiency tax assessments for taxable years
14
deficiency tax assessments for the years 1996 and 1997, including the alleged deficiency documentary stamp
1996 and 1997: 15
tax on special savings accounts, deficiency onshore tax, and deficiency withholding tax on compensation
mentioned above." 19

Particulars Basic Tax( ) Surcharge( ) Interest( ) Total( )

Deficiency Income Tax After trial, the Court of Tax Appeals Second Division rendered its Decision on August 9, 2004, with the
1996 (ST-INC-96-0174-99) 20,916,785.03 11,346,639.55 32,263,424.58 following disposition:
1997 (ST-INC-97-0185-99) 133,533,114.54 45,730,518.68 179,263,633.22
Deficiency Withholding Tax WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and 1997 deficiency branch
on Compensation profit remittance tax and 1997 deficiency documentary stamp tax on IBCLs exceeding five days are hereby
CANCELLED and WITHDRAWN. However, the assessments for 1996 and 1997 deficiency withholding tax on
compensation, 1996 deficiency onshore tax and 1996 and 1997 deficiency documentary stamp tax on special On December 20, 2007, ING Bank filed a Manifestation and Motion  informing this court that it had availed
31

savings accounts are hereby UPHELD in the following amounts: itself of the tax amnesty authorized and granted under Republic Act No. 9480 covering "all national internal
revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor,
Particulars Basic Tax Surcharge Interest Total that have remained unpaid as of December 31, 2005[.]"  ING Bank stated that it filed before the Bureau of
32

Internal Revenue its Notice of Availment of Tax Amnesty Under Republic Act No. 9480  on December 14,
33

2007, together with the following documents:

Deficiency Withholding Tax on Compensation
1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97 (1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005 (original and
1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70 amended declarations); 34

Deficiency Onshore Tax

1996 (ST-OT-96-0176-99) 544,991.20 P 136,247.80 316,094.89 997,333.89 (2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form No. 2116);  and (3) Tax
35

Deficiency Documentary Stamp Tax Amnesty Payment Form (Acceptance of Payment Form) for Taxable Year 2005 and Prior Years (BIR
Form No. 0617)  showing payment of the amnesty tax in the amount of ₱500,000.00.
36

1996 (ST-DST-96-0178-99) 3,838,753.06 959,688.27 4,798,441.33

1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05 ING Bank prayed that this court issue a resolution taking note of its availment of the tax amnesty, and
confirming its entitlement to all the immunities and privileges under Section 6 of Republic Act No. 9480,
TOTALS ₱191,774,768.40 ₱47,845,258.28 P 486,902.26 ₱240,106,928.94 particularly with respect to the "payment of deficiency documentary stamp taxes on its special savings
accounts for the taxable years 1996 and 1997 and deficiency tax on onshore interest income derived under
Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of ₱240,106,928.94, plus the foreign currency deposit system for taxable year 1996[.]" 37

20% delinquency interest per annum from February 3, 2000 until fully paid, pursuant to Section 249(C) of the
National Internal Revenue Code of 1997. Pursuant to this court’s Resolution  dated January 23, 2008, the Commissioner of Internal Revenue filed its
38

Comment  and ING Bank, its Reply.

39 40

SO ORDERED.  (Emphasis in the original)

20

Originally, ING Bank raised the following issues in its pleadings:

Both the Commissioner of Internal Revenue and ING Bank filed their respective Motions for
Reconsideration.  Both Motions were denied through the Second Division’s Resolution dated November 12,
21
First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner’s Special Saving
2004, as follows: Accounts are subject to documentary stamp tax (DST) as certificates of deposit under Section 180 of the 1977
Tax Code"; 41

WHEREFORE, the respondent’s Motion for Partial Reconsideration and the petitioner’s Motion for
Reconsideration are hereby DENIED for lack of merit. The pronouncement reached in the assailed decision is Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency onshore
REITERATED. tax considering that under the 1977 Tax Code and the pertinent revenue regulations, the obligation to pay the
ten percent (10%) final tax on onshore interest income rests on the payors-borrowers and not on petitioner as
SO ORDERED. 22 payee-lender";  and 42

On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En Banc.  The Court of Tax
23
Appeals En Banc denied due course to ING Bank’s Petition for Review and dismissed the same for lack of
merit in the Decision promulgated on April 5, 2005.24
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency withholding
tax on compensation for the accrued bonuses in the taxable years 1996 and 1997 considering that these were
not distributed to petitioner’s officers and employees during those taxable years, hence, were not yet subject
to withholding tax." 43

Hence, ING Bank filed its Petition for Review  before this court. The Commissioner of Internal Revenue filed
25

its Comment  on October 5, 2005 and ING Bank its Reply  on December 14, 2005. Pursuant to this court’s
26 27 However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with respect to its liabilities
Resolution  dated January 25, 2006, the Commissioner of Internal Revenue filed its Manifestation and
28 for deficiency documentary stamp taxes on its special savings accounts for the taxable years 1996 and 1997
Motion  on February 14, 2006, stating that it is adopting its Comment as its Memorandum, and ING Bank filed
29 and deficiency tax on onshore interest income under the foreign currency deposit system for taxable year
its Memorandum  on March 9, 2006.
30 1996.

Consequently, the issues now for resolution are:

First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by Republic Act No.
9480; and
Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses for the
taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section 5 [of Republic Act No.
9480] and . . . not disqualified under Section 8 [of the same law]."  Respondent Commissioner of Internal
44
Revenue, for its part, does not deny the authenticity of the documents submitted by petitioner ING Bank or
dispute the payment of the amnesty tax. However, respondent Commissioner of Internal Revenue claims that
petitioner ING Bank is not qualified to avail itself of the tax amnesty granted under Republic Act No. 9480
because both the Court of Tax Appeals En Banc and Second Division ruled in its favor that confirmed the
liability of petitioner ING Bank for deficiency documentary stamp taxes, onshore taxes, and withholding taxes.
Respondent Commissioner of Internal Revenue asserts that BIR Revenue Memorandum Circular No. 19-2008
specifically excludes "cases which were ruled by any court (even without finality) in favor of the BIR prior to
amnesty availment of the taxpayer" from the coverage of the tax amnesty under Republic Act No. 9480.  In
any case, respondent Commissioner of Internal Revenue argues that petitioner ING Bank’s availment of the
tax amnesty is still subject to its evaluation,  that it is "empowered to exercise [its] sound discretion . . . in the
47
implementation of a tax amnesty in favor of a taxpayer,"  and "petitioner cannot presume that its application . .
48
. would be granted[.]"  Accordingly, respondent Commissioner of Internal Revenue prays that "petitioner [ING
49
Bank’s] motion be denied for lack of merit." 50
Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008 cannot override Republic
Act No. 9480 and its Implementing Rules and Regulations, which only exclude from tax amnesty "tax cases
subject of final and [executory] judgment by the courts."  Petitioner ING Bank asserts that its full compliance
51
with the conditions prescribed in Republic Act No. 9480 (the conditions being submission of the requisite
documents and payment of the amnesty tax), which respondent Commissioner of Internal Revenue does not
dispute, confirms that it is "qualified to avail itself, and has actually availed itself, of the tax amnesty."  It 52
argues that there is nothing in the law that gives respondent Commissioner of Internal Revenue the discretion
to rescind or erase the legal effects of its tax amnesty availment.  Thus, the issue is no longer about whether
53
"[it] is entitled to avail itself of the tax amnesty[,]"  but rather whether the effects of its tax amnesty availment
54
extend to the assessments of deficiency documentary stamp taxes on its special savings accounts for 1996
and 1997 and deficiency tax on onshore interest income for 1996. 55
Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank and Trust Company v.
Commissioner of Internal Revenue,  to the effect that full compliance with the requirements of the tax amnesty
56
law extinguishes the tax deficiencies subject of the amnesty availment.  Thus, with its availment of the tax
57
amnesty and full compliance with all the conditions prescribed in the statute, petitioner ING Bank asserts that
it is entitled to all the immunities and privileges under Section 6 of Republic Act No. 9480. 58
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to its officers and
employees during taxable years 1996 and 1997.  It maintains its position that the liability of the employer to
59
withhold the tax does not arise until such bonus is actually distributed. It cites Section 72 of the 1977 National
Internal Revenue Code, which states that "[e]very employer making payment of wages shall deduct and
withhold upon such wages a tax," and BIR Ruling No. 555-88 (November 23, 1988) declaring that "[t]he
withholding tax on the bonuses should be deducted upon the distribution of the same to the officers and
employees[.]"  Since the supposed bonuses were not distributed to the officers and employees in 1996 and
60
1997 but were distributed in the succeeding year when the amounts of the bonuses were finally determined,
petitioner ING Bank asserts that its duty as employer to withhold the tax during these taxable years did not
arise.
61
Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on Section 29(j) of the 1993
National Internal Revenue Code and Section 3 of Revenue Regulations No. 8-90 is not applicable because
the issue in this case "is not whether the accrued bonuses should be allowed as deductions from petitioner’s
taxable income but, rather, whether the accrued bonuses are subject to withholding tax on compensation in
45
the respective years of accrual[.]"  Respondent Commissioner of Internal Revenue counters that petitioner
62
ING Bank’s application of BIR Ruling No. 555-88 is misplaced because as found by the Second Division of the
Court of Tax Appeals, the factual milieu is different: 63
46
In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter [sic] the audit of each
company is completed (on or before April 15 of the succeeding year)". The withholding and remittance of
income taxes were also made in the year they were distributed to the employees. . . .
In petitioner’s case, bonuses were determined during the year but were distributed in the succeeding year. No
withholding of income tax was effected but the bonuses were claimed as an expense for the year. . . .
Since the bonuses were not subjected to withholding tax during the year they were claimed as an expense,
the same should be disallowed pursuant to the above-quoted law. 64
Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s act of "claim[ing] [the]
subject bonuses as deductible expenses in its taxable income although it has not yet withheld and remitted
the [corresponding withholding] tax"  to the Bureau of Internal Revenue contravened Section 29(j) of the 1997
65
National Internal Revenue Code, as amended.  Respondent Commissioner of Internal Revenue claims that
66
"subject bonuses should also be disallowed as deductible expenses of petitioner." 67
I
Taxpayers with pending tax cases may avail themselves of the tax amnesty program under Republic Act No.
9480.
In CS Garment, Inc. v. Commissioner of Internal Revenue,  this court has "definitively declare[d] . . . the
68
exception ‘[i]ssues and cases which were ruled by any court (even without finality) in favor of the BIR prior to
amnesty availment of the taxpayer’ under BIR [Revenue Memorandum Circular No.] 19-2008 [as] invalid, [for
going] beyond the scope of the provisions of the 2007 Tax Amnesty Law."  Thus:
69
[N]either the law nor the implementing rules state that a court ruling that has not attained finality would
preclude the availment of the benefits of the Tax Amnesty Law. Both R.A. 9480 and DOF Order No. 29-07 are
quite precise in declaring that "[t]ax cases subject of final and executory judgment by the courts" are the ones
excepted from the benefits of the law. In fact, we have already pointed out the erroneous interpretation of the
law in Philippine Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal
Revenue, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in favor of the
BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA
9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases subject of final
and executory judgment by the courts." The present case has not become final and executory when
Metrobank availed of the tax amnesty program.  (Emphasis in the original, citation omitted)
70
Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner of Internal
Revenue,  we confirmed that only cases that involve final and executory judgments are excluded from the tax
71
amnesty program as explicitly provided under Section 8 of Republic Act No. 9480. 72
Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty under the law during the
pendency of its appeal before this court.
II
Petitioner ING Bank showed that it complied with the requirements set forth under Republic Act No. 9480.
Respondent Commissioner of Internal Revenue never questioned or rebutted that petitioner ING Bank fully
complied with the requirements for tax amnesty under the law. Moreover, the contestability period of one (1)
year from the time of petitioner ING Bank’s availment of the tax amnesty law on December 14, 2007 lapsed.
Correspondingly, it is fully entitled to the immunities and privileges mentioned under Section 6 of Republic Act
No. 9480. This is clear from the following provisions:
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail himself of the tax
amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice
and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as of
December 31, 2005, in such form asmay be prescribed in the implementing rules and regulations (IRR) of this
Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR.
....
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31, 2005 shall be considered
as true and correct except where the amount of declared networth is understated to the extent of thirty percent
(30%) or more as may be established in proceedings initiated by, or at the instance of, parties other than the
BIR or its agents: Provided, That such proceedings must be initiated within one year following the date of the
filing of the tax amnesty return and the SALN. Findings of or admission in congressional hearings, other
administrative agencies of government, and/or courts shall be admissible to prove a thirty percent (30%)
under-declaration. . . . .
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty under Section 5
hereof, and have fully complied with all its conditions shall be entitled to the following immunities and
privileges:
a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of
1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year
2005 and prior years.
b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar
as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or administrative
bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the
networth beginning January 1, 2006, the same shall not be examined, inquired or looked into by any
person or government office. However, the taxpayer may use this as a defense, whenever
appropriate, in cases brought against him.
c. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty
availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may
authorize in writing the examination of the said books of accounts and other records to verify the
validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes
withheld on wages), tax incentives, and/or exemptions under existing laws. (Emphasis supplied)
Contrary to respondent Commissioner of Internal Revenue’s stance, Republic Act No. 9480 confers no
discretion on respondent Commissioner of Internal Revenue. The provisions of the law are plain and simple.
Unlike the power to compromise or abate a taxpayer’s liability under Section 204  of the 1997 National
73
Internal Revenue Code that is within the discretion of respondent Commissioner of Internal Revenue,  its 74
authority under Republic Act No. 9480 is limited to determining whether (a) the taxpayer is qualified to avail
oneself of the tax amnesty; (b) all the requirements for availment under the law were complied with; and (c)
the correct amount of amnesty tax was paid within the period prescribed by law. There is nothing in Republic
Act No. 9480 which can be construed as authority for respondent Commissioner of Internal Revenue to
introduce exceptions and/or conditions to the coverage of the law nor to disregard its provisions and substitute
his own personal judgment.
Republic Act No. 9480 provides a general grant of tax amnesty subject only to the cases specifically excepted
by it. A tax amnesty "partakes of an absolute. . . waiver by the Government of its right to collect what
otherwise would be due it[.]"  The effect of a qualified taxpayer’s submission of the required documents and
75
the payment of the prescribed amnesty tax was immunity from payment of all national internal revenue taxes
as well as all administrative, civil, and criminal liabilities founded upon or arising from non-payment of national
internal revenue taxes for taxable year 2005 and prior taxable years. 76
Finally, the documentary stamp tax and onshore income tax are covered by the tax amnesty program under
Republic Act No. 9480 and its Implementing Rules and Regulations.  Moreover, as to the deficiency tax on
77
onshore interest income, it is worthy to state that petitioner ING Bank was assessed by respondent
Commissioner of Internal Revenue, not as a withholding agent, but as one that was directly liable for the tax
on onshore interest income and failed to pay the same.
Considering petitioner ING Bank’s tax amnesty availment, there is no more issue regarding its liability for Supporting document is under the name of the Bank 1,630,292.14 7,039,976.36
deficiency documentary stamp taxes on its special savings accounts for 1996 and 1997 and deficiency tax on TOTAL ₱3,479,332.84 P 7,970,283.92
onshore interest income for 1996, including surcharge and interest. III.
Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ₱397,157.70 representing
The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division that accrued bonuses deficiency withholding taxes on compensation for the respective years of 1996 and 1997, computed as
were recorded in petitioner ING Bank’s books as expenses for taxable years 1996 and 1997, although no follows:
withholding of tax was effected:
1996 1997
With the preceding defense notwithstanding, petitioner now maintained that the portion of the disallowed
bonuses in the amounts of ₱3,879,407.85 and ₱9,004,402.63 for the respective years 1996 and 1997, were
actually payments for reimbursements of representation, travel and entertainment expenses of its officers. Total Disallowed Accrued Bonus P 3,879,407.85 P 9,004,402.63
These expenses according to petitioner are not considered compensation of employees and likewise not Less: Substantiated
subject to withholding tax.
Reimbursement of Expense 3,479,332.84 7,970,283.92
In order to prove that the discrepancy in the accrued bonuses represents reimbursement of expenses,
petitioner availed of the services of an independent CPA pursuant to CTA Circular No. 1-95, as amended. As Unsubstantiated P 400,075.01 P 1,034,119.43
a consequence, Mr. Ruben Rubio was commissioned by the court to verify the accuracy of petitioner’s
position and to check its supporting documents. Tax Rate 26.48% 27.83%

In a report dated January 29, 2002, the commissioned independent CPA noted the following pertinent Basic Withholding Tax Due
findings: . . . Thereon P 105,939.86 P 287,795.44

Findings and Observations 1997 1996 Interest (Sec. 249) 61,445.11 109,362.26
Supporting document is under the name of the employee P 930,307.56 P 1,849,040.70
Supporting document is not under the name of the Bank nor its 537,456.37 53,384.80 Deficiency Withholding Tax on
employees (addressee is "cash"/blank)
Compensation P 167,384.97 P 397,157.70
78

Supporting document is under the name of the Bank 7,039,976.36 1,630,292.14

Supporting document is in the name of another person (other than the 362,919.59 62,615.91
employee claiming the expense)
Supporting document is not dated within the period (i.e., 1996 and 13,404.00 423,199.07 An expense, whether the same is paid or payable, "shall be allowed as a deduction only if it is shown that the
1997) tax required to be deducted and withheld therefrom [was] paid to the Bureau of Internal Revenue[.]" 79

Date/year of transaction is not Indicated 31,510.00 26,126.49

Amount is not supported by liquidation document(s) 313,319.09 935,044.28
Section 29(j) of the 1977 National Internal Revenue Code  (now Section 34(K) of the 1997 National Internal
80

TOTAL ₱9,228,892.97 ₱4,979,703.39

Revenue Code) provides:

Based on the above report, only the expenses in the name of petitioner’s employee and those under its name
can be given credence. Therefore, the following expenses are valid expenses for income tax purposes:
Section 29. Deductions from gross income. — In computing taxable income subject to tax under Sec. 21(a);
24(a), (b) and (c); and 25(a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to
(i) of this section: . . . .
....

(a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary expenses paid or
  1996 1997 incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for
Supporting document is under the name of the employee ₱1,849,040.70 P 930,307.56 salaries or other compensation for personal services actually rendered; travelling expenses while away from
home in the pursuit of a trade, profession or business, rentals or other payments required to be made as a
condition to the continued use or possession, for the purpose of the trade, profession or business, of property
to which the taxpayer has not taken or is not taking title or in which he has no equity.
....
(j) Additional requirement for deductibility of certain payments. — Any amount paid or payable which is
otherwise deductible from, or taken into account in computing gross income for which depreciation or
amortization may be allowed under this section, shall be allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in
accordance with this section, Sections 51  and 74  of this Code. (Emphasis supplied)
81 82
Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue Regulations No. 2-98) provides:
Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as follows:
Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise deductible under
Sections 29 and 54 of the Tax Code, as amended, shall be allowed as a deduction from the payor’s gross
income only if it is shown that the tax required to be withheld has been paid to the Bureau of Internal Revenue
in accordance with Sections 50, 51, 72, and 74 also of the Tax Code.(Emphasis supplied)
Under the National Internal Revenue Code, every form of compensation for personal services is subject to
income tax and, consequently, to withholding tax. The term "compensation" means all remunerations paid for
services performed by an employee for his or her employer, whether paid in cash or in kind, unless specifically
excluded under Sections 32(B)  and 78(A)  of the 1997 National Internal Revenue Code.  The name
83 84 85
designated to the remuneration for services is immaterial. Thus, "salaries, wages, emoluments and honoraria,
bonuses, allowances (such as transportation, representation, entertainment, and the like), [taxable] fringe
benefits[,] pensions and retirement pay, and other income of a similar nature constitute compensation
income"  that is taxable.
86
Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it claimed the same as
expenses in the year they were accrued.
Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were not yet subject to
withholding tax because these bonuses were actually distributed only in the succeeding years of their accrual
(i.e., in 1997 and 1998) when the amounts were finally determined.
Petitioner ING Bank’s contention is untenable.
The tax on compensation income is withheld at source under the creditable withholding tax system wherein
the tax withheld is intended to equal or at least approximate the tax due of the payee on the said income. It
was designed to enable (a) the individual taxpayer to meet his or her income tax liability on compensation
earned; and (b) the government to collect at source the appropriate taxes on compensation.  Taxes withheld
87
are creditable in nature.  Thus, the employee is still required to file an income tax return to report the income
88
and/or pay the difference between the tax withheld and the tax due on the income.  For over withholding, the
89
employee is refunded.  Therefore, absolute or exact accuracy in the determination of the amount of the
90
compensation income is not a prerequisite for the employer’s withholding obligation to arise.
It is true that the law and implementing regulations require the employer to deduct and pay the income tax on
compensation paid to its employees, either actually or constructively.
Section 72 of the 1977 National Internal Revenue Code, as amended,  states:
91
SECTION 72. Income tax collected at source. — (a) Requirement of withholding. — Every employer making
payment of wages shall deduct and withhold upon such wages a tax determined in accordance with
regulations to be prepared and promulgated by the Minister of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No. 6-82,  as amended,  relative to the withholding of tax on
92 93
compensation income, provide:
Section 7. Requirement of withholding.— Every employer or any person who pays or controls the payment of
compensation to an employee, whether resident citizen or alien, non-resident citizen, or nonresident alien
engaged in trade or business in the Philippines, must withhold from such compensation paid, an amount
computed in accordance with these regulations.
I. Withholding of tax on compensation paid to resident employees. – (a)In general, every employer making
payment of compensation shall deduct and withhold from such compensation income for the entire calendar
year, a tax determined in accordance with the prescribed new Withholding Tax Tables effective January 1,
1992 (ANNEX "A").
....
Section 14. Liability for the Tax.— The employer is required to collect the tax by deducting and withholding the
amount thereof from the employee’s compensation as when paid, either actually or constructively. An
employer is required to deduct and withhold the tax notwithstanding that the compensation is paid in
something other than money (for example, compensation paid in stocks or bonds) and to pay the tax to the
collecting officer. If compensation is paid in property other than money, the employer should make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for payment to the
collecting officer.
Every person required to deduct and withhold the tax from the compensation of an employee is liable for the
payment of such tax whether or not collected from the employee. If, for example, the employer deducts less
than the correct amount of tax, or if he fails to deduct any part of the tax, he is nevertheless liable for the
correct amount of the tax. However, if the employer in violation of the provisions of Chapter XI, Title II of the
Tax Code fails to deduct and withhold and thereafter the employee pays the tax, it shall no longer be collected
from the employer. Such payment does not, however, operate to relieve the employer from liability for
penalties or additions to the tax for failure to deduct and withhold within the time prescribed by law or
regulations. The employer will not be relieved of his liability for payment of the tax required to be withheld
unless he can show that the tax has been paid by the employee.
The amount of any tax withheld/collected by the employer is a special fund in trust for the Government of the
Philippines.
When the employer or other person required to deduct and withhold the tax under this Chapter XI, Title II of
the Tax Code has withheld and paid such tax to the Commissioner of Internal Revenue or to any authorized
collecting officer, then such employer or person shall be relieved of any liability to any person. (Emphasis
supplied)
Constructive payment of compensation is further defined in Revenue Regulations No. 6-82:
Section 25. Applicability; constructive receipt of compensation.
—....
Compensation is constructively paid within the meaning of these regulations when it is credited to the account
of or set apart for an employee so that it may be drawn upon by him at any time although not then actually
reduced to possession. To constitute payment in such a case, the compensation must be credited or set apart
for the employee without any substantial limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made, and must be made available to him so that it may be drawn
upon at any time, and its payment brought within his control and disposition. (Emphasis supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal Revenue Code (then
Section 39 of the 1977 National Internal Revenue Code, as amended), deductions from gross income are
taken for the taxable year in which "paid or accrued" or "paid or incurred" is dependent upon the method of
accounting income and expenses adopted by the taxpayer.
In Commissioner of Internal Revenue v. Isabela Cultural Corporation,  this court explained the accrual method
94
of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set of rules for determining when and how to report income
and deductions. . . .
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves
in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense
is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability
to pay; and (2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability
be determined with reasonable accuracy.  However, the test does not demand that the amount of income or
1âwphi1
liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its
basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be
determined with "reasonable accuracy. "Accordingly, the term "reasonable accuracy" implies something less
than anex act or completely accurate amount.  (Emphasis supplied, citations omitted)
95
Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was paid, regardless of the year
it was incurred. If he is on the accrual method, he can deduct the expense upon accrual thereof. An item that
is reasonably ascertained as to amount and acknowledged to be due has "accrued"; actual payment is not
essential to constitute "expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is
already fixed; (2) the amount can be determined with reasonable accuracy; and (3) it is already knowable or
the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code  (Section 34(K) of the 1997 National Internal
96
Revenue Code) expressly requires, as a condition for deductibility of an expense, that the tax required to be
withheld on the amount paid or payable is shown to have been remitted to the Bureau of Internal Revenue by
the taxpayer constituted as a withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the 1997 National
Internal Revenue Code) regarding withholding on wages must be read and construed in harmony with Section
29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997 National Internal Revenue Code)
on deductions from gross income. This is in accordance with the rule on statutory construction that an
interpretation is to be sought which gives effect to the whole of the statute, such that every part is made
effective, harmonious, and sensible,  if possible, and not defeated nor rendered insignificant, meaningless,
97
and nugatory.  If we go by the theory of petitioner ING Bank, then the condition imposed by Section 29(j)
98
would have been rendered nugatory, or we would in effect have created an exception to this mandatory
requirement when there was none in the law.
Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and withhold
the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in
the payor’s/employer’s books, whichever comes first.
Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its
obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at the
time of accrual and not at the time of actual payment.
In Filipinas Synthetic Fiber Corporation v. Court of Appeals,  the issue was raised on "whether the liability to
99

withhold tax at source on income payments to non-resident foreign corporations arises upon remittance of the
amounts due to the foreign creditors or upon accrual thereof."  In resolving this issue, this court considered
100

the nature of the accounting method employed by the withholding agent, which was the accrual method,
wherein it was the right to receive income, and not the actual receipt, that determined when to report the
amount as part of the taxpayer’s gross income.  It upheld the lower court’s finding that there was already a
101

definite liability on the part of petitioner at the maturity of the loan contracts.  Moreover, petitioner already
102

deducted as business expense the said amounts as interests due to the foreign corporation.  Consequently,
103

the taxpayer could not claim that there was "no duty to withhold and remit income taxes as yet because the
loan contract was not yet due and demandable."  Petitioner, "[h]aving ‘written-off’ the amounts as business
104

expense in its books, . . . had taken advantage of the benefit provided in the law allowing for deductions from
gross income." 105

Here, petitioner ING Bank already recognized a definite liability on its part considering that it had deducted as
business expense from its gross income the accrued bonuses due to its employees. Underlying its accrual of
the bonus expense was a reasonable expectation or probability that the bonus would be achieved. In this
sense, there was already a constructive payment for income tax purposes as these accrued bonuses were
already allotted or made available to its officers and employees.

We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the bonus accruals in 1996
and 1997 were disbursed in the following year of accrual, as reimbursements of representation, travel, and
entertainment expenses incurred by its employees.  This shows that the accrued bonuses in the amounts of
106

₱400,075.0l (1996) and Pl,034,119.43 (1997) on which deficiency withholding taxes of Pl67,384.97 (1996)
and ₱397,157.70 (1997) were imposed, respectively, were already set apart or made available to petitioner
ING Bank's officers and employees. To avoid any tax issue, petitioner ING Bank should likewise have
recognized the withholding tax liabilities associated with the bonuses at the time of accrual.

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to petitioner ING Bank's
liabilities for deficiency documentary stamp taxes on its special savings accounts for the taxable years 1996
and 1997 and deficiency tax on onshore interest income under the foreign currency deposit system for taxable
year 1996 are hereby SET ASIDE solely in view of petitioner ING Bank's availment of the tax amnesty
program under Republic Act No. 9480. The April 5, 2005 Decision of the Court of Tax Appeals En Banc, which
affirmed the August 9, 2004 Decision and November 12, 2004 Resolution of the Court of Tax Appeals Second
Division holding petitioner ING Bank liable for deficiency withholding tax on compensation for the taxable
years 1996 and 1997 in the total amount of ₱564,542.67 inclusive of interest, is AFFIRMED.

SO ORDERED.
 The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax
Code, thus:

SEC. 37. Income from sources within the Philippines. —  (a) Gross income from sources within the
Philippines. — The following items of gross income shall be treated as gross income from sources
within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents, corporate or otherwise;

x x x           x x x          x x x

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision
G.R. No. L-53961 June 30, because all the related activities — the signing of the contract, the construction of the vessels, the payment of
1987 the stipulated price, and their delivery to the NDC — were done in Tokyo.   The law, however, does not speak
8

of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation with
NATIONAL DEVELOPMENT COMPANY, petitioner, vs. COMMISSIONER OF INTERNAL principal offices in Manila.
REVENUE, respondent.
As the Tax Court put it:
CRUZ, J.:
It is quite apparent, under the terms of the law, that the Government's right to levy and collect income
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have tax on interest received by foreign corporations not engaged in trade or business within the
carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm. Philippines is not planted upon the condition that 'the activity or labor — and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived from
Reduced to simplest terms, the background facts are as follows. sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed. The residence of the
The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding obligor  who pays the interest rather than the physical location of the securities, bonds or notes or the
companies for the construction of twelve ocean-going vessels.   The purchase price was to come from the
1
place of payment, is the determining factor of the source of interest income. (Mertens, Law of Federal
proceeds of bonds issued by the Central Bank.   Initial payments were made in cash and through irrevocable
2
Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19
letters of credit.   Fourteen promissory notes were signed for the balance by the NDC and, as required by the
3
BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine
shipbuilders, guaranteed by the Republic of the Philippines.   Pursuant thereto, the remaining payments and
4
Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest
the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed payment paid by him can have no other source than within the Philippines. The interest is paid not by
and delivered to the NDC in Tokyo.  5
the bond, note or other interest-bearing obligations, but by the obligor. (See mertens, Id.,  Vol. 8, p.
124.)
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the
balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax Here in the case at bar, petitioner National Development Company, a corporation duly organized and
in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a existing under the laws of the Republic of the Philippines, with address and principal office at Calle
warrant of distraint and levy to enforce collection of the claimed amount.   The NDC went to the Court of Tax
6
Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese shipbuilders,
Appeals. as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract price of the
twelve (12) ocean-going vessels purchased and acquired by it from the Japanese corporations,
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, including the interest on the principal sum at the rate of five per cent (5%) per annum. (See Exhs.
representing the compromise penalty.   The NDC then came to this Court in a petition for certiorari.
7 "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to
the terms and conditions of these promisory notes, which are duly signed by its Vice Chairman and
General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the years 1960,
The petition must fail for the following reasons.
1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest
 on the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial
Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the
interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and
as a corporation duly organized and existing under the laws of the Philippines, it is a domestic
corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest
paid by petitioner, which is admittedly a resident of the Philippines, is on the promissory notes issued
by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961
and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest
derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of
the National Internal Revenue Code.  9
There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and
that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4]
of the Tax Code, reading as follows:
SEC. 29. Gross Income. —  xxxx xxx xxx xxx
(b) Exclusion from gross income.  — The following items shall not be included in gross income and
shall be exempt from taxation under this Title:
x x x           x x x          x x x
(4) Interest on Government Securities. — Interest upon the obligations of the Government of the
Republic of the Philippines or any political subdivision thereof, but in the case of such obligations
issued after approval of this Code, only to the extent provided in the act authorizing the issue
thereof.  (As amended by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is
silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A.
No. 1407, does not exempt from taxes the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest
remitted because of the undertaking signed by the Secretary of Finance in each of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of the
Philippines, the due and punctual payment of both principal and interest of the above note. 10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a
clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be
categorically and unmistakably expressed.   Any doubt concerning this question must be resolved in favor of
11
the taxing power.  12
Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact,
such undertaking was made by the government in consonance with and certainly not against the following
provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership (companies
colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having control, receipt, custody; disposal or
payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or categorical gains, profits and
income of any nonresident alien individual, not engaged in trade or business within the Philippines
and not having any office or place of business therein, shall (except in the cases provided for in
subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits and
income a tax to twenty (now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject
to taxation under this Title not engaged in trade or business within the Philippines and not having any
office or place of business therein, there shall be deducted and withheld at the source in the same
manner and upon the same items as is provided in section fifty-three a tax equal to thirty (now
35%) per centum thereof, and such tax shall be returned and paid in the same manner and subject to
the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the
NDC but without diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the
petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary
activities not only by its charter but also by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned
by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines
that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the
same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under
this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year,
and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to
the officer of the Government of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and demands of any person for
the amount of any payments made in accordance with the provisions of this section. (As amended by
Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals,   the 13
Court quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and
promptly causing a query to be addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not subject to withholding. In case
the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to
withholding, the withholding agent may thereupon remit the amount of a tax withheld. (2nd par., Sec.
200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be released from liability,"
so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from
taxation; hence, an exempting provision should be construed strictissimi juris." 
14
The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so
should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered.
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. JULIANE BAIER-NICKEL, as represented by
Marina Q. Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision 1 of the Court
of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and
reversed the June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner
also assails the May 8, 2002 Resolution3 of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of
JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying
or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile
products."4 Through JUBANITEX’s General Manager, Marina Q. Guzman, the corporation appointed and
engaged the services of respondent as commission agent. It was agreed that respondent will receive 10%
sales commission on all sales actually concluded and collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from
which JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted
the same to the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income
tax return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been
mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales
commission income is not taxable in the Philippines because the same was a compensation for her services
rendered in Germany and therefore considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken
by the BIR on her claim for refund.7 On June 28, 2000, the CTA rendered a decision denying her claim. It held
that the commissions received by respondent were actually her remuneration in the performance of her duties
as President of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is
therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent
received the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source"
of income means the activity or service that produce the income, the sales commission received by
respondent is not taxable in the Philippines because it arose from the marketing activities performed by
respondent in Germany. The dispositive portion of the appellate court’s Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000
is hereby REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax
refund in the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied.9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source
thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus implied that source of
income means the physical source where the income came from. It further argued that since respondent is the
President of JUBANITEX, any remuneration she received from said corporation should be construed as
payment of her overall managerial services to the company and should not be interpreted as a compensation
for a distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her marketing services.
She contended that income of nonresident aliens like her is subject to tax only if the source of the income is
within the Philippines. Source, according to respondent is the situs of the activity which produced the income.
And since the source of her income were her marketing activities in Germany, the income she derived from
said activities is not subject to Philippine income taxation.
The issue here is whether respondent’s sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. –
(1) In General. – A nonresident alien individual engaged in trade or business in the Philippines shall be subject
to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a ‘nonresident alien doing business in the Philippines,’ Section 22(G) of this
Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. – There shall be
levied, collected and paid for each taxable year upon the entire income received from all sources within the
Philippines by every nonresident alien individual not engaged in trade or business within the Philippines x x x
a tax equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or
business, are subject to Philippine income taxation on their income received from all sources within the
Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the income’s "source." In
construing the meaning of "source" in Section 25 of the NIRC, resort must be had on the origin of the
provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833,10 which took effect
on January 1, 1920.11 Under Section 1 thereof, nonresident aliens are likewise subject to tax on income "from
all sources within the Philippine Islands," thus –
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources by every individual, a citizen or resident of the
Philippine Islands, a tax of two per centum upon such income; and a like tax shall be levied, assessed,
collected, and paid annually upon the entire net income received in the preceding calendar year from all
sources within the Philippine Islands by every individual, a nonresident alien, including interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S.
Revenue Law of 1917.12 Being a law of American origin, the authoritative decisions of the official charged with
enforcing it in the U.S. have peculiar persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources
within the U.S. and specifies when similar types of income are to be treated as from sources outside the
U.S.14 Under the said Code, compensation for labor and personal services performed in the U.S., is generally
treated as income from U.S. sources; while compensation for said services performed outside the U.S., is
treated as income from sources outside the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. – Compensation for labor or personal services performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from
three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "sources within the United States" and suggest an investigation
into the nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the
income should be from "sources within the United States." If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the income should be from "sources
within the United States." If the income is from the sale of capital assets, the place where the sale is made
should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is
an activity or property. As such, it has a situs or location, and if that situs or location is within the United States
the resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of
taxing nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of
the activities or property which produce the income. The result is that, on the one hand, nonresident aliens
and nonresident foreign corporations are prevented from deriving income from the United States free from tax,
and, on the other hand, there is no undue imposition of a tax when the activities do not take place in, and the
property producing income is not employed in, this country. Thus, if income is to be taxed, the recipient
thereof must be resident within the jurisdiction, or the property or activities out of which the income issues or is
derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in
this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the
income rightly to be levied upon to defray the burdens of the United States Government is that income which
is created by activities and property protected by this Government or obtained by persons enjoying that
protection. 16
The important factor therefore which determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is entered into, or the place of payment, but
the place where the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18 the Court addressed the issue on the
applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign
insurance company in respect of risks located in the Philippines. It was held therein that the undertaking of the
foreign insurance company to indemnify the local insurance company is the activity that produced the income.
Since the activity took place in the Philippines, the income derived therefrom is taxable in our jurisdiction.
Citing Mertens, The Law of Federal Income Taxation, the Court emphasized that the technical meaning of
source of income is the property, activity or service that produced the same. Thus:
The source of an income is the property, activity or service that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines. x x x the reinsured, the
liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation  (BOAC),20 the issue was
whether BOAC, a foreign airline company which does not maintain any flight to and from the Philippines is
liable for Philippine income taxation in respect of sales of air tickets in the Philippines, through a general sales
agent relating to the carriage of passengers and cargo between two points both outside the Philippines. Ruling
in the affirmative, the Court applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue,  and reiterated the rule that the source of income is that "activity" which produced the income. It was
held that the "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC
should pay income tax in the Philippines because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas
Airways Corporation in support of their arguments, but the correct interpretation of the said case favors the
theory of respondent that it is the situs of the activity that determines whether such income is taxable in the
Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do
with the underlying principle of the law on sourcing of income. In fact, both applied the case of Alexander
Howden & Co., Ltd. v. Collector of Internal Revenue.  The divergence in opinion centered on whether the sale
of tickets in the Philippines is to be construed as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his
dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets
as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to
support its view that source of income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated that source of income is not the business
activity of BOAC but the place where the person or entity disbursing the income is located or where BOAC
physically received the same. But such was not the import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its
conclusion that BOAC is subject to Philippine income taxation. Thus –
BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the
Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and
object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is
the very lifeblood of the airline business, the generation of sales being the paramount objective. There should
be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the
period covered by the assessments. x x x21
xxxx
The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to
pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and
conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces
within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the
relationship.22
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced
the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where
the labor or service was performed that determines the source of the income. There is therefore no merit in
petitioner’s interpretation which equates source of income in labor or personal service with the residence of
the payor or the place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able
to establish the factual circumstances showing that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the income, but the
sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not
raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will
settle the vital question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi previous and present case of respondent which deals with income earned and activities performed for
juris against the taxpayer.24 To those therefore, who claim a refund rest the burden of proving that the different taxable years.
transaction subjected to tax is actually exempt from taxation.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000
the service which would entitle her to 10% commission income, are "sales actually concluded and collected Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which denied respondent’s claim for refund of
through [her] efforts."25 What she presented as evidence to prove that she performed income producing income tax paid for the year 1995 is REINSTATED.
activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to
the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders SO ORDERED.
purportedly relayed to her by clients. However, these documents do not show whether the instructions or
orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence
show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly concluded in
Germany, respondent presented no such evidence. Neither did she establish reasonable connection between
the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany.

The paucity of respondent’s evidence was even noted by Atty. Minerva Pacheco, petitioner’s counsel at the
hearing before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders
signed by the customers in Germany to prove the sale transactions therein. 26 Likewise, in her Comment to the
Formal Offer of respondent’s evidence, she objected to the admission of the faxed documents bearing
instruction/orders marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by
petitioner’s counsel as to the absence of substantial evidence that would constitute proof that the sale
transactions for which respondent was paid commission actually transpired outside the Philippines, is relevant
because respondent stayed in the Philippines for 89 days in 1995. Except for the months of July and
September 1995, respondent was in the Philippines in the months of March, May, June, and August
1995,30 the same months when she earned commission income for services allegedly performed abroad.
Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell embroidered
products in the Philippines and that her appointment as commission agent is exclusively for Germany and
other European markets.

In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or
that relevant evidence that a reasonable mind might accept as adequate to support the conclusion31 that it was
in Germany where she performed the income producing service which gave rise to the reported monthly sales
in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that
her income was from sources outside the Philippines and exempt from the application of our income tax law.
Hence, the claim for tax refund should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case for refund of
income withheld from respondent’s remunerations for services rendered abroad, the Court in a Minute
Resolution dated February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled
to refund the sum withheld from her sales commission income for the year 1994. This ruling has no bearing in
the instant controversy because the subject matter thereof is the income of respondent for the year 1994
while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has no application here.
Its elements are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must
have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits; (4) there
must be between the two cases identity of parties, of subject matter, and of causes of action. 34 The instant
case, however, did not satisfy the fourth requisite because there is no identity as to the subject matter of the