1. COMMISSIONER OF INTERNAL REVENUE vs. JULIANE BAIER-NICKEL (G.R. No.

153793 August 29, 2006)

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 nonresident
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.

Facts: Respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of

JUBANITEX, Inc., a domestic corporation engaged in manufacturing, marketing on wholesale
only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing
embroidered textile products." 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. Respondent filed her 1995 income tax return reporting a taxable
income of P1,707,772.64 and a tax due representing 10% which is P170,777.26. Then 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, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for refund. The CTA rendered a
decision denying her claim stating that the income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation. On petition with the
CA, the latter reversed the decision. Petitioner filed a motion for reconsideration but was denied.
Hence, this instant recourse.

Issue: Whether the respondent’s sales commission income is taxable in the Philippines?

Ruling: Yes, the respondent’s sales commission income is taxable in the Philippines. 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 nonresident 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 settled rule is that tax refunds are in the nature
of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those
therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is
actually exempt from taxation. In the instant case, the appointment letter of respondent as agent
of JUBANITEX stipulated that the activity or the service which would entitle her to 10%
commission income, are "sales actually concluded and collected through [her] efforts." What
she presented as evidence to prove that she performed income producing 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 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. 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 conclusion 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.

2. CIR vs. CA and A Soriano (301 SCRA 152)

Facts: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which
were of original issue when the corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her
conjugal share (wife’s “legitime”) and the other half (92,577 shares, which is further broken
down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate.
For sometime after his death, his estate still continued to receive stock dividends from ASC until
it grew to at least 108,000 shares. In 1968, ASC through its Board issued a resolution for the
redemption of shares from Soriano’s estate purportedly for the planned “Filipinization” of ASC.
Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was
conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment
against ASC for deficiency withholding tax-at-source. The CIR explained that when the
redemption was made, the estate profited (because ASC would have to pay the estate to
redeem), and so ASC would have withheld tax payments from the Soriano Estate yet it remitted
no such withheld tax to the government. ASC averred that it is not duty bound to withhold tax
from the estate because it redeemed the said shares for purposes of “Filipinization” of ASC and
also to reduce its remittance abroad.

Issue: Whether or not ASC’s arguments are tenable.

Ruling: No. The reason behind the redemption is not material. The proceeds from a redemption
is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely
profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold
the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was
original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have
been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in
the absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that
the latter is merely redeeming them as such. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine — wherein the capital
stock, property and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended
for the protection of corporate creditors.

3. CIR vs. Manning (G.R. No. L-28398, Aug. 06, 1975)

A dividend is any distribution made by a corporation to its shareholders, whether in money or in

other property, out of its earnings or profits. A stock dividend is a conversion of surplus or
undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.
The fact that the resolution authorizing the distribution of earnings is null and void is of no
moment. Under the National Internal Revenue Code, income tax is assessed on income
received from any property, activity or service that produces income. The Tax Code stands as
an indifferent, neutral party on the matter of where the income comes from. The action taken by
the Commissioner of assessing fraud penalty and imposing interest charges pursuant to the
provisions of the Tax Code is in accordance with law.

FACTS: This is a petition for review of the decision of the Court of Tax Appeals, in CTA case
1626, which set aside the income tax assessments issued by the Commissioner of Internal
Revenue against John L. Manning, W.D. McDonald and E.E. Simmons (hereinafter referred to
as the respondents), for alleged undeclared stock dividends received in 1958 from the Manila
Trading and Supply Co. (hereinafter referred to as the MANTRASCO) valued at P7,973,660.
Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common
shares of MANTRASCO, and the three private respondents who owned the rest, at 100 shares
each, deposited all their shares with the Trustees. The trust agreement provided that upon
Reese’s death MANTRASCO shall purchase Reese’s shares. The trust agreement was
executed in view of Reese’s desire that upon his death the Company would continue under the
management of respondents. Upon Reese’s death and partial payment by the company of
Reeses’s share, a new certificate was issued in the name of MANTRASCO, and the certificate
indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the
Treasury to the capital account of the company as stock dividends to be distributed to the
stockholders. When the entire purchase price of Reese’s interest in the company was paid in full
by the latter, the trust agreement was terminated, and the shares held in trust were delivered to
the company. The Bureau of Internal Revenue concluded that the distribution of the 24,700
shares of Reese as stock dividends was in effect a distribution of the "assets or property of the
corporation." It therefore assessed respondents for deficiency income taxes as well as for fraud
penalty and interest charges. The Court of Tax Appeals absolved respondent from any liability
for receiving the questioned stock dividends on the ground that their respective one-third
interest in the Company remained the same before and after the declaration of the stock
dividends and only the number of shares held by each of them had changed.

ISSUE: Whether the distributed stock dividends were “Treasury shares” and the Taxability of
the "treasury" stock dividends received by the respondents.

HELD: The record shows that the earnings of MANTRASCO over a period of years were used
to gradually wipe out the holdings therein of Reese. Consequently, those earnings, which we
hold, under the facts disclosed in the case at bar, as in effect having been distributed to the
respondents, should be taxed for each of the corresponding years when payments were made
to Reese’s estate on account of his 24,700 shares. With regard to payments made with
MANTRASCO earnings in 1958 and the years before, while indeed those earnings were utilized
in those years to gradually pay off the value of Reese’s holdings in MANTRASCO, there is no
evidence from which it can be inferred that prior to the passage of the stockholders’ resolution of
December 22, 1958 the contributed equity of each of the respondents rose correspondingly. It
was only by virtue of the authority contained in the said resolution that the respondents actually,
albeit illegally, appropriated and partitioned among themselves the stockholders’ equity
representing Reese’s interests in MANTRASCO. As those payments accrued in favor of the
respondents in 1958 they are and should be liable, for income tax purposes, to the extent of the
aggregate amount paid, from 1955 to 1958, by MANTRASCO to buy off Reese’s shares. On a
petition for review, the Supreme Court held that the newly acquired shares were not treasury
shares; their declaration as treasury stock dividends was a complete nullity and that the
assessment by the Commissioner of fraud penalty and the imposition of interest charges
pursuant to the provision of the Tax Code were made in accordance with law. The judgment of
the Court of Tax Appeals absolving the respondents from any deficiency income tax liability is
set aside.

4. CIR vs. Toda (G.R. No. 147188, Sep. 14, 2004)

The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e. from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud. Altonaga’s sole purpose of acquiring
and transferring title of the subject properties on the same day was to create a tax shelter. The
sale to him was merely a tax ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the
end in view of reducing the consequent income tax liability. This is a case of tax evasion.

FACTS: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its outstanding capital stock, to sell the Cibeles Building. On 30 August 1989, Toda
purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same
property on the same day to Royal Match Inc. (RMI) for P200 million. Three and a half years
later Toda died. On 29 March 1994, the BIR sent an assessment notice and demand letter to
the CIC for deficiency income tax for the year 1989. On 27 January 1995, the Estate of Benigno
P. Toda, Jr., represented by special coadministrators Lorna Kapunan and Mario Luza Bautista,
received a Notice of Assessment from the CIR for deficiency income tax for the year 1989. The
Estate thereafter filed a letter of protest. The Commissioner dismissed the protest. On 15
February 1996, the Estate filed a petition for review with the CTA. In its decision the CTA held
that the Commissioner failed to prove that CIC committed fraud to deprive the government of
the taxes due it. It ruled that even assuming that a preconceived scheme was adopted by CIC,
the same constituted mere tax avoidance, and not tax evasion. Hence, the CTA declared that
the Estate is not liable for deficiency of income tax. The Commissioner filed a petition for review
with the Court of Appeals. The Court of Appeals affirmed the decision of the CTA, hence, this
recourse.

ISSUE: Whether or not this is a case of tax evasion or tax avoidance.

HELD: CIC committed tax evasion. Tax avoidance and Tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the taxpayer in good faith
and at arm’s length. Tax evasion, on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer to further or additional civil of
criminal liabilities. Tax evasion connotes the integration of three factors: (1) the end to be
achieved, i.e. the payment of less than that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being “evil,” in “bad faith,” “willfull,” or “deliberate and not accidental”; and (3) a
course of action or failure of action which is unlawful. All these factors are present in the instant
case. The scheme resorted to by CIC in making it appear that there were two sales of the
subject properties, i.e. from CIC to Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning. Such scheme is tainted with fraud. Altonaga’s sole
purpose of acquiring and transferring title of the subject properties on the same day was to
create a tax shelter. The sale to him was merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless, the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing the consequent income tax liability.
 5. Republic vs. Sps. Salvador (GR 205428)

FACTS: The case rooted from a verified complaint filed with the RTC-Valenzuela by the
Department of Public Works and Highways (DPWH) on 9 November 2011 for the expropriation
of the 83 out of 229 square meters parcel of land owned by herein Respondents spouses
Senando Salvador and Josefina Salvador (Respondents, for brevity), for the construction of the
C-5 Northern Link Road Project Phase 2 (Segment 9). On 10 February 2012, Respondents
posed no objection on the said expropriation and manifested that they already received 2
checks from DPWH amounting in total to P685,349.22 representing the full zonal value of the
subject property and the cost of the house erected thereon. On 23 August 2012, the RTC
rendered judgment in favour of the Republic but directed the latter to pay Respondents
consequential damages equivalent to the capital gains tax and other taxes necessary for the
transfer of the subject property to Republic’s name. DPWH moved for partial reconsideration but
was denied for having been belatedly filed and for having no justifiable basis. Hence, this case.

ISSUE: Whether or not the capital gains tax on the transfer of the expropriated property can be
considered as consequential damages?

RULING: The Court ruled NO. The Court stated that just compensation is the full and fair
equivalent of the property sought to be expropriated and the measure is not the taker’s gain but
the owner’s loss. While it is true that the determination of the amount of just compensation is
within the court’s jurisdiction, it should not be done arbitrarily or capriciously. The Court
furthered that in this case, the RTC’s consideration of the capital gains tax that should be paid
by the Republic was clearly an error. The Court stressed that it is settled that the transfer of
property through expropriation proceedings is a sale or exchange within the meaning of the
NIRC, and profit from the transaction constitutes capital gain. Since capital gains tax is a tax on
passive income, it is the seller, which in this case, the Respondents, who are liable to shoulder
the same. Moreover, in BIR Ruling No. 476-2013, the BIR constituted the DPWH as a
withholding agent tasked to withhold the 6% withholding tax in the expropriation of real
properties for infrastructure projects. Thus, as far as the government is concerned, the capital
gains tax in expropriation proceedings remains a liability of the seller (Respondent).

6. Soriano vs. Secretary of Finance (GR 184450)

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

ISSUES: 1) Whether or not the increased personal and additional exemptions provided by R.A.
9504 should be applied to the entire taxable year 2008
2) Whether or not Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that
an MWE who receives other benefits in excess of the statutory limit of P30,00019 is no longer
entitled to the exemption provided by R.A. 9504

HELD: 1) Yes. R.A. 9504 as a piece of social legislation clearly intended to afford immediate tax
relief to individual taxpayers, particularly low-income compensation earners. Indeed, if R.A.
9504 was to take effect beginning taxable year 2009 or half of the year 2008 only, then the
intent of Congress to address the increase in the cost of living in 2008 would have been
negated. In one case, the test is whether the new set of personal and additional exemptions
was available at the time of the filing of the income tax return. In other words, while the status of
the individual taxpayers is determined at the close of the taxable year, their personal and
additional exemptions – and consequently the computation of their taxable income – are
reckoned when the tax becomes due, and not while the income is being earned or received. In
the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable year
2008. Hence, individual taxpayers were entitled to claim the increased amounts for the entire
year 2008. This was true despite the fact that incomes were already earned or received prior to
the law’s effectivity on 6 July 2008.

2) Yes. To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) of
Republic Act No. 8424 says he/she must be one who is paid the statutory minimum wage if
he/she works in the private sector, or not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned, if he/she is a government employee. R.A. 9504 is
explicit as to the coverage of the exemption: the wages that are not in excess of the minimum
wage as determined by the wage boards, including the corresponding holiday, overtime, night
differential and hazard pays. In other words, the law exempts from income taxation the most
basic compensation an employee receives – the amount afforded to the lowest paid employees
by the mandate of law. In a way, the legislature grants to these lowest paid employees
additional income by no longer demanding from them a contribution for the operations of
government. An administrative agency may not enlarge, alter or restrict a provision of law. The
Court is not persuaded that RR 10-2008 merely clarifies the law. The treatment of bonuses and
other benefits that an employee receives from the employer in excess of the P30,000 ceiling
cannot but be the same as the prevailing treatment prior to R.A. 9504 – anything in excess of
P30,000 is taxable; no more, no less. The treatment of this excess cannot operate to
disenfranchise the MWE from enjoying the exemption explicitly granted by R.A. 9504. Moreover,
RR 10-2008 does not withdraw the MWE exemption from those who are earning other income
outside of their employer employee relationship. Section 2.78.1 (B) of RR 10-2008 provides
that: MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and
hazard pay shall still be exempt from withholding tax. In sum, the proper interpretation of R.A.
9504 is that it imposes taxes only on the taxable income received in excess of the minimum
wage, but the MWEs will not lose their exemption as such. Workers who receive the statutory
minimum wage their basic pay remain MWEs. The receipt of any other income during the year
does not disqualify them as MWEs. They remain MWEs, entitled to exemption as such, but the
taxable income they receive other than as MWEs may be subjected to appropriate taxes.

7. COURAGE vs CIR (GR 213446)

However, not all income payments to employees are subject to withholding tax as there are
items excluded by the NIRC from the employee's compensation income and, thus, are exempt
from withholding tax on compensation. In the case at bar, it is the petitioner’s assertion that the
assailed RMO went beyond the provisions of the NIRC insofar as it imposes new or additional
taxes to allowances, benefits or bonuses granted to government employees which are
otherwise non-taxable. This cannot be sustained. On the contrary, the RMO merely mirrors the
relevant provisions of the NIRC and its implementing rules on the withholding tax on
compensation income. While Section III of the RMO enumerates certain allowances which may
be subject to withholding tax, it does not exclude the possibility that these allowances may fall
under the exemptions, thus, the phrase "subject to the exemptions enumerated herein.

FACTS: Commissioner of Internal Revenue (CIR) issued RMO No. 23-2014 on the "Reiteration
of the Responsibilities of the Officials and Employees of Government Offices for the Withholding
of Applicable Taxes on Certain Income Payments and the Imposition of Penalties for Non-
Compliance Thereof” in order to clarify the responsibilities of the public sector to withhold taxes
on its transactions as a customer and as an employer. In G.R. No. 213446, petitioners filed a
Petition for Prohibition and Mandamus before the SC, imputing grave abuse of discretion on the
part of CIR in issuing RMO No. 23-2014. According to petitioners, the said RMO classified some
items of income of government employees as taxable compensation which they alleged to be
considered by law as non-taxable fringe and de minimis benefits. The imposition of withholding
tax on the said items of income which have been allotted by the Government free of tax for a
long time, violates the prohibition on non-diminution of benefits and infringes upon the fiscal
autonomy of the Judiciary and Constitutional Commissions, among others. It also violates the
equal protection clause as it discriminates against government employees by imposing fringe
benefit tax upon their allowances as opposed to the allowances of employees of the private
sector, the fringe benefit tax of which is borne by their employers. Furthermore, they believe that
the ceiling of the 13th month pay and other benefits must be upgraded by CIR.

In G.R. No. 213658, petitioners filed a Petition for Certiorari and Prohibition before the SC
seeking to nullify RMO No. 23-2014 on the following grounds: (1) CIR is bereft of any authority
to issue the assailed RMO. The NIRC of 1997 expressly vests to the Secretary of Finance the
authority to promulgate rules and regulations for the effective enforcement of tax provisions; and
(2) CIR committed grave abuse of discretion when it subjected to withholding tax allowances of
court employees which are tax-exempt such as Special Allowance for Judiciary (SAJ) and
additional cost of living allowance (AdCOLA), among others. Petitioners further asserted that
RMO No. 23-2014 violates their right to due process because while it is denominated as a
revenue issuance, it is a legislative action which sharply increased the tax burden of the
employees of the Judiciary without the benefit of being heard. In response, respondents argue
that the petitions are barred by the doctrine of hierarchy of courts. Maintaining that RMO No. 23-
2014 was validly issued in accordance with the CIR’s power to make opinion in connection with
the implementation of internal revenue laws, respondents aver that unlike RRs, RMOs do not
require the approval of the Secretary of Finance as these merely provide directives in the
implementation of stated policies. In fact, the said RMO is a mere reiteration of the Tax Code
and previous RMOs. As to the alleged violation of fiscal autonomy, respondents argue that such
constitutional guarantee does not include exemption from payment of taxes. On the other hand,
as to the alleged violation of petitioners' right to equal protection of laws, respondents claim that
the same is not true as it covers all employees and officials of the government. In any case,
respondents assert that the allowances claimed to be tax exempt are not actually fringe benefits
nor de minimis benefits. SAJ and AdCOLA, for instance, are additional allowances which form
part of the employee's basic salary. Lastly, respondents aver that mandamus will not lie to
compel respondents to increase the ceiling for tax exemptions because the Tax Code does not
impose a mandatory duty on the part of respondents to do the same.

ISSUES: (1) Whether the doctrine of non-exhaustion of administrative remedies is violated by

the petitioners. (YES)

(2) Whether the doctrine of hierarchy of courts is violated by the petitioners. (YES)

(3) Whether the RMO went beyond the provisions of the NIRC when it imposed new or
additional taxes to allowances, benefits or bonuses granted to government employees claimed
by petitioners to be non-taxable (NO)

(4) Whether the RMO contravene the equal protection clause, fiscal autonomy, and the rule on
nondiminution of benefits (NO)

RULING: (1) Rule 65 will only lie if there is no appeal, or any other plain, speedy and adequate
remedy in the ordinary course of law against the assailed issuance of the CIR. In the case at
bar, the petitioners could still have appealed the assailed RMO with the Secretary of Finance
pursuant to Section 4 of the NIRC, to wit: SEC. 4. Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases. – The power to interpret the provisions of this Code and other
tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance. xxx The CIR's exercise of its power to interpret tax laws
comes in the form of revenue issuances which include RMOs. These revenue issuances are
subject to the review of the Secretary of Finance. As provided in Department of Finance
Department Order No. 007-02, a taxpayer is granted a period of 30 days from receipt of the
adverse ruling of the CIR to file with the Office of the Secretary of Finance a request for review
in writing and under oath. Accordingly, the petition in the present case should be dismissed. It is
settled that the premature invocation of the court's intervention is fatal to one's cause of action.
While there are recognized exceptions to this salutary rule, petitioners have failed to prove the
presence of any of those in the instant case. In any case, it must be noted that the availment of
administrative remedy entails lesser expenses and provides for a speedier disposition of
controversies. Be that as it may, it must be remembered the CIR cannot issue administrative
rulings or circulars inconsistent with the law sought to be applied. Indeed, administrative
issuances must not override, supplant or modify the law, but must remain consistent with the
law they intend to carry out.

(2) The petitions should have been initially filed with the CTA, having the exclusive appellate
jurisdiction to determine the constitutionality or validity of revenue issuances. While there is no
law which explicitly provides where the rulings of the Secretary of Finance under Section 4 of
NIRC are appealable, the law creating the CTA is sufficient, albeit impliedly, to include appeals
from the Secretary of Finance's review. Moreover, it is settled that the CTA has the power,
through certiorari, to rule on the validity of a particular administrative rule so long as it is within
its appellate jurisdiction even without the prior issuance of an assessment as its power is not
limited to determining the propriety of an assessment. When RA 9282 was enacted, it expanded
the jurisdiction of the CTA. Section 1 specifically provides that the CTA is of the same level as
the CA and possesses all the inherent powers of a Court of Justice. Section 7, as amended,
grants the CTA the exclusive jurisdiction to resolve all tax-related issues. Except for local taxes,
appeals from the decisions of quasi-judicial agencies (Commissioner of Internal Revenue,
Commissioner of Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be brought exclusively to the
CTA. Nevertheless, despite the procedural infirmities, the Court deems it prudent to take
cognizance of the present petitions as they assail the actions of the CIR that affect thousands of
government employees.

(3) Compensation income is the income of the individual taxpayer arising from services
rendered pursuant to an employer-employee relationship. Every form of compensation for
services, whether paid in cash or in kind, is generally subject to income tax and consequently to
withholding tax. The name designated to the compensation income received by an employee is
immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions, fees,
(including director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe benefits tax
under Section 33 of the Tax Code), pensions, retirement pay, and other income of a similar
nature, constitute compensation income that are taxable and subject to withholding. The
withholding tax system was devised for 3 primary reasons, namely: (1) to provide the taxpayer a
convenient manner to meet his probable income tax liability; (2) to ensure the collection of
income tax which can otherwise be lost or substantially reduced through failure to file the
corresponding returns; and (3) to improve the government's cash flow. It resulted in prompt and
efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to
collect taxes through more complicated means and remedies. In relation, Section 79(A) of the
NIRC provides: SEC. 79. Income Tax Collected at Source. – (A) Requirement of Withholding -
Except in the case of a minimum wage earner as defined in Section 22(HH) of this Code, every
employer making payment of wages shall deduct and withhold upon such wages a tax
determined in accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner. Said rule applies to all employed
individuals whether citizens or aliens, deriving income from compensation for services rendered
in the Philippines. As provided in RR No. 2-98, the term employee covers all employees,
including officers and employees, whether elected or appointed, of the Government of the
Philippines, or any political subdivision thereof or any agency or instrumentality; while the term
employer embraces not only an individual and an organization engaged in trade or business,
but also includes an organization exempt from income tax, as well as the Government of the
Philippines. Accordingly, the Government, as an employer, is constituted as a withholding agent
who is mandated to deduct, withhold and remit the corresponding tax on compensation income
paid to all its employees. However, not all income payments to employees are subject to
withholding tax as there are items excluded by the NIRC from the employee's compensation
income and, thus, are exempt from withholding tax on compensation. In the case at bar, it is the
petitioner’s assertion that the assailed RMO went beyond the provisions of the NIRC insofar as
it imposes new or additional taxes to allowances, benefits or bonuses granted to government
employees which are otherwise non-taxable. This cannot be sustained. On the contrary, the
RMO merely mirrors the relevant provisions of the NIRC and its implementing rules on the
withholding tax on compensation income. It simply reinforces the rule that every form of
compensation arising from employer-employee relationship is deemed subject to income tax
and, consequently, to withholding tax, unless specifically exempted or excluded by the NIRC.
While Section III of the RMO enumerates certain allowances which may be subject to
withholding tax, it does not exclude the possibility that these allowances may fall under the
exemptions, thus, the phrase "subject to the exemptions enumerated herein."

(4) The constitutional guarantee of equal protection is not violated by an executive issuance
which was issued to simply reinforce existing taxes applicable to both the private and public
sector. While the assailed RMO is a directive to the Government as a reminder of its obligation,
it did not amend the provisions of the NIRC, for or against the Government or its employees. As
to the issue of fiscal autonomy raised by the petitioners, it is held that said fiscal autonomy does
not grant immunity or exemption from the common burden of paying taxes imposed by law.
Fiscal autonomy entails freedom from outside control other than those provided by law. It is the
freedom to allocate and utilize funds in accordance with law and pursuant to the wisdom and
dispatch its needs may require from time to time. With regards to the alleged violation of the
principle of non-diminuition of benefits, it is held that the imposition of taxes on salaries does not
result in diminution of benefits. All citizens should bear their aliquot part of the cost of
maintaining the government and should share the burden of general income taxation equitably.