Tax1 Digests

A.
General Principles
CONCEPT, NATURE AND CHARACTERISTICS OF TAXATION AND TAXES
CIR v. Cebu Pr!lan" Ce#en! C.
The Court of Tax Appeals ordered the Commission of Internal Revenue
(CIR) to refund to Cebu Portland Cement Co. about P350!" #$%
represented overpa&ments of ad valorem taxes on %ement produ%ed
and sold b& it.
CIR opposed the rulin'" %laimin' that it had a ri'ht to appl& the
overpa&ment to another tax liabilit& of Cebu Portland ( sales tax on a
manufa%tured produ%t (the %ement). CIR said that %ement is a
manufa%tured and )*T a mineral produ%t and therefore )*T exempt
from sales taxes. (mineral + exempt, manufa%tured + not exempt)
*n the other hand" Cebu Portland said that it is exempt from sales tax
under the Tax Code be%ause %ement is a mineral produ%t and )*T a
manufa%tured produ%t.
Court of Tax Appeals held that the alle'ed sales tax liabilit& of Cebu
Portland #as still bein' -uestioned and therefore %ould not be set.o/
a'ainst the refund.
A petition for revie# #as 0led b& CIR.
I1 2$n CIR must refund the overpa&ment of the ad valorem tax
R1 )*. CIR has the ri'ht to appl& the overpa&ment to Cebu Portland3s
sales tax de0%ien%&.
The sales tax #as properl& imposed upon the %ompan& for the reason
that %ement has al#a&s been %onsidered a manufa%tured produ%t and
)*T a mineral produ%t. (CIR v Republi% Cement)
o Cement #as never %onsidered a mineral produ%t #$in the
meanin' of the Tax Code" despite it bein' %omposed of 405
mineral" be%ause %ement is a PR*67CT of the manufa%turin'
pro%ess.
o Relian%e %annot be made on Cebu Portland v CIR sa&in' that
%ement + mineral be%ause this %ase has been overruled.
The ar'ument that the assessment %annot as &et be enfor%ed be%ause
it is still bein' %ontested loses si'ht of the ur'en%& of the need to
%olle%t taxes as 8the lifeblood of the 'overnment.9
If the pa&ment of taxes %ould be postponed b& simpl& -uestionin' their
validit&" the 'overnment #ould be paral&:ed.
Thus" !$e Ta% C"e prvi"es !$a! n cur! s$all $ave au!$ri!&
! 'ran! an in(unc!in r res!rain !$e cllec!in ) !a%es,
except #hen in the opinion of the Court of Tax Appeals" the %olle%tion
b& the ;IR or the ;ureau of Customs ma& (epar"i*e !$e in!eres! )
!$e Gvern#en! an"+r !$e !a%pa&er.
o In su%h a %ase" the Court" at an& sta'e of the pro%eedin' ma&
suspend the %olle%tion and re-uire the taxpa&er to either1
<. "epsi! !$e a#un! %laimed *R
=. ,le a sure!& bn" for not more than double the
amount #ith the Court.
The ex%eption does not appl& in this %ase. In fa%t" there is all the more
reason to enfor%e the rule 'iven that even after %reditin' of the refund
a'ainst the tax de0%ien%&" a balan%e of more than P> million #as still
due from the %ompan&.
To re-uire the Commissioner to a%tuall& refund to the %ompan& the
amount of the ?ud'ment debt" #hi%h he #ill later have the ri'ht to
distrain for pa&ment of its sales tax liabilit& is an idle ritual.
C##issiner ) In!ernal Revenue v. Al'ue
The Phil. @u'ar Astate 6evelopment Compan& (P@A6C) appointed
Al'ue" In%." a famil& %orporation" as its a'ent" authori:in' it to sell its
land" fa%tories" and oil manufa%turin' pro%ess.
Pursuant to this authorit&" 0ve members of the famil& %orporation
formed the Be'etable *il Investment Corp. and indu%ed other persons
to invest in it.
The ne#l& formed %orporation then pur%hased the P@A6C properties.
Cor this sale" P@A6C 'ave Al'ue" In%. a %ommission of P<=5"000.
Crom this amount" Al'ue In%. paid the 0ve famil& members PD5"000 as
promotional fees.
Al'ue" In%. de%lared this PD5"000 as a dedu%tion from its in%ome tax as
a le'itimate business expense.
The CIR -uestioned the dedu%tion" %laimin' that it #as not an ordinar&"
reasonable" or ne%essar& expense and #as merel& an attempt to evade
pa&ment of taxes.
I1 2$n the PD5"000 is tax.dedu%tible as a le'itimate business expense
of Al'ue" In%.
R1 Ees" the PD5"000 promotional fee is tax.dedu%tible.
@e%. 30 of the Tax Code provides that ordinar& and ne%essar& expenses
in%urred durin' the taxable &ear in %arr&in' on an& trade or business"
in%ludin' a reasonable allo#an%e for salaries or other %ompensation for
personal servi%es a%tuall& rendered are tax.dedu%tible.
Fo#ever" the burden in provin' the validit& of a %laimed dedu%tion
belon's to the taxpa&er. In this %ase" the burden has been satisfa%toril&
dis%har'ed b& the taxpa&er Al'ue" In%.
Al'ue" In%. #as able to prove that the promotional fees #ere not
0%titious and #ere in fa%t paid periodi%all& to the 0ve famil& members.
Goreover" the amount of the promotional fees #as reasonable"
%onsiderin' that the 0ve pa&ees a%tuall& performed a servi%e for Al'ue"
In%. b& main' the sale of the properties of P@A6C possible.
As a result of this sale" Al'ue" In%. earned a net %ommission of P50"000.
Taxes are #hat #e pa& for %ivili:ed so%iet&. 2ithout taxes" the
'overnment #ould be paral&:ed for la% of the motive po#er to
a%tivate and operate it.
Fen%e" despite the natural relu%tan%e to surrender part of one3s hard.
earned in%ome" ever& person #ho is able to must %ontribute his share
in runnin' the 'overnment. The 'overnment" for its part" is expe%ted to
respond in the form of ;A)ACIT@ for 'eneral #elfare. This s&#bi!ic
rela!ins$ip is !$e ra!inale ) !a%a!in and should dispel the
erroneous notion that it is an arbitrar& exa%tion b& those in the seat of
po#er.
Fo#ever" it should also be exer%ised reasonabl& and in a%%ordan%e
#ith the pres%ribed pro%edure. If it is not" the taxpa&er has a ri'ht to
%omplain to the %ourts.
G*)TAR* . Tax < 6i'ests H E. @an%he: =A =0<= 1
C.N. H"'es v. -unicipal .ar" ) Ilil
The Guni%ipal ;oard of Iloilo ena%ted *rdinan%e )o. 33 pursuant to the
Io%al Autonom& A%t #$%1
o re-uired persons" 0rms" asso%s and %orps to pa& a sales tax
of <$= of <5 of the sellin' pri%e of an& motor vehi%le A)6
o prohibited the re'istration of the sale of the motor vehi%le
unless the tax had been paid
Fod'es" #ho #as en'a'ed in the bu&in' and sellin' of se%ond.hand
motors" -uestioned the validit& of the tax for havin' been ena%ted in
ex%ess of authorit&.
I1 2$n the tax is valid.
R1 EA@" the tax is valid.
The Io%al Autonom& A%t 'ives muni%ipal boards the authorit& to ena%t
ordinan%es for the %olle%tion of taxes on an& person en'a'es in an&
o%%upation or business.
Fo#ever" the IAA prohibits %hartered %ities" su%h as Iloilo from
imposin' a tax on the re'istration of motor vehi%les. Thus" the lo#er
%ourt ruled that to re-uire pa&ment of sales tax before re'istration is
tantamount to imposin' a tax for the re'istration of motor vehi%les.
F*2ABAR" the @C disa'reed #ith this" sa&in' that the tax imposed #as
merel& a %oer%ive measure to mae the enfor%ement of the
%ontemplated sales tax more e/e%tive.
Taxes are imposed for the @7PP*RT of the 'overnment in return for the
'eneral advanta'e and prote%tion #hi%h the 'overnment a/ords to
taxpa&ers and their propert&.
Taxes are the lifeblood of the 'overnment. The po#er to tax in%ludes
the po#er to devise #a&s and means to a%%omplish tax %olle%tion in
the most e/e%tive manner. *ther#ise" 'ov ma& falter $ fail.
Thus" the ordinan%e is a BAII6 exer%ise of the po#er of taxation
'ranted to Iloilo Cit& b& the IAA.
C/ASSIFICATIONS AND DISTINCTIONS
Asscia!in ) Cus!#s .r0ers Inc. v. -unicipal .ar"
The Guni%ipal ;oard of Ganila passed an ordinan%e lev&in' a propert&
tax on all motor vehi%les operatin' #ithin the Cit& of Ganila.
The ordinan%e provided that the rate of the tax #ould be <5 ad
valorem per annum" and that the pro%eeds of the tax shall a%%rue to
the @treets and ;rid'es Cunds of the Cit&" #$% #ill be used for the
repair" maintenan%e" and improvement of its streets and brid'es.
The Charter of Ganila 'ives the muni%ipal board the po#er to tax
motor vehi%les" but this is limited b& the Gotor Behi%les Ia#" #hi%h
disallo#s the imposition of fees on motor vehi%les" AJCAPT propert&
taxes imposed b& a muni%ipal %orp.
TF7@" the la# allo#s the Cit& of Ganila to impose a propert& tax on
motor vehi%les operatin' #ithin its limits.
Fo#ever" the Asso%iation of Customs ;roers %ontended that the
ordinan%e is void be%ause it a%tuall& imposes a li%ense tax in the 'uise
of a propert& tax.
I1 2$n ordinan%e is valid
R1 )o" it is void.
<) It imposes a li%ense tax" #hi%h the muni%ipal %orporation ma& not
impose" althou'h it is made to appear as a propert& tax$
As a rule" an ad valorem tax is a propert& tax. Fo#ever" if the tax is
reall& imposed upon the performan%e of an a%t" en?o&ment of a
privile'e" or the en'a'in' in an o%%upation" it #ill be %onsidered an
AJCI@A" even if its amount is determined in proportion to the value of
the propert& used in %onne%tion #ith the o%%upation" privile'e" or a%t
#hi%h is taxed.
In this %ase" the tax is 0xed ad valorem. ;7T" the purpose is to raise
funds for the repair" maintenan%e" and improvement of the streets and
brid'es in the %it&. Thus" it is a%tuall& a li%ense fee under the 'uise of
an ad valorem tax to %ir%umvent the prohibition imposed b& the Gotor
Behi%les Ia#.
The reason for the prohibition is that under the Gotor Behi%les Ia#"
muni%ipal %orporations alread& 'et pro%eeds for the purpose of
repairin' and maintainin' their streets and brid'es. The prohibition
aims at preventin' a dupli%ation in the imposition of fees for the same
purpose.
=) The ordinan%e infrin'es on the rule of uniformit& of taxation be%ause
it exa%ts the tax upon AII motor vehi%les operatin' #ithin the Cit& of
Ganila" #ithout distin'uishin' bet#een those for hire and for private
use" those re'istered in and those re'istered outside but o%%asionall&
%ome to Ganila.
The ordinan%e imposes the tax onl& on those vehi%les re'istered in
Ganila" even if those vehi%les #hi%h are re'istered outside the %it& but
#hi%h use its streets also %ontribute e-uall& to the deterioration of the
roads and brid'es.
Ess S!an"ar" Eas!ern Inc. v. CIR
A@@* dedu%ted from its 'ross in%ome for <K5K" as part of its ordinar&
and ne%essar& business expenses" the amount it had spent for drillin'
and exploration of its petroleum %on%essions.
The Commissioner on Internal Revenue (CIR) disallo#ed the %laim on
the 'round that the expenses should be %apitali:ed and mi'ht be
#ritten o/ as a loss onl& #hen a 8dr& hole9 should result.
Fen%e" A@@* 0led an amended return #here it ased for the refund of
P3=3"=D0 b& reason of its abandonment" as dr& holes" of several of its
oil #ells. It also %laimed as ordinar& and ne%essar& expenses in the
same return amount representin' mar'in fees it had paid to the
Central ;an on its pro0t remittan%es to its )e# Eor *L%e.
I1 2$n the mar'in fees are taxes *R ne%essar& expenses #hi%h are
dedu%tible from its 'ross in%ome
R1 )o" the& are neither taxes nor ne%essar& expenses.
<) Gar'in fees are )*T taxes be%ause the& are )*T imposed as a
revenue measure but as a police measure #hose pro%eeds are applied
to stren'then the %ountr&3s international reserves. Thus" the fee #as
imposed b& the @tate in the exer%ise of its P*IICA P*2AR and )*T
taxation po#er.
=) )either are the& ne%essar& and ordinar& business expenses.
An expense is %onsidered )ACA@@ARE #here the expenditure is helpful
in the development of the taxpa&er3s business.
It is *R6I)ARE #hen it %onnotes a pa&ment #hi%h is normal in relation
to the business of the taxpa&er and the surroundin' %ir%umstan%es.
The expenditure bein' ordinar& and ne%essar& is determined based on
its nature ( the extent and permanen%& of the #or a%%omplished b&
the expenditure.
In this %ase" A@@* #as unable to sho# that the remittan%e to the head
oL%e of part of its pro0ts #as made in furtheran%e of its o#n trade or
business.
It merel& presumed that all %orporate expenses are ne%essar& and
appropriate in the absen%e of a sho#in' that the& are ille'al or ultra
vires, #hi%h is erroneous. Claims for dedu%tions are a matter of
le'islative 'ra%e and do not turn on mere e-uitable %onsiderations.
Pr'ressive Develp#en! Crp. v. 1C
The Cit& Coun%il of MC passed an ordinan%e no#n as the Garet Code
of MC" #hi%h imposed a 55 supervision fee on 'ross re%eipts on rentals
or lease of privatel&.o#ned maret spa%es in MC.
In %ase of failure of the o#ners of the maret spa%es to pa& the tax for
three %onse%utive months" the Cit& shall revoe the permit of the
privatel&.o#ned maret to operate.
Pro'ressive 6evelopment Corp" o#ner and operator of Carmer3s Garet"
0led a petition for prohibition a'ainst MC on the 'round that the tax
imposed b& the Garet Code #as in realit& a tax on in%ome" #hi%h the
muni%ipal %orporation #as prohibited b& la# to impose.
I1 2$n the supervision fee is an in%ome tax or a li%ense fee.
R1 It is a li%ense fee.
A IICA)@A CAA is imposed in the exer%ise of the poli%e po#er primaril&
for purposes of re'ulation" #hile TAJ is imposed under the taxin'
po#er primaril& for purposes of raisin' revenues.
If the 'eneratin' of revenue is the primar& purpose and re'ulation is
merel& in%idental" the imposition is a tax, but if re'ulation is the
primar& purpose" the fa%t that in%identall&" revenue is also obtained
does not mae the imposition a tax.
To be %onsidered a li%ense fee" the imposition must relate to an
o%%upation or a%tivit& that so en'a'es the publi% interest in health"
morals" safet&" and development as to re-uire re'ulation for the
prote%tion and promotion of su%h publi% interest, the imposition must
also bear a reasonable relation to the probable expenses of re'ulation"
tain' into a%%ount not onl& the %osts of dire%t re'ulation but also its
in%idental %onse-uen%es.
In this %ase" the Carmers3 Garet is a privatel&.o#ned maret
established for the rendition of servi%e to the 'eneral publi%. It
#arrants %lose supervision and %ontrol b& the Cit& for the prote%tion of
the health of the publi% b& insurin' the maintenan%e of sanitar&
%onditions" prevention of fraud upon the bu&in' publi%" et%.
@in%e the purpose of the ordinan%e is primaril& re'ulation and not
revenue 'eneration" the tax is a li%ense fee. The use of the 'ross
amount of stall rentals as basis for determinin' the %olle%tible amount
of li%ense tax does not" b& itself" %onvert the li%ense tax into a
prohibited tax on in%ome.
@u%h basis a%tuall& has a reasonable relationship to the probable %osts
of re'ulation and supervision of Pro'ressive3s ind of business" sin%e
ordinaril&" the hi'her the amount of rentals" the hi'her the volume of
items sold.
The hi'her the volume of 'oods sold" the 'reater the extent and
fre-uen%& of supervision and inspe%tion ma& be re-uired in the interest
of the bu&in' publi%.
PA/ v. E"u
7nder a le'islative fran%hise" Philippine Airlines is exempt from all
taxes ex%ept for the pa&ment of =5 of its 'ross revenue to the )ational
Novernment.
*n the stren'th of an opinion of the @e%retar& of Ousti%e" PAI #as
determined not to have been pa&in' motor vehi%le re'istration fees
sin%e <K5P.
Aventuall&" the Iand Transportation Commissioner re-uired all tax
exempt entities" in%ludin' PAI" to pa& motor vehi%le re'istration fees.
PAI protested.
I1 2$n PAI is exempt from the pa&ment of motor vehi%le re'istration
fees
R1 EA@" PAI is exempt.
The motor vehi%le re'istration fee is a tax" to #hi%h PAI is exempt.
Taxes are for revenue" #hile fees are exa%tions for purposes of
re'ulation and inspe%tion. Thus" fees are limited in amount to #hat is
ne%essar& to %over the %ost of the servi%es rendered in that
%onne%tion.
It is the *;OACT of the %har'e" and )*T the name" that determines
#hether a %har'e is a tax or a fee.
In this %ase" the mone& %olle%ted under the Gotor Behi%le Ia# is not
intended for the expenditures of the Gotor Behi%le *L%e but for the
%onstru%tion and maintenan%e of publi% roads" streets and brid'es.
Thus" sin%e the said fees are %olle%ted )*T for the re'ulatin' motor
vehi%les on publi% hi'h#a&s but for providin' RABA)7A for the 'ov in
order to %onstru%t publi% hi'h#a&s" the& are TAJA@" not merel& fees.
PAI is exempt from pa&in' su%h fees" ex%ept for the period bet#een =D
Oune <KP4 to K April <KDK" #here its tax exeption in the fran%hise #as
repealed.
2ille'as v. Hiu C$in' Tsai Pa H
The Guni%ipal ;oard of Ganila passed an ordinan%e prohibitin' an alien
from bein' emplo&ed or en'a'in' in an& position or o%%upation or
business enumerated therein" #hether permanent" temporar&" or
%asual" #ithout 0rst se%urin' an emplo&ment permit from the Ga&or
and pa&in' the P50 permit fee.
Fiu Chion' 0led an a%tion to restrain the enfor%ement of the ordinan%e
and to have it de%lared null and void for bein' dis%riminator& and
violative of the rule on uniformit& in taxation.
The Ga&or ar'ued that the ordinan%e %annot be de%lared null and void
on the 'round that it violates the rule on uniformit& of taxation
be%ause this rule applies onl& to purel& tax or revenue measures and
not to re'ulator& measures" su%h as the ordinan%e.
I1 2$n the ordinan%e is valid.
R1 )*" the ordinan%e is void.
The 0rst part of the ordinan%e re-uirin' an alien to se%ure an
emplo&ment permit is re'ulator& in %hara%ter be%ause it involves the
exer%ise of dis%retion on the part of the Ga&or in approvin' or
disapprovin' the appli%ations.
Fo#ever" the se%ond part #hi%h re-uires the pa&ment of P50 as
emplo&ee3s fee is not re'ulator& but a revenue measure. There is no
lo'i% or ?usti0%ation in exa%tin' P50 from aliens #ho have been %leared
for emplo&ment. The obvious purpose of the ordinan%e is to raise
mone& under the 'uise of re'ulation.
The P50 fee is unreasonable not onl& be%ause it is ex%essive but
be%ause it fails to %onsider valid substantial di/eren%es in situation
amon' individual aliens #ho are re-uired to pa& it. The same amount is
bein' %olle%ted from ever& emplo&ed alien" #hether he is %asual or
permanent" part time or full time" or #hether he is a lo#l& emplo&ee or
a hi'hl& paid exe%utive.
C#pania General "e Tabacs v. Ci!& ) -anila
Taba%alera paid for its li-uor li%ense and also paid sales tax on its sale
of 'eneral mer%handise" in%ludin' li-uor.
It %laimed that it made an overpa&ment and demanded a refund of the
sales tax paid on the 'round that sin%e it alread& paid the li%ense fees"
it #as no lon'er bound to pa& the sales tax on the li-uor.
I1 2$n Taba%alera is liable for sales tax on the li-uor despite alread&
havin' paid for its li-uor li%ense.
R1 EA@" Taba%alera is liable.
Nenerall&" the term 8tax9 applies to all inds of exa%tions #hi%h
be%ome publi% funds. Ie'all&" ho#ever" a li%ense fee is a le'al %on%ept
-uite distin%t from tax.
o Taxes are for raisin' revenues #hile li%ense fees are imposed
in the exer%ise of poli%e po#er for purposes of re'ulation.
7nder on ordinan%e" Taba%alera must pa& li%ense fees in order to
%ontinue en?o&in' the privile'e of sellin' li-uor" %onsiderin' that the
sale of intoxi%atin' li-uor is potentiall& harmful to publi% health and
morals" and must be sub?e%t to @tate re'ulation.
7nder another ordinan%e" Taba%alera is liable for sales tax on sales of
'eneral mer%handise" in%ludin' li-uor.
;oth a li%ense fee and a tax ma& be imposed on the same business or
o%%upation" or for sellin' the same arti%le" #ithout it bein' in violation
of the rule a'ainst double taxation.
A#erican -ail /ines v. Ci!& ) .asilan
The Cit& Coun%il of ;asilan ena%ted an ordinan%e imposin' an an%hora'e
fee on forei'n vessels" #hi%h an%hor #ithin its territorial #aters.
The an%hora'e fee #as Q %entavo per ton of the vessel for ever& => hours
or part thereof" provided that the maximum %har'e shall not ex%eed PD5
per da&.
Ameri%an Gail Iines" et al -uestioned the validit& of the ordinan%e on the
'round that the Cit& of ;asilan had no authorit& to %olle%t an%hora'e fees
from forei'n vessels.
The Cit& of ;asilan ar'ued that the ordinan%e #as a valid exer%ise of the
%it&3s poli%e po#er and that the fees #ere for purel& re'ulator& purposes. It
%laimed that sin%e the Cit& of ;asilan #as an island #ith mountainous
%oasts and frin'ed b& %oves" ba&s and islets" there #as a need for funds to
suppress possible smu''lin' a%tivities.
I1 2$n the ordinan%e #as valid
The Charter of the City of Basilan gives the Council the authority to fx the
charges to be paid by all watercraft landing at or using public wharves,
docks, levees, or landing places. The anchorage fees are not included in
this power, as shown by the need of the Council to enact the amendatory
ordinance.
Contrary to the claim of the Council, the anchorage fees are not being
charged for regulatory purposes. They are actually intended for revenue
purposes.
The po#er to re'ulate as an exer%ise of poli%e po#er does )*T in%lude the
po#er to impose fees for revenue purposes.
Cees for purel& re'ulator& purposes ma& onl& be of suL%ient amount to
in%lude1
o expenses of issuin' the li%ense A)6
o %ost of the ne%essar& inspe%tion $ poli%e surveillan%e"
o tain' into a%%ount I)CI6A)TAI expenses
In this %ase" the fees #ere based on the tonna'e of the vessels. This basis
of 0xin' the fees has no reasonable relation to the %ost of issuin' permits
and the %ost of inspe%tion or surveillan%e.
Also" the fee imposed on forei'n vessels ( Q %entavo per ton for the 0rst =>
hours" and #hi%h shall not ex%eed PD5 per da& ( ex%eeded even the harbor
fee imposed b& the )ational Novernment" #hi%h #as onl& P50.
Iastl&" the %it&3s o#n %ontention that the ordinan%e #as ena%ted in the
exer%ise of taxation po#er maes it obvious that the fees #ere not merel&
re'ulator&.
TF7@" the fees #ere intended for revenue purpose and )*T for re'ulator&
purposes.
Os#e3a v. Orbs
Pres. Gar%os issued P6 <K5P %reatin' the *il Pri%e @tabili:ation Cund
(*P@C)" #hi%h #as desi'ned to reimburse oil %ompanies for %ost
in%reases in %rude oil and imported petroleum produ%ts resultin' from1
o ex%han'e rate ad?ustments A)6
o in%reases in the #orld maret pri%es of %rude oil
A portion of the *P@C #as taen from %olle%tions of ad valorem taxes
levied on oil %ompanies.
@ubse-uentl&" b& virtue of an A*" the *P@C #as re%lassi0ed into a trust
liabilit& a%%ount and ordered released from the )ATI*)AI TRAA@7RE to
the GI)I@TRE of Aner'&. @aid A* also authori:ed the investment of the
fund in 'overnment se%urities" #ith the earnin's a%%ruin' to the fund.
A-uino then amended P6 <K5P b& promul'atin' A* <3D" #$% expanded
the 'rounds for reimbursement to oil %ompanies for possible C*@T
7)6ARRAC*BARE in%%ured resultin' from the redu%tion of domesti%
pri%es on petroleum produ%ts. The said %ost underre%over& #as left to
the determination of the Ginistr& of Cinan%e.
*smena then -uestioned the %reation of the trust fund" sa&in' that it
violates the Constitution.
R This is be%ause the mone& %olle%ted pursuant to P6 <K5P is a
spe%ial fund" and under the Constitution" if a spe%ial tax is %olle%ted for
a spe%i0% purpose" the revenue 'enerated from it shall be treated as a
@PACIAI C7)6 to be used onl& for the indi%ated purpose. It must not be
%hanneled to another 'overnment ob?e%tive.
I1 2$n the %reation of the trust fund is violative of the Constitution
R1 )*" %reation of the trust fund #as valid.
In order for the funds to fall under the prohibition" it must be sho#n
that the& #ere %olle%ted as TAJA@ ( as a form of revenue
2hile the funds %olle%ted ma& be referred to as taxes" the& are exa%ted
in the exer%ise of the P*IICA P*2AR of the @tate .
The main ob?e%tive #as )*T revenue but to stabili:e the pri%e of oil
and petroleum.
The *P@C is a%tuall& a @PACIAI C7)6" as seen from the spe%ial
treatment 'iven to it b& A* <3D. It is se're'ated from the 'eneral fund,
and #hile it is pla%ed in #hat the la# refers to as a Strust liabilit&
a%%ount"S the fund nonetheless remains sub?e%t to the s%rutin& and
revie# of the C*A.
These measures thus %ompl& #ith the %onstitutional des%ription of a
Sspe%ial fund.S
What is here involved is not so much the power of taxation as police
power.
or a valid delegation of power, it is essential that the law delegating
the power must be!
o "# complete in itself $$ must set forth the policy to be
executed by the delegate
o %# it must fx a standard & limits of whichare
su'ciently determinate or determinable & to which the
delegate must conform.
(uch was fulflled in this case.
Republic v. .acl"4-urcia -illin' C.
The Philippine @u'ar Institute (Philsu'in)" a semi.publi% %orporation"
#as %reated for the purpose of %ondu%tin' resear%h to advan%e the
%ountr&3s su'ar industr&.
To %arr& out these ob?e%tives" the %harter of Philsu'in authori:ed the
lev& of <0 %ents $ pi%ul of su'ar for 5 &ears to be %olle%ted from su'ar
%ane planters in the %ountr&.
The pro%eeds of this lev& #ould 'o to a spe%ial fund to be used
ex%lusivel& b& Philsu'in.
Philsu'in then pur%hased the Insular @u'ar Re0ner& usin' mone& from
this spe%ial fund.
@everal &ears later" Insular @u'ar Re0ner& had a%%umulated
tremendous losses.
3 su'ar %entrals refused to %ontinue pa&in' their %ontributions to the
fund" 'iven that the pur%hase of the Insular @u'ar Re0ner& b& Philsu'in
#as )*T authori:ed b& its %harter" and its %ontinued operation #as
inimi%al to their interests.
The& also %ontended that their obli'ation to pa& their %ontributions
subsisted *)IE to the AJTA)T that the& #ere bene0ted b& the
%ontributions" sin%e the lev& #as merel& a spe%ial assessment and not
a tax.
I1 2$n the lev& #as a spe%ial assessment or a revenue measure
R1 It #as )AITFART
The lev& for the Philsu'in Cund is not so mu%h an exer%ise of the po#er
of taxation nor the imposition of a spe%ial assessment" but the exer%ise
of the P*IICA P*2AR for the 'eneral #elfare of the entire %ountr&.
It is therefore an exer%ise of a soverei'n po#er" #hi%h no private
%iti:en ma& la#full& resist.
In )ut* v. +raneta, Court held that sin%e su'ar produ%tion is one of the
leadin' industries of our nation" its development redounds 'reatl& to
the 'eneral #elfare. Thus" the Ie'islature found it in the interest of the
'eneral #elfare to stabili:e the su'ar industr& throu'h the po#er of
taxation.
Goreover" the %harter of Philsu'in authori:es it to %ondu%t resear%h in
the su'ar industr& in order to 0nd #a&s to redu%e the %ost of
produ%tion and a%hieve 'reater eL%ien%& in the industr&. This provision
?usti0es the a%-uisition of the re0ner&" sin%e there is no better #a& to
%arr& out this resear%h than to a%tuall& operate a re0ner&.
Aven if the operations of the re0ner& su/ered from losses" Philsu'in3s
experien%e of runnin' the re0ner& is a NAI) to the industr&. Fen%e" the
su'ar %entrals #ere still bene0ted b& the a%-uisition.
TAJ vs. @PACIAI A@@A@@GA)T1
o The purpose of a spe%ial assessment is to 0nan%e the
improvement of par!icular prper!ies" #$ the bene0ts of
the improvement a%%ruin' to the o#ners thereof #ho pa& the
assessment.
o The purpose of an ordinar& tax is to provide the Novernment
#ith revenues nee"e" )r !$e ,nancin' ) s!a!e a5airs.
Refusal of a %iti:en to pa& taxes ma& not be san%tioned
be%ause it #ould impair 'overnment fun%tions. This #ould not
hold true in the %ase of a refusal to %ompl& #ith a spe%ial
assessment.
2ic!rias -illin' v. -unicipali!& ) 2ic!rias
The muni%ipal %oun%il of Bi%torias ena%ted
*rdinan%e < #$% re-uired su'ar %entrals operatin' #$in the muni%ipalit& to
pa& an annual muni%ipal li%ense tax.
;ased on the ordinan%e" Bi%torias Gillin' #as
assessed >0U (imposed on su'ar %entrals) and another >0U (imposed on
su'ar re0neries).
Thus" Bi%torias Gillin' 0led a suit to de%lare the
ordinan%e void sin%e it1
o a) ex%eeds the amount 0xed in Provin%ial Cir%ular <=.A issued
b& the Cinan%e 6ept
o b) is dis%riminator&" as it sin'les out BG" #$% is the onl&
operator of a su'ar %entral and a su'ar re0ner& #ithin the
?urisdi%tion of defendant muni%ipalit&
o %) %onstitutes double taxation
o d# the national government has preempted the feld of
taxation with respect to sugar centrals or refneries
The lo#er %ourt held that the exa%tion #as invalid
be%ause the muni%ipalit& CA))*T impose a tax for revenue in the 'uise of
a poli%e measure. The amounts set forth in the ordinan%e also ex%eeded the
%ost of li%ensin'" re'ulatin'" and surveillan%e.
I1 2$n the ordinan%e #as valid.
R1 The ordinan%e #as valid.
The ordinan%e #as promul'ated not in the exer%ise
of the muni%ipalit&Vs re'ulator& po#er but as a RABA)7A measure"
authori:ed b& Common#ealth A%t >D=.
7nder this" a muni%ipalit& is authori:ed to impose
three inds of li%enses1
o <) li%ense for re'ulation of useful o%%upations $ enterprises
o =) li%ense for restri%tion$ re'ulation of non.useful o%%upations
or enterprises
o 3) li%ense for revenue
The 0rst = fall #$in poli%e po#er" #hile the 3rd is for
revenue purposes.
The li%ense fee in this %ase falls under W3 and is
valid.
Nenerall& speain'" it is )*T a li%ense fee" but rests
on taxin' po#er" #$% must be expressl& %onferred b& statute upon the
muni%ipalit&.
There is no double taxation be%ause the %ompan& is
bein' taxed for the same ob?e%t1 *ne tax is on su'ar %entrals and the other
is on su'ar re0neries. It ?ust so happens that the %ompan& is both. ,+lso,
the tax was imposed based on capacity of the sugar centrals to produce, so
it was really a license on the occupation or business of sugar centrals and
sugar refneries and not on the sugar itself- hence there was no identity of
ob.ect of taxation/.
There is no dis%rimination despite the fa%t that the
%ompan& is the onl& su'ar produ%in' entit& in the muni%ipalit&. Bi%torias
Gillin' is not named in the ordinan%e and should another %orporation
de%ide to produ%e su'ar in the area" it #ill be taxed a%%ordin'l&.
NR1 If not for poli%e inspe%tion" supervision"
re'ulation + it is a revenue measureT
/u!* v. Arane!a
Common#ealth A%t 5PD or the @u'ar Ad?ustment
A%t" #as promul'ated in <K>0 in response to the imminent threat to
the su'ar industr& b& the imposition of export taxes upon su'ar as
provided in the T&din's.G%6uLe A%t" and the eventual loss of its
preferential position in the 7@ maret.
In order to stabili:e the su'ar industr& to prepare for
the loss" CA 5PD provided for an I)CRAA@A in the existin' tax on the
manufa%ture of su'ar (on a 'raduated basis)" the pro%eeds of #hi%h
#ould a%%rue to the @u'ar Ad?ustment and @tabili:ation Cund (a spe%ial
fund in the Phil Treasur&).
2alter Iut:" in his %apa%it& as administrator of the
Astate of Antonio Iedesma" #anted to re%over from the Colle%tor of
Internal Revenue the amount paid b& the estate as taxes" alle'in' that
the tax imposed b& CA 5PD is un%onstitutional" bein' levied for the aid
and support of the su'ar industr& ex%lusivel&" #hi%h is )*T a publi%
purpose.
I1 2$n the tax is un%onstitutional be%ause it is not
devoted to a publi% purpose.
R1 The tax is validT
The defe%t in the ar'ument of Iut: is his assumption
that the tax provided for in CA 5PD is a pure exer%ise of the taxin'
po#er.
In realit&" the tax is levied #ith a re'ulator&
purpose" to provide means for the rehabilitation and stabili:ation of the
threatened su'ar industr&. Thus" it is primaril& an exer%ise of poli%e
po#er.
@u'ar produ%tion is one of the 'reat industries of
our nation. @u'ar1
o *%%upies the leadin' position amon' export produ%ts
o Nives emplo&ment to thousands of laborers
o Is an impt sour%e of forei'n ex%han'e
Thus" its development redounds to NA). 2AICARA
and the le'islature ma& determine #ithin reasonable bounds #hat is
ne%essar& for its prote%tion and promotion. Taxation ma& be made the
implement of the @tate3s poli%e po#er.
0t is inherent in the power to tax that a state be free
to select the sub.ects of taxation, so the argument that the tax to be
levied burdens sugar producers themselves does not hold water.
It does not matter that the funds raised under the
@u'ar @tabili:ation A%t should be ex%lusivel& spent in aid of the su'ar
industr&" sin%e it is that ver& enterprise that is bein' prote%ted,
le'islature is not re-3d b& the Consti to adhere to the poli%& of 8all or
none.9
Iastl&" the taxation does not %onstitute expenditure
of tax mone& for private purposes" sin%e the funds #ill be used to
in%rease su'ar produ%tion" solve problems and improve #orin'
%onditions in su'ar mills.
PCGG v C(uan'c
After the A6@A Revolution" Pres A-uino issued A*s <" = and <>1
o A* < %reated the Presidential Commission on Nood
Novernment (PCNN) to assist the President in the re%over& of
ill.'otten #ealth a%%umulated b& former Pres Gar%os and his
famil&.
o A* = states that the ill.'otten #ealth is in the form of
properties lo%ated in the the Phils and other %ountries.
o A* <> empo#ered PCNN #$ assistan%e of the @olNen and
other 'ov a'en%ies" to 0le and prose%ute %ases under A*s <
and =.
Pursuant to these la#s" the PCNN issued and implemented numerous
se-uestrations" free:e orders and provisional taeovers of properties of
alle'edl& ill.'otten %ompanies.
Amon' the properties se-uestered #ere shares of sto% in the 7CP;
(7nited Co%onut Planters ;an)" the so.%alled CIIC Companies (Co%onut
Industr& Investment Cund %ompanies) and Co?uan'%o" Or.
@andi'anba&an then issued a resolution liftin' the se-uestration of the
7CP; shares on the 'round that respondents C*C*CA6 and the CIIC
Companies #ere )*T been impleaded b& the PCNN as parties.
defendants.
PCNN %hallen'ed the said resolution.
Gean#hile" @andi'anba&an ordered the holdin' of ele%tions for the
7CP; ;oard of 6ire%tors. It also allo#ed the se-uestered shares to be
voted b& their re'istered o#ners.
Thus" respondents C*C*CA6" Co?uan'%o" et%" as re'istered o#ners"
#ere allo#ed to exer%ise their ri'ht to vote their shares of sto% in
7CP; at the @to%holder3s Geetin'" and exer%ise their sto%holders3
ri'hts.
Republi% of the Phils then %ontended that the @andi'anba&an
%ommitted NA6 in en?oinin' the PCNN from votin' the se-uestered
shares of sto% in the 7CP;" despite the fa%t that1
o the se-uestration shares #ere pur%hased #ith %o%onut lev&
funds" #hi%h #ere P7;IIC in %hara%ter" A)6
o A previous resolution allo#ed the PCNN to vote the
se-uestered shares
I1 2$n the %o%onut lev& funds partae of the nature of taxes" and if the
ans#er is in the aLrmative" #$n the& %onstitute publi% funds
R1 The %o%onut lev& funds partae of the nature of taxes #$% %onstitute
publi% funds
Nenerall&" the ri'ht to vote se-uestered shares of sto% re'istered in
the names of private individuals $ entitles alle'ed to have been
a%-uired #ith ill.'otten #ealth shall be exer%ised b& the RANI@TRA6
*2)AR@.
F*2ABAR" the PCNN ma& be 'ranted su%h votin' ri'ht provided it %an
sho#1
o prima fa%ie eviden%e that the shares are indeed ill.'otten
o there is imminent dan'er of dissipation of the assets"
ne%essitatin' their %ontinued se-uestration and votin' b& the
'overnment until a 0nal de%ision on their o#nership is
promul'ated b& the proper %ourt
In this %ase" %o%onut lev& funds partae of the nature of taxes #hi%h" in
'eneral" are enfor%ed proportional %ontributions from persons and
properties" exa%ted b& the @tate b& virtue of its soverei'nt& for the
support of 'overnment and for all publi% needs.
;ased on this de0nition" a tax has 3 elements" namel& that it is1
o an enfor%ed proportional %ontribution from persons and
properties
o imposed b& the @tate b& virtue of its soverei'nt&
o levied for the support of the 'overnment.
Taxation is done not merel& to raise revenues to support the
'overnment" but also to provide means for the rehabilitation and the
stabili:ation of a threatened industr& a/e%ted b& publi% interest" as to
be #ithin the poli%e po#er of the @tate.
The %ourt in its earlier pronoun%ements stressed that the %o%onut lev&
funds are not onl& a/e%ted #ith publi% interest but are also prima fa%ie"
P7;IIC C7)6@ .. mone& raised b& operation of la# to support the 'ov
in the dis%har'e of its obli'ations.
Conse-uentl&" the 'overnment should be allo#ed to %ontinue votin'
sin%e the shares #ere pur%hased #$ %o%onut lev& funds" #$% are publi%
in %hara%ter and a/e%ted #$ publi% interest.
C##issiner n In!ernal Revenue v P/DT
P6IT paid the ;IR about P<P>! for e-uipment and spare parts it
imported for its business. The amount in%luded %ompensatin'" advan%e
sales and other internal revenue taxes. PI6T also paid BAT.
As a fran%hise holder" PI6T #as entitled to a tax exemption privile'e
under RAD04= ('rant of fran%hise)" #hi%h provided that the 'rantee
should pa& a fran%hise tax e-uivalent to 35 of all 'ross re%eipts" and
that the said per%enta'e shall be in IIA7 of all taxes on the fran%hise$
its earnin's.
PI6T #rote to the ;IR re-uestin' %on0rmation of its exemption
privile'e" and ;IR %on0rmed this" sa&in' that PI6T #as liable for the
35 fran%hise tax and exempt from BAT on its importation of
e-uipment.
PI6T 0led a %laim for tax refund of the BAT" %ompensatin' taxes"
advan%e sales taxes and other taxes it had been pa&in' erroneousl&
from *%tober" <KK=. 6e%ember" <KK>.
CTA 'ranted the petition (althou'h rulin' that a portion from *%t.
6e%<P" <KK= had alread& pres%ribed and #as be&ond the =.&r period
allo#ed b& la# for refunds)" orderin' CIR to RAC7)6 or to I@@7A in
favor of petitioner a Tax Credit Certi0%ate in the redu%ed amount of
about P==3! representin' erroneousl& paid BAT and other taxes
(%ompensatin'" advan%e sales" importation) from <KK= to <KK>.
1udge (aga dissented, saying who clarifed that the 2in lieu of3
provision of (ec"% refers only to 4056CT taxes and not to indirect
taxes such as 7+T, compensating tax, and advance sales tax.
;IR moved for re%onsideration and the same #as denied. CA also
dismissed its appeal.
I1 2$n PI6T is exempt from pa&ment of BAT other taxes b& virtue of the
provision in its fran%hise that the 35 fran%hise tax on its 'ross re%eipts
shall be in lieu of all taxes on its fran%hise $ earnin's
R1 )*" PI6T is not exempt from BAT and other taxes
Court has al#a&s ruled that TAJATI*) is the R7IA" and exemption is
the ex%eption. Thus" statutes 'rantin' tax exemptions must be
%onstrued stri%tl& a'ainst the taxpa&er and liberall& in favor of the
taxin' authorit&.
The burden of ?ustf&in' exemption is imposed on the one #ho %laims a
refund.
The %lause 8in lieu of all taxes9 in @e% <= of RA D04= is immediatel&
follo#ed b& the limitin' or -ualif&in' %lause 8on this fran%hise or
earnin's thereof9" su''estin' that the exemption is limited to taxes
imposed 6IRACTIE on PI6T sin%e taxes pertainin' to PI6T3s fran%hise
or earnin's are its dire%t liabilit&.
Thus" indire%t taxes" not bein' taxes on PI6T3s fran%hise or earnin's"
are *7T@I6A the purvie# of the 8in lieu9 provision.
The <05 BAT on importation of 'oods partaes of an ex%ise tax levied
on the privile'e of importin' arti%les. It is )*T a tax on the fran%hise of
a business enterprise" but is imposed on all taxpa&ers #ho import
'oods #hether or not the 'oods #ill eventuall& be sold" bartered"
ex%han'ed or utili:ed for personal %onsumption.
The 7+T on importation replaces the advance sales tax payable by
regular importers who import articles for sale or as raw materials in the
manufacture of fnished articles for sale.
6ire%t taxes . impositions for #hi%h a taxpa&er is dire%tl& liable on the
transa%tion or business he is en'a'ed in
Indire%t taxes . those #here the liabilit& for the pa&ment of the tax falls
on one person but the burden %an be shifted or passed on to another
person" su%h as #hen the tax is imposed upon 'oods before rea%hin'
the %onsumer #ho ultimatel& pa&s for it
o In this %ase" advan%e sales tax has the attributes of an
indire%t tax be%ause the tax.pa&in' importer of 'oods for sale
or of ra# materials to be pro%essed into mer%handise %an
shift the tax $ la& the 8e%onomi% burden of the tax9 on the
pur%haser" b& subse-uentl& addin' the tax to the sellin' pri%e
of the imported arti%le or 0nished produ%t
o Compensatin' tax also partaes of the nature of an ex%ise tax
pa&able b& all persons #ho import arti%les" #hether in the
%ourse of business or not. (Purpose1 to pla%e" for tax
purposes" persons pur%hasin' from mer%hants in the
Philippines on a more or less e-ual basis #ith those #ho bu&
dire%tl& from forei'n %ountries)
Plan!ers Pr"uc!s Inc v Fer!ip$il
Gar%os issued I*I <>P5" imposin' a %apital re%over& %omponent of
Php<0.00 per ba' of fertili:er. The lev& #as to %ontinue until ade-uate
%apital #as raised to mae PPI 0nan%iall& viable
Certiphil remitted to the Certili:er and Pesti%ide Authorit& (CPA)" #hi%h
then remitted said amount to Car Aast ;an and Trust Compan&" the
depositor& ban of PPI. PP! #as remitted from <K45 to <K4P.
After A6@A" Certiphil demanded from PPI a refund of the amount it
remitted, PPI refused.
Certiphil 0led a %omplaint for %olle%tion and dama'es" -uestionin' the
%onstitutionalit& of I*I <>P5.
The& %laimed it #as un?ust" unreasonable" oppressive" invalid and an
unla#ful imposition that amounted to a denial of due pro%ess
CPA on the other hand said that the issuan%e of I*I <>P5 #as a valid
exer%ise of poli%e po#er of the state in insurin' the fertili:er industr&"
and that Certiphil did not sustain an& dama'e be%ause the burden
imposed b& the lev& fell on the ultimate %onsumer" not the seller
I1 <. 2$m the issuan%e of I*I <>P5 #as an exer%ise of the poli%e po#er
of the state . )*
=. 2$n the lev& #as for a publi% purpose . )*
R1
<. The imposition of the lev& #as a exer%ise of the taxation po#er of
the state.
2hile it is true that the po#er to tax %an be used as an implement of
poli%e po#er" the primar& purpose of the lev& #as revenue 'eneration.
If the purpose is primaril& revenue" or if revenue is" at least" one of the
real and substantial purposes" then the exa%tion is properl& %alled a
tax.
In this %ase" the imposition of Php<0 per ba' is too ex%essive to serve a
mere re'ulator& purpose.
Aven if it #as an exer%ise of the poli%e po#er of the state" the I*I
#ould still be invalid as it did not %ompl& #ith the test of 8la#ful
sub?e%ts9 and 8la#ful means9 .. spe%i0%all&" that the interest of the
publi%" 'enerall&" re-uires its exer%ise" and that the means emplo&ed
are reasonabl& ne%essar& for the a%%omplishment of the purpose and
not undul& oppressive upon individuals.
=. I*I <>P5 is not for a publi% purpose.
The purpose for the issuan%e of I*I <>P5 #as to support a private
%ompan&1
o Cirst" it is expressl& provided that the lev& be imposed to
bene0t a private %ompan& ( PPI.
o @e%ond" the lev& #as %onditional and dependent on PPI
be%omin' 0nan%iall& viable.
o Third" the levies #ere dire%tl& remitted and deposited in
CA;TC" the ban of PPI" #hi%h used said remittan%es to pa& of
PPI3s debts.
/I-ITATIONS ON THE PO6ER OF TAXATION
Pascual v Secre!ar& ) Public 6r0s
Con'ress passed an RA appropriatin' P45U for the %onstru%tion of Pasi'
feeder road terminals.
The Provin%ial Novernor of Ri:al 0led an a%tion for de%larator& relief and
in?un%tion" %laimin' that at the time of the passa'e and approval of the
A%t" these feeder roads had not &et been %onstru%ted and #ere not
%onne%ted to an& 'overnment propert& or main hi'h#a&. The feeder
roads #ere a%tuall& #ithin the Antonio @ubdivision" #hi%h #as o#ned b&
Oose Xulueta" a member of the @enate of the Philippines. Xulueta" before
the passa'e of the A%t" had o/ered to donate the propert& to the
muni%ipalit& of Pasi'" but the deed of donation #as exe%uted onl& several
months after the RA #as passed. Fen%e" Con'ress appropriated publi%
funds for the %onstru%tion of feeder roads that #ere" at the time the la#
#as passed" private propert&.
ISSUE7 2hether the appropriation is valid.
HE/D7
The appropriation is invalid.
The taxin' po#er must be exer%ised for publi% purposes onl& and not for
the advanta'e of private individuals. The ri'ht of the le'islature to
appropriate publi% funds is %orrelative #ith its ri'ht to tax. As the
Constitution prohibits taxation ex%ept for a publi% purpose" so also no
appropriation of state funds %an be made other than for a publi% purpose.
The test of the %onstitutionalit& of a statute re-uirin' the use of publi%
funds is #hether the statute is desi'ned to promote the publi% interests as
opposed to the furtheran%e of the advanta'e of individuals" althou'h su%h
advanta'e to individuals mi'ht incidentally serve the publi%.
Aven if subse-uentl&" Xulueta exe%uted the deed of donation in favor of
the muni%ipalit&" main' the roads publi% propert&" the appropriation is
still invalid. The validit& of the statute depends upon the po#ers of
Con'ress at the time of its passa'e" not upon events o%%urrin' after. At
the time the bill #as passed" the road #as still private propert&.
Therefore" the appropriation sou'ht a private purpose and #as null and
void. The subse-uent donation %ould not have %ured this nullit&.
Os#ena v Orbs
Pres. Gar%os issued P6 <K5P %reatin' the *il Pri%e @tabili:ation Cund
(*P@C)" #hi%h #as desi'ned to reimburse oil %ompanies for %ost
in%reases in %rude oil and imported petroleum produ%ts resultin' from1
o ex%han'e rate ad?ustments A)6
o in%reases in the #orld maret pri%es of %rude oil
A portion of the *P@C #as taen from %olle%tions of ad valorem taxes
levied on oil %ompanies.
@ubse-uentl&" b& virtue of an A*" the *P@C #as re%lassi0ed into a trust
liabilit& a%%ount and ordered released from the )ATI*)AI TRAA@7RE to
the GI)I@TRE of Aner'&. @aid A* also authori:ed the investment of the
fund in 'overnment se%urities" #ith the earnin's a%%ruin' to the fund.
A-uino then amended P6 <K5P b& promul'atin' A* <3D" #$% expanded
the 'rounds for reimbursement to oil %ompanies for possible C*@T
7)6ARRAC*BARE in%%ured resultin' from the redu%tion of domesti%
pri%es on petroleum produ%ts. The said %ost underre%over& #as left to
the determination of the Ginistr& of Cinan%e.
*smena then -uestioned the %reation of the trust fund" sa&in' that it
violates the Constitution.
This is be%ause the mone& %olle%ted pursuant to P6 <K5P is a spe%ial
fund" and under the Constitution" if a spe%ial tax is %olle%ted for a
spe%i0% purpose" the revenue 'enerated from it shall be treated as a
@PACIAI C7)6 to be used onl& for the indi%ated purpose. It must not be
%hanneled to another 'overnment ob?e%tive.
I1 2$n the %reation of the trust fund is violative of the Constitution
R1 )*" %reation of the trust fund #as valid.
<. Cor the funds to fall under the prohibition" it must be sho#n that
the& #ere %olle%ted as TAJA@ ( as a form of revenue
2hile the funds %olle%ted ma& be referred to as taxes" the& are exa%ted
in the exer%ise of the P*IICA P*2AR of the @tate .
The main ob?e%tive #as )*T revenue but to stabili:e the pri%e of oil
and petroleum.
The *P@C is a%tuall& a @PACIAI C7)6" as seen from the spe%ial
treatment 'iven to it b& A* <3D. It is se're'ated from the 'eneral fund,
and #hile it is pla%ed in #hat the la# refers to as a Strust liabilit&
a%%ount"S the fund nonetheless remains sub?e%t to the s%rutin& and
revie# of the C*A.
These measures thus %ompl& #ith the %onstitutional des%ription of a
Sspe%ial fund.S
=. Also" there #as no undue dele'ation of taxation po#er be%ause the
la# provides a suL%ient standard b& #hi%h the authorit& must be
exer%ised.
Cor a valid dele'ation of po#er" it is essential that the la# dele'atin'
the po#er must be1
o <) %omplete in itself .. must set forth the poli%& to be
exe%uted b& the dele'ate
o =) it must 0x a standard Y limits of #hi%h are
suL%ientl& determinate or determinable Y to #hi%h the
dele'ate must %onform.
In this %ase" there #as a suL%ient standard" #hi%h is the 'eneral poli%&
of the la# to prote%t the %onsumer b& stabili:in' and subsidi:in'
petroleum pri%es.
Pepsi4Cla v -unicipali!& ) Tanauan
This %ase involved = Guni%ipal *rdinan%es and the Io%al Autonom& A%t
(RA ==P>)1
o The Io%al Autonom& A%t (RA ==P>) 'rants muni%ipalities the
authorit& to impose muni%ipal taxes or fees upon persons
en'a'ed in an& o%%upation or business #ithin their
?urisdi%tions" provided that the& #ere not allo#ed to impose
per%enta'e tax on sales and on items alread& sub?e%t to
spe%i0% tax under the )IRC
o Guni%ipal *rdinan%e )o. =3 of Tanauan" Ie&te imposes on soft
drin produ%ers and manufa%turers a tax of 8+89 ) a
cen!av )r ever& b!!le ) s)! "rin0 cr0e".
o Guni%ipal *rdinan%e )o. =D imposes on soft drins produ%ed
or manufa%tured a tax of 8 cen!av n eac$ 'alln )
vlu#e capaci!&.
Pepsi 0led an a%tion to de%lare the Io%al Autonom& A%t and the t#o
ordinan%es void. It %laimed that RA ==P> is an undue dele'ation of
po#er.
I1 2$n RA ==P> %onstitutes an undue dele'ation of po#er . )*
=. 2hether G*s =3 and =D are valid ( EA@T
R1
<. RA ==P> is not an undue dele'ation of po#er.
The po#er of taxation ma& be dele'ated to lo%al 'overnments in
respe%t of matters of lo%al %on%ern.
This is not to sa& thou'h that the %onstitutional in?un%tion a'ainst
deprivation of propert& #ithout due pro%ess of la# ma& be passed over
under the 'uise of the taxin' po#er" ex%ept #hen the tain' of
propert& is in the la#ful exer%ise of the taxin' po#er" as #hen1
o the tax is for a publi% purpose,
o the rule on uniformit& of taxation is observed,
o either the person or propert& taxed is #ithin the ?urisdi%tion
of the
o 'overnment lev&in' the tax, and
o in the assessment and %olle%tion of %ertain inds of taxes"
noti%e and opportunit& for hearin' are provided.
The dele'ation of the taxin' po#er to the muni%ipal %orporation %annot
be assailed either on the 'round of double taxation. 6ouble taxation is
prohibited onl& #hen the taxpa&er is taxed t#i%e for the same bene0t
b& the same entit& for the same purpose" not #here one tax is imposed
b& the @tate and the other b& a muni%ipalit&.
=. The G*s are valid.
G* )o. =D is not a tax on sales but on the produ%e" sin%e it is based on
volume %apa%it&.
)either is it a spe%i0% tax be%ause soft drins do not fall #ithin the
enumeration of items sub?e%t to spe%i0% tax. The rate of the tax is also
reasonable and %annot be said to be unfair or oppressive.
Guni%ipalities are empo#ered to impose" not onl& muni%ipal li%ense
taxes
upon persons en'a'ed in an& business or o%%upation" but also to lev& for
publi% purposes" ?ust and uniform taxes.
SSS v Ci!& ) .acl"
The @@@ had an oL%e buildin' in ;a%olod Cit&. It failed to pa& realt&
taxes for three %onse%utive &ears. The Cit& levied upon the propert&
and forfeited it in its favor.
@@@ protested the forfeiture on the 'round that the @@@" bein' a
'overnment o#ned and %ontrolled %orporation" is exempt from
pa&ment of real estate taxes.
The CCI ruled that @@@ is )*T %overed b& the exemption" sa&in' that
the exemption onl& applies to properties o#ned b& 'overnment
a'en%ies and instrumentalities performin' 'overnmental$ soverei'n
fun%tions.
It ex%luded from the %overa'e of the exemption those performin'
proprietar& fun%tions" su%h as the @@@. It relied on the %ase of 8+C9C9
v. Bacani in #hi%h the Court held that 'overnment a'en%ies performin'
proprietar& fun%tions are )*T exempt from pa&in' le'al fees.
I1 2$n a N*CC performin' prprie!ar& fun%tions lie the @@@" is
exempt from pa&in' realt& taxes.
R1 Ees. The @@@ is exempt from pa&in' realt& taxes.
The Charter of the Cit& of ;a%olod provides that lands and buildin's
o#ned b& the 'overnment are exempt from realt& taxes.
The appli%ation of the 8+C9C9 v. Bacani %ase is in%orre%t" sin%e that
%ase #as referrin' to le'al fees and )*T to realt& taxes.
Cor purposes of exemptions in the pa&ment of realt& taxes" the
distin%tion bet#een 'overnment a'en%ies performin' %onstituent and
ministrant fun%tion is not important.
2hat is de%isive is merel& that the properties possessed b& the @@@ are
in fa%t o#ned b& the 'overnment of the Philippines. As su%h" the& are
exempt from realt& taxes.
To mae su%h a distin%tion #ould have the e/e%t of tain' mone& from
one po%et and puttin' it in another po%et. It #ould not serve the
main purpose of taxation and #ould even tend to defeat it" be%ause of
the paper#or" time" and expenses that it #ould entail.
6$en public prper!& is invlve", e%e#p!in is !$e rule an"
!a%a!in, !$e e%cep!in
-anila In!:l Airpr! Au!$ri!& v Ci!& ) P:;ue
As operator of the )AIA" the Ganila Intl Aiport (GIAA) administers the
land" improvements and e-uipment #ithin the )AIA %omplex.
The GIAA %harter transferred to the GIAA approximatel& P00 he%tares
of land" in%ludin' run#a&s and buildin's. The %harter also provided
that no portion of the land transferred to the GIAA shall be disposed of
throu'h sale or an& other mode unless approved b& the President.
The *L%e of the Novernment Corporate Counsel #as of the opinion
that the lo%al 'overnment %ode #ithdre# the exemption from real
estate tax 'ranted to GIAA.
GIAA paid some of the real estate taxes due but #as also held
delin-uent.
The Cit& of Parana-ue threatened to sell the Airport lands should GIAA
fail to pa& the real estate delin-uen%&.
GIAA 0led a petition for in?un%tion but CA dismissed this.
GIAA. A da& before the s%heduled publi% au%tion" the GIAA 0led a
motion for an issuan%e of a TR* before the @C #hi%h the @C 'ranted
immediatel&.
Fo#ever the respondents re%eived the TR* 3 hours after the
%on%lusion of the publi% au%tion" so the @C issued a resolution
%on0rmin' nun% pro tun% (no# for then) the TR*.
I1 2$n the Airport lands and buildin's of GIAA are exempt from real
estate taxes under existin' la#s
Feld1 EA@" it is.
<. A N*CC is )*T exempt from real estate tax.
Fo#ever" GIAA is )*T a N*CC. A N*CC must be or'ani:ed as a sto%
or non.sto% %orporation. GIAA is not or'ani:ed as a sto% or non.sto%
%orporation.
GIAA is a 'overnment instrumentalit& vested #ith %orporate po#ers to
perform eL%ientl& its 'overnmental fun%tions. It is lie an& other 'ov
instrumentalit&" but is )*T vested #$ %orporate po#ers.
A 'overnment instrumentalit& lie GIAA falls under the INC #$% states
that lo%al 'ovs CA))*T tax the national 'overnment" #$% dele'ates
the po#er to tax to lo%al 'ovs. The po#er of lo%al 'ovs to tax is sub?e%t
to Con'ress limitations.
=. Airport lands and buildin's of GIAA are propert& of publi% dominion"
devoted to publi% use" and are o#ned b& the @tate (Art >=0 Civ CodeY
roads" portsZ o#ned b& state).
Thus" the& are outside the %ommer%e of man and CA))*T be the
sub?e%t of sale. 7nless the President issues a pro%lamation #ithdra#in'
the Airport lands and ;uildin's from publi% use" these properties
remain properties of publi% dominion and are inalienable.
GIAA is merel& holdin' title to the Airport lands and buildin's in TR7@T
for the Republi%. This is made %learer b& the fa%t that onl& the
President %an si'n su%h deed of %onve&an%e involvin' said propert&.
The transfer of the said property to the :0++ was meant to implement
a reorgani*ation. The :0++ charter transferred +irport lands and
buildings to :0++ without the 5epublic receiving any cash. The
purpose was to reorgani*e a division in the Bureau of +ir
Transportation into a separate and autonomous body. The 5epublic
remains the benefcial owner of the lands and buildings.
INC exempts from real estate tax an& real propert& o#ned b& the
Republi% of the Philippines.
It also states that real propert& o#ned b& the Republi% loses its tax
exemption *)IE if the bene0%ial use thereof has been 'ranted" to a
taxable person. GIAA is not a taxable person.
F*2ABAR" portions of the lands and buildin's that GIAA leases to
private entities are )*T exempt from real estate tax.
Sea4/an" Services Inc. v. CA7 In!erna!inal C#i!&
@ea.Iand" an Ameri%an shippin' %ompan&" entered into a %ontra%t #ith
the 7@ Novernment for the transport of militar& household 'oods and
e/e%ts of 7@ militar& personnel assi'ned to the @ubi% )aval ;ase.
The ;IR %olle%ted <.55 in%ome tax on the in%ome derived b& @ea.Iand"
#hi%h @ea.Iand paid.
Iater" @ea.Iand ased for a refund" %laimin' that it had paid the tax b&
mistae. It invoed the tax exemption provided in the RP.7@ Gilitar&
;ases A'reement" #hi%h exempts from tax an& pro0t derived b& a 7@
national under a %ontra%t #ith the 7@ 'overnment in %onne%tion #ith
the construction, maintenance, operation, and defense of the bases.
@ea.Iand 0led a petition for revie# #ith the CTA to ?udi%iall& pursue its
%laim for refund and to stop the runnin' of the =.&ear pres%riptive
period.
CTA3s [ CA denied refund.
I7 2$) @ea.Iand falls #ithin the %overa'e of the tax exemption. )*
R7 The transport or shipment of household 'oods and e/e%ts of
7@militar& personnel is not in%luded in the term construction,
maintenance, operation, and defense of the bases. )either %an the
a%tivit& be interpreted as dire%tl& related to the defense and se%urit& of
the Philippine territories. It is therefore not %overed b& the exemption.
8Ia#s 'rantin' exemption from tax are %onstrued stri%tissimi ?uris
a'ainst the taxpa&er and liberall& in favor of the taxin' po#er.
Taxation is the rule and exemption is the ex%eption.9 The la# 8does not
loo #ith favor on tax exemptions and that he #ho #ould see to be
thus privile'ed must ?ustif& it b& #ords too plain to be mistaen and
too %ate'ori%al to be misinterpreted.9
The avo#ed purpose of tax exemption 8is some publi% bene0t or
interest" #hi%h the la#main' bod& %onsiders suL%ient to o/set the
monetar& loss entailed in the 'rant of the exemption.9 The haulin' or
transport of household 'oods and personal e/e%ts of 7. @. militar&
personnel #ould not dire%tl& %ontribute to the defense and se%urit& of
the Philippines.
CIR v. -i!subis$i -e!al Crp.7 In!erna!inal C#i!&
Atlas Consolidated Ginin' entered into a Ioan and @ales Contra%t #ith
Gitsubishi. 7nder the Contra%t" Gitsubishi #ould lend Atlas \=0G for
the installation of a ne# %on%entrator for %opper produ%tion" and in
turn" Atlas #ould sell to Gitsubishi all the %opper %on%entrates
produ%ed from the ma%hine for the next <5 &ears.
Thereafter" Gitsubishi applied for a loan #ith Aximban of Oapan and
other %onsortium of Oapanese bans so that it %ould %ompl& #ith its
obli'ations under the %ontra%t. The total amount of both loans #as
\=0G.
Approval of the loan b& Aximban to Gitsubishi #as sub?e%t to the
%ondition that Gitsubishi #ould use the amount as loanto Atlas and as
%onsideration for importin' %opper %on%entrates from Atlas.
Atlas made interest pa&ments in favor of Gitsubishi totalin' P<3G. The
%orrespondin' <55 tax on the interest in the amount of P<.KG #as
#ithheld and remitted to the Novernment.
@ubse-uentl&" Gitsubishi and Atlas 0led a %laim for tax %redit"
re-uestin' that the P<.KG be applied a'ainst their existin' tax
liabilities on the 'round that the interest earned b& Gitsubishi on the
loan #as exempt from tax.
The )IRC provides that in%ome re%eived from loans in the Philippines
extended b& 0nan%in' institutions o#ned" %ontrolled" or 0nan%ed b&
forei'n 'overnments are exempt from tax.
Gitsubishi and Atlas %laim that the interest earned from the loan falls
under the above exemption be%ause Gitsubishi #as merel& a%tin' as
an a'ent of Aximban" #hi%h is a 0nan%in' institution o#ned"
%ontrolled" and 0nan%ed b& the Oapanese Novernment. The& alle'e that
Gitsubishi #as merel& the %onduit bet#een Atlas and Aximban" and
that the ultimate %reditor #as reall& Aximban.
I7 2$) the interest in%ome from loans extended to Atlas b& Gitsubishi
is ex%luded from 'ross in%ome taxation and therefore ex%luded from
#ithholdin' tax. )*
R7 Gitsubishi #as not a mere a'ent of Aximban. It entered into the
a'reement #ith Atlas in its o#n independent %apa%it&. The transa%tion
bet#een Gitsubishi and Atlas on the one hand" and bet#een Gitsubishi
and Aximban on the other" #ere separate and distin%t.
Thus" the interest in%ome of the loan paid b& Atlas to Gitsubishi is
entirel& di/erent from the interest in%ome paid b& Gitsubishi to
Aximban. 2hat #as sub?e%t of the #ithholdin' tax is not the interest
in%ome paid b& Gitsubishi to Aximban but the interest in%ome earned
b& Gitsubishi from the loan to Atlas.
@in%e the transa%tion #as bet#een Gitsubishi and Atlas" the exemption
that #ould have been appli%able to Aximban" does not appl&. The
interest is therefore not exempt from tax.
It is true that under the %ontra%t of loan #ith Aximban" Gitsubishi
a'reed to use the amount as a loan to and in %onsideration for
importin' %opper %on%entrates from Atlas" but this onl& proves the
?usti0%ation for the loan as represented b& Gitsubishi #hi%h is a
standard banin' pra%ti%e for evaluatin' the prospe%ts of due
repa&ment.
2hile international %omit& is invoed in this %ase on the nebulous
representation that the funds involved in the loans are those of a
forei'n 'overnment" s%rupulous %are must be taen to avoid openin'
means to violate our tax la#s. *ther#ise" the mere expedient of havin'
Phil %orp enter into a %ontra%t for loans #ith private forei'n entities"
#hi%h in turn #ill ne'otiate independentl& #ith their 'overnments"
%ould be availed to tae advanta'e of the tax exemption la# under
dis%ussion.
<8
s!
In)an!r& Ps! E%c$an'e v. Psa"as7 In!erna!inal
C#i!&
The 3<
st
Infantr& Post Ax%han'e #as an a'en%& under the %ontrol of the
7@ Arm&" operatin' in the Philippines. The Ax%han'e bou'ht 'oods"
su%h as soap and toiletries" and resold them to oL%ers" soldiers" and
%ivilian emplo&ees of the 7@ Arm& and their families.
The pro%eeds derived from the sales #ere then used for the betterment
of the %ondition of the personnel of the Arm&.
In the %ourse of its business" the Ax%han'e pur%hased 'oods from
mer%hants in the Philippines. The Colle%tor of Internal Revenue
%olle%ted from these mer%hants taxes at the rate of <.55 of the 'ross
value sold b& them to the Ax%han'e.
The Ax%han'e 0led an a%tion for prohibition a'ainst the CIR for him to
desist from %olle%tin' the taxes from the mer%hants. The Ax%han'e
%laims that the taxes imposed on the mer%hants #ere drivin' up the
pri%es of 'oods sold to it b& the mer%hants.
The Ax%han'e %laims that the mer%hants should be exempt from taxes
sin%e the revenue la# provides that no spe%i0% tax shall be %olle%ted
on an& 'oods sold and delivered dire%tl& to the 7@ Arm& of )av& for
their a%tual use or issue.
I7 2$) the mer%hants sellin' 'oods to the Ax%han'e are exempt from
sales tax. )*
R7 The tax exemption %overs those 'oods that are sold dire%tl& to the
7@ Arm& or )av& for their a%tual use or issue. In this %ase" the 'oods
are sold to the Ax%han'e for resale to individuals belon'in' to the
Arm& or )av&" and not to the Arm& or )av& itself. Fen%e" the& do not
fall #ithin the exemption.
The rule is that #ithout Con'ressional %onsent" no Cederal a'en%& or
instrumentalit& %an be taxed b& state authorit&. Fo#ever" nl& !$se
a'encies !$ru'$ =$ic$ !$e Fe"eral Gvern#en! i##e"ia!el&
an" "irec!l& e%ercises i!s sverei'n p=ers are i##une )r#
!$e !a%in' p=er ) !$e s!a!es.
The reason upon #hi%h the rule rests must be the 'uidin' prin%iple to
%ontrol its operation. The limitations upon the taxin' po#er of the state
must re%eive a pra%ti%al %onstru%tion #hi%h does not seriousl& impair
the taxin' po#er of the Novernment imposin' the tax.
The e/e%t of the tax upon the fun%tions of the Novernment and the
nature of the 'overnmental a'en%& determine 0nall& the extent of the
exemption.
In this %ase" the tax laid upon Philippine mer%hants #ho sell to the
Ax%han'e does not interfere #ith the suprema%& of the 7@ Novernment
or #ith the operations of its instrumentalit& the 7@ Arm&" to su%h an
extent or in su%h a manner as to render the tax ille'al. The tax does
not deprive the Arm& of the po#er to serve the Novernment or hinder
the eL%ient exer%ise of its po#er.
CIR v. -arubeni Crpra!in
Garubeni #as a Oapanese %orporation en'a'ed in the import and
export" tradin'" and %onstru%tion business. It %ompleted t#o %ontra%ts
in <K4>" the in%ome from #hi%h it did not de%lare.
*ne of the %ontra%ts #as #ith )6C in %onne%tion #ith the %onstru%tion
of a #harf$port %omplex in Ie&te. The other %ontra%t #as #ith the
Philippine Phosphate Certili:er Corp (Philfos) for the %onstru%tion of an
ammonia stora'e %omplex also in Ie&te.
The CIR then made an assessment on GarubeniVs de0%ien%& taxes. It
found that the )6C and Philpos %ontra%ts #ere made on a 8turn.e&9
basis (a ?ob in #hi%h the %ontra%tor a'rees to %omplete the #or of
buildin' and installation to the point of readiness or o%%upan%&, in
other #ords" the produ%ts are brou'ht to the %lient %omplete and read&
for use) amountin' to about PKP0G!.
The t#o %ontra%ts #ere divided into t#o parts ( the o/shore portion
and the onshore portion. All materials and e-uipment in the %ontra%t
under the o/shore portion #ere manufa%tured and %ompleted in Oapan.
After manufa%ture" these #ere transported to Ie&te and installed to the
pier #ith the use of bolts.
CIR found that Garubeni #as liable for %ontra%torVs tax on the o/shore
portion.
Garubeni 0led a petition #ith the CTA" ar'uin' that the in%ome derived
from the o/shore portion should be exempt from tax sin%e it #as
derived outside of the Philippine ?urisdi%tion.
I7 2$) in%ome of Garubeni is taxable even if it %laims that it #as
earned outside of the Philippines. )*" Garubeni is )*T liable for the
%ontra%tor3s tax.
R7 A %ontra%tor3s tax is in the nature of an ex%ise tax on the exer%ise of
a privile'e of sellin' servi%es or labor rather than a sale of produ%ts. It
is dire%tl& %olle%tible from the person exer%isin' the privile'e. ;ein' an
ex%ise tax" it %an be levied b& the taxin' authorit& onl& #hen the a%ts"
privile'es or business are done or performed #ithin the ?urisdi%tion of
said authorit&. Iie propert& taxes" it %annot be imposed on an
o%%upation or privile'e outside the taxin' distri%t.
In this %ase" the ship loaders" boats and mobile e-uipment used in the
%onstru%tion pro?e%ts #ere all desi'ned" en'ineered and fabri%ated in
Oapan. The& #ere merel& shipped to Ie&te and assembled there. 2hile
the %onstru%tion and installation #or #ere %ompleted #ithin the
Philippines" some pie%es of e-uipment and supplies #ere %ompletel&
desi'ned and en'ineered in Oapan. @in%e these servi%es #ere rendered
outside the taxin' ?urisdi%tion of the Philippines" the& are therefore not
sub?e%t to the %ontra%tor3s tax.
Rea'an v. CIR7 Terri!rial >uris"ic!in
Rea'an" an Ameri%an %iti:en and an emplo&ee ;endix Aviation
Corporation" #hi%h provides te%hni%al assistan%e to the 7@ Air Cor%e"
#as assi'ned at Clar Air ;ase. Fe imported a tax.free <KP0 Cadilla%
%ar.
After a fe# months" he ased his ;ase Commander at the Clar Air
;ase for a permit to sell the %ar #hi%h #as 'ranted provided that the
sale should be made to a member of the 7@ Armed Cor%es or a 7@
%iti:en emplo&ed in the 7@ militar& base in the Philippines. Fe then
sold the %ar to
" Or. #ho #as a member of the 7@ Garine Corps in Cavite. Oohnson" Or.
then sold the %ar to Geneses.
The CIR assessed him and he paid the in%ome tax on the amount
reali:ed from the sale. After pa&in' the in%ome tax" he sou'ht a refund
from CIR %laimin' that he is exempt. 2hile the a%tion #as pendin'" he
0led the %ase #ith the CTA seein' the re%over& of #hat he paid plus
the le'al rate of interest.
Rea'an is imputin' that the Clar Air Cor%e is forei'n soil or territor&
and thus is be&ond the 'overnment3s ?urisdi%tional po#er to tax. Fis
'round is based upon an obiter di%tum in a <KP= de%ision
I7 2$) the sale is exempt from in%ome tax. )*
R7 The sale is not exempt from in%ome tax be%ause it too pla%e #ithin
Philippine territor& thus #ithin the 'overnment3s ?urisdi%tional po#er to
tax.
Clar Air Cor%e ;ase is not a forei'n soil or territor& for purpose of
in%ome tax le'islation. There is nothin' in the Gilitar& ;ases
A'reement that lends support to su%h assertion. It has not be%ome
forei'n soil or territor&. The Philippine3s ?urisdi%tional ri'hts therein"
%ertainl& not ex%ludin' the po#er to tax" have been preserved.
The Phils bein' independent and soverei'n" its authorit& ma& be
exer%ised over its entire domain. There is no portion thereof that is
be&ond its po#er. Its la#s 'overn therein" and ever&one to #hom it
applies must submit to its terms. The 'round o%%upied b& an embass&
is not in fa%t the territor& of the forei'n @tate to #hi%h the premises
belon' throu'h possession or o#nership. The la#fulness or
unla#fulness of a%ts there %ommitted is determined b& the territorial
soverei'n.
A state is not pre%luded from allo#in' another po#er to parti%ipate in
the exer%ise of ?urisdi%tional ri'ht over %ertain portions of its territor&. If
it does so" it does not follo# that su%h areas be%ome impressed #$
alien %hara%ter. The& retain their status as native soil. The& are still
sub?e%t to its authorit&. Itts ?urisdi%tion ma& be diminished" but it does
not disappear. @o it is #ith the bases under lease to the Ameri%an
armed for%es b& virtue of the Gilitar& ;ases A'reement of <K>D. The&
are not and %annot be forei'n territor&.
Tiu v. CA7 E;ual Pr!ec!in ) !$e /a=s
Con'ress passed RA D==D #hi%h %reated the @ubi% @pe%ial A%onomi%
Xone" 'rantin' tax and dut& in%entives (tax and dut&.free importations
of ra# materials" %apital and e-uipment) to businesses and residents
#ithin the area en%ompassed b& the :one.
The la# provides that no lo%al and national taxes shall be imposed
#ithin the :one. In lieu of taxes" 35 of the 'ross in%ome of enterprises
operatin' #ithin the :one shall be remitted to the )ational
Novernment" <5 to the lo%al 'overnment units" and <5 to a
development fund to be utili:ed for the development of muni%ipalities
outside *lan'apo and @ubi%.
Pres. Ramos later issued an A* spe%if&in' a 8se%ured area9 area #ithin
the :one in #hi%h the privile'es #ere operative.
o EO?@
tax and dut&.free importations #ill onl& appl& to
ra# materials" %apital 'oods and e-uipment brou'ht
in b& business enterprises into the @@AX.
Ax%ept for import tax and duties" all business are
re-uired to pa& the spe%i0ed taxes in @e%tion <=(%)
of RAD==D.
o EO?@4A the tax in%entives are onl& appli%able to business
enterprises and individuals residin' #ithin the se%ured area.
Petitioners outside the 8se%ured area9 %hallen'ed the %onstitutionalit&
of this A* for alle'edl& bein' violative of their ri'ht to e-ual prote%tion
of the la#s.
The& assert that the @@AX en%ompasses (<) the Cit& of *lon'apo" (=)
the Guni%ipalit& of @ubi% in Xambales" and (3) the area formerl&
o%%upied b& the @ubi% )aval ;ase. Fo#ever" A* KD.A" a%%ordin' to
them" narro#ed do#n the area #ithin #hi%h the spe%ial privile'es
'ranted to the entire :one #ould appl& to the present 8fen%ed.in
former @ubi% )aval ;ase9 onl&. It has hereb& ex%luded the residents of
the 0rst t#o %omponents of the :one from en?o&in' the bene0ts
'ranted b& the la#.
I7 2$) the A* %on0nin' the appli%ation of the privile'es under RA D==D
#ithin the se%ured area and ex%ludin' the residents of the :one outside
the se%ured area violates the e-ual prote%tion %lause. )*.
R7 There are real and substantive distin%tions bet#een the
%ir%umstan%es obtainin' inside and outside the @ubi% )aval base"
thereb& ?ustif&in' avalid and reasonable %lassi0%ation.
Cor a valid %lassi0%ation" the follo#in' re-uisites must be present1
<. it must rest on substantial di/eren%es,
=. must be 'ermane to the purpose of the la#,
3. must not be limited to existin' %onditions onl&, and
>. must appl& e-uall& to all members of the same %lass.
In this %ase" the purpose of the la# is to a%%elerate the %onversion of
militar& reservations into produ%tive areas (e%onomi% or industrial
areas) . Thus" the lands %overed under the Gilitar& ;ases A'reement
are its ob?e%t.
To a%hieve purpose" Con'ress deemed it ne%essar& to extend e%onomi%
in%entives to attra%t and en%oura'e investors. It #as thus reasonable
for the President to have delimited the appli%ation of some in%entives
to the %on0nes of the former @ubi% militar& base" sin%e it is this spe%i0%
area #hi%h the 'overnment intends to transform and develop into a
self.sustainin' industrial and e%onomi% :one" parti%ularl& for the use of
bi' forei'n and lo%al investors to use as operational bases for their
businesses and industries. These bi' investors possess the %apital
ne%essar& to spur e%onomi% 'ro#th and 'enerate emplo&ment
opportunities.
There are substantial di/eren%es bet#een the bi' investors #ho are
bein' lured to establish and operate their industries in the so.%alled
8se%ured area9 and the present business operators outside the area.
;i' investors lured into se%ured areas Present bi: operators outside the are
.billion.peso investments [ thousand
of ne# ?obs
.national e%onomi% impa%t
.
.no su%h ma'nitude
.onl& lo%al e%onomi% impa%t
.bi: a%tivities outside se%ured areas
are not liel& to have an& impa%t in
a%hievin' purpose of la# #hi%h is to
turn former militar& base to
produ%tive use for the bene0t of the
Phil e%onom&
There is" then" hardl& an& reasonable basis to extend to them the
bene0ts and in%entives a%%orded in RA D==D
>$n Ha& Peples Al!erna!ive Cali!in v. /i#
RA )o. D==D %reated the ;ases Conversion and 6evelopment Authorit&
(;C6A)" #hi%h also %reated the @ubi% @pe%ial A%onomi% Xone (@ubi%
@AX). Aside from 'rantin' in%entives to @ubi% @AX" RA D==D also
'ranted the President is an express authorit& to %reate other @AXs in
the areas %overed respe%tivel& b& the Clar militar& reservation" the
2alla%e Air @tation in @an Cernando" Ia 7nion" and Camp Oohn Fa&
throu'h exe%utive pro%lamations.
;C6A entered into a G*A and As%ro# A'reement #ith T7)TAJ and
A@IA2*RI6" private %orporations under the la#s of the ;ritish Bir'in
Islands" preparator& to the formation of a ?oint venture for the
development of Poro Point Ia 7nion and Camp Oohn Fa& as premier
tourist destinations and re%reation %enters.
;C6A" T7)TAJ and A@IA2*RI6 exe%uted a OBA to put up the ;a'uio
International 6evelopment and Gana'ement Corporation #hi%h #ould
lease areas #ithin Camp Oohn Fa& and Poro Point for the attainment of
the tourist and re%reation spots in Ia 7nion and Camp Oohn Fa&.
President Ramos issued Pro%lamation )o. >=0 #hi%h established a @AX
on a portion of Camp Oohn Fa&. =
nd
senten%e of @e%tion 3 of said
Pro%lamation provided for national and lo%al tax exemption #ithin and
'raned other e%onomi% in%entives to the Oohn Fa& @pe%ial A%onomi%
Xone.
8@e%tion 31 Investment Climate in Oohn Fa& @pe%ial A%onomi% Xone..
Pursuant to @e%tion 5(m) and @e%tion <5 of RA )o. D==D" the Oohn Fa&
Poro Point 6evelopment Corporation shall implement all ne%essar&
poli%ies" rules" and re'ulations 'overnin' the :one" in%ludin'
investment in%entives" in %onsultation #ith pertinent 'overnment
departments. A#n' !$ers, !$e *ne s$all $ave all !$e
applicable incen!ives ) !$e Special Ecn#ic Ane un"er
Sec!in 8B ) Republic Ac! N. @BB@ an" !$se applicable
incen!ives 'ran!e" in !$e E%pr! Prcessin' Anes, the *mnibus
Investment Code of <K4D" the Corei'n Investment A%t of <KK<" and ne#
investment la#s that ma& hereinafter be ena%ted.9
Petitioners 0led this %ase to en?oin the respondents from implementin'
Pro%. >=0. is un%onstitutional on 'rounds of1
o Cor bein' ille'al and invalid in so far as it 'rants tax
exemptions thus amountin' to un%onstitutional exer%ise of b&
the President of po#er 'ranted onl& to le'islature
o Iimits po#ers and interferes #ith the autonom& of the %it&
o Biolates rule that all taxes should be uniform and e-uitable
I7 2$) Pro%lamation )o. >=0 is %onstitutional b& providin' for national
and lo%al tax exemption #ithin and 'rantin' other e%onomi% in%entives
to the Oohn Fa& @pe%ial A%onomi% Xone. )*" =
nd
senten%e" @e%tion 3 of
said pro%lamation is un%onstitutional.
2$) Pro%lamation )o. >=0 is %onstitutional for limitin' or interferin'
#ith the lo%al autonom& of ;a'uio Cit&. EA@
R7 T$e B
n"
Sen!ence ) SECTION < ) Prcla#a!in N. CBD is
$ereb& "eclare" NU// an" 2OID and is a%%ordin'l& de%lared of no
le'al for%e and e/e%t. Publi% respondents are hereb& en?oined from
implementin' the aforesaid void provision. Pro%lamation )o. >=0"
#ithout the invalidated portion" remains valid and e/e%tive.
Un"er Sec!in 8B ) RA N. @BB@ i! is clear !$a! ON/E THE
SU.IC SEA =$ic$ =as 'ran!e" b& Cn'ress =i!$ !a% e%e#p!in,
inves!#en! incen!ives an" !$e li0e. THERE IS NO EXPRESS
EXTENSION OF THE SAID PRO2ISION IN PRESIDENTIA/
PROC/A-ATION N. CBD. (@e%tion <= ept mentionin' @ubi% @pe%ial
A%onomi% Xone" spe%i0%all&Z) Als )un" in !$e "elibera!ins )
!$e Sena!e, a cn,r#a!in ) !$e e%clusivi!& ) !$e !a% an"
inves!#en! privile'es ! Subic SEA. FSena!r An'ara7 T$e
Gen!le#an is abslu!el& crrec!. -r. Presi"en!. SO 6E -UST
CONFINE THESE PO/ICIES ON/E TO SU.IC.G
It is the le'islature" unless limited b& a provision of the state
%onstitution that has full po#er to exempt an& person" %orporation or
%lass of propert& from taxation" its po#er to exempt bein' as broad as
its po#er to tax. *ther than the Con'ress" the Constitution ma& itself
provide for spe%i0% tax exemptions" or lo%al 'overnments ma& pass
ordinan%es on exemption onl& from lo%al taxes. The %hallen'ed 'rant of
tax exemption must have %on%urren%e of a ma?orit& of all members of
Con'ress. In same vein" the other inds of privile'es extended to the
Oohn Fa& @AX are b& tradition and usa'e for Con'ress to le'islate upon.
Tax exemption %annot be implied as it must be %ate'ori%all& and un
mistaabl& expressed ( if it #ere the intent of the le'islature to 'rant
to the Oohn Fa& @AX the same tax exemption and in%entives 'iven to
@ubi% @AX" it #ould have so expressl& provided in RA D==D.
;C6A" under R.A D==D" is expressl& entrusted #ith broad ri'hts of
o#nership and administration over Camp Oohn Fa&" as the 'overnin'
a'en%& of the Oohn Fa& @AX.
COCONUT OI/ REFINERS ASSOCIATION INC. 2. .CDA
RA D==D #as ena%ted providin' for the sound and balan%ed %onversion
of the Clar and @ubi% militar& reservations and their extensions into
alternative produ%tive uses in the form of spe%ial e%onomi% :ones.
President Ramos issued A* 40 #hi%h de%lared that Clar (C@AX) shall
have all the appli%able in%entives 'ranted to the @ubi% @pe%ial
A%onomi% and Cree Port Xone (@@AX) under RA D==D.
Petitioners %laim that the said A.* as #ell as RA D==D are replete #ith
%onstitutional in0rmities and must be de%lared invalid and void.
Petitioner assail1
o A* 40 and ;C6A ;oard Resolution1 allo#in' the tax and dut&.
free sale at retail of %onsumer 'oods imported via %lar for
%onsumption outside C@AX.
o A* KD" A* KD.A1 'rantin' \<00 monthl& and \=00 &earl& tax.
free shoppin' privile'es to @@AX residents livin' outside
se%ured area of @@AX and to Cilipinos a'ed <5 and over
residin' outside @@AX
Petitioners ar'ue that the Axe%utive 6epartment" b& allo#in' thru
-uestioned issuan%es the settin' up of tax and dut& free shops and the
removal of %onsumer ''oods and items from the :ones #ithout
pa&ment of %orrespondnin' duties and taxes arbitraril& provided
additional exemptions to the limitations imposed b& RA D==D.
I7 (other issues1 e-ual prote%tion %lause" preferential use of Cilipino
labor" prohibition a'ainst unfair %ompetition)
2$) assailed issuan%es amounts to violation of the rule on separation
of po#ers bein' exe%utive le'islation.
R7
Petitioners %laim that the #ordin' of RA D==D %learl& limits the 'rant of
tax in%entives to the importation of ra# materials and %apital
e-uipment onl&" hen%e the& %laim that assailed issuan%es %onstitute
exe%utive le'islation for invalidl& 'rantin' tax in%entives in importation
of %onsumer 'oods. The %ourt ho#ever said that to limit the tax.free
importation privile'e of enterprises to those lo%ated inside the spe%ial
:one onl& to ra# materials %learl& runs %ounter to the intention of the
le'islature to %reate a free port #here 8free ]o# of 'oods or %apital
#ithin" into and out of the :ones9 is insured.
The re%ords of the @enate %ontainin' the dis%ussion of the %on%ept of
@AX in @e% <=a RA D==D sho# the le'islative intent that %onsumer
'oods enterin' the @@AX #hi%h satisf& the needs of the :one and are
%onsumed there are not sub?e%t to duties and taxes in a%%ordan%e #ith
Philippine la#s. A%%ordin' to @enator Nuin'ona1 The @AX %ould
embra%e the needs of tourism" servi%in'" 0nan%in' and other
investment aspe%ts.
Fo#ever #ith re'ard to the exe%utive order issued b& President Ramos
%on%ernin' Clar as bein' a @AX (and thus en?o& tax exemptions and
in%entives) the %ourt de%lared that su%h #as an invalid exer%ise of
exe%utive le'islation. As #as de%ided in the %ase of Camp Oohn Oa&"
#herein the %ourt held that Oohn Fa& #as not 'ranted an& tax
exemption as it #as not an&#here stated in the la#. As in this %ase" RA
D==D expressl& provides for the 'rant of in%entives to the @@AX it fails
to mae an& similar 'rant ho#ever to the other e%onomi% :ones
in%ludin' Clar. Tax and dut& free in%entives bein' in the nature of tax
exemptions the basis thereof should be %ate'ori%all& and unmistaabl&
expressed from the lan'ua'e of the statute.
Prvince ) Abra v Hernan"
The Roman Catholi% ;ishop of ;an'ued #anted to be exempted from
pa&ment of real estate tax.
Fe 0led an a%tion for de%larator& relief in the CCI of Abra.
The CCI rendered a summar& ?ud'ment 'rantin' the exemption.
The Provin%e of Abra 0led an a%tion for %ertiorari a'ainst the CCI on the
'round that it 'ranted the a%tion for de%larator& relief 0led b& the
Roman Catholi% ;ishop #ithout allo#in' the Provin%e to ans#er and
#ithout hearin'" in violation of its ri'ht to due pro%ess.
It also alle'ed that the ?ud'e (Fernando) failed to abide P6 )o. >P>
#hi%h states that" 8)o %ourt shall entertain an& suit A@@AIII)N the
validit& of tax until the taxpa&er pa&s under protest the tax assessed
a'ainst him.. nor shall an& %ourt de%lare an& portion of the tax
assessed I)BAII6 ex%ept if the taxpa&er shall pa& the ?ust amount of
tax determined b& the %ourt.9
I1 2$n the ?ud'ment of the %ourt 'rantin' the exemption to the Roman
Catholi% ;ishop of ;an'ued is valid
R1 )*" it is invalid
In order to exempt reli'ious institutions from the pa&ment of real
estate taxes" the propert& must be use" e%clusivel&, ac!uall&, an"
"irec!l& )r reli'ius purpses.
T$us, To be exempted from realt& tax" there must be proof of ACT7AI
and 6IRACT use of the propert& for reli'ious or %haritable purposes.
In this %ase" the ri'ht of the Provin%e of Abra to pro%edural due pro%ess
#as violated b& the summar& ?ud'ment 'rantin' the exemption.
Instead of a%%eptin' the bare alle'ation of the bishop that the propert&
#as bein' used ex%lusivel&" dire%tl&" and a%tuall& for publi% purposes"
the ?ud'e should have 0rst re-uired proof of these alle'ations.
Tlen!in v. Sec. ) Finance
@everal parties 0led %omplaints in the @C -uestionin' the le'alit& of Axpanded
BAT la# (RA DD<P)" #hi%h sou'ht to #iden the tax base of the existin' BAT
s&stem
(^7+T! a tax levied on the sale, barter or exchange of goods and properties +(
W6)) +( as on the sale or exchange of services- or (0:;)< tax on spending =
consumption)1
<) The P$ilippine Press Ins!i!u!e %ontends that b& removin' BAT
exemption from the press #hile maintainin' those 'ranted to others"
the ABAT Ia# dis%riminates a'ainst the press and violates the freedom
of the press.
R1 @in%e the la# 'ranted the press a privile'e" the la# %ould tae ba%
the privile'e an&time 2ITF*7T o/ense to the Constitution.
The @tate" b& 'rantin' exemptions" does )*T forever #aive the
exer%ise of its soverei'n prero'ative. In #ithdra#in' the exemption"
the la# merel& sub?e%ts the press to the same tax burden to #hi%h
other businesses have alread& been sub?e%t.
The %ase of >ros.ean v. +merican ;ress Co. %ited b& the PPI is di/erent
be%ause in that %ase" the tax #as found to be dis%riminator& be%ause it
#as imposed onl& on ne#spapers #hose #eel& %ir%ulation #as over
P=0. These papers #ere %riti%al of a %ertain senator #ho %ontrolled
the state le'islature. The %ensorial motivation of the la# #as thus
evident. F*2ABAR" in this %ase" the motivation #as not to %ensor but
merel& to raise revenues.
2hat the le'islature %annot impose upon the press is a license tax"
#hi%h is mainl& for re'ulation A)6 is un%onstitutional be%ause it la&s
PRI*R RA@TRAI)T on the exer%ise of a ri'ht.
In this %ase" the BAT is not a li%ense tax be%ause it is not a tax on the
exer%ise of a privile'e or of a %onstitutional ri'ht. It is imposed on the
sale of 'oods purel& for revenue purposes.
=) Philippine ;ible @o%iet& %laims that the imposition of BAT on the
sales of its bibles I)CRI)NA@ on reli'ious freedom be%ause the tax
I)CRAA@A@ the pri%e of the bibles" #hile RA67CI)N the volume of
sales.
It also %laims exemption from the re'istration fee of P<.
R1 The resultin' burden on the exer%ise of reli'ious freedom is so
I)CI6A)TAI as to mae it diL%ult to di/erentiate it from an& other
e%onomi% imposition that mi'ht mae the ri'ht to disseminate reli'ious
do%trines %ostl&.
To follo# P;@3 ar'ument of in%reasin' the tax on the sale of vestments
#ould be to la& an impermissible burden on the ri'ht of the prea%her to
mae a sermon.
The re'istration fee is reall& ?ust to pa& for the expenses of re'istration
and enfor%ement of the provisions of the la#. Aven if P;@ is ex%used
from pa&in' taxes on those bibles that it distributes for free" it still has
to pa& the re'istration fee sin%e it also en'a'es in the sale of bibles.
3. CRA;A %laims that the la#1
a) impairs the obli'ations of %ontra%ts be%ause the appli%ation of the
tax to existin' %ontra%ts of the sale of real propert& b& installment
#ould result in substantial in%reases in monthl& amorti:ations" #hi%h
the bu&er did not anti%ipate at the time he entered into the %ontra%t.
b) violates e-ual prote%tion sin%e the la# exempts lo#.%ost housin'
from BAT but )*T middle.%lass housin'.
%) ;ein' an indire%t" re'ressive tax" BAT violates the %onstitutional
mandate to provide a pro'ressive s&stem of taxation.
R1
a) BAT does )*T violate the non.impairment %lause be%ause the
obli'ation of %ontra%ts CA))*T defeat the authorit& of the 'overnment
to tax b& virtue of its soverei'nt&.
b) )either did it violate APC be%ause there #as a substantial distin%tion
bet#een the homeless poor and the middle %lass. The middle %lass %an
a/ord to rent houses #hile the homeless poor %annot.
%) As to it bein' a re'ressive tax" the Constitution does not prohibit
re'ressive taxes. 2hat it simpl& provides is that Con'ress shall evolve
a pro'ressive s&stem of taxation" #hi%h means that dire%t taxes are to
be preferred and indire%t taxes minimi:ed.
BAT provides exemptions in favor of basi% 'oods utili:ed b& the lo#er
in%ome bra%ets and its burden a%tuall& falls more on those 'oods that
%onsumers from the hi'her in%ome bra%et bu&.
Therefore" the tax is not repu'nant to the Constitution.
A.AHADA v Er#i!a
R.A. K33D $ the ABAT Ia# #as ena%ted in Ga& =005. This la#1
<) authori:ed the President" upon re%ommendation of the @e%retar& of
Cinan%e" to raise !$e 2AT ra!e ! 8BI e5ec!ive >anuar& 8, BDD9" if
t#o %onditions are satis0ed1
o BAT %olle%tion as a per%enta'e of N6P of the previous &ear
ex%eeds = >$5 5
o )ational 'overnment de0%it as a per%enta'e of N6P of the
previous &ear ex%eeds < Q5
o maintainin' the rate of <05 until the %onditions above too
pla%e
It also inserted a provision imposin' a D05 limit on the amount of input
tax to be %redited a'ainst the output tax.
Petitions #ere thus 0led assailin' the %onstitutionalit& of the la#1
o A;AUA6A ar'ued that Con'ress abandoned its ex%lusive
authorit& to 0x taxes b& 'ivin' the President the authorit&
upon the Cinan%e @e%3s re%ommendation to raise BAT to <=5
o @en. Pimentel and Rep. As%udero ar'ued that the la# #as an
undue dele'ation of le'islative po#ers and a violation of due
pro%ess
o Pilipinas @hell dealers ar'ued that the BAT reform #as
arbitrar&" oppressive and %on0s%ator&.
*n the other hand" respondents %ountered that the la# #as %omplete"
that it left no dis%retion to the President" and that it merel& %har'ed the
President #ith %arr&in' out the rate in%rease on%e an& of the =
%onditions arise.
I1 2$n RA K33D is %onstitutional
R1 EA@" it is valid and %onstitutional.
<) /a= =as NOT an un"ue "ele'a!in ) le'isla!ive p=er
Con'ress didn3t dele'ate the po#er to tax but the mere
implementation of the la# ( the as%ertainment of fa%ts %ontin'ent on
%onditions alread& provided.
In this %ase" the le'islature made the operation of the <=5 rate
%ontin'ent upon = spe%i0ed %onditions. Thus" no dis%retion #ould be
exer%ised b& the President" and he #ould onl& exer%ise the ministerial
dut& of imposin' the <=5 rate.
Goreover" the President %an3t alter or modif& $ nullif& $ set aside the
0ndin's of fa%t of the @e%retar& of Cinan%e" #ho #ill as%ertain the said
%onditions be%ause the @oC #ill not a%t as alter e'o of President but
ANA)T of the le'islative department.
=) T$e 8BI increase "es NOT i#pse an un)air an"
unnecessar& a""i!inal !a% bur"en.
;e%ause of the %ountr&3s 'loom& states of e%onomi% a/airs" it is
ne%essar& to raise revenue to meet 'overnment expenditures.
3) T$e @DI li#i!a!in n inpu! !a% "es NOT vila!e "ue
prcess an" EPC
Input tax is )*T a propert& ri'ht but a @TAT7T*RE privile'e" #$% ma&
be re'ulated. ;esides" the unutili:ed input tax ma& be %redited in the
subse-uent periods or even refunded" so it is )*T %ompletel& lost.
)either does it violate APC #$ re'ard to the 55 %reditable #ithholdin'
tax imposed on pa&ments made b& the 'overnment for TAJA;IA
TRA)@ACTI*)@. This is be%ause it is applied e-uall& to members of the
same %lass. Taxable transa%tions #ith the 'overnment are sub?e%t to a
uniform 55 rate" in %ontrast to its di/erent rates prior to amendment.
It is %lear that Con'ress intended to treat di/erentl& taxable
transa%tions #ith the 'overnment.
>) T$e la= is cnsis!en! =+ Uni)r#i!& an" E;ui!abili!& )
Ta%a!in
7niformit& of taxation means that all taxable arti%les$propert& of the
@AGA CIA@@ be taxed at the @AGA RATA.
In this %ase" the tax la# is uni)r# as it provides for a standard rate of
<05 $ <=5 on all 'oods and servi%es. It does )*T even mae an&
distin%tion as to the t&pe of industr& $ trade that #ill bear the D05
limitation on the %reditable input tax" 5&ear amorti:ation of input tax
paid on pur%hase of %apital 'oods or the 55 0nal #ithholdin' tax b&
the 'overnment.
The la# is also e;ui!able be%ause it is e-uipped #ith a threshold
mar'inYthe <0$<=5 BATA rate #ill not appl& to the sale of 'oods #$
'ross annual sales at P<.5 or belo#. @mall %orner sari.sari stores are
%onse-uentl& exempt from its appli%ation.
5) Aven if BAT is re'ressive" it is still %onstitutional.
The %onstitution does )*T prohibit the imposition of indire%t taxes $ a
re'ressive s&stem of taxation. It simpl& provides that Con'ress shall
AB*IBA a pro'ressive s&stem of taxation" meanin' dire%t taxes must
be preferred to indire%t taxes.
In the %ase of the BAT" the la# minimi:es the re'ressive e/e%ts of this
imposition b& providin' for :ero ratin' of %ertain transa%tions.
-isa#is Orien!al Asscia!in ) Cc Tra"ers v. Dep!. ) Finance
Secre!ar&
The )IRC exempts from BAT the sale of a'ri%ultural non.food produ%ts
in their ori'inal state if the sale is made b& the primar& produ%er or
o#ner of the land from #hi%h the same are produ%ed.
The sale made b& an& other person $ entit&" lie a trader or dealer" is
)*T exempt from the tax.
A revenue memorandum %ir%ular #as issued" re%lassif&in' C*PRA into
an a'ri%ultural non.food produ%t.
Gisamis *riental" #$% #as en'a'ed in the bu&in' and sellin' of %opra"
%laimed that the memorandum %ir%ular #as dis%riminator& and
violative of the e-ual prote%tion %lause be%ause #hile %o%onut farmers
and %opra produ%ers are exempt" TRA6AR@ and 6AAIAR@ are )*T"
althou'h both sell %opra in its ori'inal state.
I1 2$n there #as a violation of e-ual prote%tion.
R1 )*" it #as not violative of APC
The Constitution does not forbid the di/erential treatment of persons
so lon' as there is a RAA@*)A;IA basis for %lassif&in' them di/erentl&.
In this %ase" there is a material or substantial di/eren%e bet#een
%o%onut farmers and %opra produ%ers" on the one hand" and %opra
traders and dealers" on the other.
The farmers$ produ%ers PR*67CA and @AII %opra" #hile traders and
dealers merel& @AII %opra.
so lon' as there is a reasonable basis for %lassif&in' them di/erentl&.
CIR v. CA
Cortune Toba%%o Corp. is en'a'ed in the manufa%ture of di/erent
brands of %i'arettes.
The Philippine Patent *L%e issued to the %orporation %erti0%ates of
trademar re'istration over 8Champion"9 8Fope"9 and 8Gore9
%i'arettes.
Initiall&" the CIR %lassi0ed the brands as C*RAIN) ;RA)6@ sin%e the&
#ere listed in the 2orld Toba%%o 6ire%tor& as belon'in' to forei'n
%ompanies.
Fo#ever" Cortune Toba%%o %han'ed the names as follo#s1
o 8Fope9 to 8Fope Iuxur&9
o 8Gore9 to 8Premium Gore9
TF7@" the& #ere removed them from the forei'n brand %ate'or&.
A %erti0%ation #as presented to sho# that 8Champion9 #as an ori'inal
Cortune Toba%%o brand.
The three brands #ere therefore taxed ad valorem as lo%al brands.
@ubse-uentl&" RA DP5> #as passed amendin' the )IRC provisions on
%i'arettes. The said la# imposed a 555 tax on lo%all& manufa%tured
%i'arettes bearin' a C*RAIN) brand and >55 tax on %i'arettes bearin'
a I*CAI brand.
After the ena%tment of RA DP5> but ;AC*RA its e/e%tivit&" the ;IR
issued a %ir%ular re%lassif&in' the three brands as forei'n brands.
Pursuant to RA DP5>" the CIR assessed Cortune Toba%%o for ad valorem
tax de0%ien%& amountin' to PK.5G.
Cortune 0led a petition for revie# #ith the CTA.
The CTA upheld the stand of Cortune" statin' that at the time of the
ena%tment of RA DP5>" the three brands #ere still %lassi0ed as lo%al
brands and %ould thus )*T be assessed the 555 tax" but onl& the >55
tax. This #as aLrmed b& the CA
I1 2$n the 555 tax %lassi0%ation as forei'n brands #as valid
R1 )*" it #as )*T valid. The& are lo%al brands.
<) T$e .IR circular vila!e" "ue prcess.
The ;IR ma& issue rules in the exer%ise of its -uasi.le'islative po#ers"
but these rules must be merel& interpretative in nature.
It %annot 'o be&ond providin' for the means that %an fa%ilitate the
implementation of the la#.
In this %ase" the %ir%ular issued b& the ;IR imposin' the 555 tax rate
did not simpl& interpret the la# ;7T le'islated under its -uasi.
le'islative authorit&.
Thus" the re-uirements of noti%e" hearin'" and publi%ation should not
have been then i'nored.
=) T$e circular in)rin'e" n uni)r#i!& ) !a%a!in.
The Constitution re-uires taxation to be uniform and e-uitable.
7niformit& re-uires that all taxable arti%les or inds of propert& of the
same %lass must be taxed at the same rate" and the tax must operate
#ith the same for%e and e/e%t in ever& pla%e #here the sub?e%t ma&
be found.
In this %ase" other %i'arettes bearin' forei'n brands #ere )*T in%luded
#ithin the s%ope of the %ir%ular. A%%ordin' to Commissioner Chato" the
reason for leavin' out the other brands #as be%ause there #as not
enou'h time to in%lude them. Thus" the %ir%ular #as hastil&
promul'ated" in violation of the rule on uniformit& of taxation.
CIR v. /in'a&en Gul) Elec!ric P=er C. Inc
Iin'a&en Nulf" an ele%tri% po#er plant operator" #as the 'rantee of a
muni%ipal fran%hise to suppl& ele%tri%it& in Pan'asinan. It #as sub?e%t
to a =5 fran%hise tax under the muni%ipal fran%hise.
The CIR assessed Iin'a&en a de0%ien%& fran%hise tax" %omputed at 55"
based on the rate pres%ribed b& the )IRC" instead of the lo#er rates as
provided in the muni%ipal fran%hises.
Iin'a&en re-uested for a reinvesti'ation 'iven that instead of in%urrin'
a de0%ien%& liabilit&" it made an overpa&ment of the fran%hise tax.
This #as denied b& the CIR so Iin'a&en appealed to the CTA.
In the meantime" RA 34>3 #as passed 'rantin' Iin'a&en a le'islative
fran%hise to suppl& ele%tri% %urrent to the publi%" sub?e%t to =5
fran%hise tax.
The CIR %laimed that the la# #as un%onstitutional for bein' violative of
the uniformit& and e-ualit& of taxation %lause of the Constitution sin%e
other similar fran%hises #ere sub?e%t to a 55 fran%hise tax imposed b&
the Tax Code.
CTA dismissed CIR3s %laim and ruled that the provisions of RA 34>3
should appl&.
I1 2$n RA 34>3 violates the rule on uniformit& and e-ualit& of taxation
R1 )o.
A tax is uniform #hen it operates #ith the same for%e and e/e%t in
ever& pla%e #here the sub?e%t of it is found. 7niformit& means that all
propert& belon'in' to the same %lass shall be taxed alie.
The Ie'islature has the inherent po#er not onl& to sele%t the sub?e%ts
of taxation but to 'rant exemptions. TAJ AJAGPTI*)@ have never been
deemed violative of the e-ual prote%tion %lause.
In this %ase" althou'h Iin'a&en3s muni%ipal fran%hises #ere obtained
under A%t )o. PPD of the Philippine Commission" these ori'inal
fran%hises have been repla%ed b& a ne# le'islative fran%hise" RA 34>3.
Iin'a&en3s po#er plant falls #ithin the %lass of po#er plants %reated b&
A%t )o. 3P3P" as amended b& C.A. )o. <3= and RA 34>3. RA 34>3
merel& transferred the petitionerVs po#er plant from that %lass
provided for in A%t )o. PPD" until the approval of RA 34>3.
Thus" the la# merel& transferred Iin'a&en3s po#er plant from its
former %lass to #hi%h it belon'ed. All po#er plants belon'in' to this
parti%ular %lass #ere sub?e%t to the same =5 tax and therefore" the
rule on uniformit& #as not violated.
Hapa!iran n' #'a Na'lilin'0" sa Pa#a$alaan n' Pilipinas v.
Tan
President A-uino issued A* =D3" adoptin' the value.added tax (BAT).
Cour petitions %ontended that A* =D3 is un%onstitutional on the
'rounds that the President had no authorit& to issue it, that it is
oppressive" dis%riminator&" un?ust" and re'ressive.
I1 2$n the A* =D3" adoptin' BAT" is valid.
R7 The A* is valid.
7nder the Provisional and <K4D Constitutions" the President is vested
#ith le'islative po#ers until a le'islature under a ne# Constitution is
%onvened.
In this %ase" the A* #as ena%ted = da&s before Con'ress %onvened.
Therefore" the A* #as still #ithin the President3s po#er to issue.
A* =D3 is not oppressive" dis%riminator&" un?ust" or re'ressive.
It satis0es all the re-uirements of a valid tax in that it is uniform and
e-uitable.
A tax is %onsidered uniform #hen it operates #ith the same for%e and
e/e%t in ever& pla%e #here the sub?e%t ma& be found.
In this %ase" the tax is applied similarl& on all 'oods and servi%es sold
to the publi%" #hi%h are not exempt" at the %onstant rate of 05 or <05.
The tax is also e-uitable be%ause it is imposed *)IE on sales of 'oods
or servi%es b& persons en'a'ed in business #ith an a''re'ate 'ross
annual sales ex%eedin' =00U.
Thus" small %orner sari.sari stores" sales of marine and farm produ%ts
and basi% food and ne%essities are not %overed b& BAT.
Customs broers %ontend that the A* is also dis%riminator& be%ause it
exempts from BAT servi%es performed in the exer%ise of one3s
profession except customs brokers.
The distin%tion is based on material di/eren%es in that the a%tivities of
%ustoms broers partae more of a business rather than a profession.
Sisn v. Anc$e!a
;P <35 amended @e%tion =< of the )ational Internal Revenue Code.
The amendment provided a di/erent s%hedule of tax rates for
%ompensation in%ome and net in%ome.
It provided that1
o The tax base for those earnin' %ompensation in%ome at 0xed
rates #ould be NR*@@ I)C*GA"
o The tax base for the in%ome of businesses and professionals
#ould be )AT I)C*GA
@ison" as taxpa&er" %hallen'ed the validit& of the amendment on the
'round that he #ould be undul& dis%riminated a'ainst b& the
imposition of hi'her rates of tax upon his in%ome arisin' from the
exer%ise of his profession as %ompared to those #hi%h are imposed
upon 0xed in%ome or salaried individual taxpa&ers.
Fe %laims that it amounts to %lass le'islation" in violation of APC" due
pro%ess and the rule on uniformit& in taxation.
I1 2$n it is violative of APC" dp and the rule on uniformit& in taxation
R1 )*T
8J 6ue pro%ess %lause ma& onl& be invoed #here a taxin' statute is
so arbitrar& that it 0nds no support in the Constitution. (ie. 2hen it
amounts to %on0s%ation of propert& $ not used for a publi% purpose)
BJ As )r EPC, !he Constitution does not re-uire thin's #hi%h are
di/erent be treated the same. It is inherent in the po#er to tax that a
state be free to sele%t the sub?e%ts of taxation and Vine-ualities #hi%h
result from a sin'lin' out of one parti%ular %lass for taxation" or
exemption infrin'e no %onstitutional limitation.
KT$us, !$ere =as n vila!in ) "ue prcess r EPC.
<J T$ere =as als n vila!in ) uni)r#i!&.
7niformit& does )*T %all for perfe%t e-ualit&. It merel& means that all
taxable arti%les $ propert& of the same %lass shall be taxed at the same
rate.
The taxin' po#er has the authorit& to mae reasonable and natural
%lassi0%ations for purposes of taxation.
In this %ase" there is a dis%ernible basis of %lassi0%ation" #hi%h is the
SUSCEPTI.I/ITE ) !$e inc#e ! !$e applica!in ) 'enerali*e"
rules re#vin' all "e"uc!ible i!e#s )r all !a%pa&ers =i!$in !$e
class an" ,%in' a se! ) re"uce" !a% ra!es ! be applie" ! all
) !$e# .
Taxpa&ers #ho are re%ipients of %ompensation in%ome are set apart as
a %lass. As there is pra%ti%all& no overhead expense" these taxpa&ers
are not entitled to mae dedu%tions for in%ome tax purposes be%ause
the& are in the same situation more or less.
*n the other hand" in the %ase of professionals in the pra%ti%e of their
%allin' and businessmen" there is n uni)r#i!& in !$e cs!s r
e%penses necessar& ! pr"uce !$eir inc#e.
It #ould not be ?ust to disre'ard the disparities b& 'ivin' all of them
:ero dedu%tion and indis%riminatel& impose on all alie the same tax
rates on the basis of 'ross in%ome.
There is ample ?usti0%ation for the la# to adopt 'ross s&stem of in%ome
taxation to %ompensation in%ome" #hile %ontinuin' the s&stem of net
in%ome taxation as re'ards the professional and business in%ome.
2ille'as v. Hiu C$in' Tsai Pa H
The Guni%ipal ;oard of Ganila passed an ordinan%e prohibitin' an alien
from bein' emplo&ed or en'a'in' in an& position or o%%upation or
business enumerated therein" #hether permanent" temporar&" or
%asual" #ithout 0rst se%urin' an emplo&ment permit from the Ga&or
and pa&in' the P50 permit fee.
Fiu Chion' 0led an a%tion to restrain the enfor%ement of the ordinan%e
and to have it de%lared null and void for bein' dis%riminator& and
violative of the rule on uniformit& in taxation.
The Ga&or ar'ued that the ordinan%e %annot be de%lared null and void
on the 'round that it violates the rule on uniformit& of taxation
be%ause this rule applies onl& to purel& tax or revenue measures and
not to re'ulator& measures" su%h as the ordinan%e.
The 0rst part of the ordinan%e re-uirin' an alien to se%ure an
emplo&ment permit is re'ulator& in %hara%ter be%ause it involves the
exer%ise of dis%retion on the part of the Ga&or in approvin' or
disapprovin' the appli%ations.
Fo#ever" the se%ond part #hi%h re-uires the pa&ment of P50 as
emplo&ee3s fee is not re'ulator& but a revenue measure. There is no
lo'i% or ?usti0%ation in exa%tin' P50 from aliens #ho have been %leared
for emplo&ment. The obvious purpose of the ordinan%e is to raise
mone& under the 'uise of re'ulation.
The P50 fee is unreasonable not onl& be%ause it is ex%essive but
be%ause it fails to %onsider valid substantial di/eren%es in situation
amon' individual aliens #ho are re-uired to pa& it. The same amount is
bein' %olle%ted from ever& emplo&ed alien" #hether he is %asual or
permanent" part time or full time" or #hether he is a lo#l& emplo&ee or
a hi'hl& paid exe%utive.
2illanueva v. Ci!& ) Ilil7 Uni)r#i!&
The muni%ipal board of Iloilo ena%ted *R6I)A)CA << (series of <K40)
imposin' 4P li%ense tax fees on persons en'a'ed in the business of
operatin' tenement houses ((tenement house ( an& buildin' or
d#ellin' for rentin' spa%e divided into separate apartments or
a%%essories).
The Billanuevas" o#ners of > tenement houses %ontainin' 3>
apartments" %hallen'ed the validit& of su%h ordinan%e be%ause onl& the
taxpa&ers of the Cit& of Iloilo are sin'led out to pa& taxes on their
tenement houses" #hile %iti:ens of other %ities" #here their %oun%ils do
not ena%t a similar tax ordinan%e are permitted to es%ape su%h
imposition.
Io#er %ourt rendered the ordinan%e ille'al as it is oppressive and
unreasonable" %onstitutes double taxation and violates uniformit&.
I1 2$n the ordinan%e violates the rule on e-ualit& and uniformit& in
taxation.
R1 )*.
<) The rule on e-ualit& and uniformit& does not re-uire that taxes for
the same purpose should be imposed in di/erent territorial
subdivisions at the same time.
Taxes are uniform and e-ual #hen imposed upon all propert& of the
same %lass or %hara%ter #ithin the taxin' authorit&.
In this %ase" tenement buildin's %onstitute a distin%t %lass of propert&.
=) Contrar& to petitionersV assertion that the tax in -uestion is a RAAI
A@TATA tax" this ar'ument %annot be sustained.
The tax is not a 0xed proportion of the assessed value of the tenement
houses" and does not re-uire the intervention of assessors or
appraisers. It is not pa&able at a desi'nated time or date" and is not
enfor%eable a'ainst the tenement houses either b& sale or distraint.
RATFAR" it is seen from the %ontext of the ordinan%e that the intention
is to impose a li%ense tax on the operation of tenement houses" #hi%h
is a form of business or %allin'.
3) Also" the petitionersV %ontention that the& are doubl& taxed be%ause
the& are pa&in' the real estate taxes and the tenement tax imposed b&
the ordinan%e in -uestion is devoid of merit.
A li%ense tax ma& be levied upon a business or o%%upation althou'h
the land or propert& used in %onne%tion there#ith is sub?e%t to propert&
tax. This #ould not %onstitute double taxation be%ause there is onl&
double taxation #hen the @AGA PR*PARTE $ @7;ACT GATTAR is taxed
t#i%e for the same purpose" #$in the same ?urisdi%tion and period" and
of the same ind of %hara%ter of tax.
Real estate and tenement tax aer )*T of the same ind $ %hara%ter.
At all events" there is no %onstitutional prohibition a'ainst double
taxation in the Philippines. It is somethin' not favored" but is
permissible" provided some other %onstitutional re-uirement is not
thereb& violated" su%h as the re-uirement that taxes must be uniform.
Pepsi4Cla .!!lin' C. ) !$e P$il. v. Ci!& ) .u!uan7 Uni)r#i!&
The Cit& of ;utuan ena%ted an ordinan%e imposin' on an& a'ent and$or
%onsi'nee of an& entit& en'a'ed in sellin' soft drins a tax of <0 %ents
per %ase of => bottles to be paid at the end of ever& month.
The tax shall be based from the %ar'o manifest" bill of ladin'" or on an&
re%ord sho#in' the number of %ases received #ithin the month.
The ordinan%e provides that the revenue derived from su%h Sshall be
alloted as follo#s1 >05 for Roads and ;rid'es Cund, >05 for the
Neneral Cund and =05 for the @%hool Cund.
Pepsi 0led an a%tion to nullif& the ordinan%e on the 'round that it
partaes of the nature of an import tax and is hi'hl& un?ust and
dis%riminator&.
I7 6+n !he ordinan%e is valid
R7 The ordinan%e is null and void.
<) The tax is dis%riminator& and violative of uniformit& be%ause it is
levied onl& on those persons #ho are a'ents or %onsi'nees of another
dealer" #ho must be one en'a'ed in business outside the %it&.
Thus" lo%al dealers (#$in %it&) )*T a%tin' for or on behalf of other
mer%hants #ould be exempt from the tax.
=) Goreover" the tax shall be based on the number of bottles re%eived"
)*T @*I6" b& the taxpa&er. These %ir%umstan%es sho# that the
ordinan%e is limited in appli%ation to those soft drins brou'ht into the
Cit& from outside thereof.
The tax thus partaes of the nature of an import dut&" #hi%h is be&ond
the authorit& of the %it& to impose b& express provision of la#.
3) In order for valid %lassi0%ation to tae pla%e it must be 'ermane to
purpose of la#" rest on substantial distin%tions" appl& e-uall& to all
members of same %lass" appl& to present and future %onditions.
There is no valid %lassi0%ation here be%ause if the purpose of the la#
#ere merel& to lev& a burden upon the sale of soft drins" there is no
reason #h& sales thereof b& dealers other than a'ents or %onsi'nees of
produ%ers or mer%hants outside the %it& should be exempt from the
tax.
*n double taxation ar'ument1 double taxation" in 'eneral" is not
forbidden b& our fundamental la#" so it %annot be sustained.
Or#c Su'ar C. v. Treasurer ) Or#c Ci!&7 Uni)r#i!& an"
E;ual Pr!ec!in
The Guni%ipal ;oard of *rmo% Cit& passed *rdinan%e )o > imposin' a
muni%ipal tax of <5 per export sale of su'ar milled at the *rmo% @u'ar
Compan&.
*rmo% -uestioned the validit& of the ordinan%e on the 'round that it
violated the e-ual prote%tion %lause and the rule of uniformit& in
taxation.
R1 )*" it is )*T.
The Io%al Autonom& A%t 'ave %hartered %ities" muni%ipalities and
muni%ipal distri%ts authorit& to lev& for publi% purposes ?ust and
uniform taxes" li%enses or fees.
Cor a tax to be ?ust and uniform" it must appl& e-uall& to thin's
identi%all& situated. F*2ABAR" %lassi0%ation %an be made as lon' as it
is be 'ermane to purpose of la#" rest on substantial distin%tions" appl&
e-uall& to all members of same %lass" appl& to present and future
%onditions.
In this %ase" the tax imposed is violative of the e-ual prote%tion %lause.
2hen the taxin' ordinan%e #as ena%ted" *rmo% @u'ar #as the *)IE
su'ar %entral in the %it&.
A reasonable %lassi0%ation should be in terms appli%able to future
%onditions as #ell. The taxin' po#er should not be sin'ular and
ex%lusive as to ex%lude an& subse-uent established su'ar %entral from
the %overa'e of the tax.
A subse-uentl& established su'ar %entral %annot be sub?e%t to tax
be%ause the ordinan%e expressl& points to *rmo% @u'ar Compan& In%
as the entit& to be levied upon.
/u!* v. Arane!a4 Uni)r#i!&
Common#ealth A%t 5PD or the @u'ar Ad?ustment
A%t" #as promul'ated in <K>0 in response to the imminent threat to
the su'ar industr& b& the imposition of export taxes upon su'ar as
provided in the T&din's.G%6uLe A%t" and the eventual loss of its
preferential position in the 7@ maret.
In order to stabili:e the su'ar industr& to prepare for
the loss" CA 5PD provided for an I)CRAA@A in the existin' tax on the
manufa%ture of su'ar (on a 'raduated basis)" the pro%eeds of #hi%h
#ould a%%rue to the @u'ar Ad?ustment and @tabili:ation Cund (a spe%ial
fund in the Phil Treasur&).
2alter Iut:" in his %apa%it& as administrator of the
Astate of Antonio Iedesma" #anted to re%over from the Colle%tor of
Internal Revenue the amount paid b& the estate as taxes" alle'in' that
the tax imposed b& CA 5PD is un%onstitutional" bein' levied for the aid
and support of the su'ar industr& ex%lusivel&" #hi%h is )*T a publi%
purpose.
I1 2$n the tax is un%onstitutional be%ause it is not
devoted to a publi% purpose.
R1 )*" it is validT
It is inherent in the po#er to tax that a state be free
to sele%t the sub?e%ts of taxation. Ine-ualities #hi%h result from a
sin'lin' out of one parti%ular %lass for taxation or exemption infrin'e
no %onstitutional limitation.
It does not matter that the funds raised under the
@u'ar @tabili:ation A%t should be ex%lusivel& spent in aid of the su'ar
industr&" sin%e it is that ver& enterprise that is bein' prote%ted,
le'islature is not re-3d b& the Consti to adhere to the poli%& of 8all or
none.9
Iastl&" the taxation does not %onstitute expenditure
of tax mone& for private purposes" sin%e the funds #ill be used to
in%rease su'ar produ%tion" solve problems and improve #orin'
%onditions in su'ar mills.
Asscia!in ) Cus!#s .r0ers v. -unicipal .ar"7 Uni)r#i!&
The Guni%ipal ;oard of Ganila passed an ordinan%e lev&in' a propert&
tax on all motor vehi%les operatin' #ithin the Cit& of Ganila.
The ordinan%e provided that the rate of the tax #ould be <5 ad
valorem per annum" and that the pro%eeds of the tax shall a%%rue to
the @treets and ;rid'es Cunds of the Cit&" #$% #ill be used for the
repair" maintenan%e" and improvement of its streets and brid'es.
The Charter of Ganila 'ives the muni%ipal board the po#er to tax
motor vehi%les" but this is limited b& the Gotor Behi%les Ia#" #hi%h
disallo#s the imposition of fees on motor vehi%les" AJCAPT propert&
taxes imposed b& a muni%ipal %orp.
TF7@" the la# allo#s the Cit& of Ganila to impose a propert& tax on
motor vehi%les operatin' #ithin its limits.
Fo#ever" the Asso%iation of Customs ;roers %ontended that the
ordinan%e is void be%ause it a%tuall& imposes a li%ense tax in the 'uise
of a propert& tax.
I1 2$n ordinan%e is valid
R1 )*" it is voidT
The ordinan%e infrin'es the rule of uniformit& of taxation.
This is be%ause it exa%ts the tax upon all motor vehi%les operatin'
#ithin the Cit& of Ganila" #ithout distin'uishin' bet#een those for FIRA
and for PRIBATA 7@A" as #ell as those RANI@TARA6 I) GA)IIA and
those RANI@TAR6 *7T@I6A ;7T *CCA@@I*)AIIE C*GA T* GA)IIA.
The ordinan%e imposes the tax *)IE on those vehi%les re'istered in
Ganila" even if those vehi%les #hi%h are re'istered outside the %it& but
#hi%h use its streets also %ontribute e-uall& to the deterioration of the
roads and brid'es.
Eas!ern T$ea!rical C. Inc v. Al)ns7 E;uali!& an" Uni)r#i!&
The Cit& of Ganila ena%ted an ordinan%e imposin' a fee on the pri%e of
ever& admission ti%et sold b& %inemato'raphers" theatres" vaudeville
%ompanies and boxin' exhibitions.
These fees shall be delivered b& the operator = da&s after the
performan%e. *ther#ise" a violation should result to imprisonment and
0ne.
Thus" <= %orporations en'a'ed in motion pi%ture business 0led a
%omplaint assailin' the said ordinan%e for violatin' the prin%iple of
e-ualit& and uniformit& of taxation be%ause it did )*T tax other pla%es
of amusement" su%h as ra%etra%s" %abarets" %ir%uses" et%.
I1 2$n the ordinan%e violates the rule on e-ualit& and uniformit& of
taxation.
R1 A-ualit& and uniformit& in taxation means that all taxable arti%les or
inds of propert& of the same %lass shall be taxed at the same rate.
%lassi0%ations for purposes of taxation.
Thus" the fa%t that some pla%es of amusement are taxed #hile others
lie theatres and %inemato'raphs are not does not violate uniformit&
and e-ualit& in taxation.
Petitioners ar'ued that the Revised Administrative Code %onfers upon
the Cit& of Ganila the po#er to impose a tax on business but )*T on
amusement and" %onse-uentl&" the ordinan%e #as be&ond the Cit&Vs
po#er to ena%t.
F*2ABAR" the assumption is based on an arbitrar& labelin' of the ind
of tax authori:ed b& the said Code. The ver& fa%t that the said Code
in%ludes in%ludes theaters" %inemato'raphs" et%. #ill sho# %on%lusivel&
that the po#er to tax amusement is expressl& in%luded #ithin the
po#er 'ranted b& the said Code.
P$il. Trus! C. v. Ea!c7 Uni)r#i!&
@everal bans doin' business in the Philippines" in%ludin' Phil Trust and
Peoples ;an" assailed the validit& of the Revised Administrative Code
for bein' dis%riminator& and violative of the rule on uniformit& in
taxation.
This is be%ause the said la# imposes a tax on %apital" deposits" and
%ir%ulation on all bans doin' business in the Phils" #hile exemptin' the
)ational Cit& ;an of )e# Eor.
I1 2$n the la# violates the rule of uniformit& in taxation.
R1 )o" it does )*T violate uniformit&.
The exemption of an instrumentalit& of the Cederal Novernment
()C;)E) does )*T deprive the Common#ealth of the Philippines of the
po#er to tax the %ompetitors of )C;)E.
A tax is %onsidered uniform #hen it operates #ith the same for%e and
e/e%t in ever& pla%e #here the sub?e%t ma& be found.
The rule of uniformit& does not %all for perfe%t uniformit& or perfe%t
e-ualit&" be%ause this is hardl& attainable.
In this %ase" the -uestioned statute applies uniforml& to all bans in the
Philippines #ithout distin%tion and dis%rimination.
If the )ational Cit& ;an is exempted from its operation be%ause it is a
federal instrumentalit& sub?e%t onl& to the authorit& of Con'ress" that
alone %ould not have the e/e%t of renderin' it violative of the rule of
uniformit&.
Also" a state ma& impose a di/erent rate of taxation upon a forei'n
%orporation for the privile'e of doin' business #ithin the state than it
applies to its o#n %orporations upon the fran%hise #hi%h the state
'rants in %reatin' them.
The argument that the 5evised +dministrative Code was declared
unconstitutional by the (upreme Court of the ?nited (tates insofar as
the 8CB8< is erroneous.
;osadas v. 8ational City Bank held that the 8CB8< in the ;hilippines
was established by virtue of the ederal 5eserve +ct, w=c which
authori*ed the establishment of branches of national banking
associations in foreign countries or dependencies of the ?nited (tates.
+lso it was held in 4eomenech v 8ational City Bank that @a
dependency may 89T tax its sovereign@ and the ;hilippines is a
possession and dependency of the ?(.
C$urc$ill v. Cncepcin7 Uni)r#i!&
A%t =>3= amendin' A%t =33K #as passed imposin' an annual tax of P=
per s-uare meter upon ele%tri% si'ns" billboards" and spa%es used for
postin' or displa&in' temporar& si'ns and all si'ns displa&ed on
premises not o%%upied b& buildin's.
Chur%hill and Tait" %o.partners doin' business under the 0rm Ger%antile
Advertisin' A'en%& #ere o#ners of a billboard %onstru%ted on private
propert& in Ganila.
The& #ere taxed P<0>. The& paid under protest.
@ubse-uentl&" the 0led a %omplaint a'ainst the CIR" assailin' the
validit& of the tax for la% of uniformit& be%ause it #as not 'raded
a%%ordin' to value and #as %lassi0ed arbitraril& #ithout reasonable
'round.
I1 2$n the la# violates the rule on uniformit&.
R1 )o" it does )*T violate the uniformit& rule.
7niformit& in taxation means that all taxable arti%les or inds of
propert& of the same %lass shall be taxed at the same rate.
ever& pla%e #here the sub?e%t is found.
7niformit& does not si'nif& an intrinsi%" but simpl& a 'eo'raphi%al
uniformit&.
In this %ase" the P=$s-. meter tax is imposed on ever& ele%tri% si'n or
billboard #herever found in the Philippines.
The rule of uniformit& does not re-uire taxes to be 'raded a%%ordin' to
the value of the sub?e%t upon #hi%h the& are imposed" espe%iall& those
levied as privile'e or o%%upation taxes.
Also" the fa%t that the land upon #hi%h the billboards are lo%ated is
taxed at so mu%h per unit and the billboards at so mu%h per s-uare
meter does not %onstitute Sdouble taxation.S
6ouble taxation does not ne%essaril& a/e%t its validit&.
.ri!is$ A#erican Tbacc v Ca#ac$
R.A. 4=>0 #as passed re%odif&in' the )IRC #here @e% <>= #as
renumbered @e% <>5.
;ritish Ameri%an Toba%%o assailed the validit& of @e%. <>5 of the )IRC
(amended b& RA 4=>0)" ar'uin' that the said provisions are violative of
the e-ual prote%tion and uniformit& %lause of the Constitution.
@e%tion <>5 provides for a four.tier tax rate based on net retail pri%e
per pa% of %i'arettes1 (<) lo#.pri%ed" (=) medium.pri%ed" (3) hi'h.
pri%ed" and (>) premium.pri%ed.
@e%tion <>5 further provides that )A2 ;RA)6@ (re'istered after
Oanuar& <" <KKD) of %i'arettes shall be taxed at their %urrent retail
pri%e. If the %urrent net retail pri%e has not been established" the
su''ested net retail pri%e shall be used to determine the spe%i0% tax
%lassi0%ation.
*n the other hand" old or existin' brands (re'istered before Oanuar& <"
<KKD) shall be taxed at their net retail pri%e as of *%tober <" <KKP.
o 8et retail price A price B which cigarettes are sold on retail
in %C supermarkets in ::
o (uggested net retail price A net retail price B which brands
of cigarettes are intended by the manufacturer to be sold
To implement RA 4=>0" ;IR issued a Revenue Re'ulation (RR )o. <.KD)
%lassif&in' existin' brands of %i'arettes as those existin' or a%tive (old)
brands prior to Oanuar& <" <KKD" #hile ne# brands of %i'arettes are
those re'istered after Oanuar& <" <KKD. Another Revenue Re'ulation
#as issued amendin' the 0rst (RR )o. K.=003) b& providin' ;IR #ith
the po#er to periodi%all& revie# ever& t#o &ears $ earlier the %urrent
net retail pri%e of ne# brands to A@TA;II@F $ 7P6ATA their tax
%lassi0%ation.
In Oune =00<" ;ritish Ameri%an Toba%%o introdu%ed the Iu%& @trie
Cilter" Iu%& @trie Ii'hts and Iu%& @trie Genthol Ii'hts. Iu%& @trie
#as taxed based on its su''ested 'ross retail pri%e from the time of its
introdu%tion in the maret in =00< until the ;IR maret surve& in =003.
The brands #ere sold at P==.5>" P==.P< and P=<.=3 so the appli%able
tax rate is P<3.>> per pa%. ;AT no# ar'ues that the S%lassi0%ation
free:e provisionS violates the e-ual prote%tion and uniformit& of
taxation %lauses be%ause the Iu%& @trie brands are taxed based on
their <KKP net retail pri%es #hile ne# brands are taxed based on their
present da& net retail pri%es. Thus" Iu%& @trie su/ers from hi'her
taxes #hile its %ompetitors pa& a lo#er amount.
;AT further ar'ued that the toba%%o ex%ise la# #as dis%riminator&
be%ause under it" brands that entered the maret after <KKP #ere
imposed taxes based on their %urrent retail pri%es #hile older brands
paid taxes based on their <KKP retail pri%es. Gean#hile" Philip Gorris"
Cortune Toba%%o" Gi'ht& Corp. and OT International (respodnents.in.
intervention) %laim that no ine-ualit& exists bet#een %i'arettes and
that nulli0%ation of said annex #ould brin' about tremendous loss.
I1 <. 2$n @e%. <>5 of the )IRC violates APC and uniformit& of taxation
%lauses
2$) the Revenue Re'ulations are invalid in so far as the& empo#er ;IR
to re%lassif& and update the %lassi0%ation of ne# brands ever& t#o
&ears or earlier
R1 @e% <>5 )IRC is %onstitutional but the RRs are invalid for 'ratnin'
the ;IR the po#er to re%lassif& and update the %lassi0%ation.
<) )IRC is %onstitutional
The %lassi0%ation free:e provision does not violate the e-ual prote%tion
and uniformit& of taxation. It meets the standards for valid
%lassi0%ation1 rests on a substantial distin%tion" is 'ermane to the
purpose of the la#" applies to present and future %onditions and
applies e-uall& to all those belon'in' to the same %lass.
()*TA1 The se%ond %ondition" ho#ever" #as not full& satis0ed as it
failed to promote fair %ompetition amon' the pla&ers in the industr&.
Fo#ever" this does not mae the assailed la# un%onstitutional)
The %lassi0%ation free:e provision #as done in 'ood faith and is
'ermane to the purpose of the la#. It #as inserted for reasons of
pra%ti%alit& and expedien%&.
@in%e a ne# brand #as not &et in existen%e at the time of the passa'e
of RA 4=>0" then Con'ress needed a uniform me%hanism to 0x the tax
bra%et of a ne# brand. The %urrent net retail pri%e" similar to #hat #as
used to %lassif& the brands as of *%tober <" <KKP" #as thus the lo'i%al
and pra%ti%al %hoi%e.
2ith the amendments introdu%ed b& RA K33>" the free:in' of the tax
%lassi0%ations no# expressl& applies not ?ust to old brands (%i'arettes
#hi%h are taxed on the basis of avera'e net retail pri%e as of *%tober
<" <KKP) but to ne#er brands introdu%ed after the e/e%tivit& of RA
4=>0 on Oanuar& <" <KKD and an& ne# brand that #ill be introdu%ed in
the future.
Thus" the %lassi0%ation free:e provision %ould hardl& be %onsidered
biased to#ared older brands over ne#er brands.
Con'ress #as even #illin' to dele'ate the po#er to periodi%all& ad?ust
the ex%ise tax rate and tax bra%ets as #ell as to periodi%all& resurve&
and re%lassif& the %i'arette brands based on the in%rease in the
%onsumer pri%e index to the 6*C and the ;IR.
Thus" the provision #as the result of Con'ress3s earnest e/orts to
improve the eL%ien%& and e/e%tivit& of the tax administration over sin
produ%ts #hile tr&in' to balan%e the same #ith other @tate interests.
On Uni)r#i!&7 7niformit& of taxation re-uires that all sub?e%ts or
ob?e%ts of taxation" similarl& situated" are to be treated alie both in
privile'es and liabilities. In the instant %ase" there is no -uestion that
the CCP meets the 'eo'raphi%al uniformit& re-uirement be%ause the
assailed la# applies to AII CINARATTA ;RA)6@ n the Philippines.
On Ine;ui!abli!& an" Re'ressivi!&7 ;AT %laims that the use of
di/erent tax bases for old brands as a'ainst ne# brands is
dis%riminator& $ ine-uitable" and that the CCP is re'ressive in %hara%ter.
This %annot be sustained be%ause the CCP meets the re-uirements of
the APC.
*n re'ressivit& .. the ex%ise tax imposed on %i'arettes is an indire%t
tax" and thus" re'ressive in %hara%ter. F*2ABAR" this does not mean
that the la# ma& be de%lared un%onstitutional be%ause the Constitution
does not prohibit the imposition of indire%t taxes but merel& provides
that Con'ress shall AB*IBA pro'ressive s&stem of taxation.
=) The ;IR RR is invalid be%ause the )IRC does )*T authori:e the ;IR
to update the tax %lassi0%ation of ne# brands ever& = &ears or earlier.
The po#er to re%lassif& %i'arette brands remains in Con'ress.
Allo#in' the periodi% re%lassi0%ation of brands mi'ht tempt %i'arette
manufa%turers to manipulate their brandsV pri%e levels or bribe the tax
implementers to allo# their brands to be %lassi0ed as a lo#er tax
bra%et.
A.AHADA v Purisi#a
RA K335 (Attrition A%t of =005) #as ena%ted to optimi:e the revenue.
'eneration %apabilit& and %olle%tion of the ;IR and ;*C b& providin' a
s&stem of re#ards and san%tions. This is done throu'h the %reation of a
Re#ards and In%entives Cund (Cund) and a Revenue Performan%e
Avaluation ;oard (;oard).
It %overs all oL%ials and emplo&ees of the ;IR and the ;*C #ith at least six
months of servi%e" re'ardless of emplo&ment status.
The Cund is sour%ed from the %olle%tion of the ;IR and the ;*C in ex%ess of
their revenue tar'ets for the &ear. An& in%entive or re#ard is taen
from the fund and allo%ated to the ;IR and the ;*C in proportion to
their %ontributions.
Petitioners in%ludin' A;AUA6A" invoin' their ri'ht as taxpa&ers" %hallen'ed
the %onstitutionalit& of RA K3351
The& %laimed that limitin' the s%ope of the s&stem of re#ards and
in%entives onl& to oL%ials and emplo&ees of the ;IR and the
;*C vila!es !$e cns!i!u!inal 'uaran!ee ) e;ual
pr!ec!in. There is no reason #h& su%h s&stem should )*T
appl& to *TFAR oL%ials and emplo&ees of all other
'overnment a'en%ies.
The& assert that the la= un"ul& "ele'a!es !$e p=er ! ,%
revenue !ar'e!s to the President as it la%s a suL%ient
standard on that matter.
I1 <) 2$n li#i!in' !$e scpe ) !$e s&s!e# ) re=ar"s an" incen!ives
nl& ! Lcials an" e#pl&ees ) !$e .IR an" !$e .OC vila!es
!$e cns!i!u!inal 'uaran!ee ) e;ual pr!ec!in
=) 6$e!$er r n! !$e la= un"ul& "ele'a!es !$e p=er ! ,%
revenue !ar'e!s ! !$e Presi"en!.
R1 )*" it does not violate APC and does )*T undul& dele'ate po#er to the
President
<) The e-ual prote%tion %lause re%o'ni:es a valid and reasonable
%lassi0%ation.
RA K335 has an expressed publi% poli%&" #$% is the optimi:ation of the
revenue.'eneration %apabilit& and %olle%tion of the ;IR and the ;*C.
@in%e the sub?e%t of the la# is the revenue. 'eneration %apabilit& and
%olle%tion of the ;IR and the ;*C" the in%entives and$or san%tions
provided in the la# should lo'i%all& pertain to the said a'en%ies.
@in%e the ;IR and ;*C perform the spe%ial fun%tion of taxation" su%h
substantial distin%tion is 'ermane and intimatel& related to the purpose
of the la#. Fen%e" the %lassi0%ation and treatment a%%orded to the ;IR
and the ;*C under RA K335 full& satisf& the demands of e-ual
prote%tion.
=. T#o tests determine the validit& of dele'ation of le'islative po#er1
<) the %ompleteness test
=) the suL%ient standard test
A la# is %omplete #hen it sets forth therein the poli%& to be exe%uted and is
suL%ient #hen it provides ade-uate 'uidelines or limitations of the
dele'ate3s authorit&
RA K335 ade-uatel& states the poli%& and standards to 'uide the President
in 0xin' revenue tar'ets and the implementin' a'en%ies in %arr&in'
out the provisions of the la#.
Revenue tar'ets are based on the ori'inal estimated revenue %olle%tion
expe%ted respe%tivel& of the ;IR and the ;*C for a 'iven 0s%al &ear as
approved b& the 6evelopment ;ud'et and Coordinatin' Committee
(6;CC) and submitted b& the President to Con'ress. Thus" the
determination of revenue tar'ets does not rest solel& on the President
as it also under'oes the s%rutin& of the 6evelopment ;oard
Also" @e%tion D spe%i0es the limits of the ;oard3s authorit& and identi0es the
%onditions under #hi%h oL%ials and emplo&ees #hose revenue
%olle%tion falls short of the tar'et b& at least D.55 ma& be removed
from the servi%e.
-eralc v. Prvince ) /a'una7 Dele'a!in ! /GUs, I#pair#en!
Clause
Geral%o #as 'ranted b& several muni%ipalities of the Provin%e of
Ia'una a fran%hise to operate.
RA D<P0 or the Io%al Nov Code of <KK< #as then issued #$% allo#ed
lo%al 'overnment units to %reate their o#n sour%es of revenue and to
lev& taxes" fees and %har'es %onsistent #$ the basi% poli%& of
autonom&.
Purusant to this" the provin%e of Ia'una ena%ted an ordinan%e
imposin' on businesses en?o&in' a fran%hise a fran%hise tax of 505 of
<5 of 'ross annual re%eipts.
Geral%o paid under protest and sent a formal %laim for refund to the
Provin%ial Treasurer %laimin' that the fran%hise tax it had paid to the
)ational Novernment (pursuant to P.6. 55<) alread& in%luded the
fran%hise tax imposed b& the Provin%ial Tax *rdinan%e.
Geral%o also %ontended that Ia'una3s imposition of fran%hise tax
%ontravened the provisions of P.6. 55< @e%tion < #hi%h provided that
the fran%hise tax pa&able b& all 'rantees of ele%tri% fran%hises shall be
=5 of their 'ross re%eipts re%eived from the sale of ele%tri% %urrent and
from transa%tions in%ident to the 'eneration" distribution and sale of
ele%tri% %urrent
I1 2$n the provin%e of Ia'una had the po#er to lev& the fran%hise tax
R1 Ees.
7nder the present Constitution" #here there is neither a 'rant nor a
prohibition b& statute" the tax po#er must be deemed to exist althou'h
Con'ress ma& provide statutor& limitations and 'uidelines.
The reason for this is to safe'uard the viabilit& and self.suL%ien%& of
lo%al 'overnment units b& dire%tl& 'rantin' them 'eneral and broad tax
po#ers.
The INC of <KK< expli%itl& authori:es provin%ial 'overnments"
not#ithstandin' an& exemption 'ranted b& la#" to impose a tax on
businesses en?o&in' a fran%hise.
2hile the Court has referred to tax exemptions %ontained in spe%ial
fran%hises as bein' in the nature of %ontra%ts and a part of the
indu%ement for %arr&in' on the fran%hise" these exemptions"
nevertheless" are far from bein' @TRICTIE C*)TRACT7AI.
Fo#ever" %ontra%tual tax exemptions should not be %onfused #$ tax
exemptions under fran%hises.
Contra%tual tax exemptions are those a'reed to b& the taxin' authorit&
in %ontra%ts" su%h as those %ontained in 'overnment bonds" #here the
'overnment a%ts in its private %apa%it& and #aives its 'overnmental
immunit&. Tax exemptions of this ind ma& )*T be revoed #ithout
impairin' the obli'ations of %ontra%ts.
*n the other hand" a fran%hise partaes the nature of a 'rant #hi%h is
be&ond the purvie# of the non.impairment %lause of the Constitution.
Art <= of the Consti provides that no fran%hise for the operation of a
publi% utilit& shall be 'ranted ex%ept under the %ondition that su%h
privile'e shall be sub?e%t to amendment" alteration or repeal b&
Con'ress as and #hen the %ommon 'ood so re-uires.
Prvince ) -isa#is Orien!al v. Ca'a&an Elec!ric P=er an"
/i'$! C#pan& MCEPA/COJ
CAPAIC* #as 'ranted a fran%hise to operate an ele%tri%" li'ht" heat"
and po#er s&stem in Ca'a&an de *ro.
The fran%hise imposed a 35 fran%hise tax #hi%h shall be in lieu of all
taxes and assessments of #hatever authorit& upon the privile'es"
earnin's" in%ome" et%" from #hi%h CAPAIC* #as expressl& exempted.
@ubse-uentl& the Io%al Tax Code #as promul'ated allo#in' provin%es
to impose a tax of Q of <5 on businesses en?o&in' fran%hises.
Pursuant to this" the Provin%e of Gisamis *riental ena%ted an ordinan%e
#hi%h also provided a fran%hise tax.
CAPAIC* refused to pa& the additional tax" %laimin' the exemption
'ranted to it under its fran%hise.
)evertheless" be%ause of the opinion rendered b& the Provin%ial Cis%al"
upholdin' the le'alit& of the Revenue *rdinan%e" CAPAIC* paid under
protest.
I1 2$n CAPAIC* is exempt from pa&in' the provin%ial fran%hise tax
R1 Ees.
The fran%hise of CAPAIC* expressl& exempts it from pa&ment of all
taxes of #hatever authorit&" ex%ept the 35 tax on its earnin'.
The fran%hise 'rantin' the exemption is a spe%ial la# appli%able onl& to
CAPAIC*" #hile the Io%al Tax Code is a 'eneral tax la#.
The presumption is that spe%ial statutes are ex%eptions to the 'eneral
la# be%ause the& pertain to a spe%ial %harter 'ranted to meet a
parti%ular set of %onditions and %ir%umstan%es.
Also" the Io%al Tax Re'ulation 3.D5 issued b& the @e%retar& of Cinan%e
made it %lear that the fran%hise tax imposed under lo%al tax ordinan%e
pursuant to the Tax Code shall be %olle%ted from businesses holdin'
fran%hise but )*T from business establishments #hose fran%hise
%ontain the _in.lieu.of.all.taxes.proviso3
Carcar 6lectric D 0ce ;lant vs. C05! the tax exemption is part of the
inducement for the acceptance of the franchise and the rendition of
public service by the grantee. +s a charter is in the nature of a private
contract, the imposition of another franchise tax on the corporation by
the local authority would constitute an impairment of the contract
between the government and the corporation.
:65+)C9 v 7era is not applicable in the present case because what
the >overnment sought to impose on :eralco in that case was not a
franchise tax but a C9:;68(+T08> T+E on the eFuipment it imported.
CEPA/CO v. CIR
CAPAIC* #as 'ranted a le'islative fran%hise (RA 3=>D) to operate an
ele%tri%" li'ht" heat" and po#er s&stem in Ca'a&an de *ro.
The le'islative fran%hise imposed a 35 fran%hise tax #hi%h shall be in
lieu of all taxes and assessments of #hatever authorit& upon the
privile'es" earnin's" in%ome" et%" from #hi%h CAPAIC* #as expressl&
AJAGPTA6.
*n Oune <KP4" RA 5>3< amended @e% => of the Tax Code b& main'
liable for in%ome tax all %orporate taxpa&ers )*T exempt under the Tax
Code.Thus" fran%hise %ompanies #ere sub?e%ted to in%ome tax in
addition to fran%hise tax.
Fo#ever" in CAPAIC*Vs %ase" its fran%hise #as amended b& RA P0=0"
e/e%tive > Au'ust <KPK #$% reena%ted the tax exemption in its ori'inal
%harter or neutrali:ed the modi0%ation made b& RA 5>3< more than a
&ear before.
;& reason of the Tax Code amendment" the CIR sent a demand letter
re-uirin' CAPAIC* to pa& de0%ien%& in%ome taxes for <KP4 to <KD<.
The %ompan& %ontested the assessments.
The CIR %an%elled the assessments for <KD0 and <KD< but insisted on
those for <KP4 and <KPK.
The %ompan& 0led a petition for revie# #ith the Tax Court" #hi%h held
the %ompan& liable onl& for the in%ome tax for the period from Oanuar&
to Au'ust <KPK $ before the passa'e of RA P0=0 #hi%h reiterated its tax
exemption.
I1 2$n CAPAIC* is exempt from pa&in' the provin%ial fran%hise tax.
R1 Ees.
The ar'ument that Con'ress %annot impair a le'islative fran%hise is
untenable be%ause under the Constitution" a fran%hise is sub?e%t to
amendment" alteration or repeal b& the Con'ress #hen the publi%
interest so re-uires
RA 5>3<" in amendin' the Tax Code b& sub?e%tin' to in%ome tax all
%orporate taxpa&ers (not expressl& exempted)" had the e/e%t of
#ithdra#in' CAPAIC*Vs exemption from in%ome tax.
F*2ABAR" the exemption #as restored b& the subse-uent ena%tment
of RA P0=0 #$% reena%ted the said tax exemption. Thus" CAPAIC* is
onl& liable for the in%ome tax for the period from Oanuar& < to Au'ust 3"
<KPK #hen its tax exemption #as modi0ed b& RA 5>3<.
0t is relevant to note that franchise companies, like ;)4T have been
paying income tax in addition to the franchise. +lso, the "GHG
assessment appears to be highly controversial. The Commissioner at
the outset was not certain as to petitionerIs income tax liability. 0t had
reason not to pay income tax because of the tax exemption in its
franchise.

/eal"a Elec!ric C. v. CIR
In <K<5" Oulian Anson #as 'ranted a fran%hise to operate an ele%tri%
li'ht and po#er plant in Ie'aspi and 6ara'a Alba&.
The fran%hise #as transferred to several parties until it #as 0nall& sold
to Iealda Ale%tri% Co.
Anson and his su%%essors.in.interest re'ularl& paid the =5 fran%hise
tax imposed on all fran%hises.
In <K>P" the )IRC #as amended b& RA 3K" in%reasin' the fran%hise tax
to 55.
Iealda paid at 0rst" but later 0led a %laim for refund #$ the CIR
%ontendin' that under its %harter" it #as liable to pa& onl& =5 fran%hise
tax.
It ar'ues that the fran%hise #as a private %ontra%t bet#een its
prede%essor.in.interest on one hand and the Novernment" on the other"
and as su%h" %annot be amended b& the Tax Code.
;e%ause of CIR3s ina%tion" it 0led a petition #$ the CTA" #$% held Iealda
liable for the 55 fran%hise tax
I1 2$n Iealda should pa& 55 fran%hise tax.
R1 EA@T
The rulin' in other %ases (Bisa&an Ale%tri% and Ganila Railrod) to the
e/e%t that spe%ial la#s or %harters ma& not be amended" altered or
repealed" ex%ept b& %onsent of all %on%erned %annot be inoved
be%ause1
<) Iealda3s %harter %ontains an express provision to the e/e%t that the
same ma& be altered or repealed b& Con'ress
=) the fran%hises involved in the %ases %ited di/er substantiall& from
Iealda3s fran%hise in that those of the Bisa&an Ale%tri% and of the
Ganila Railroad spe%i0%all& provided that the fran%hise tax #hi%h the
'rantees #ere re-uired to pa& #as to be 8in lieu of all taxes of an& ind
levied" established" or %olle%ted b& an& authorit& #hatsoever" no# or in
the future9
IealdaVs %harter did )*T %ontain su%h provision.
J0(T95<! 5+ KG amending the Tax Code became the basic franchise
tax law by fxing the tax to be paid by holders of all existing and future
franchises. Thus, the provisions of 5+ KG should apply to )ealda since
its franchise was already existing at the time of the adoption of the
amendment.
Cassanvas v. Hr"7 I#pair#en! Clause
In <4KD" the @panish Nov 'ranted Cassanovas %ertain mines in Ambos
Camarines.
The Internal Revenue A%t imposes on all minin' %on%essions 'ranted
prior to <4KK a propert& tax of P<00 ! an ad valorem tax of 35 of the
a%tual maret value of the output of the mines.
The CIR thus %onsidered Cassanovas to fall under su%h.
Cassanovas assailed the validit& of this provision on the 'round that it
impairs the obli'ations of %ontra%ts. 7nder the de%ree of the @panish
Novernment" the minin' %laim #as sub?e%t onl& to P=0 propert& tax !
ad valorem tax of 35. The de%ree provided that no other taxes ex%ept
those mentioned shall be imposed upon minin' industries.
I1 2$n there #as a violation of the impairment %lause
R1 Ees. Therefore" the provision is void.
<) There #as a %ontra%t bet#een the @panish Novernment and
Cassanovas" the obli'ation of #hi%h %ontra%t #as impaired b& the
Internal Revenue Ia#.
A @tate ma& b& %ontra%t based on consideration exempt the propert&
of an individual or %orporation from taxation either for a spe%i0ed
period or permanentl&.
And it is e-uall& #ell settled that the exemption is presumed to be on
suL%ient %onsideration" and binds the @tate if the %harter %ontainin' it
is a%%epted. @u%h %ontra%t %an be enfor%ed a'ainst the @tate at the
instan%e of the %orporation.
=) Also" the provision %on]i%ts #ith @e%tion P0 of the A%t of Con'ress of
< Oul& <K0=" #hi%h indi%ate that %on%essions %an be %an%elled onl& b&
reason of IIIANAIITE in the pro%edure b& #hi%h the& #ere obtained" or
for CAII7RA to %ompl& #ith the %onditions pres%ribed. The 'rounds
#ere not sho#n or %laimed in the %ase.
The important distinction in this case is that there was consideration
between both parties for entering into the contract. rom the
provisions of the deed, it was not a unilateral grant of a privilege by
the (panish >overnment.
Cassanovas undertook to perform some things with respect to the
mining claim in consideration of the privilege. Jence, there was a
binding contract with reciprocal obligations, which the (tate cannot
abrogate.
A#erican .ible Scie!& v. Ci!& ) -anila7 Free e%ercise )
Reli'in
The Ameri%an ;ible @o%iet& #as a missionar& so%iet& en'a'ed in the
distribution and sale of bibles in the Philippines.
The Cit& Treasurer of Ganila informed the @o%iet& that it #as
%ondu%tin' the business of 'eneral mer%handisin' #ithout a Ga&or3s
permit and muni%ipal li%ense" in violation of *rdinan%es 3000 and
=5=K.
*rdinan%e 3000 re-uires one to obtain a Ga&or3s permit before
en'a'in' in an& business" trade" or o%%upation" except those on which
the city is not allowed to impose a license or tax.
*rdinan%e =5=K re-uires the -uarterl& pa&ment of li%ense fees based
on 'ross sales from" amon' others" retail dealers in ne# mer%handise"
su%h as those en'a'ed in the sale of boos.
The @o%iet& paid the fees in protest" %laimin' that it never re%eived an&
pro0t from the sale of the materials.
It then 0led a %omplaint to de%lare the muni%ipal ordinan%es in
-uestion un%onstitutional for violatin' the non.establishment and free
exer%ise %lause of the Constitution.
I1 2$n the @o%iet& is re-uired to pa& the fees under the t#o ordinan%es.
R1 )o" the @o%iet& is )*T re-uired to pa&.
Reli'ious 'roups and the press are not free from all 0nan%ial burdens of
'overnment.
The )IRC exempts asso%iations operatin' ex%lusivel& for reli'ious"
%haritable" or edu%ational purposes from tax" PR*BI6A6 that in%ome
from their PR*PARTIA@" real or personal" *R an& a%tivit& %ondu%ted for
pro0t shall be liable for tax.
In this %ase" the a%t of sellin' bibles is purel& reli'ious and does not fall
under the said provision.
Aven if the pri%e ased for the bibles and other reli'ious pamphlets #as
sometimes a little bit hi'her than their a%tual %ost" it %annot mean that
the @o%iet& #as en'a'ed in the business or o%%upation of sellin'
mer%handise for pro0t.
Cor this reason" *rdinan%e =5=K" #hi%h imposes a li%ense tax on the
exer%ise of the ri'ht to sell reli'ious materials" %annot be applied to the
@o%iet&" for in doin' so" it #ould impair its free exer%ise and en?o&ment
of its reli'ious profession and #orship as #ell as its ri'hts of
dissemination of reli'ious beliefs.
*n the other hand" *rdinan%e 3000 re-uirin' a ma&or3s permit before a
person %an en'a'e in a business" does )*T impose an& %har'e upon
the en?o&ment of a ri'ht 'ranted b& the Constitution nor tax the
exer%ise of reli'ious pra%ti%es. Thus" it is not appli%able to the @o%iet&"
and %annot be %onsidered un%onstitutional even if applied to it.
Thus" sin%e *rdinan%e =5=K is not appli%able to the @o%iet&" the Cit& of
Ganila is po#erless to li%ense or tax the business of the @o%iet&. Fen%e"
*rdinan%e 3000 is also inappli%able to the business of the @o%iet&.
Abra 2alle& Clle'e v. A;uin7 E%e#p!ins in )avr )
e"uca!inal ins!i!u!ins
Abra Balle& Colle'e #as an edu%ational %orporation and institution of
hi'her learnin' dul& in%orporated #ith the @AC in <K>4.
The premises of Abra Balle& #ere bein' used for the edu%ational
purposes of the %olle'e (as %lassrooms of its hi'h s%hool and %olle'e
students).
In addition" its se%ond ]oor #as the permanent residen%e of the
President and 6ire%tor of the Colle'e and his famil&.
The 'round ]oor #as bein' rented to a %ommer%ial establishment" the
)orthern Garetin' Corporation.
The Guni%ipal and Provin%ial treasurers issued a )oti%e of @ei:ure upon
Abra Balle& to satisf& their taxes. The& then served a )oti%e of @ale"
the sale bein' held on the same da&.
6r. Gillare" then muni%ipal ma&or" o/ered the hi'hest bid and a
%erti0%ate of sale #as issued to him.
Abra 0led a petition to annul the )oti%e of @ei:ure and )oti%e of @ale.
CIC ruled in favor of CIR" sa&in' that the propert& #as )*T bein' used
ex%lusivel& for edu%ation purposes
I1 2$n the propert& #as used ex%lusivel& for edu%ational purposes"
thereb& exemptin' Abra Balle& Colle'e from pa&ment of tax.
R1 )o.
Abra Balle& Colle'e is not exempt be%ause the propert& #as also bein'
used for %ommer%ial purposes.
The test of exemption from taxation is the 7@A of the propert& for
purposes mentioned in the Constitution.
2hile the Court allo#s a more liberal and non.restri%tive interpretation
of the phrase 8ex%lusivel& used for edu%ational purposes"9 reasonable
emphasis has al#a&s been made that exemption extends to fa%ilities
#hi%h are inci"en!al ! and reasnabl& necessar& for the
a%%omplishment of the main purposes.
2hile the use of the se%ond ]oor for residential purposes of the
6ire%tor and his famil& ma& 0nd ?usti0%ation under the %on%ept of
in%idental use" #hi%h is %omplimentar& to the main or primar& purpose"
the lease of the 0rst ]oor to )orthern Garetin' CA))*T be %onsidered
in%idental to the purpose of edu%ation.
@C aLrmed CCI3s de%ision sub?e%t to the modi0%ation that half of the
assessed tax be returned to Abra" 'iven that the 'round ]oor is bein'
used for %ommer%ial purposes (leased) ;7T the se%ond ]oor bein'
used as in%idental to edu%ation (residen%e of the dire%tor).
CIR v .is$p ) !$e -issinar& Dis!ric! ) !$e P$ilippines
The ;ishop of the Gissionar& 6istri%t of the Phils in the 7@A is a
%orporation sole re'istered #$ @AC and in %har'e of mana'in' estate
properties in the Phils of the Gissionar& @o%iet&. *n the other hand" the
Gissionar& 6istri%t is a dul& in%orporated and established reli'ious
so%iet&. It o#ns and operates di/ hospitals in the Phils namel& @t.
Iue3s" ;rent and @t. @tephen3s.
*n di/erent dates" the Gissionar& 6istri%t in the Philippines re%eived
from the Gissionar& @o%iet& in the 7@ various shipments of materials
for the %onstru%tion and operation of the ne# @t. Iue3s Fospital and
the ;rent Fospital in @t. @tephen3s.
The Gissionar& 6istri%t also re%eived from a %ertain 2illiam Ginnis of
Canada a stove for use of the ;rent Fospital.
*n these shipments" the CIR levied and %olle%ted the total amount of
P<<4! as %ompensatin' tax.
The ;ishop of the Gissionar& 6istri%t 0led %laims for refund of the
amount he had paid on the 'round that under RA <K<P" the materials
re%eived b& him #ere exempt from the pa&ment of %ompensatin' tax.
CIR denied the %laim for refund on the 'round that the shipments
%annot be %onsidered donations be%ause the Gissionar& 6istri%t is
merel& a bran%h of the Gissionar& @o%iet&" and are thus identi%al. It
also alle'ed that @t. IueVs Fospital is not a %haritable institution and"
therefore" is not exempt from taxation be%ause its admits pa& patients.
The @e%retar& of Cinan%e states in his 6ept. *rder )o. <4 that hospitals
admittin' pa& patients and %harit& patients are not %haritable
institutions.
CTA rendered a de%ision holdin' the shipments exempt from taxation
orderin' CIR to refund to the ;ishop.
I1 2$n the ;ishop and Gissionar& 6istri%t are exempt from tax
R1 EA@T
The follo#in' re-uisites must %on%ur in order that a taxpa&er ma&
%laim exemption under RA <K<P1
o <) the imported arti%les must have been donated
o =) the donee must be a dul& in%orporated $ established
international %ivi% or'ani:ation" reli'ious or %haritable so%iet&"
or institution for %ivi%" reli'ious or %haritable purposes
o 3) the arti%les so imported must have been donated for the
use of the or'ani:ation" so%iet& or institution or for free
distribution and not for barter" sale or hire
The ;ishop is admitted to be a %orporation sole dul& re'istered #ith
@AC and the Gissionar& 6istri%t is a dul& in%orporated and established
reli'ious so%iet&.
The& are therefore entities separate and distin%t from the Gissionar&
@o%iet& in the 7@A.
The fa%t that the Gissionar& 6istri%t is a bran%h of the Gissionar&
@o%iet& is of no moment be%ause it is a bran%h onl& in reli'ious
matters" but in other respe%ts" it is independent (?ust lie the Phil
Catholi% %hur%h to the universal Catholi% %hur%h).
The materials and supplies #ere pur%hased b& the Gissionar& @o%iet&
#ith mone& obtained from %ontributions from other people #ho should
be %onsidered the real donors" aLrmed b& the testimon& of Ge&er"
Treasurer of the Gissionar& 6istri%t.
Iaslt&" the @e%retar& of Cinan%e CA))*T limit or other#ise -ualif& the
en?o&ment of this exemption 'ranted under RA <K<P in implementin'
the la#. Thus" the admission of pa& patients does not detra%t from the
%haritable %hara%ter of a hospital" if" as in the %ase of @t. Iue3s
Fospital" its fund are devoted ex%lusivel& to the maintenan%e of the
institution
/la"c v CIR
G.;. Astate of ;a%olod Cit&" donated P<0 to Cr. Crispin Rui:" then parish priest
of Bi%torias" )e'ros *%%idental" for the %onstru%tion of a ne# Catholi% Chur%h
in the lo%alit&. The total amount #as a%tuall& spent for the purpose intended.
The follo#in' &ear" Cr. Rui: #as subsitituted b& Cr. Ilado%.
@ubse-uentl&" the donor G.;. Astate" In%. 0led the donorVs 'ift tax return.
CIR then issued an assessment for doneeVs 'ift tax a'ainst the Catholi% Parish
of Bi%torias" of #hi%h Cr. Ilado% #as alread& the priest. The tax amounted to
P<"3D0 in%ludin' sur%har'es plus interests of <5 monthl&" and the
%ompromise for the late 0lin' of the return.
Cr. Ilado% protested to the assessment and re-uested the #ithdra#al of su%h"
but this #as denied b& the CIR" so he appealed to the CTA.
Fe %ontested that1
o at the time of the donation" he #as not the parish priest in
Bi%torias and it #as his prede%essor" Cr. Rui:" that should be
liable
o there is ?uridi%al person no#n as the SCatholi% Parish Priest
of Bi%torias"S and" therefore" he should not be liable for the
doneeVs 'ift tax and the head of the 6io%ese should be liable
instead
o the assessment of the 'ift tax" even a'ainst the Roman
Catholi% Chur%h" #ould not be valid" for su%h #ould be a %lear
violation of Art BI @e% == of the Constitution #hi%h exempts
from taxation cemeteries, churches and parsonages or
convents, appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious purposes.
CTA aLrmed the de%ision of the CIR ex%ept #ith re'ard to the imposition of
the %ompromise penalt& in the amount of P=0
Cr. Ilado% appealed to the @C" and the @C issued a resolution orderin' parties
to sho# %ause #h& the Fead of the 6io%ese should or should not be
substituted in lieu of Ilado%.
I1 2$n Cr Ilado% should be liable for the assessed doneeVs 'ift tax on the P<0
for the %onstru%tion of the Bi%torias Parish
R1 EA@" there is a tax liabilit&" ;7T Cr. Ilado% is )*T personall& liable for the
said 'ift tax. Instead" the Fead of the 6io%ese (;ishop of ;a%olod) should pa&
the said 'ift tax.
8J Gi)! !a% is an e%cise !a%, n! prper!& !a%. E%cise !a% is NOT
inclu"e" in !a% e%e#p!in even i) e%clusivel& use" )r reli'ius
purpses.
In the present %ase" #hat the Colle%tor assessed #as a doneeVs 'ift tax, the
assessment #as not on the properties themselves. It did not rest upon 'eneral
o#nership, it #as an ex%ise upon the use made of the properties" upon the
exer%ise of the privile'e of re%eivin' the properties.
2hen a 'ift tax is imposed on propert& used ex%lusivel& for reli'ious purposes"
it 6*A@ )*T %onstitute an impairment of the Constitution. The phrase
Sexempt from taxation"S as emplo&ed in the Constitution should not be
interpreted to mean exemption from all inds of taxes.There bein' no %lear"
positive or express 'rant of su%h privile'e b& la#" in favor of petitioner" the
exemption herein must be denied.
BJ Hea" ) Dicese is !$e real par!& in in!eres!. The 8Catholi% Parish
Priest of Bi%torias9 as the donee pertains to the Fead of the 6io%ese" therefore
main' the latter the real part& in interest and thus validl& ma& substitute Cr.
Ilado% as part& in the %ase, and thus liable for the pa&ment of the ex%ise tax.
Herrera v 1C .ar" ) Assess#en! Appeals
The 6ire%tor of the ;ureau of Fospitals authori:ed Oose and
Aster Ferrera to establish and operate the @t. Catherine3s Fospital.
The Ferreras sent a letter to the MC Assessor re-uestin'
exemption from pa&ment of real estate tax on the hospital" statin' that the
same #as established for %haritable and humanitarian purposes and not for
%ommer%ial 'ain.
The exemption #as 'ranted e/e%tive &ears <K53 to <K55.
In <K55" ho#ever" the Assessor re%lassi0ed the properties
from 8exempt9 to 8taxable9 e/e%tive <K5P" as it #as as%ertained that out
3= beds in the hospital" <= of #hi%h are for pa&.patients. A s%hool of
mid#ifer& is also operated #ithin the premises of the hospital.
I1 2$n @t. Catherine3s Fospital is exempt from realt& tax.
R1 )*" it is not.
2here renderin' %harit& is its primar& ob?e%t" and the funds
derived from pa&ments made b& patients able to pa& are devoted to the
benevolent purposes of the institution" the mere fa%t that a pro0t has been
made #ill not deprive the hospital of its benevolent %hara%ter
The exemption in favor of propert& used ex%lusivel& for
%haritable or edu%ational purpose AJTA)6@ to fa%ilities #hi%h are
inci"en!al ! an" reasnabl& necessar& )r !$e acc#plis$#en! )
sai" purpse" su%h as in the %ase of hospitals Y a s%hool for trainin'
nurses, a nurses3 home, propert& used to provide housin' fa%ilities for
interns" resident do%tors" superintendents and other members of the
hospital sta/, and re%reational fa%ilities for student nurses" interns and
residents.
Thus" #ithin the purvie# of the Constitution" @t. Catherine3s
Fospital is a %haritable institution exempt from taxation.
.is$p ) Nueva Se'via v Prvincial .ar" ) Ilcs Nr!e
The Roman Catholi% Apostoli% Chur%h" represented b& the ;ishop of
)ueva @e'ovia" o#ned a par%el of land in the muni%ipalit& of @an )i%olas"
Ilo%os )orte" all four sides of #hi%h fa%e on publi% streets.
*n the south side is a part of the %hur%h&ard" the %onvent and an
ad?a%ent lot used for a ve'etable 'arden" in #hi%h there is a stable and a
#ell for the use of the %onvent.
In the %enter is the remainder of the %hur%h&ard and the %hur%h.
*n the north side is an old %emeter& #ith = of its #alls still standin'"
and a portion #here formerl& stood a to#er" the base of #hi%h ma& still be
seen.
As re-uired b& the provin%ial board" the Chur%h paid under protest" the
land tax on the lot ad?oinin' the %onvent and the lot #hi%h formerl& #as the
%emeter& #ith the portion #here the to#er stood.
The ;ishop 0led an a%tion for the re%over& of the sum paid b& #a& of
land tax" alle'in' that the %olle%tion of this tax is ille'al.
The lo#er %ourt de%lared that the tax %olle%ted on the lot" #hi%h
formerl& #as the %emeter& and on the portion #here the to#er stood" #as
ille'al. ;oth parties appealed from this ?ud'ment.
I1 2$n the par%els of land are exempt from tax
R1 EA@" the lots are exempt from land tax and the Provin%e of Ilo%os
)orte should refund the amounts paid.
The exemption in favor of the %onvent in the pa&ment of the land tax
(Administrative Code) refers to the home of the parties #ho presides over
the %hur%h and #ho has to tae %are of himself in order to dis%har'e his
duties.
It therefore must" in the sense" in%lude not onl& the land a%tuall&
o%%upied b& the %hur%h" but also the ad?a%ent 'round destined to the
ordinar& in%idental uses of man.
Ax%ept in lar'e %ities #here the densit& of the population and the
development of %ommer%e re-uire the use of lar'er tra%ts of land for
buildin's" a ve'etable 'arden belon's to a house and" in the %ase of a
%onvent" it use is limited to the ne%essities of the priest" #hi%h %omes under
the exemption.
Iand used as a lod'in' house b& the people #ho parti%ipate in reli'ious
festivities" #hi%h %onstitutes an in%idental use in reli'ious fun%tions" not for
%ommer%ial purposes" %omes #ithin the exemption. Thus" the lot #hi%h
formerl& #as the %emeter&" #hile it is no lon'er used as su%h" %onstitutes
an in%idental use in reli'ious fun%tions" #hi%h also %omes #ithin the
exemption.
@C reversed the appealed ?ud'ment in all its parts and held that both
lots are exempt from land tax and the defendants are ordered to refund to
plainti/ #hatever #as paid as su%h tax" #ithout an& spe%ial pronoun%ement
as to %osts.
CIR v CA an" E-CA
EGCA is a non.sto%" non.pro0t institution" #hi%h %ondu%ts various
pro'rams and a%tivities that are bene0%ial to the publi%" espe%iall& the
&oun' people" pursuant to its reli'ious" edu%ational and %haritable
ob?e%tives.
In <K40" EGCA" amon' others" an amount of in%ome (about PD00!)
from leasin' out a portion of its premises to small shop o#ners" lie
restaurants and %anteen operators" and from parin' fees %olle%ted
from non.members.
The CIR thus issued an assessment to EGCA totalin' about P><5!
in%ludin' sur%har'e and interest" for de0%ien%& in%ome tax" de0%ien%&
expanded #ithholdin' taxes on rentals and professional fees and
de0%ien%& #ithholdin' tax on #a'es.
EGCA protested the assessment and 0led a letter. In repl&" the CIR
denied the %laims of EGCA.
EGCA thus 0led a petition to the CTA to tae out the taxes and CTA
ruled in favor of EGCA.
CIR 0led a petition #ith the CA to reverse" but CA aLrmed CTAVs
de%ision.
I1 2$n the in%ome derived from rentals of real propert& o#ned b& EGCA
(established as Sa #elfare" edu%ational and %haritable non.pro0t
%orporationS) is sub?e%t to in%ome tax under the )IRC and Constitution
R1 EA@" the in%ome derived b& EGCA from rentals of its real propert& is
sub?e%t to in%ome tax.
Under the NIRC: 2hile @e%tion =D of the )IRC provides that non.
pro0t or'ani:ations and %lubs shall not be taxed on their in%ome" it also
provides that this exemption #ill )*T appl& to in%ome derived from <)
properties" real or personal" and =) an& other a%tivities %ondu%ted for
pro0t shall be sub?e%t to tax (amended b& P6 <>5D).
Appl&in' the do%trine of stri%t interpretation of tax exemptions" the
phrase San& of their a%tivities %ondu%ted for pro0t9 does )*T -ualif&
the #ord 8properties.9 This maes in%ome from the propert& of the
or'ani:ation taxable" re'ardless of ho# that in%ome is used .. #hether
for pro0t or for loft& non.pro0t purposes.
Under the Constitution: Arti%le BI" @e%tion =4 of the Constitution
exempts 8%haritable institutions9 from the pa&ment not onl& of taxes.
F*2ABAR" a%d' to %onsti framers" the exemption does )*T pertain to
in%ome tax but onl& propert& taxes.
Cor the EGCA to be 'ranted the exemption as an 8edu%ational
institution9 under the Consti (Art <> @e% >)" it must prove #ith
substantial eviden%e that1
a. it falls under the %lassi0%ation non.sto%" non.pro0t
edu%ational institution, and
b. the in%ome it sees to be exempted from taxation is used
a%tuall&" dire%tl&" and ex%lusivel& for edu%ational purposes
Fo#ever" no eviden%e #as submitted b& EGCA to
prove that the& met the re-uisites. The term 8edu%ational institution9
or 8institution of learnin'9 has a%-uired a #ell.no#n te%hni%al
meanin'" of #hi%h the members of the Constitutional Commission are
deemed %o'ni:ant.
7nder the Adu%ation A%t of <K4=" su%h term
refers to s%hools" #hi%h is s&non&mous #ith formal edu%ation *R a
s%hool seminar&" %olle'e" or edu%ational establishment. The Court"
upon examinin' the 8Amended Arti%les of In%orporation9 and 8;&.Ia#s9
of the EGCA" but found nothin' in them that even hints that it is a
s%hool or an edu%ational institution.
Aven if EGCA is an edu%ational institution" the
Court also notes that EGCA did not submit proof of the proportionate
amount of the sub?e%t in%ome that #as a%tuall&" dire%tl& and
ex%lusivel& used for edu%ational purposes.
NOTE Lif (ir asks about how this diMers with 9TJ65 cases#! The cases relied on
by <:C+ do not support its cause. <:C+ of :anila v. C05 and +bra 7alley
College, 0nc. v. +Fuino are not applicable, because the controversy in both cases
involved exemption from the payment of property tax, not income tax. Jospital
de (an 1uan de 4ios, 0nc. v. ;asay City is not in point either, because it involves a
claim for exemption from the payment of regulatory fees, specifcally electrical
inspection fees, imposed by an ordinance of ;asay City $$ an issue not at all
related to that involved in a claimed exemption from the payment if income
taxes imposed on property leases. 0n 1esus (acred Jeart College v. Com. 9f
0nternal 5evenue, the party therein, which claimed an exemption from the
payment of income tax, was an educational institution which submitted
substantial evidence that the income sub.ect of the controversy had been
devoted or used solely for educational purposes. 9n the other hand, <:C+ in
the present case had not given any proof that it is an educational institution, or
that of its rent income is actually, directly and exclusively used for educational
purposes.
/un' Cen!er ) !$e P$ils v 1C
The Iun' Center of the Philippines" a non.sto% and non.pro0t entit&
established b& virtue of P6 <4=3" #as the o#ner of a par%el of land in
MC.
In the middle of the lot #as a hospital no#n as the Iun' Center of the
Philippines.
A bi' spa%e at the 'round ]oor #as bein' leased to private parties" for
%anteen and small store spa%es" and to medi%al pra%titioners #ho use
the same as their private %lini%s for their patients #hom the& %har'e
for their professional servi%es.
Almost Q of the entire area on the left side of the buildin' alon' M Ave
#as va%ant and idle" #hile a bi' portion on the ri'ht side" at the %orner
of M Ave and Allipti%al Road" #as bein' leased for %ommer%ial purposes
to a private enterprise no#n as the Allipti%al *r%hids and Narden
Center.
The Iun' Center a%%epts pa&in' and non.pa&in' patients. It also
renders medi%al servi%es to out.patients" both pa&in' and non.pa&in'.
Aside from its in%ome from pa&in' patients" it also re%eived 'ov
subsidies.
The Cit& Assessor of MC assessed both the land and the hospital
buildin' for real propert& taxes amountin' to about P>G.
Iun' Center 0led a Claim for exemption from real propert& taxes
sa&in' it #as a %haritable institution.
The Iun' Center3s re-uest #as denied" and a petition #as" thereafter"
0led before the Io%al ;oard of Assessment Appeals of Mue:on Cit& (MC.
I;AA) for the reversal of the resolution of the Cit& Assessor.
The Iun' Center alle'ed that under @e%tion =4" para'raph 3 of the
<K4D Constitution" the propert& is exempt from real propert& taxes. It
averred that a minimum of P05 of its hospital beds are ex%lusivel&
used for %harit& patients and that the ma?or thrust of its hospital
operation is to serve %harit& patients.
Fo#ever" the Io%al ;oard held Iun' Center liable for real propert&
taxes. 6e%ision #as aLrmed b& MC Central ;oard. Petition #as
elevated to @C.
I1 <)2$n Iun' Center is a %haritable institution #ithin the %ontext of P6
<4=3 and under the Consti . EA@
=) 2$n the real properties of the Iun' Center are exempt from real
propert& taxes. )*
R1 <) EES, !$e /un' Cen!er is a c$ari!able ins!i!u!in.
To determine #hether an enterprise is a %haritable institution" the
elements #hi%h should be %onsidered in%lude the statute %reatin' it" its
purpose" b&.la#s" servi%es and nature$ use of properties.
7nder P6 <4=3" the Iun' Center is a non.pro0t and non.sto%
%orporation #hi%h" sub?e%t to the provisions of the de%ree" is to be
administered b& the *L%e of the President of the Philippines #ith the
Ginistr& of Fealth and the Ginistr& of Fuman @ettlements. It #as
or'ani:ed for the #elfare and bene0t of the Cilipino people prin%ipall&
to help %ombat the hi'h in%iden%e of lun' and pulmonar& diseases in
the Philippines.
The Arti%les of In%orporation of IC provide that its medi%al servi%es are
to be rendered to the publi% in 'eneral in an& and all #als of life
in%ludin' those #ho are poor and the need& #ithout dis%rimination.
A %haritable institution does not lose its %hara%ter as su%h and its
exemption from taxes simpl& be%ause it derives in%ome from pa&in'
patients" #hether out.patient" or %on0ned in the hospital" or re%eives
subsidies from the 'overnment" so lon' as the mone& re%eived is used
for the CFARITA;IA ob?e%tive it is intended for" and no mone& inures to
the private bene0t of the persons mana'in' or operatin' the
institution.
In this %ase" the mone& re%eived b& the Iun' Center be%omes a part of
the trust fund and must be devoted to publi% trust purposes and
%annot be diverted to private pro0t or bene0t.
7nder P6 <4=3" the Iun' Center is entitled to re%eive donations. The
Iun' Center does not lose its %hara%ter as a %haritable institution
simpl& be%ause of 'ov subsidies (donation).
=) NO, n! all are e%e#p! )r# real prper!& !a%.
The portions of its real propert& that are leased to private entities are
not exempt from real propert& taxes as these are not a%tuall&" dire%tl&
and ex%lusivel& used for %haritable purposes.
@in%e taxation is the rule and exemption is the ex%eption" a %laim for
exemption from tax pa&ments must be %learl& sho#n and based on
lan'ua'e in the la# too plain to be mistaen.
7nder P6 <4=3" the Iun' Center does )*T en?o& an& propert& tax
exemption privile'es for its real properties and buildin's. If the
intentions #ere other#ise" the same should have been amon' the
enumeration of tax exempt privile'es under @e%tion = thereof.
7nder the <KD3 and <K4D Constitutions and RA D<P0 in order to be
entitled to the exemption of propert& tax" the Iun' Center should
prove that a) it is a %haritable institution, and (b) its real properties are
ACT7AIIE" 6IRACTIE and AJCI7@IBAIE used for %haritable purposes.
o If real propert& is used for one or more %ommer%ial purposes"
it is not ex%lusivel& used for the exempted purposes but is
sub?e%t to taxation. TF7@" 8ex%lusivel&9 means @*IAIE.
o 2hat is meant b& a%tual" dire%t and ex%lusive use of the
propert& for %haritable purposes is the 6IRACT" IGGA6IATA"
ACT7AI appli%ation of the PR*PARTE itself to the purposes for
#hi%h the %haritable institution is or'ani:ed. It is )*T the use
of I)C*GA of the propert& #$% is the %ontrollin' fa%tor (to
exempt).
In this %ase" #hile portions of the hospital are used for the treatment of
patients" other parts are bein' leased to private individuals for their
%lini%s and a %anteen. Curther" a portion of the land is bein' leased to a
private individual for her business enterprise under the business name
SAllipti%al *r%hids and Narden Center.S
Thus" portions of the land leased to private entities and individuals are
)*T tax exempt" #hile those used for patients" pa&in' and non.pa&in'"
are exempt.
SITUS OF TAXATION AND DOU./E TAXATION
Republic .an0 v CTA
In <KD<" Republi% ;an #as assessed the amount of about P<.3G! as
<5 monthl& ban reserve de0%ien%& tax for the &ear <KPK.
In <KD3" R; #as assessed the amount of about P<.KG! as <5 monthl&
ban reserve de0%ien%& tax for the &ear <KD0.
*n both o%%asions" R; re-uested re%onsideration of the assessment
#hi%h the CIR denied.
R; %ontended that @e%tion =>K of the Tax Code is no lon'er
enfor%eable" be%ause @e%tion <=P of A%t <>5K $ the Corporation Ia#"
#hi%h #as alle'edl& the basis for the imposition of the <5 reserve
de0%ien%& tax" #as repealed b& @e%tion K0 of Republi% A%t 33D" the
Neneral ;anin' A%t" and b& @e%tions <00 and <0< of Republi% A%t =P5.
Sec. BC? ) !$e Ta% C"e provides that bans #ill be %har'ed <5 a
month on the amount of reserve de0%ien%ies in%urred.
Sec. 8B9 ) !$e Crpra!in /a= provides that 8Reserve
de0%ien%ies shall be penali:ed at the rate of <5 per month upon the
amount of the de0%ien%ies and for the periods of their duration in
a%%ordan%e #ith the re'ulation to Tbe issued b& the ;an
Commissioner.9
A%%ordin' to petitioner" @e%tion <=P has been expressl& repealed b&
Sec!in ?D ) !$e General .an0in' Ac! #hi%h provides that se%tion
<03.<>P and <D<.<K0 of the Corp Ia# are repealed.
CTA" ho#ever" upheld the validit& of the assessed taxes.
I1 2$n @e%. =>K of the Tax Code #as repealed
R1 )*" @e% =>K is @TIII enfor%eable.
Both petitioner and respondent agree that the reFuirement on the
maintenance of bank reserves, previously found in (ection "%H of +ct
"NOG LThe Corporation )aw#, remained prescribed based on (ec. %H of
5+ KKP, the >eneral Banking +ct, and (ections "CC, "C", and "CH of
5+. %HO, the Central Bank +ct, all providing for the reserve
reFuirements on banking operations.
R; ar'ues that in %ase of a reserve de0%ien%&" the violatin' ban #ould
be liable at the same time for a tax of <5 a month pa&able to ;IR
(under @e% =>K" Tax Code)" PI7@ a penalt& of <$<0 of <5 a da& pa&able
to C; (@e%tion <0P" Central ;an A%t). It posits that @e% =>K imposes
not a tax but a PA)AITE (sin%e it states that 8reserve de0%ien%ies shall
be penali*e" at the rate of one per %entum per monthZ9)
Fo#ever" the la# %learl& intended for it to be %har'ed as a tax for it
falls under the headin' TIT/E 2III44-ISCE//ANEOUS TAXES.
As the la# stood durin' the &ears that R; #as assessed for taxes on
reserve de0%ien%ies (<KPK [ <KD0)" R; had to pa& t#i%e1
o a penalt& to the Central ;an b& virtue of @e%tion <0P for
violation of @e%s. <00 and <0<" all of the Central ;an A%t and
o tax to the ;IR for in%urrin' a reserve de0%ien%&.
Thus" it is %lear from the statutes then in for%e that there #as no
double taxation involved. *ne #as a PA)AITE and the other #as a TAJ.
At an& rate" the @C has upheld the validit& of double taxation. The
pa&ment of <$<0 of <5 for in%urrin' reserve de0%ien%ies (@e%tion <0P"
Central ;an A%t) is a penalt& as the primar& purpose involved is
re'ulation" #hile the pa&ment of <5 for the same violation (@e%ond
Para'raph"@e%tion =>K" )IRC) is a tax for the 'eneration of revenue
#hi%h is the primar& purpose in this instan%e.
R; should not %omplain that it is bein' ased to pa& t#i%e for in%urrin'
reserve de0%ien%ies. It %an al#a&s avoid this predi%ament b& not
havin' reserve de0%ien%ies.
R;3s %ase is %overed b& t#o spe%ial la#s.one a banin' la# and the
other" a tax la#.
CR*G PA*1 theyIre saying kasi that (6C "%H was repealed na. but then the basis
kasi for (6C "%H can be found in other laws. like the >6865+) B+8Q08> +CT. in
that law it penali*es bank reserve defciencies. parang theyIre saying theyIre
being penali*ed TW0C6. one by the law and the other by the B05. but the one by
the law is a T+E kasi its under nga the heading :0(C6))+869?( T+E6(. so hindi
sya pwede double taxation kasi " is a tax and the other is a penalty lang.
Prc!r N Ga#ble v -unicipali!& ) >a'na
The Guni%ipal Coun%il of Oa'na" ;ohol" ena%ted Guni%ipal *rdinan%e >

#$% imposed @T*RANA CAA@ on all exportable %opra deposited in the
bode'a #$in the ?urisdi%tion of Oa'na" ;ohol at the rate of 8D cen!s
PER 8DD 0ils.
It also provides that all e%pr!able cpra deposited in the bode'a

#ithin the Guni%ipalit& of Oa'na ;ohol" is part of the surveillan%e and
looout of the Guni%ipal Authorities.
In this li'ht" P[N" a domesti% %orp en'a'ed in the manufa%ture of oil"

soap and others" #$% maintained a bode'a in the muni%ipalit& #here it
stored C*PRA (pur%hased from the muni%ipalit& and shipped for its
manufa%turin' ops)" paid stora'e fees for P &rs from <K54 to <KP3. The
fees totalled P<G!.
P[N then 0led a suit in the CCI of Ganila" pra&in'1

o to de%lare *rdinan%e 5 I)APPIICA;IA Tto it or" that it be
pronoun%ed ultra$vires and void for bein' be&ond the po#er
of the Guni%ipalit& to ena%t and
o that defendant Guni%ipalit& be ordered to refund to it the
amount of P>=! #hi%h it paid under protest, and %osts
P[N ar'ues that the tax imposed in the said ordinan%e is an 8AJP*RT
TAJ9 on AJP*RTA;IA C*PRA and thus" the said lev& #as inappli%able
to their business be%ause the& are store %opra for their AJCI7@IBA 7@A
in %onne%tion #$ the manufa%ture of soap" edible oil" mar'arine and
other similar produ%ts" for purposes of pro0t $ revenue.
TC ruled in favour of the Guni%ipalit&" sa&in' it had the po#er to ena%t

the *rdinan%e under the Revised Admin Code (se% ==34)" other#ise
no#n as the Neneral 2elfare Clause. It also de%lared P[N3s ri'ht of
a%tion had pres%ribed under the 5.&ear period provided for b& Arti%le
<<>K of the Civil Code. Thus" this dire%t appeal.
I1 <) 2$n G* > is ultra vires and void. )*" it is BAII6T
=) 2$n P[N is entitled for the reimbursement of ex%ess amount paid..

)*T
R1
*rdinan%e )o. > is valid as a muni%ipalit&

is authori:ed to impose 3 inds of li%enses" pursuant to the broad
authorit& %onferred upon muni%ipalities b& Common#ealth A%t )o. >D=1
a li%ense for re'ulation
of useful o%%upation or enterprises,
li%ense for restri%tion or
re'ulation of non.useful o%%upations or enterprises, and
li%ense for revenue
It is thus unne%essar& to determine #hether the sub?e%t stora'e fee is

a tax for revenue purposes or a li%ense fee to reimburse defendant
Guni%ipalit& for servi%e of supervision be%ause defendant Guni%ipalit&
is authori:ed not onl& to impose a li%ense fee but also to tax for
revenue purposes.
It has been held that a #arehouse used for eepin' or storin' %opra is
an establishment liel& to en"an'er !$e public sa)e!& r li0el& !
'ive rise ! cnOa'ra!in because !$e il cn!en! ) !$e cpra
=$en i'ni!e" is "iLcul! ! pu! un"er cn!rl b& =a!er an" !$e
use ) c$e#icals is necessar& ! pu! u! !$e ,re.

And as the *rdinan%e itself states" all exportable %opra deposited

#ithin the muni%ipalit& is Spart of the surveillan%e and looout of
muni%ipal authorities.
;D>Is argument that the imposition of ;C."C per "CC kilos of copra
stored in a bodega within defendantIs territory is beyond the cost of
regulation and surveillance is not well taken. +s enunciated in the case
of 7ictorias :illing Co. vs. :unicipality of 7ictorias, supra. :unicipal
corporations are allowed wide discretion in determining the rates of
imposable license fees even in cases of purely police power measures.
0n the case at bar, appellant has not su'ciently shown that the rate
imposed by the Fuestioned 9rdinance is oppressive, excessive and
prohibitive.
2hen the *rdinan%e itself speas of SexportableS %opra" the meanin'

%onve&ed is )*Tex%lusivel& export to a forei'n %ountr& but shipment
out of the muni%ipalit&. T$e s!ra'e )ee i#pu'ne" is n! a !a% n
e%pr! because i! is i#pse" n! nl& upn cpra ! be
e%pr!e" bu! als upn cpra SO/D AND USED )r DO-ESTIC
PURPOSES i) s!re" in an& =are$use in !$e -unicipali!& an"
!$e =ei'$! !$ere) is 8DD 0ils r #re.
6ouble taxation has also been de0ned as taxin' the same person t#i%e
b& the same ?urisdi%tion for the same thin'. In this %ase" a tax on P[NVs
produ%ts is di/erent from a tax on the privile'e of storin' %opra in a
bode'a situated #ithin the territorial boundar& of defendant
muni%ipalit&.
Fo#ever" lo#er %ourt erred in rulin' that a%tion had pres%ribed. In

:unicipality of 9pon vs. Caltex ;hil1 the period for pres%ription of
a%tions to re%over muni%ipal li%ense taxes is P &ears under Arti%le
<<>5(=) of the Civil Code. Thus" P[NVs a%tion brou'ht #ithin six &ears
from the time the ri'ht of a%tion 0rst a%%rued in <K54 has not &et
pres%ribed.
Pepsi4Cla v -unicipali!& ) Tanauan
This %ase involved = Guni%ipal *rdinan%es and the Io%al Autonom& A%t
(RA ==P>)1
o The Io%al Autonom& A%t (RA ==P>) 'rants muni%ipalities the
authorit& to impose muni%ipal taxes or fees upon persons
en'a'ed in an& o%%upation or business #ithin their
?urisdi%tions" provided that the& #ere not allo#ed to impose
per%enta'e tax on sales and on items alread& sub?e%t to
spe%i0% tax under the )IRC
o Guni%ipal *rdinan%e )o. =3 of Tanauan" Ie&te imposes on soft
drin produ%ers and manufa%turers a tax of 8+89 ) a
cen!av )r ever& b!!le ) s)! "rin0 cr0e".
o Guni%ipal *rdinan%e )o. =D imposes on soft drins produ%ed
or manufa%tured a tax of 8 cen!av n eac$ 'alln )
vlu#e capaci!&.
Pepsi 0led an a%tion to de%lare the Io%al Autonom& A%t and the t#o
ordinan%es void. It %laimed that the G*s %onstituted double taxation"
be%ause the& %over the same sub?e%t matter and impose pra%ti%all&
the same tax rate.
I1 2$n the G*s %onstitute double taxation
R1 )*.
6ouble taxation" in 'eneral" is not forbidden b& our fundamental la#"
sin%e #e have not adopted as part of the in?un%tion a'ainst double
taxation found in the Constitution of the 7nited @tates and some states
of the 7nion.
6ouble taxation be%omes obnoxious onl& #here the taxpa&er is taxed
T2ICA for the bene0t of the @AGA 'overnmental entit& $ b& the @AGA
?ursid%tion for the @AGA purpose" but not in a %ase #here one tax is
imposed b& the @tate and the other b& the %it&$muni%ipalit&.
In this %ase" petitioner is #ron' in assertin' that G* =3 and =D
%onstitute double taxation on its assumption that both ordinan%es are
valid and le'all& enfor%eable.
G* =3 levies or %olle%ts from soft drins produ%ers or manufa%turers
<$<P of a %entavo for ever& bottle %ored" irrespe%tive of the volume
%ontents of the bottle used.
2hen it #as dis%overed that the produ%er or manufa%turer %ould
in%rease the volume %ontents of the bottle and still pa& the same tax
rate" the Guni%ipalit& of Tanauan ena%ted G* =D" approved on *%tober
=4" <KP=" imposin' a tax of < %entavo on ea%h NAII*) of B*I7GA
%apa%it&.
The di/eren%e bet#een the t#o ordinan%es %learl& lies in the tax rate
of the soft drins produ%ed. The intention of the Guni%ipal Coun%il of
Tanauan in ena%tin' G* =D is thus %lear1 it #as intended as a plain
substitute for the prior G* =3" and operates as a repeal of the latter"
even #ithout #ords to that e/e%t.
K2illanueva v Ci!& ) Ilil
The muni%ipal board of Iloilo ena%ted *R6I)A)CA << (series of <K40)
imposin' 4P li%ense tax fees on persons en'a'ed in the business of
operatin' tenement houses ((tenement house ( an& buildin' or
d#ellin' for rentin' spa%e divided into separate apartments or
a%%essories).
The Billanuevas" o#ners of > tenement houses %ontainin' 3>
apartments" %hallen'ed the validit& of su%h ordinan%e be%ause onl& the
taxpa&ers of the Cit& of Iloilo are sin'led out to pa& taxes on their
tenement houses" #hile %iti:ens of other %ities" #here their %oun%ils do
not ena%t a similar tax ordinan%e are permitted to es%ape su%h
imposition.
Io#er %ourt rendered the ordinan%e ille'al as it %onstitutes double
taxation
I1 2$n ordinan%e amounts to double taxation
R1 )*T
The petitionersV %ontention that the& are doubl& taxed be%ause the&
are pa&in' the real estate taxes and the tenement tax imposed b& the
ordinan%e in -uestion is devoid of merit.
A li%ense tax ma& be levied upon a business or o%%upation althou'h
the land or propert& used in %onne%tion there#ith is sub?e%t to propert&
tax. This #ould not %onstitute double taxation be%ause there is onl&
double taxation #hen the @AGA PR*PARTE $ @7;ACT GATTAR is taxed
t#i%e for the same purpose" #$in the same ?urisdi%tion and period" and
of the same ind of %hara%ter of tax.
Real estate and tenement tax are )*T of the same ind $ %hara%ter.
At all events" there is no %onstitutional prohibition a'ainst double
taxation in the Philippines. It is somethin' not favored" but is
permissible" provided some other %onstitutional re-uirement is not
thereb& violated" su%h as the re-uirement that taxes must be uniform.
K2ic!rias -illin' v -unicipali!& ) 2ic!rias
The muni%ipal %oun%il of Bi%torias ena%ted
*rdinan%e < #$% re-uired su'ar %entrals operatin' #$in the muni%ipalit& to
pa& an annual muni%ipal li%ense tax.
;ased on the ordinan%e" Bi%torias Gillin' #as
assessed >0U (imposed on su'ar %entrals) and another >0U (imposed on
su'ar re0neries).
Thus" Bi%torias Gillin' 0led a suit to de%lare the
ordinan%e void sin%e it1
o a) ex%eeds the amount 0xed in Provin%ial Cir%ular <=.A issued
b& the Cinan%e 6ept
o b) is dis%riminator&" as it sin'les out BG" #$% is the onl&
operator of a su'ar %entral and a su'ar re0ner& #ithin the
?urisdi%tion of defendant muni%ipalit&
o cJ cns!i!u!es "uble !a%a!in
o d# the national government has preempted the feld of
taxation with respect to sugar centrals or refneries
The lo#er %ourt held that the exa%tion #as invalid
be%ause the muni%ipalit& CA))*T impose a tax for revenue in the 'uise of
a poli%e measure. The amounts set forth in the ordinan%e also ex%eeded the
%ost of li%ensin'" re'ulatin'" and surveillan%e.
I1 2$n the ordinan%e #as valid.
R1 The ordinan%e #as valid.
There is no double taxation be%ause the %ompan& is
bein' taxed for the same ob?e%t1 *ne tax is on su'ar %entrals and the other
is on su'ar re0neries. It ?ust so happens that the %ompan& is both.
Also" the tax #as imposed based on %apa%it& of the
su'ar %entrals to produ%e" so it #as reall& a li%ense on the o%%upation or
business of su'ar %entrals and su'ar re0neries and not on the su'ar itself,
hen%e there #as no identit& of ob?e%t of taxation
There is no dis%rimination despite the fa%t that the
%ompan& is the onl& su'ar produ%in' entit& in the muni%ipalit&. Bi%torias
Gillin' is not named in the ordinan%e and should another %orporation
de%ide to produ%e su'ar in the area" it #ill be taxed a%%ordin'l&.
NR1 If not for poli%e inspe%tion" supervision"
re'ulation + it is a revenue measureT
KC#pania General "e Tabacs v Ci!& ) -anila
Taba%alera paid for its li-uor li%ense and also paid sales tax on its sale
of 'eneral mer%handise" in%ludin' li-uor.
It %laimed that it made an overpa&ment and demanded a refund of the
sales tax paid on the 'round that sin%e it alread& paid the li%ense fees"
it #as no lon'er bound to pa& the sales tax on the li-uor.
I1 2$n Taba%alera is liable for sales tax on the li-uor despite alread&
havin' paid for its li-uor li%ense.
R1 EA@" Taba%alera is liable.
Nenerall&" the term 8tax9 applies to all inds of exa%tions #hi%h
be%ome publi% funds. Ie'all&" ho#ever" a li%ense fee is a le'al %on%ept
-uite distin%t from tax.
o Taxes are for raisin' revenues #hile li%ense fees are imposed
in the exer%ise of poli%e po#er for purposes of re'ulation.
7nder on ordinan%e" Taba%alera must pa& li%ense fees in order to
%ontinue en?o&in' the privile'e of sellin' li-uor" %onsiderin' that the
sale of intoxi%atin' li-uor is potentiall& harmful to publi% health and
morals" and must be sub?e%t to @tate re'ulation.
7nder another ordinan%e" Taba%alera is liable for sales tax on sales of
'eneral mer%handise" in%ludin' li-uor.
;oth a li%ense fee and a tax ma& be imposed on the same business or
o%%upation" or for sellin' the same arti%le" #ithout it bein' in violation
of the rule a'ainst double taxation.
Prvince ) .ulacan v CA
The @an''unian' Panlala#i'an of ;ula%an passed a provin%ial
ordinan%e #hi%h provided for the imposition of a <05 tax on the fair
maret value in the lo%alit& per %ubi% meter of ordinar& stones" sand"
'rave" earth and other -uarr& resour%es" extra%ted from publi% lands or
other publi% #aters #ithin its territorial ?urisdi%tion.
Thus the provini%ial treasurer of ;ula%an assessed Republi% Cement
Corporation for taxes from several par%els of private land in the
provin%e.
Republi% paid under protest" %laimin' that the imposition of su%h tax is
be&ond the po#er of the taxin' authorit& of ;ula%an.
The %ase #as eventuall& elevated to CA and CA ruled that the Provin%e
of ;ula%an had )* authorit& to impose the tax
I7 2$n the Provin%e of ;ula%an has the authorit& to impose su%h tax.
R7 )o" the& do not have the authorit&.
Petitioners %ontend that their authorit& %omes from @e%tion <4P of the
INC #$% provides that the provin%e ma& lev& taxes and fees not more
than <05 of the fair maret value per %ubi% meter of ordinar& stones"
sand" 'ravel et%" extra%ted from publi% lands.
Fo#ever" a perusal of the said la# sho#s that the tax imposed is an
ex%ise tax bein' a tax upon the performan%e" %arr&in' on" or exer%ise
of an a%tivit& and the INC provides that %ities" muni%ipalities" and
baran'a&s shall )*T extend to ex%ise taxes enumerated under the
)IRC.
The )IRC levies a tax on all -uarr& resour%es" re'ardless of ori'in"
#hether extra%ted from publi% or private land.
Thus" a provin%e ma& not ordinaril& impose taxes on stones" sand"
'ravel" earth and other -uarr& resour%es" as the same are alread&
taxed under the )IRC.
F*2ABAR" the provin%e %an impose a tax on stones" sand" 'ravel"
earth and other -uarr& resour%es extra%ted from publi% land be%ause it
is expressl& empo#ered to do so under the Io%al Novernment Code.
As to the -uarr& resour%es extra%ted from PRIBATA IA)6" it ma& not do
so due to the limitations in the INC (se% <33) in relation to the )IRC
(@e% <5<).
Cinall& the petitioners %annot invoe the Re'alian 6o%trine to extend
the %overa'e to -uarr& resour%es be%ause taxes" bein' burdens are
)*T presumed be&ond #hat the appli%able statute expressl& and
%learl& de%lares. Tax statutes are %onstrued strictissimi .uris a'ainst the
'overnment.
FOR-S OF ESCAPE FRO- TAXATION
Delp$er Tra"es Crp v IAC
Pa%he%o and his sister o#ned a par%el of real estate land identi0ed that
#as re'istered in ;ula%an.
The& then leased the land to Constru%tion Components In%" and
providin' that durin' the existen%e or after the term of the lease" the
lessor (Pa%he%o"sister) should he de%ide to sell the propert& leased"
shall 0rst o/er the same to the lessee(Constru%tion) and the lessee has
the priorit& to bu& under similar %onditions.
Constru%tion then assi'ned its ri'hts and obli'ations to F&dro Pipes #$
the %onsent of the Pa%he%os.
A deed of ex%han'e #as exe%uted bet#een the Pa%he%os and 6elpher
Trades #here Pa%he%os %onve&ed to 6elpher the leased propert&
to'ether #$ another par%el of land also lo%ated in Galinta Astate"
Balen:uela for ="500 shares of sto% of 6elpher #$ a total value of
P<.5G.
*n the 'round that it #as not 'iven the 0rst option to bu& the leased
propert& pursuant to the proviso in the lease a'reement" F&dro Pipes
0led an amended %omplaint for re%onve&an%e of the sub?e%t lot in its
favor under %onditions similar to those #here 6elpher a%-uired the
propert& from the Pa%he%o3s.
The CCI of ;ula%an ruled in favor of F&dro Pipes #ho had the
preferential ri'ht to a%-uire the propert& (ri'ht of 0rst refusal)" and
Pa%he%o #as ordered to immediatel& %onve& the propert& to F&dro
Pipes.
The IAC aLrmed this de%ision.
6elpher ar'ued that the 8deed of ex%han'e9 exe%uted bet#een
Pa%he%o and 6elpher #as )*T a %ontra%t of sale" so it did not pre?udi%e
the ri'ht of 0rst refusal in the %ontra%t bet#een Pa%he%o and F&dro
Pipes
I1 2$n the deed of ex%han'e #as a %ontra%t of sale
R1 2$n there #as a violation of the ri'ht of 0rst refusal entitled to F&dro
Pipes
R1 )*" the deed of ex%han'e #as )*T a %ontra%t of sale, thus" there
#as no violation of the ri'ht of 0rst refusal
The S6eed of Ax%han'eS of propert& bet#een the Pa%he%os and
6elpher Trades Corporation %annot be %onsidered a %ontra%t of sale
be%ause there #as no transfer of a%tual o#nership interests b& the
Pa%he%os to a third part&.
The Pa%he%o famil& merel& %han'ed their o#nership from one form to
another. The o#nership remained in the same hands. Fen%e" F&dro
Pipes has no basis for its %laim of a li'ht of 0rst refusal under the lease
%ontra%t.
In order to perpetuate their %ontrol over the propert& throu'h the
%orporation and to avoid taxes" the t#o pie%es of real estate #$% had
been leased to F&dro Pipes" #ere transferred to the %orporation b&
virtue of a deed of ex%han'e of propert&.
In ex%han'e for these properties" Pela'ia and 6el0n a%-uired ="500
unissued no par value shares of sto% #hi%h are e-uivalent to a 555
ma?orit& in the %orporation be%ause the other o#ners onl& o#ned ="000
shares, the& refer to this s%heme as Sestate plannin'.S
In e/e%t" the 6elpher Trades Corporation is a business %onduit or alter
e'o of the Pa%he%os. 2hat the& reall& did #as to invest their properties
and %han'e the nature of their o#nership from unin%orporated to
in%orporated form b& or'ani:in' 6elpher Trades Corporation to tae
%ontrol of their properties and at the same time save on inheritan%e
taxes.
Its other advanta'es are %ontinuous %ontrol of the propert&" tax
exemption bene0ts" and other inherent bene0ts in a %orporation.
A no.par value share does not purport to represent an& stated
proportionate interest in the %apital sto% measured b& value" but onl&
an ali-uot part of the #hole number of su%h shares of the issuin'
%orporation.
The holder of no.par shares ma& see from the %erti0%ate itself that he
is onl& an ali-uot sharer in the assets of the %orporation. Thus" b&
removin' the par value of shares" the attention of persons interested in
the 0nan%ial %ondition of a %orporation is fo%used upon the value of
assets and the amount of its debts.
Hen' Tn' Te%!iles v CIR
Textiles from abroad #ere #ithdra#n from Customs b& Pan.Asiati%
Commer%ial" #hi%h paid" in the name of Hen' Tn' Te%!iles" the
%orrespondin' advan%e sales tax under @e% <43 of the Internal
Revenue Code.
CIR then assessed a'ainst Fen' Ton' Textiles de0%ien%& sales taxes
and sur%har'es from <K>K.<K50 in the sum of P4K for the importation
of textiles from abroad. This #as on the 'round that Fen' Ton' #as the
RAAI IGP*RTAR of 'oods and did not pa& taxes due on the basis of
'ross sellin' pri%es.
Fen Ton' appealed the assessment to the ;oard of Appeals" and the
%ase #as transferred to the CTA upon its or'ani:ation in <K5>.
I1 <) 2$n the Fen Ton' #as the importer of the 'oods, =) 2$n it #as
'uilt& of fraud to #arrant the imposition of a penalt& of 505 de0%ien%&
R1 EA@ FT #as the importer but there #as )* fraud to #arrant

imposition of penalt&
@C aLrmed CTA 0ndin's that Fen' Ton' #as the importer of the 'oods
based on eviden%e1
o FT and Pan.Asiati% #ere sister %orporations.
o Commer%ial do%s %overin' the importations (shippin' do%s"
insuran%e papers" et%.) #ere all in the name of FT
o In %onne%tion #$ advan%e sales tax" Pan.Asiati% #rote a letter
to FT providin' a breado#n of the 55 sales tax to'ether #$
oL%ial re%eipt numbers and other details
o There is both do%umentar& and testimonial eviden%e (#itness
de%larations) to sho# that PA a%ted merel& as I)6A)T*R. FT
pla%ed throu'h PA orders for importations of textiles from the
7@.
+lthough JT avers that the importation papers were placed in JTRs
name only to accommodate and introduce JT to textile suppliers
abroad and that it was in no position to make the importations due to
its small ;KCk capital, these circumstances only show a ;507+T6
+55+8>6:68T between JT and ;+. 0t did not aMect the role of JT as
importer.
@C per%eived it the entire set.up as an ARRA)NAGA)T throu'h #$%
sales tax %ould be GI)IGIXA6 b& havin' PA as indorser #ithdra# 'oods
from Customs upon pa&ment of advan%e sales tax then sell it to Fen
Ton' at %ost $ ne'li'ible pro0t.
The 'oods #ere made to appear as havin' been sold so that no sales
tax #as paid b& FT upon the sale of 'oods" nor #as an& sales tax paid
on the supposed sales b& PA. (The sales tax on sales of imported
arti%les #as based on NR*@@ @AIII)N pri%e)
F*2ABAR" the arran'ement itself does not ?ustif& the penalt& imposed
b& CTA. @e% <43 of the Internal Revenue Code speas of #illful ne'le%t
to 0le the return $ #ilful main' of a false $ fraudulent return. An
a!!e#p! ! #ini#i*e ne:s !a% "es n! necessaril& cns!i!u!e
)rau".
A !a%pa&er #a& "i#inis$ $is liabili!& b& an& #eans =+c !$e la=
per#i!s.
Intention to minimi:e taxes in the %ontext of fraud must thus be proven
b& CIAAR A)6 C*)BI)CI)N ABI6A)CA. There #as no sho#in' of su%h
in this %ase so penalt& imposed b& CTA is modi0ed" eliminatin' the
505 penalt& on de0%ien%& sales tax.

CIR v T"a
CIC authori:ed ;eni'no Toda" Or." President and o#ner of KK.KK<5
of its issued and outstandin' %apital sto%" to sell the Cibeles ;uildin'
and the t#o par%els of land on #hi%h the buildin' stands for an amount
of not less than PK0G.
Toda purportedl& sold the propert& for P<00 million to Rafael
Altona'a" #ho" in turn" sold the same propert& on the same da& to
Ro&al Gat%h for P=00G.
Cor the sale of the propert& to Ro&al Gat%h (RGI)" Altona'a paid
%apital 'ains tax in the amount of P<0G.
CIC then 0led its %orporate annual in%ome tax return for the &ear
<K4K" de%larin'" amon' other thin's" its 'ain from the sale of real
propert& in the amount of about PD5!.
After %reditin' #ithholdin' taxes of P=5>!" it paid P=P! for its
net taxable in%ome of PD5!
Toda sold his entire shares of sto%s in CIC to Choa for P<=.5G.
Three and a half &ears later" Toda died.
@ubse-uentl&" the ;IR sent an assessment noti%e and demand
letter to the CIC for de0%ien%& in%ome tax for the &ear <K4K in the
amount of about PDK!.
The ne# CIC ased for a re%onsideration" assertin' that the
assessment should be dire%ted a'ainst the old CIC" and not a'ainst the
ne# CIC" #hi%h is o#ned b& an entirel& di/erent set of sto%holders,
moreover" Toda had undertaen to hold the bu&er of his sto%holdin's
and the CIC free from all tax liabilities for the 0s%al &ears <K4D.<K4K.
The Astate of Toda re%eived a )oti%e of Assessment from the CIR
for de0%ien%& in%ome tax for the &ear <K4K in the amount of PDK!.
The Astate thereafter 0led a protest" #hi%h the CIR dismissed.
The estate 0led a Petition for Revie# before the CTA alle'in'"
amon' others" that the CIR erred in holdin' the estate liable for in%ome
tax de0%ien%&. Foldin' that CTA ruled in favour of the Astate.
I12$n CTA erred in holdin' that Toda %ommitted no fraud #ith
intent to evade the tax on the sale of the properties of Cibelles
Insuran%e Corporation
R1 EA@" CTA erred. Toda %ommitted fraud so his Astate should pa&
the PDK! de0%ien%& in%ome tax for <K4K" plus le'al interest until the
amount is full& paid.
Tax avoidan%e and tax evasion are the t#o most %ommon #a&s
used b& taxpa&ers in es%apin' from taxation1
Ta% avi"ance is the tax savin' devi%e #ithin the means
san%tioned b& la#. This method should be used b& the taxpa&er in
'ood faith and at arms len'th.
Ta% evasin" on the other hand" is a s%heme used outside of
those la#ful means and #hen availed of" it usuall& sub?e%ts the
taxpa&er to further or additional %ivil or %riminal liabilities. It %onnotes
the inte'ration of three fa%tors1 A;7T
o <) end to be a%hieved (pa&ment of ` taxes)
o =) bad faith $ evil state of mind
o 3) unla#ful %ourse of a%tion $ failure of a%tion
All these fa%tors are present in the instant %ase.
Prior to the purported sale of the Cibeles propert& b& CIC to
Altona'a" CIC re%eived P>0G from from RGI" and )*T Altona'a.
The P>0G #as debited b& RGI and re]e%ted in its trial balan%e as
Sother inv. ( Cibeles ;ld'.S Another a>0G #as debited and re]e%ted in
RGI3s trial balan%e as Sother inv. ( Cibeles ;ld'.S
This sho#s that the real bu&er of the properties #as RGI" and )*T
Altona'a.
The Astate admitted that the sale #as made to Toda as part of the
tax plannin' s%heme of CIC.
The s%heme resorted to b& CIC in main' it appear that there #ere
t#o sales of the sub?e%t properties" i.e." from CIC to Altona'a" and then
from Altona'a to RGI %annot be %onsidered a le'itimate tax plannin'.
@u%h s%heme is tainted #ith fraud.
Craud pertains to a%ts and omissions for purposes of de%eption"
brea%h of trust or tain' advanta'e is taen of another.
In this %ase" it is obvious that the ob?e%tive of the sale to Altona'a
#as to redu%e the amount of tax to be paid espe%iall& that the transfer
from him to RGI #ould then sub?e%t the in%ome to onl& 55 individual
%apital 'ains tax" and )*T the 355 %orporate in%ome tax.
Altona'a3s sole purpose of a%-uirin' and transferrin' title of the
sub?e%t properties on the same da& #as to %reate a tax shelter.
Altona'a never %ontrolled the propert& and did not en?o& the normal
bene0ts and burdens of o#nership. The sale to him #as merel& a tax
plo&" a sham" and #ithout business purpose and e%onomi% substan%e.
To allow a taxpayer to deny tax liability on the ground that the
sale was made through another and distinct entity when it is proved
that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Jence, the sale to +ltonaga should be disregarded for
income tax purposes. The two sale transactions should be treated as a
single direct sale by C0C to 5:0.
EXE-PTION FRO- TAXATION
Dava Gul) /u#ber v CIR
6avao Nulf is a li%ensed forest %on%essionaire possessin' a Timber
Ii%ense A'reement 'ranted b& the Ginistr& of )atural Resour%es (no#
6A)R).
Cor about = &rs" it pur%hased from various oil %ompanies mineral oil
and diesel fuel #$% it used ex%lusivel& for the exploitation and
operation of its forest %on%ession.
The oil %ompanies paid the spe%i0% taxes imposed under Secs8P< an"
8P9 ) !$e NIRC on the sale of its produ%ts. @in%e the taxes #ere
in%luded in the pur%hase pri%e" the& #ere eventuall& passed on to the
user .. 6avao Nulf in this %ase.
6N then 0led before the CIR a %laim for refund in the amount of about
P<=0!" #$% represented =55 of the spe%i0% taxes a%tuall& paid on the
said fules and oils. This #as based on the %ase of Insular /u#ber v.
CTA and SecP, RA8C<P #$% provided that #hen oils are used b&
miners$forest %on%essionaires" =55 #ill be refunded b& the CIR upon
submission of proof of a%tual use. (pro%eeds of the tax #ill a%%rue to
road and brid'e funds)
6N bein' able to %ompl& #$ the said pro%edure" 0led #$ the CTA a
petition for revie#.
CTA found that 6N #as entitled to a partial refund of spe%i0% taxes in
the redu%ed amt of about P=!" sin%e its %laim on pur%hases of
lubri%atin' oil and manufa%tured oils other than lubri%atin' oil had
PRA@CRI;A6. In other #ords" CTA 'ranted the %laim" but %omputed the
refund based on rates deemed paid under RA <>35" and )*T on the
hi'her rates a%tuall& paid under the )IRC.
6N elevated the %ase to the CA" insistin' that the basis for %omputin'
the refund should be the in%reased rates in the )IRC and )*T under RA
<>35.
CA ruled that the %laim for refund should indeed be %omputed on the
basis of the amounts deemed paid under @e%s < and = of RA <>35" and
that the %laims for refund #$% pres%ribed and those not 0led in the
admin level must be ex%luded.
I1 2$n 6N is entitled under RA <>35 to the refund of =55 of the amt of
spe%i0% taxes it a%tuall& paid on mineral oils $ oil produ%ts taxed under
the )IRC (refund based on in%reasedd rates)
R1 )*. 6N is onl& entitled to a partial refund.
<) 6N is entitled to partial refund under @e%5" RA <>35" #hi%h #as
ena%ted to provide means for in%reasin' the Fi'h#a& @pe%ial Cund.
The spe%i0% taxes %olle%ted on 'asoline and fuel a%%rue to the Cund"
#hi%h is to be used for the %onstru%tion and maintenan%e of the
hi'h#a& s&stem. ;ut be%ause the 'asoline and fuel pur%hased b&
minin' and lumber %on%essionaires are used #ithin their *2)
%ompounds and roads" the& do )*T dire%tl& bene0t the fund and its
use. Thus" the tax refund for su%h %on%essionares is but proper.
=) F*2ABAR" sin%e the partial refund authori:ed under @e%tion 5" RA
<>35" is in the nature of a tax exemption" it must be %onstrued stri%tl&
a'ainst the 'rantee.
RA <>35 and the subse-uent pertinent statutes" after s%rutin&" sho# no
expression of a le'islative #ill authori:in' a refund based on the
hi'her rates %laimed b& 6N.
The mere fa%t that the privile'e of refund #as in%luded in @e%tion 5"
and not in @e%tion <" is insuL%ient to support 6N3s %laim.
2hen the la# itself does not expli%itl& provide that a refund under RA
<>35 ma& be based on hi'her rates #hi%h #ere nonexistent at the time
of its ena%tment" this Court %annot presume other#ise. A le'islative
la%una %annot be 0lled b& ?udi%ial 0at.
6N then asserts that 8e-uit& and ?usti%e demand that the %omputation
of the tax refunds be based on a%tual amounts paid under @e%tions <53
and <5P of the )IRC.9 F*2ABAR" there is no tax exemption solel& on
the 'round of e-uit&.
P$il Ace!&lene v CIR
Philippine A%et&lene Co. In% (PAC). is a %orporation en'a'ed in the
manufa%ture and sale of ox&'en and a%et&lene 'ases.
Crom <K53 to <K54" it made various sales of its produ%ts to the
)AP*C*R" a Phil 'ov a'en%&" and the B*ICA *C AGARICA" a 7@ 'ov
a'en%&.
The CIR assessed de0%ien%& sales tax and sur%har'e on the sales" #$%
amounted to about P<=!" pursuant to the )IRC.
The %ompan& denied liabilit& for the pa&ment of the tax on the 'round
that both )AP*C*R and the B*A are exempt from taxation.
It ased for a re%onsideration of the assessment and" failin' to se%ure
one" appealed to the CTA.
The CTA ruled that the tax on the sale of arti%les or 'oods in se%tion
<4P of the Code is a tax on the GA)7CACT7RAR and )*T the ;7EAR.
PAC" bein' a manufa%turer" CA))*T %laim exemption from the
pa&ment of sales tax simpl& be%ause its bu&er" )apo%or" is exempt.
2ith respe%t to the sales made to the B*A" CTA held that 'oods
pur%hased b& the Ameri%an Novernment or its a'en%ies from
manufa%turers or produ%ers are exempt from the pa&ment of the sales
tax under the a'reement bet#een the Novernment of the Philippines
and that of the 7nited @tates" provided the pur%hases are supported b&
%erti0%ates of exemption.
I1 2$n PAC should be exempt from sales tax
R1 )*. PAC should pa& P<=! de0%ien%& tax.
@tatutes #hi%h impose a tax on sales" have been des%ribed as 8a%ts
#ith s%hi:ophreni% s&mptoms"9 as the& apparentl& have t#o fa%es Y
one that of a vendor tax" the other" a vendee tax.
F*2ABAR" this is %lari0ed b& the )IRC 2$% provides that the sales tax
8shall be paid b& the GA)7CACT7RAR or produ%er"9 #ho must 8mae a
true and %omplete return of the amount of his" her or its 'ross monthl&
sales" re%eipts or earnin's or 'ross value of output a%tuall& removed
from the fa%tor& or mill #arehouse and #ithin
(ec "SH, 805C provides that a tax A to PT of the gross selling price
shall be levied on articles sold, to be paid by the manufacturer or
producer. (ec "SK further provides that it persons conducting
businesses should pay the percentage tax, because otherwise, the
amount of the tax shall be increased by %OT, the increment to be a
part of the tax.
2hen the e%onomi% burden of the tax 0nall& falls on the pur%haser" the
tax be%omes a part of the pri%e #hi%h the pur%haser must pa&.
It does not matter that an additional amount is billed as tax to the
pur%haser. The method of listin' the pri%e and the tax separatel& and
de0nin' taxable 'ross re%eipts as the amount re%eived less the amount
of the tax added" merel& avoids pa&ment b& the seller of a tax on the
amount of the tax.
The e/e%t is still the same" namel&" that the pur%haser does )*T pa&
the tax. Fe pa&s or ma& pa& the seller more for the 'oods be%ause of
the seller3s obli'ation" but that is all and the amount added be%ause of
the tax is paid to 'et the 'oods and for nothin' else.
;ut the tax burden ma& not even be shifted to the pur%haser at all. A
de%ision to absorb the burden of the tax is lar'el& a matter of
e%onomi%s. Then it %an no lon'er be %ontended that a sales tax is a tax
on the pur%haser.
The tax imposed b& se%tion <4P of the )IRC is a tax on the
manufa%turer or produ%er and )*T a tax on the pur%haser ex%ept
probabl& in a ver& remote and in%onse-uential sense. A%%ordin'l& its
lev& on the sales made to tax.exempt entities lie the )PC is
permissible.
The a'reement bet#een RP and the 7@ %on%ernin' militar& bases
provides tax exemption for 'oods that #ill be used AJCI7@IBAIE in the
%onstru%tion" maintenan%e" operation and defense of bases. TF7@" onl&
@AIA@ to the -uartermaster are exempt from taxation.
Fen%e" the %ir%ular of the ;ureau of Internal Revenue #$% 'ives the tax
exemptions in the A'reement an expansive %onstru%tion it is void. The
sales to the B*A are sub?e%t to the pa&ment of per%enta'e taxes under
se%tion <4P of the Code.
F*2ABAR" the )apo%or en?o&s tax exemption b& virtue of an a%t of
Con'ress" in order to fa%ilitate indebtedness.
CIR v CA an" A!ene "e -anila
Ateneo de Ganila 7niversit&" is a non.sto%" non.pro0t edu%ational
institution" #as %ondu%tin' resear%h throu'h an auxiliar& unit" the
Institute of Philippine Culture.
In <K43" Ateneo re%eived from CIR a demand letter assessin' Ateneo of
the the sum of about P<D0! for alle'ed de0%ien%& %ontra%tor3s tax"
and an assessment in the sum of about P<G! for alle'ed de0%ien%&
in%ome tax for the 0s%al &ear of Gar%h <KD4.
6en&in' said tax liabilities" Ateneo sent CIR a letter.protest %ontestin'
the validit& of the assessments.
CIR rendered a letter.de%ision %an%elin' the assessment for de0%ien%&
in%ome tax but modi0ed the assessment for de0%ien%& %ontra%tor3s tax
b& in%reasin' the amount due to P<K0!.
Ateneo re-uested for a re%onsideration or reinvesti'ation of the
modi0ed assessment. At the same time" it 0led in the CTA a petition for
revie# of the said letter.de%ision.
2hile the petition #as pendin' before the CTA" CIR issued a 0nal
de%ision redu%in' the assessment for de0%ien%& %ontra%tor3s tax from
P<K0! to P>P!" ex%lusive of sur%har'e and interest.
CTA %an%eled the de0%ien%& %ontra%tor3s tax assessment" #$% #as
aLrmed b& the CA.
CIR 0led a petition for revie# before the @C.
I1 2$n Ateneo should pa& the 35 %ontra%tor3s tax under @e% =05 of the
Tax Code
R1 )*.
<) In %ase of doubt" statutes on tax imposition are to be %onstrued
stron'l& a'ainst the N*B and in favor of %iti:ens" be%ause burdens are
)*T to be imposed nor presumed be&ond #hat is expressed.
Ateneo3s IPC )ABAR sold its servi%es for a fee to an&one or #as ever
en'a'ed in a business apart from and independentl& of the a%ademi%
purposes of the universit&.
Cunds re%eived b& Ateneo are te%hni%all& not a fee. The& ma& ho#ever
fall as 'ifts or donations #hi%h are 8tax.exempt9 as sho#n b& Ateneo3s
%omplian%e #$ the )IRC re-uirement providin' for the exemption of
su%h 'ifts to an edu%ational institution.
=) The term _independent %ontra%tors3 in%lude persons #hose a%tivit&
%onsists essentiall& of the sale of all inds of servi%es for a fee.
The term Ugross receiptsR means all amounts received by the prime or
principal contractor as the total contract price, undiminished by
amount paid to the subcontractor, shall be excluded from the taxable
gross receipts of the subcontractor.
Ateneo3s IPC %annot be deemed either as a %ontra%t of sale or a
%ontra%t for a pie%e of #or. ;& the %ontra%t of sale" one of the
%ontra%tin' parties obli'ates himself to transfer the o#nership of and
to deliver a determinate thin'" and the other to pa& therefor a pri%e
%ertain in mone& or its e-uivalent.
In the %ase of a %ontra%t for a pie%e of #or" the %ontra%tor binds
himself to exe%ute a pie%e of #or for the emplo&er" in %onsideration of
a %ertain pri%e or %ompensation.
F*2ABAR" it is %lear in from the eviden%e on re%ord that there #as no
sale either of ob?e%ts or servi%es be%ause there #as no transfer of
o#nership over the resear%h data obtained or the results of resear%h
pro?e%ts undertaen b& the IPC.
TO SU-1 Ateneo is )*T a %ontra%tor sellin' its servi%es for a fee but
an a%ademi% institution %ondu%tin' these resear%hes pursuant to its
%ommitments to edu%ation and" ultimatel&" to publi% servi%e. Adu%ation
is and )*T pro0t is the motive for undertain' the resear%h pro?e%ts.
Cal!e% v C##issin n Au"i! M!$is "esn:! cver all !$e issues, pls
rea" !$e "i'es! 'en #a"e+!$e ri'inal i) &u =anna be super sureJ
The *il Pri%e @tabili:ation Cund (*P@C) #as %reated b& P6<K54"
amended b& A* <3D" for the purpose of minimi:in' fre-uent pri%e
%han'es brou'ht about b& ex%han'e rate ad?ustments and$or %han'es
in #orld maret pri%es of %rude oil and imported petroleum produ%ts. It
#as to be sour%ed from tax %olle%tions.
C*A sent a letter to Caltex" dire%tin' it to remit its %olle%tion to the
*P@C" ex%ludin' that unremitted for <K4P and <K44 of the additional
tax on petroleum produ%ts authori:ed under @e%tion 4 of P6 <K5P, and
that pendin' su%h remittan%e" all its %laims for reimbursement from the
*P@C shall be held in abe&an%e.
Caltex re-uested C*A for an earl& release of its reimbursement
%erti0%ates from the *P@C. It invoed in support of su%h C*A Cir%ular
)o. 4K.=KK on the liftin' of pre.audit of 'overnment transa%tions of
national 'overnment a'en%ies and N*CCs.
Fo#ever" C*A denied this" and repeated its earlier dire%tive to Caltex
to for#ard pa&ment of its unremitted %olle%tions to the *P@C.
Caltex ten submitted a proposal to C*A for the pa&ment and the
re%over& of %laims.
C*A approved the proposal but prohibited Caltex from further o/setin'
remittan%es and reimbursements for the %urrent and ensuin' &ears.
Caltex moved for re%onsideration.
I1<) 2$n Caltex %an %laim for reimbursement of under re%over& arisin'
from sales to )AP*C*R .EA@
<) 2$n Caltex %ould be reimbursed on its sales to ATIA@ and
GARC*PPAR.)*
=) 2$n the amounts due from Caltex to the *P@C ma& be o/setted
a'ainst Caltex3 outstandin' %laims from said funds.)*
R1 )*.
<) The C*A admits in their Comment that under re%over& arisin' from
sales to )PC are reimbursable be%ause )PC #as 'ranted full exemption
from the pa&ment of taxes, to prove this" C*A tra%es the la#s
providin' for su%h exemption.
The last la# %ited is the Cis%al In%entives Re'ulator& ;oardVs Resolution
)o. <D.4D of => Oune <K4D #hi%h provides" in part" Sthat the tax and
dut& exemption privile'es of the )ational Po#er Corporation" in%ludin'
those pertainin' to its domesti% pur%hases of petroleum and petroleum
produ%ts . . . are restored e/e%tive Gar%h <0" <K4D.S
In a Gemorandum issued on 5 *%tober <K4D b& the *L%e of the
President" )PCVs tax exemption #as %on0rmed and approved. Fen%e"
Caltex %an re%over its %laim arisin' from sales of petroleum produ%ts to
the )ational Po#er Corporation.
=) 2ith respe%t to its %laim for reimbursement on sales to ATIA@ and
GARC*PPAR" Caltex relies on Ietter of Instru%tion (I*I) <><P #$%
ordered the suspension of pa&ments of all taxes" duties" fees and other
%har'es" #hether dire%t or indire%t" due and pa&able b& the %opper
minin' %ompanies in distress to the national 'overnment.
Pursuant to this I*I" Ginister of Aner'& Belas%o issued a Gemorandum
Cir%ular #$% advised oil %ompanies that ATIA@ and GARC*PPAR minin'
%orps are amon' those de%lared to be in distress.
C*A denied su%h %laim based on the fa%t that Caltex has no authorit&
to %laim reimbursement for the un%olle%ted impost be%ause I*I.<><P
#as issued #hen the *P@C #as not &et existin' and %ould not have
%ontemplated *P@C imposts at the time of its formulation. The I*I #as
also never published in the *L%ial Na:ette so it has no for%e and
e/e%t.
The @C said that even 'rantin' arguendo that the I*I has for%e and
e/e%t" Caltex3s %laim must still fail. Tax exemptions as a 'eneral rule
are %onstrued stri%tl& a'ainst the 'rantee and liberall& in favor of the
taxin' authorit&. The burden of proof rests upon the part& %laimin'
exemption to prove that it is in fa%t %overed b& the exemption so
%laimed. The part& %laimin' exemption must therefore be expressl&
mentioned in the exemptin' la# or at least be #ithin its purvie# b&
%lear le'islative intent.
In this %ase" CAITAJ failed to prove that it is entitled" as a
%onse-uen%e of its sales to ATIA@ and GARC*PPAR" to %laim
reimbursement from the *P@C under I*I <><P.
Thou'h I*I <><P ma& suspend the pa&ment of taxes b& %opper minin'
%ompanies" it does not 'ive petitioner the same privile'e #ith respe%t
to the pa&ment of *P@C
3) Taxation is no lon'er envisioned as a measure merel& to raise
revenue to support the existen%e of 'overnment, taxes ma& be levied
#ith a re'ulator& purpose to provide means for the rehabilitation and
stabili:ation of a threatened industr& #hi%h is a/e%ted #ith publi%
interest as to be #ithin the poli%e po#er of the state.
P6 <K5P" as amended b& A* <3D" expli%itl& provides that the sour%e of
*P@C is taxation. A taxpa&er ma& not o/set taxes due from the %laims
that he ma& have a'ainst the 'overnment.
Taxes %annot be the sub?e%t of %ompensation be%ause the 'overnment
and taxpa&er are not mutuall& %reditors and debtors of ea%h other and
a %laim for taxes is not su%h a debt" demand" %ontra%t or ?ud'ment as
is allo#ed to be set.o/.
/u*n S!eve"rin' v CTA
Iu:on @tevedorin' Corp." in <KP< and <KP=" imported various en'ine
parts and other e-uipment for the repair and maintenan%e of its
tu'boats for #hi%h it paid the assessed %ompensatin' tax under
protest.
7nable to se%ure a tax refund from the CIR" it 0led a Petition for Revie#
#ith the CTA" pra&in' to be 'ranted a refund of about P33!.
The CTA ho#ever denied the %laims for refund due to la% of suL%ient
le'al ?usti0%ation.
I@ 0led a Gotion for Re%onsideration" but the same #as denied.
I@ %ontends that Stu'boatsS are embra%ed and in%luded in the term
S%ar'o vesselS under the tax exemption provisions of @e%tion <K0 of
the Revenue Code" as amended b& RA 3<DP.
I@ ar'ues that in le'al %ontemplation" the tu'boat and a bar'e loaded
#ith %ar'oes #ith the tu'boat to#in' the %ar'oe vessel for loadin' and
unloadin' %onstitute a @I)NIA BA@@AI. Thus" the en'ines" spare parts
and e-uipment imported b& it and used in the repair and maintenan%e
of its tu'boats are exempt from %ompensatin' tax.
*n the other hand" CTA %ontended that Stu'boatsS are not SCar'o
vesselS be%ause the& are neither desi'ned nor used for %arr&in' and$or
transportin' persons or 'oods b& themselves but are mainl& emplo&ed
for to#in' and pullin' purposes. Thus" the& do not fall #$in the purvie#
of the Tax Code amended b& RA 3<DP.
I1 2$n the tax exemption a%%orded to %ar'o vessels also appli%able to
the tu'boats
)*.
<) The 'eneral rule is that an& %laim for exemption from the tax statute
should be stri%tl& %onstrued a'ainst the taxpa&er.
In order that the importations in -uestion ma& be de%lared exempt
from the %ompensatin' tax" it is indispensable that the re-uirements of
the amendator& la# be %omplied #ith" namel&1
o <) the en'ines and spare parts must be used b& the importer
himself as a passen'er and$or %ar'o vessel
o =) the said passen'er and$or %ar'o vessel must be used in
%oast#ise or o%ean'oin' navi'ation
A%%d' to 2ebster" 8a tu'boat is a stron'l& built" po#erful steam or
po#er vessel" used for to#in' and" no#" also used for attendan%e on
vessel.9 Nrolier An%&%lopedia further provides that 8a tu'boat is a
diesel or steam po#er vessel desi'ned primaril& for movin' lar'e ships
to and3 from piers for to#in' bar'es and li'hters in harbors" rivers and
%anals.9 It is" a%%ordin' to ;ouvier3s" 8a vessel built for T*2I)N.9
Clearl&" the %orporation3s tu'boats do )*T fall under the %ate'ories of
passen'er and$or %ar'o vessels.
It is a %ardinal prin%iple of statutor& %onstru%tion that #hen the la# is
%lear" no interpretation is needed.
=) Re'ardless of %onstru%tion and interpretation" it is also a fundmental
rule that statutes are to be %onstrued in the li'ht of purposes to be
a%hieved and the evils sou'ht to be remedied.
In this %ase" the le'islature in amendin' @e%tion <K0 of the Tax Code b&
RA 3<DP intended to provide in%entives and indu%ements to bls!er
!$e s$ippin' in"us!r& and )*T the business of stevedorin'" as
manifested in the sponsorship spee%h of @enator Nil Pu&at.
*n anal&sis of the %orporation3s transa%tions" CTA found no eviden%e
that tu'boats are passen'er and$or %ar'o vessels used in the shippin'
industr& as an independent business.
*n the %ontrar&" the %orporation3s o#n eviden%e supports the vie# that
it is en'a'ed as a stevedore" i.e. the #or of unloadin' and loadin' of a
vessel in port, and to#in' of bar'es %ontainin' %ar'oes is a part of its
undertain' as a stevedore.
Its trade name is indi%ative that its sole and prin%ipal business is
stevedorin' and li'htera'e" taxed under @e%tion <K< of the )ational
Internal Revenue Code as a %ontra%tor" and not an entit& #hi%h
transports passen'ers or frei'ht for hire #hi%h is taxed under @e%tion
<K= of the same Code as a %ommon %arrier b& #ater.

Na!inal Develp#en! C#pan& v CIR
The )6C entered into %ontra%ts in To&o #ith several Oapanese
shipbuildin' %ompanies for the %onstru%tion of <= o%ean.'oin' vessels.
The pur%hase pri%e #as to %ome from the pro%eeds of bonds issued b&
the Central ;an.
Initial pa&ments #ere made in %ash and throu'h irrevo%able letters of
%redit. <> promissor& notes #ere si'ned for the balan%e b& the )6C
and" as re-uired b& the shipbuilders" 'uaranteed b& the Republi% of the
Philippines.
The remainin' pa&ments and the interests thereon #ere remitted in
due time b& the )6C to To&o.
The vessels #ere eventuall& %ompleted and delivered to the )6C in
To&o.
)6C remitted to the shipbuilders in To&o the total amount of about
7@\>G! as interest on the balan%e of the pur%hase pri%e. )o tax #as
#ithheld.
The Commissioner then held the )6C liable on su%h tax in the total
sum of P5!. )e'otiations follo#ed but failed.
The ;IR thereupon served on the )6C a #arrant of distraint and lev& to
enfor%e %olle%tion of the %laimed amount.
The )6C #ent to the CTA" #$% ruled in favor of the ;IR" ex%ept for a
sli'ht redu%tion of the tax de0%ien%& in the sum of PK00" representin'
the %ompromise penalt&.
I1 2$n )6C should be held liable for for #ithholdin' taxes on the
interest remitted to the Oapanese %orporation
R1 EA@.
The interest remitted to the Oapanese shipbuilders in Oapan on the
7)PAI6 ;AIA)CA of the pur%hase pri%e of the vessels a%-uired b& )6C
is interest derived from sour%es #ithin the Philippines and therefore
sub?e%t to in%ome tax under the )IRC.
The la#" ho#ever" does not spea of a%tivit& but of the @*7RCA. The
Novernment3s ri'ht to lev& and %olle%t in%ome tax on interest re%eived
b& forei'n %orporations not en'a'ed in trade or business #ithin the
Philippines is )*T based on the %ondition that the ACTIBITE be in the
Philippines.
Instead" it is the RA@I6A)CA of the obli'or #ho pa&s the interest that is
material in determinin' the sour%e of interest. It is not the ph&si%al
lo%ation of the se%urities" bonds or notes or the pla%e of pa&ment.
The la# spe%i0es1 8interest derived from @*7RCA@ #ithin the
Philippines and interests on bonds" notes or other interest bearin'
obli'ations of residents" %orporate or other#ise.9
In this %ase" )6C is a Philippine %orporation en'a'ed in the business in
the Philippines" it is a domesti% %orporation and resident of the
Philippines. Thus" it is sub?e%t to tax.
=) )6C also has no basis for sa&in' that the interest pa&ments #ere
obli'ations of the Republi% of the Philippines and that the 'overnment
notes #ere exempt from taxation.
The la# invoed (RA <>0D) did )*T state an& exemption on said
interest on se%urities.
)6C has not established an& tax exemption on the said transa%tion.
The 'overnment #as )*T the one #ho issued the notes but merel&
'uaranteed the said issuan%es.
Tax exemptions %annot be merel& implied but must be %ate'ori%all&
and unmistaabl& expressed. An& doubt %on%ernin' this -uestion must
be resolved in favor of the taxin' po#er.
<J In su''estin' that the )6C is merel& an administrator of the funds
of the Republi% of the Philippines" the )6C %loses its e&es to the nature
of the entit& as a %orporation. As su%h" it is 'overned in its proprietar&
a%tivities not onl& b& its %harter but also b& the Corporation Code and
other pertinent la#s.
>) Iastl&" it must be noted that )6C is )*T the one bein' taxed. The
tax #as due on the interests earned b& the Oapanese shipbuilders. It
#as the in%ome of these %ompanies and )*T the Republi% of the
Philippines that #as sub?e%t to the tax the )6C did not #ithhold.
In e/e%t" therefore" the imposition of the de0%ien%& taxes on the )6C is
a penalt& for its failure to #ithhold the same from the Oapanese
shipbuilders" as imposed b& the Tax Code.
IA@TIE" the %ourt has stated that in %ase of the doubt" the one
#ithholdin' %an ?ust the pa& tax and as for refund later #hen an error
in the pa&ment exists.
-anila Elec!ric C#pan& v 2era
Geral%o #as the holder of a fran%hise to %onstru%t" maintain" and
operate an ele%tri% li'ht" heat" and po#er s&stem in the Cit& of Ganila
and its suburbs.
In <KP= and <KP3" Geral%o imported and re%eived from abroad %opper
#ires" transformers" and insulators for use in the operation of its
business.
The Colle%tor of Customs" as deput& of the Commissioner of Internal
Revenue" levied and %olle%ted a %ompensatin' tax.
Geral%o %laimed for refund for the said &ears" but su%h %laims #ere
either not a%ted upon or denied b& the Commissioner.
I1 2$n Geral%o is exempt from pa&ment of a %ompensatin' tax on
poles" #ires" transformers and insulators imported b& it for use in the
operation of its ele%tri% li'ht" heat" and po#er s&stem
R1 )*. Geral%o is not exempt from pa&in' the %ompensatin' tax
provided for in @e%tion <K0 of the Tax Code.
The purpose of @e%tion <K0 of the Tax Code is to 8pla%e %asual
importers" #ho are not mer%hants on e-ual footin' #ith established
mer%hants #ho pa& sales tax on arti%les imported b& them.9
GARAIC*3s %laim for exemption from pa&ment of the %ompensatin' tax
is not %lear or expressed" %ontrar& to the rule that 8exemptions from
taxation are hi'hl& disfavored in la#" and he #ho %laims exemption
must be able to ?ustif& his %laim b& the %learest 'rant of or'ani% or
statute la#.9
Tax exemption are stri%tl& %onstrued a'ainst the taxpa&er" the& bein'
hi'hl& disfavored and ma& almost be said to be 8odious to the la#.9
2hen exemption is %laimed" it must be sho#n indubitabl& to exist" for
ever& presumption is a'ainst it" and a #ell.founded doubt is fatal to the
%laim.
-ace"a v -acarai'
@in%e Ga& =D" <KDP (#hen P6 K34 #as issued) until Oune <<" <K4>
#hen P6 <K3< #as promul'ated (abolishin' the tax exemptions of all
N*CCs)" oil 0rms never paid ex%ise or spe%i0% and ad valorem taxes for
petroleum produ%ts sold and delivered to the )PC. This non.pa&ment of
taxes spanned for 4 &ears.
The oil %ompanies started to pa& spe%i0% and ad valorem taxes on their
sales of oil produ%ts to )PC onl& after the promul'ation of P6 <K3< #$%
#ithdre# all exemptions 'ranted in favor of N*CCs and empo#erin'
the Cis%al In%entives Revie# ;oard (CIR;) to re%ommend to the
President or to the Ginister of Cinan%e the restoration of the
exemptions #hi%h #ere #ithdra#n.
CIR; issued Resolution <0.45 #$% restored the tax exemption privile'es
of )PC e/e%tive retroa%tivel& to Oune <<" <K4> up to Oune 30" <K45.
Thus" the )PC applied #ith the ;IR for a refund of @pe%i0% Taxes paid
on petroleum produ%ts in the total amount of about P54!.
Ga%eda" @enate member" introdu%ed Resolution == #$% #as aimed at
%ondu%tin' an in-uir& in aid of le'islation in line #$ the reported tax
manipulations and evasions b& oil %ompanies (parti%ularl& Caltex" @hell
and Petrophil) b& availin' of their non.existin' exemption of )PC from
indire%t taxes" #$% resulted in obtainin' a tax refund totalin' P <.55
;illion from the 6epartment of Cinan%e
The ;lue Ribbon Committee %ondu%ted a len'th& formal in-uir& on the
matter and re%ommended that the tax refund to )PC be %an%elled" and
also to %an%el the approval of deed of Assi'nment b& )PC to Caltex"
and %olle%t from Caltex its tax liabilities #hi%h #ere erroneousl& treated
as paid or settled #ith the use of the tax %redit %erti0%ate that )PC
assi'ned to said 0rm.
Ga%eda %ontended that the exemption of )PC from I)6IRACT
TAJATI*) #as revoed and repealed b& the latest amendment to the
)PC %harter b& P6 K34" b& the deletion of the phrases 8dire%tl& or
indire%tl&9 and 8on all petroleum produ%ts used b& the Corporation in
the 'eneration" transmission" utili:ation and sale of ele%tri% po#er9
The exemption of )PC provided in @e%tion of P6 K34 re'ardin' the
pa&ments of 8all forms of taxes" et%9 %annot be interpreted to in%lude
indire%t tax ex%eption sin%e tax statutes must be stri%tl& %onstrued
a'ainst the one %laimin' the exemption must be stri%tl& %onstrued
a'ainst the one %laimin' the exemption
I1 2$n )PC is liable for indire%t tax
R1 )*" )PC is )*T liable for indire%t tax
Indire%t taxes are taxes primaril& paid b& persons #ho %an shift the
burden upon someone else. Cor example" the ex%ise and ad valorem
taxes that oil %ompanies pa& to the ;IR upon removal of petroleum
produ%ts from its re0ner& %an be shifted to its bu&er" lie the )PC" b&
addin' them to the 8%ash9 and$or 8sellin' pri%e9.
In interpretin' a statute" le'islative intent must be as%ertained .. the
reason for its ena%tment should be ept in mind and the statute should
be %onstrued #ith referen%e to its intended purpose ! the evil sou'ht
to be remedied.
In this %ase" )PC is a non.pro0t publi% %orporation %reated for the
'eneral 'ood and #elfare (development of h&droele%tri% 'eneration of
po#er and produ%tion of ele%tri%it& from other sour%es) #holl& o#ned
b& the 'overnment. Crom the ver& be'innin' of its %orporate existen%e"
the )PC en?o&ed preferential tax treatment to enable the Corporation
to pa& the indebtedness and obli'ation and in furtheran%e and
e/e%tive implementation of the poli%& enun%iated in @e% < of RA P3K5.
Crom the %han'es made in the )PC %harter" the intention to stren'then
its preferential tax treatment is obvious.
In the earlier la#" RA 354 the exemptions #as #orded in 'eneral terms"
as to %over 8all taxes" duties" fees" imposts" %har'es" et%9 Fo#ever" the
amendment under RA P3K5 enumerated the details %overed b& the
exemption. @ubse-uentl&" P6 340" made even more spe%i0% the details
of the exemption of )PC to %over" amon' others" both dire%t and
indire%t on all petroleum produ%ts used in its operation. P6 K34
amended the tax exemption b& simplif&in' the same la# in 'eneral
terms. It su%%in%tl& exempts )PC from 8all forms of taxes" duties" fees"
imposts9 as #ell as %osts and servi%e fees in%ludin' 0lin' fees" appeal
bonds" supersede as bonds" in an& %ourt or administrative
pro%eedin's.9
The use of the phrase Sall formsS of taxes demonstrate the intention of
the la# to 'ive )PC all the tax exemptions.
Provisions 'rantin' exemptions to 'overnment a'en%ies ma& be
%onstrued liberall&" in favor of non.tax liabilit& of su%h a'en%ies. Thus"
the rule that tax exemptions should be stri%tl& %onstrued is )*T
appli%able to )PC. The practical eMect of an exemption is merely to
reduce the amount of money that has to be handled by government in
the course of its operations.
In the %ase of propert& o#ned b& the state or a %it& or other publi%
%orporations" the express exemption should not be %onstrued #ith the
same de'ree of stri%tness that applies to exemptions %ontrar& to the
poli%& of the state" sin%e as to su%h propert& Sexemption is the rule and
taxation the ex%eption.S
-ace"a v -acarai' -R
7nfa:ed b& the 6e%ision that the @C de%ision" Ga%eda 0led a motion for
re%onsideration.
In the pro%ess" a hearin' #as held on Oul& K" <KK= #here all parties
presented their respe%tive ar'uments.
Fo#ever" the GR #as denied.
<) 6$a! 0in" ) !a% e%e#p!in privile'es "es NPC $aveQ
Ga%eda %ontended that P6 K34 repealed the indire%t tax exemption of
)PC as the phrase Sall forms of taxes et%."S in its se%tion <0" amendin'
@e%tion <3" R.A. )o. P3K5" as amended b& P.6. )o. 340" does not
expressl& in%lude Sindire%t taxes.S
The @C does not a'ree #ith this as a %hronolo'i%al revie# of the )PC
la#s #ill sho# that it has been the la#maerVs intention that the )PC
#as to be %ompletel& tax exempt from all forms of taxes Y dire%t and
indire%t.
)PCVs tax exemptions at 0rst applied to the bonds it #as authori:ed to
]oat to 0nan%e its operations upon its %reation b& virtue of C.A. )o.
<=0.
2hen the )PC #as authori:ed to %ontra%t #ith the I;R6 for forei'n
0nan%in'" an& loans obtained #ere to be %ompletel& tax exempt.
After the )PC #as authori:ed to borro# from other sour%es of funds Y
aside issuan%e of bonds Y it #as a'ain spe%i0%all& exempted from all
t&pes of taxes Sto fa%ilitate pa&ment of its indebtedness.S
Aven #hen the %eilin's for domesti% and forei'n borro#in's #ere
periodi%all& in%reased" the tax exemption privile'es of the )PC #ere
maintained.
)PCVs tax exemption from real estate taxes #as" ho#ever" spe%i0%all&
#ithdra#n b& RA K4D but #as restored b& RA P3KP. Goreover" P6 K34"
#hi%h raised its %apital sto% and 7@6 borro#in' rate" expressl& states
that the )PC must not onl& be able to pa& its indebtedness but also to
be exempt from AII forms of taxes if its 'oal is to be a%hieved.
=) Fr =$a! peri"s in !i#e =ere !$ese privile'es bein'
en(&e"Q
In the %ase of the tax exemption restoration of )PC" there is no other
%omparable entit& Y not even a sin'le publi% or private %orporation Y
#hose ri'hts #ould be violated if )PCVs tax exemption privile'es #ere
to be restored.
2hile there mi'ht have been a GARAIC* before Gartial Ia#" it is of
publi% no#led'e that the GARAIC* 'eneratin' plants #ere sold to the
)PC in line #ith the @tate poli%& that )PC #as to be the @tate
implementin' arm for the ele%tri0%ation of the entire %ountr&.
;esides" GARAIC* #as limited to Ganila and its environs. And as of
<K4>" there #as no more GARAIC* Y as a produ%er of ele%tri%it& Y
#hi%h %ould have ob?e%ted to the restoration of )PCVs tax exemption
privile'es.
It should be noted that )PC #as not asin' to be 'ranted tax
exemption privile'es for the 0rst time. It #as ?ust asin' that its tax
exemption privile'es be restored. Thus" )PC had its tax exemption
privile'es restored from <K4> to the present.
3) I) !$ere are !a%es ! be pai", =$ s$all pa& )r !$ese !a%esQ
The oil %ompanies #hi%h suppl& buner fuel oil to )PC have to pa& the
taxes imposed upon said buner fuel oil sold to )PC.
;& the ver& nature of indire%t taxation" the e%onomi% burden of su%h
taxation is expe%ted to be passed on throu'h the %hannels of
%ommer%e to the user or %onsumer of the 'oods sold.
F*2ABAR" be%ause )PC has been exempted from both dire%t and
indire%t taxation" the )PC must beheld exempted from absorbin' the
e%onomi% burden of indire%t taxation.
This means" on the one hand" that the oil %ompanies #hi%h #ish to sell
to )PC absorb all or part of the e%onomi% burden of the taxes
previousl& paid to ;IR" #hi%h %ould the& shift to )PC if )PC did not
en?o& exemption from indire%t taxes. This means also" on the other
hand" that the )PC ma& refuse to pa& the part of the SnormalS
pur%hase pri%e of buner fuel oil #hi%h represents all or part of the
taxes previousl& paid b& the oil %ompanies to ;IR.
If )PC nonetheless pur%hases su%h oil from the oil %ompanies Y
be%ause to do so ma& be more %onvenient and ultimatel& less %ostl&
for )PC than )PC itself importin' and haulin' and storin' the oil from
overseas Y )PC is entitled to be reimbursed b& the ;IR for that part of
the bu&in' pri%e of )PC #hi%h veri0abl& represents the tax alread&
paid b& the oil %ompan&.vendor to the ;IR.
A. Chronological review of the relevant NC laws with respect to tax
exe!ption provisions
". 8ovember K, "GKH$ C+ "%C was enacted creating the 8ational ;ower
Corporation L8;C# to develop hydraulic power from all sources in the ;hilippines
with a sum of ;%OC,CCC appropriated from the ;hilippine Treasury, whose main
source of funds shall be exempt from taxation.
%. 1une N, "GNG$ 5+ KOP was enacted authori*ing the ;resident to guarantee
absolutely and unconditionally as primary obligor the payment of all 8;C loans,
wherein such loans shall be exempt from taxes.
K. 9n the same date, it was authori*ed for the frst time to incur other types of
indebtedness which shall also be exempt from taxation.
N. 1anuary %%, "GPN$ ;4 KSC was issued to give extra powers to 8;C, wherein its
capital stock was raised to ;% billion, and was authori*ed to borrow a total of
?(4 " billion.
O. :ay %P, "GPH$ ;4 GKS was issued, raising its ceiling of indebtedness to ;"%
billion and its ?(4 borrowing rate at ?(4 N billion.
(everal tax laws were enacted that challenged the tax exemptions imposed on
8;C. irst, in "GPH, ;4 SS% was passed withdrawing the tax exemption of 8;C
with regard to imports in order to reduce foreign exchange spending and to
protect domestic industries. (econd, ;4 ""PP was issued as it was the declared
policy of the (tate to formulate and implement a 8ational Budget that is an
instrument of national development and that due to this, all units of
government, including >9CCs, shall pay income taxes, customs duties and other
taxes and fees imposed under revenue laws, provided that organi*ations
otherwise exempted by law from the payment of such taxes=duties may ask
from a (?B(04< from the >eneral und. Third, ;4 "GK" was passed in "GSN, due
to the economic morass after the +Fuino +ssociation. The 4ecree expressly
repeals the grant of tax privileges to any >9CCs and all other units of the
government. )astly, in "GSH, 69 GK L(RSH# was issued with a view to correct
presidential restoration or grant of tax exemption to other government and
private entities without beneft of a review by the iscal 0ncentives 5eview
Board.
CIR v G!a#c N Sns, Inc.
The 2orld Fealth *r'ani:ation (2F*) is an international or'ani:ation
#hi%h has a re'ional oL%e in Ganila.
As an international or'ani:ation" it en?o&s privile'es and immunities
#hi%h are de0ned more spe%i0%all& in the Hs! A'ree#en! entered
into bet#een the Philippines and the said *r'ani:ation.
Sec!in 88 of the A'reement provides that the *r'ani:ation" its
assets" in%ome and other properties shall be1 e%e#p! )r# all "irec!
an" in"irec! !a%es. 0t is understood, however, that the 9rgani*ation
will not claim exemption from taxes which are, in fact, no more than
charges for public utility services.
2hen the 2F* de%ided to %onstru%t a buildin' to house its o#n oL%es"
as #ell as other 7) oL%es in Ganila" it entered into a further
a'reement #ith the Novernment of the Philippines #hi%h stated that
the *r'ani:ation ma& import into the %ountr& materials and 0xtures
re-uired for the %onstru%tion )ree )r# all "u!ies an" !a%es and
a'rees not to utili:e an& portion of the international reserves of the
Novernment.
In invitin' bids for the %onstru%tion of the buildin'" the 2F* informed
the bidders that the buildin' to be %onstru%ted belon'ed to an
international or'ani:ation #ith diplomati% status and thus exempt from
the pa&ment of AII fees" li%enses" and taxes.
Thus" their bids Smust tae this into a%%ount and should not in%lude
items for su%h taxes" li%enses and other pa&ments to Novernment
a'en%ies.
The %onstru%tion %ontra%t #as a#arded to >$n G!a#c N Sns,
Inc. on Cebruar& <0" <K54 for a pri%e upon %ompletion of P>5=!
The CIR imposed a %ontra%tor3s tax and stated that Sas the 35
%ontra%torVs tax is not a dire%t nor an indire%t tax on the 2F*" but a
tax that is primaril& due from the C*)TRACT*R" the same is not
%overed b& the Fost A'reement.
The CIR sent a letter of demand to Notam%o demandin' pa&ment of
about P<P! representin' the 35 %ontra%torVs tax plus sur%har'es on
the 'ross re%eipts it re%eived from the 2F*.
Notam%o appealed the CIRVs de%ision to the CTA" #hi%h rendered a
de%ision in favor of Notam%o and reversed the CIR3s de%ision.
I1 2$n Notam%o should pa& 35 %ontra%torVs tax under @e%tion <K< of
the )IrC from the %onstru%tion of the 2F* buildin' in Ganila
R1 )*.
<) CIR3s %ontention that the %ontra%tor3s tax is an ex%ise tax imposed
upon the %onta%tor (privile'e of doin' business) #ith no bearin' on the
2F* (thus" )*T an indire%t tax on 2F*)" %annot hold #ater.
6ire%t taxes are those that are demanded from the ver& person #ho
should pa& them #hile indire%t taxes are those that are demanded in
from one person in the expe%tation that he %an shift the burden to
someone else.
The %ontra%torVs tax is %ourse pa&able b& the %ontra%tor but in the last
anal&sis it is the *2)AR of the buildin' that shoulders the burden of
the tax be%ause the same is shifted b& the %ontra%tor to the o#ner as a
matter of self.preservation.
Thus" it is an indire%t tax on 2F* be%ause" althou'h it is pa&able b&
the petitioner" the latter %an shift its burden on the 2F*.
=) CIR %laims that in Philippine A%et&lene Co. vs. CIR" the 35
%ontra%torVs tax fans dire%tl& on Notam%o and %annot be shifted to the
2F*.
F*2ABAR" the said %ase is not %ontrollin'" sin%e the Fost A'reement
spe%i0%all& exempts the 2F* from Sindire%t taxes.S
The ;hilippine +cetylene %ase involved a tax on @AIA@ of 'oods #hi%h
under the la# had to be paid b& the manufa%turer or produ%er, the fa%t
that the manufa%turer or produ%er mi'ht have added the amount of
the tax to the pri%e of the 'oods did not mae the sales tax Sa tax on
the pur%haser.S
KCIR v CA an" E-CA
EGCA is a non.sto%" non.pro0t institution" #hi%h %ondu%ts various
pro'rams and a%tivities that are bene0%ial to the publi%" espe%iall& the
&oun' people" pursuant to its reli'ious" edu%ational and %haritable
ob?e%tives.
In <K40" EGCA" amon' others" an amount of in%ome (about PD00!)
from leasin' out a portion of its premises to small shop o#ners" lie
restaurants and %anteen operators" and from parin' fees %olle%ted
from non.members.
The CIR thus issued an assessment to EGCA totalin' about P><5!
in%ludin' sur%har'e and interest" for de0%ien%& in%ome tax" de0%ien%&
expanded #ithholdin' taxes on rentals and professional fees and
de0%ien%& #ithholdin' tax on #a'es.
EGCA protested the assessment and 0led a letter. In repl&" the CIR
denied the %laims of EGCA.
EGCA thus 0led a petition to the CTA to tae out the taxes and CTA
ruled in favor of EGCA.
CIR 0led a petition #ith the CA to reverse" but CA aLrmed CTAVs
de%ision.
I1 2$n the in%ome derived from rentals of real propert& o#ned b& EGCA
(established as Sa #elfare" edu%ational and %haritable non.pro0t
%orporationS) is sub?e%t to in%ome tax under the )IRC and Constitution
R1 EA@" the in%ome derived b& EGCA from rentals of its real propert& is
sub?e%t to in%ome tax.
Under the NIRC: 2hile @e%tion =D of the )IRC provides that non.
pro0t or'ani:ations and %lubs shall not be taxed on their in%ome" it also
provides that this exemption #ill )*T appl& to in%ome derived from <)
properties" real or personal" and =) an& other a%tivities %ondu%ted for
pro0t shall be sub?e%t to tax (amended b& P6 <>5D).
Appl&in' the do%trine of stri%t interpretation of tax exemptions" the
phrase San& of their a%tivities %ondu%ted for pro0t9 does )*T -ualif&
the #ord 8properties.9 This maes in%ome from the propert& of the
or'ani:ation taxable" re'ardless of ho# that in%ome is used .. #hether
for pro0t or for loft& non.pro0t purposes.
Under the Constitution: Arti%le BI" @e%tion =4 of the Constitution
exempts 8%haritable institutions9 from the pa&ment not onl& of taxes.
F*2ABAR" a%d' to %onsti framers" the exemption does )*T pertain to
in%ome tax but onl& propert& taxes.
Cor the EGCA to be 'ranted the exemption as an 8edu%ational
institution9 under the Consti (Art <> @e% >)" it must prove #ith
substantial eviden%e that1
%. it falls under the %lassi0%ation non.sto%" non.pro0t
edu%ational institution, and
d. the in%ome it sees to be exempted from taxation is used
a%tuall&" dire%tl&" and ex%lusivel& for edu%ational purposes
Fo#ever" no eviden%e #as submitted b& EGCA to
prove that the& met the re-uisites. The term 8edu%ational institution9
or 8institution of learnin'9 has a%-uired a #ell.no#n te%hni%al
meanin'" of #hi%h the members of the Constitutional Commission are
deemed %o'ni:ant.
7nder the Adu%ation A%t of <K4=" su%h term
refers to s%hools" #hi%h is s&non&mous #ith formal edu%ation *R a
s%hool seminar&" %olle'e" or edu%ational establishment. The Court"
upon examinin' the 8Amended Arti%les of In%orporation9 and 8;&.Ia#s9
of the EGCA" but found nothin' in them that even hints that it is a
s%hool or an edu%ational institution.
Aven if EGCA is an edu%ational institution" the
Court also notes that EGCA did not submit proof of the proportionate
amount of the sub?e%t in%ome that #as a%tuall&" dire%tl& and
ex%lusivel& used for edu%ational purposes.
Ni!a)an v CIR
)itafan" et%. #ere dul& appointed and -uali0ed Oud'es in the RTC" )CR.
The& sou'h to prohibit CIR and the Cinan%ial *L%er of the @C" from
main' an& dedu%tion of #ithholdin' taxes from their salaries.
A%%ordin' to them" an& tax #ithheld from their %ompensation as
?udi%ial oL%ers %onstitutes a de%rease or diminution of their salaries"
%ontrar& to the provision of @e%tion <0" Arti%le BIII of the <K4D
Constitution mandatin' that durin' their %ontinuan%e in oL%e" their
salar& shall not be de%reased.
The& also %ited the %ases of Perfe%to vs. Geer and Anden%ia vs. 6avid
#ould appl& #hi%h de%lared the salaries of members of the Oudi%iar&
exempt from pa&ment of the in%ome tax and %onsidered su%h pa&ment
as a diminution of their salaries durin' their %ontinuan%e in oL%e
I1 2$n the #ithholdin' tax on ?udi%ial oL%ers is un%onstitutional
R1 )*" it is %onstitutional.
The intent of the Constitutional Commission #as to delete the
proposed express 'rant of exemption from pa&ment of in%ome tax to
members of the Oudi%iar&" so as to S'ive substan%e to e-ualit& amon'
the three bran%hes of NovernmentS in the #ords of Commissioner
Ri'os.
In the %ourse of the deliberations" it #as further expressl& made %lear"
spe%ialt& #ith re'ard to Commissioner ;ernasV a%%epted amendment to
the amendment of Commissioner Ri'os" that the salaries of members
of the Oudi%iar& #ould be sub?e%t to the 'eneral in%ome tax applied to
all taxpa&ers.
The Court thus dis%arded the rulin' in Perfe%to vs. Geer and Anden%ia
vs. 6avid that de%lared the salaries of members of the Oudi%iar&
exempt from pa&ment of the in%ome tax and %onsidered su%h pa&ment
as a diminution of their salaries durin' their %ontinuan%e in oL%e.
Also" the salaries of Ousti%es and Oud'es are properl& sub?e%t to a
'eneral in%ome tax la# appli%able to all in%ome earners.
The pa&ment of su%h in%ome tax b& Ousti%es and Oud'es does )*T fall
#ithin the %onstitutional prote%tion a'ainst de%rease of their salaries
durin' their %ontinuan%e in oL%e.
Besides, construing (ection "C, +rticles 7000, of the "GSP Constitution,
which, for clarity, is again reproduced hereunder! @The salary of the
Chief 1ustice and of the +ssociate 1ustices of the (upreme Court, and of
.udges of lower courts shall be fxed by law. 4uring their continuance in
o'ce, their salary shall not be decreased@ L0talics supplied#.
0t is plain that the Constitution authori*es Congress to pass a law fxing
another rate of compensation of 1ustices and 1udges but such rate
must be higher than that which they are receiving at the time of
enactment, or if lower, it would be applicable only to those appointed
after its approval. 0t would be a strained construction to read into the
provision an exemption from taxation in the light of the discussion in
the Constitutional Commission.
KPrvince ) Abra v Hernan"
The Roman Catholi% ;ishop of ;an'ued #anted to be exempted from
pa&ment of real estate tax.
Fe 0led an a%tion for de%larator& relief in the CCI of Abra.
The CCI rendered a summar& ?ud'ment 'rantin' the exemption.
The Provin%e of Abra 0led an a%tion for %ertiorari a'ainst the CCI on the
'round that it 'ranted the a%tion for de%larator& relief 0led b& the
Roman Catholi% ;ishop #ithout allo#in' the Provin%e to ans#er and
#ithout hearin'" in violation of its ri'ht to due pro%ess.
It also alle'ed that the ?ud'e (Fernando) failed to abide P6 )o. >P>
#hi%h states that" 8)o %ourt shall entertain an& suit A@@AIII)N the
validit& of tax until the taxpa&er pa&s under protest the tax assessed
a'ainst him.. nor shall an& %ourt de%lare an& portion of the tax
assessed I)BAII6 ex%ept if the taxpa&er shall pa& the ?ust amount of
tax determined b& the %ourt.9
I1 2$n the ?ud'ment of the %ourt 'rantin' the exemption to the Roman
Catholi% ;ishop of ;an'ued is valid
R1 )*" it is invalid
In order to exempt reli'ious institutions from the pa&ment of real
estate taxes" the propert& must be use" e%clusivel&, ac!uall&, an"
"irec!l& )r reli'ius purpses.
T$us, To be exempted from realt& tax" there must be proof of ACT7AI
and 6IRACT use of the propert& for reli'ious or %haritable purposes.
In this %ase" the ri'ht of the Provin%e of Abra to pro%edural due pro%ess
#as violated b& the summar& ?ud'ment 'rantin' the exemption.
Instead of a%%eptin' the bare alle'ation of the bishop that the propert&
#as bein' used ex%lusivel&" dire%tl&" and a%tuall& for publi% purposes"
the ?ud'e should have 0rst re-uired proof of these alle'ations.
K CIR v. -i!subis$i -e!al Crp.7 In!erna!inal C#i!&
Gitsubishi. 7nder the Contra%t" Gitsubishi #ould lend Atlas \=0G for
the installation of a ne# %on%entrator for %opper produ%tion" and in
turn" Atlas #ould sell to Gitsubishi all the %opper %on%entrates
\=0G.
%ondition that Gitsubishi #ould use the amount as loanto Atlas and as
#ithholdin' tax. )*
R7 Gitsubishi #as not a mere a'ent of Aximban. It entered into the
a'reement #ith Atlas in its o#n independent %apa%it&. The transa%tion
bet#een Gitsubishi and Atlas on the one hand" and bet#een Gitsubishi
and Aximban on the other" #ere separate and distin%t.
repa&ment.
dis%ussion.
K<8
s!
In)an!r& Ps! E%c$an'e v. Psa"as7 In!erna!inal
C#i!&
The 3<
st
Infantr& Post Ax%han'e #as an a'en%& under the %ontrol of the
7@ Arm&" operatin' in the Philippines. The Ax%han'e bou'ht 'oods"
su%h as soap and toiletries" and resold them to oL%ers" soldiers" and
%ivilian emplo&ees of the 7@ Arm& and their families.
The pro%eeds derived from the sales #ere then used for the betterment
of the %ondition of the personnel of the Arm&.
In the %ourse of its business" the Ax%han'e pur%hased 'oods from
mer%hants in the Philippines. The Colle%tor of Internal Revenue
%olle%ted from these mer%hants taxes at the rate of <.55 of the 'ross
value sold b& them to the Ax%han'e.
The Ax%han'e 0led an a%tion for prohibition a'ainst the CIR for him to
desist from %olle%tin' the taxes from the mer%hants. The Ax%han'e
%laims that the taxes imposed on the mer%hants #ere drivin' up the
pri%es of 'oods sold to it b& the mer%hants.
The Ax%han'e %laims that the mer%hants should be exempt from taxes
sin%e the revenue la# provides that no spe%i0% tax shall be %olle%ted
on an& 'oods sold and delivered dire%tl& to the 7@ Arm& of )av& for
their a%tual use or issue.
I7 2$) the mer%hants sellin' 'oods to the Ax%han'e are exempt from
sales tax. )*
R7 The tax exemption %overs those 'oods that are sold dire%tl& to the
7@ Arm& or )av& for their a%tual use or issue. In this %ase" the 'oods
are sold to the Ax%han'e for resale to individuals belon'in' to the
Arm& or )av&" and not to the Arm& or )av& itself. Fen%e" the& do not
fall #ithin the exemption.
The rule is that #ithout Con'ressional %onsent" no Cederal a'en%& or
instrumentalit& %an be taxed b& state authorit&. Fo#ever" nl& !$se
a'encies !$ru'$ =$ic$ !$e Fe"eral Gvern#en! i##e"ia!el&
an" "irec!l& e%ercises i!s sverei'n p=ers are i##une )r#
!$e !a%in' p=er ) !$e s!a!es.
The reason upon #hi%h the rule rests must be the 'uidin' prin%iple to
%ontrol its operation. The limitations upon the taxin' po#er of the state
must re%eive a pra%ti%al %onstru%tion #hi%h does not seriousl& impair
the taxin' po#er of the Novernment imposin' the tax.
The e/e%t of the tax upon the fun%tions of the Novernment and the
nature of the 'overnmental a'en%& determine 0nall& the extent of the
exemption.
In this %ase" the tax laid upon Philippine mer%hants #ho sell to the
Ax%han'e does not interfere #ith the suprema%& of the 7@ Novernment
or #ith the operations of its instrumentalit& the 7@ Arm&" to su%h an
extent or in su%h a manner as to render the tax ille'al. The tax does
not deprive the Arm& of the po#er to serve the Novernment or hinder
the eL%ient exer%ise of its po#er.

P/DT v Ci!& ) Dava
PI6T applied for a Ga&or3s Permit to operate its 6avao Getro
Ax%han'e.
Cit& of 6avao did not a%t on the appli%ation" pendin' PI6TVs unpaid
lo%al fran%hise tax of P3G! (for the 0rst to fourth -uarter of <KKK).
PI6T protested the assessment and re-uested a refund of the
fran%hise tax paid b& it for the &ear <KKD and the 0rst to the third
-uarters of <KK4.
;efore" PI6T en?o&ed tax exemption under @e%tion <= of RA D04=
(PI6T shall pa& a fran%hise tax e-uivalent to 35 of all 'ross re%eipts of
its business 8in lieu of all taxes on this fran%hise or earnin's thereof).
Fo#ever" this exemption #as #ithdra#n b& the Io%al Novernment
Code.
PI6T %ontended that it #as still exempt from the pa&ment of fran%hise
tax based on an opinion b& the ;ureau of Io%al Novernment Cinan%e
(;INC . 6epartment of Cinan%e) #$% amended @e%tion =3 of RA DK=5
(Publi% Tele%ommuni%ations Poli%& A%t) in e/e%t restored its exemptions
from lo%al taxes.
It states that an& 8advanta'e" favor" privile'e" exemption" or
immunit&9 'ranted to existin' fran%hises shall ipso facto be%ome part
of previousl& 'ranted tele%ommuni%ations fran%hises.
PI6T %laims that @mart and Nlobe en?o& exemption from the pa&ment
of the fran%hise tax b& virtue of their le'islative fran%hises.
Rel&in' on the ;INC opinion" PI6T then ar'ues that be%ause @mart and
Nlobe are exempt from the fran%hise tax" it follo#s that it must lie#ise
be exempt from the tax bein' %olle%ted b& the Cit& of 6avao be%ause
the 'rant of tax exemption to @mart and Nlobe ipso facto extended the
same exemption to it.
Cit& Treasurer ;ar%elona denied PI6TVs protest and %laim for tax
refund.
The trial %ourt aLrmed the Cit& Treasurer3s de%ision.
I1 2$n PI6T is exempt from pa&in' lo%al fran%hise tax
R1 )*" PI6T is still liable for fran%hise tax.
<) The Io%al Novernment Code #ithdre# all tax exemptions previousl&
en?o&ed b& all persons" natural or ?uridi%al (@e%tion <K3). The INC
further authori:ed lo%al 'overnment units to impose a tax on
businesses en?o&in' a fran%hise" not#ithstandin' the 'rant of tax
exemption to them (@e%tion <3D).
Case la# also rules that tax exemptions are hi'hl& disfavored" and he
#ho %laims an exemption must be able to point to some positive
provision of la# %reatin' the ri'ht. The exemption must be interpreted
in strictissimi .uris a'ainst the taxpa&er and liberall& in favor of the
taxin' authorit&.
The a%%eptan%e of PI6T3s theor& #ould result in absurd
%onse-uen%es. PI6T3s theor& #ould re-uire that" to level the pla&in'
0eld" an& 8advanta'e" favor" privile'e" exemption" or immunit&9
'ranted to Nlobe must be extended to all tele%ommuni%ations
%ompanies" in%ludin' @mart.
This %ould not have been the intent of Con'ress in ena%tin' b=3 of Rep.
A%t DK=5. PI6T3s theor& #ill leave the Novernment #ith the burden of
havin' to eep tra% of all 'ranted tele%ommuni%ations fran%hises" lest
some %ompanies be treated une-uall&.
The fa%t is that the term 8exemption9 in b=3 is too 'eneral. A %ardinal
rule in statutor& %onstru%tion is that le'islative intent must be
as%ertained from a %onsideration of the statute as a #hole and not
merel& of a parti%ular provision. The thrust of R.A. )o. DK=5 is to
promote 'raduall& the dere'ulation of the entr&" pri%in'" and
operations of all publi% tele%ommuni%ations entities and thus promote
a level pla&in' 0eld in the tele%ommuni%ations industr&.
There is nothin' in the lan'ua'e of b=3 or in the pro%eedin's of
Con'ress in ena%tin' this la# #hi%h sho#s that it %ontemplates the
'rant of tax exemptions to all tele%ommuni%ations entities" in%ludin'
those #hose exemptions had been #ithdra#n b& the INC.
=) Also" the ;INC is )*T an administrative a'en%& #hose 0ndin's on
-uestions of fa%t are 'iven #ei'ht and deferen%e in the %ourts. It #as
%reated merel& to provide %onsultative servi%es and te%hni%al
assistan%e to lo%al 'overnments and the 'eneral publi% on lo%al
taxation" real propert& assessment" and other related matters" amon'
others. The -uestion raised b& PI6T is a le'al -uestion" to #it" the
interpretation of b=3 of R.A. )o. DK=5. This is outside ;INCVs
%ompeten%e.
3) Iastl&" PI6T failed to present an& proof that Nlobe and @mart #ere
en?o&in' lo%al fran%hise and business tax exemptions.
KSea4/an" Services Inc. v. CA7 In!erna!inal C#i!&
@ea.Iand" an Ameri%an shippin' %ompan&" entered into a %ontra%t #ith
the 7@ Novernment for the transport of militar& household 'oods and
e/e%ts of 7@ militar& personnel assi'ned to the @ubi% )aval ;ase.
The ;IR %olle%ted <.55 in%ome tax on the in%ome derived b& @ea.Iand"
#hi%h @ea.Iand paid.
Iater" @ea.Iand ased for a refund" %laimin' that it had paid the tax b&
mistae. It invoed the tax exemption provided in the RP.7@ Gilitar&
;ases A'reement" #hi%h exempts from tax an& pro0t derived b& a 7@
national under a %ontra%t #ith the 7@ 'overnment in %onne%tion #ith
the construction, maintenance, operation, and defense of the bases.
@ea.Iand 0led a petition for revie# #ith the CTA to ?udi%iall& pursue its
%laim for refund and to stop the runnin' of the =.&ear pres%riptive
period.
CTA3s [ CA denied refund.
I7 2$) @ea.Iand falls #ithin the %overa'e of the tax exemption. )*
R7 The transport or shipment of household 'oods and e/e%ts of
7@militar& personnel is not in%luded in the term construction,
maintenance, operation, and defense of the bases. )either %an the
a%tivit& be interpreted as dire%tl& related to the defense and se%urit& of
the Philippine territories. It is therefore not %overed b& the exemption.
Taxation is the rule and exemption is the ex%eption.9 The la# 8does not
loo #ith favor on tax exemptions and that he #ho #ould see to be
thus privile'ed must ?ustif& it b& #ords too plain to be mistaen and
too %ate'ori%al to be misinterpreted.9
The avo#ed purpose of tax exemption 8is some publi% bene0t or
interest" #hi%h the la#main' bod& %onsiders suL%ient to o/set the
monetar& loss entailed in the 'rant of the exemption.9 The haulin' or
transport of household 'oods and personal e/e%ts of 7. @. militar&
personnel #ould not dire%tl& %ontribute to the defense and se%urit& of
the Philippines.
K-eralc v. Prvince ) /a'una7 Dele'a!in ! /GUs, I#pair#en!
Clause
Geral%o #as 'ranted b& several muni%ipalities of the Provin%e of
Ia'una a fran%hise to operate.
RA D<P0 or the Io%al Nov Code of <KK< #as then issued #$% allo#ed
lo%al 'overnment units to %reate their o#n sour%es of revenue and to
lev& taxes" fees and %har'es %onsistent #$ the basi% poli%& of
autonom&.
Purusant to this" the provin%e of Ia'una ena%ted an ordinan%e
imposin' on businesses en?o&in' a fran%hise a fran%hise tax of 505 of
<5 of 'ross annual re%eipts.
Geral%o paid under protest and sent a formal %laim for refund to the
Provin%ial Treasurer %laimin' that the fran%hise tax it had paid to the
)ational Novernment (pursuant to P.6. 55<) alread& in%luded the
fran%hise tax imposed b& the Provin%ial Tax *rdinan%e.
Geral%o also %ontended that Ia'una3s imposition of fran%hise tax
%ontravened the provisions of P.6. 55< @e%tion < #hi%h provided that
the fran%hise tax pa&able b& all 'rantees of ele%tri% fran%hises shall be
=5 of their 'ross re%eipts re%eived from the sale of ele%tri% %urrent and
from transa%tions in%ident to the 'eneration" distribution and sale of
ele%tri% %urrent
I1 2$n the provin%e of Ia'una had the po#er to lev& the fran%hise tax
R1 Ees.
7nder the present Constitution" #here there is neither a 'rant nor a
prohibition b& statute" the tax po#er must be deemed to exist althou'h
Con'ress ma& provide statutor& limitations and 'uidelines.
The reason for this is to safe'uard the viabilit& and self.suL%ien%& of
lo%al 'overnment units b& dire%tl& 'rantin' them 'eneral and broad tax
po#ers.
The INC of <KK< expli%itl& authori:es provin%ial 'overnments"
not#ithstandin' an& exemption 'ranted b& la#" to impose a tax on
businesses en?o&in' a fran%hise.
2hile the Court has referred to tax exemptions %ontained in spe%ial
fran%hises as bein' in the nature of %ontra%ts and a part of the
indu%ement for %arr&in' on the fran%hise" these exemptions"
nevertheless" are far from bein' @TRICTIE C*)TRACT7AI.
Fo#ever" %ontra%tual tax exemptions should not be %onfused #$ tax
exemptions under fran%hises.
Contra%tual tax exemptions are those a'reed to b& the taxin' authorit&
in %ontra%ts" su%h as those %ontained in 'overnment bonds" #here the
'overnment a%ts in its private %apa%it& and #aives its 'overnmental
immunit&. Tax exemptions of this ind ma& )*T be revoed #ithout
impairin' the obli'ations of %ontra%ts.
*n the other hand" a fran%hise partaes the nature of a 'rant #hi%h is
be&ond the purvie# of the non.impairment %lause of the Constitution.
Art <= of the Consti provides that no fran%hise for the operation of a
publi% utilit& shall be 'ranted ex%ept under the %ondition that su%h
privile'e shall be sub?e%t to amendment" alteration or repeal b&
Con'ress as and #hen the %ommon 'ood so re-uires.
K Tiu v. CA7 E;ual Pr!ec!in ) !$e /a=s
Con'ress passed RA D==D #hi%h %reated the @ubi% @pe%ial A%onomi%
Xone" 'rantin' tax and dut& in%entives (tax and dut&.free importations
of ra# materials" %apital and e-uipment) to businesses and residents
#ithin the area en%ompassed b& the :one.
The la# provides that no lo%al and national taxes shall be imposed
#ithin the :one. In lieu of taxes" 35 of the 'ross in%ome of enterprises
operatin' #ithin the :one shall be remitted to the )ational
Novernment" <5 to the lo%al 'overnment units" and <5 to a
development fund to be utili:ed for the development of muni%ipalities
outside *lan'apo and @ubi%.
Pres. Ramos later issued an A* spe%if&in' a 8se%ured area9 area #ithin
the :one in #hi%h the privile'es #ere operative.
o EO?@
tax and dut&.free importations #ill onl& appl& to
ra# materials" %apital 'oods and e-uipment brou'ht
in b& business enterprises into the @@AX.
Ax%ept for import tax and duties" all business are
re-uired to pa& the spe%i0ed taxes in @e%tion <=(%)
of RAD==D.
o EO?@4A the tax in%entives are onl& appli%able to business
enterprises and individuals residin' #ithin the se%ured area.
Petitioners outside the 8se%ured area9 %hallen'ed the %onstitutionalit&
of this A* for alle'edl& bein' violative of their ri'ht to e-ual prote%tion
of the la#s.
The& assert that the @@AX en%ompasses (<) the Cit& of *lon'apo" (=)
the Guni%ipalit& of @ubi% in Xambales" and (3) the area formerl&
o%%upied b& the @ubi% )aval ;ase. Fo#ever" A* KD.A" a%%ordin' to
them" narro#ed do#n the area #ithin #hi%h the spe%ial privile'es
'ranted to the entire :one #ould appl& to the present 8fen%ed.in
former @ubi% )aval ;ase9 onl&. It has hereb& ex%luded the residents of
the 0rst t#o %omponents of the :one from en?o&in' the bene0ts
'ranted b& the la#.
I7 2$) the A* %on0nin' the appli%ation of the privile'es under RA D==D
#ithin the se%ured area and ex%ludin' the residents of the :one outside
the se%ured area violates the e-ual prote%tion %lause. )*.
R7 There are real and substantive distin%tions bet#een the
%ir%umstan%es obtainin' inside and outside the @ubi% )aval base"
thereb& ?ustif&in' avalid and reasonable %lassi0%ation.
Cor a valid %lassi0%ation" the follo#in' re-uisites must be present1
<. it must rest on substantial di/eren%es,
=. must be 'ermane to the purpose of the la#,
3. must not be limited to existin' %onditions onl&, and
>. must appl& e-uall& to all members of the same %lass.
In this %ase" the purpose of the la# is to a%%elerate the %onversion of
militar& reservations into produ%tive areas (e%onomi% or industrial
areas) . Thus" the lands %overed under the Gilitar& ;ases A'reement
are its ob?e%t.
To a%hieve purpose" Con'ress deemed it ne%essar& to extend e%onomi%
in%entives to attra%t and en%oura'e investors. It #as thus reasonable
for the President to have delimited the appli%ation of some in%entives
to the %on0nes of the former @ubi% militar& base" sin%e it is this spe%i0%
area #hi%h the 'overnment intends to transform and develop into a
self.sustainin' industrial and e%onomi% :one" parti%ularl& for the use of
bi' forei'n and lo%al investors to use as operational bases for their
businesses and industries. These bi' investors possess the %apital
ne%essar& to spur e%onomi% 'ro#th and 'enerate emplo&ment
opportunities.
There are substantial di/eren%es bet#een the bi' investors #ho are
bein' lured to establish and operate their industries in the so.%alled
8se%ured area9 and the present business operators outside the area.
;i' investors lured into se%ured areas Present bi: operators outside the are
.billion.peso investments [ thousand
of ne# ?obs
.national e%onomi% impa%t
.
.no su%h ma'nitude
.onl& lo%al e%onomi% impa%t
.bi: a%tivities outside se%ured areas
are not liel& to have an& impa%t in
a%hievin' purpose of la# #hi%h is to
turn former militar& base to
produ%tive use for the bene0t of the
Phil e%onom&
There is" then" hardl& an& reasonable basis to extend to them the
bene0ts and in%entives a%%orded in RA D==D
-ac!an Cebu In!erna!inal Airpr! Au!$ri!& v -arcs
Ga%tan Cebu Int3l Airport #as %reated b& virtue of RA PK54" mandated
to 8prin%ipall& undertae the e%onomi%al" eL%ient and e/e%tive
%ontrol" mana'ement" and supervision of the Ga%tan International
Airport in the Provin%e of Cebu and the Iahu' Airport in Cebu Cit&.9
7nder @e%tion < of the said RA" GCIA #as 'iven exemption from realt&
taxes imposed b& the )ational Novernment on an& of its politi%al
subdivisions" a'en%ies" and instrumentalities.
Fo#ever" the *L%e of the Treasurer of Cebu Cit& demanded pa&ment
for realt& taxes on par%els of land belon'in' to the GCIA.
GCIA ob?e%ted invoin' its tax exemption. It also asserted that it is an
instrumentalit& of the 'overnment performin' 'overnmental fun%tions"
%itin' se%tion <33 of the Io%al Novernment Code #hi%h puts limitations
on the taxin' po#ers of Io%al Novernment 7nits.
The %it& refused insistin' that GCIA is a N*CC performin' prprie!ar&
fun%tions #hose tax exemption #as #ithdra#n b& @e%tions <K3 and
=3> of the Io%al Novernment Code.
GCIA 0led a de%larator& relief before the RTC.
RTC dismissed the petition" rulin' that the INC 2ITF6RA2 the tax
exemption 'ranted to the N*CCs.
I1 2$n the Cit& of Cebu has the po#er to impose taxes on the GCIA
R1 EA@.
The INC expressl& repealed the exemption RA PK54" thereb&
#ithdra#in' the exemption on realt& tax 'iven to the petitioner.
Tax statutes are %onstrued stri%tl& a'ainst the 'overnment and liberall&
in favor of the taxpa&er. Fo#ever this does not appl& if the 'rantee of
the exemption is a politi%al subdivision or instrumentalit& be%ause the
e/e%t of su%h exemption is merel& to redu%e the amount of mone& that
has to be handled b& the 'overnment in the %ourse of its operations.
AI@*" sin%e taxation is the rule and exemption is the ex%eption"
exemption ma& be #ithdra#n at the pleasure of the taxin' authorit&
(ex%eption1 %ontra%tual exemptions).
The INC authori:ed IN7s to 'rant tax exemption privile'es. Thus"
IN7s ma& also impose real propert& tax ex%ept on real propert& o#ned
b& the Republi% of the Philippines or an& of its politi%al subdivisions.
The ex%eption to this is #hen the bene0%ial use has been 'ranted to a
taxable person.
In this %ase" the land #here the airports mana'ed b& the GCIA #ere
ere%ted %an also be levied upon b& the %it& of Cebu for the GCIA3s
nonpa&ment of taxes. It #as proven that in the %it& %harter there #as
a 8transfer9 of the 8lands"9 from the %it& of Cebu to the petitioner"
#hi%h amounted to an absolute %onve&an%e of o#nership not onl&
mere bene0%ial use.
Thus the o#nership of the land passed from the Republi% of the
Philippines to the GCIA. As GCIA o#ns the said land" it CA) be%ome the
sub?e%t of lev&in' for the nonpa&ment of taxes.
Curthermore" GCIA is a 8taxable person9 under its Charter" and #as
onl& exempted from the pa&ment of real propert& taxes. The 'rant of
the privile'e onl& in respe%t of this tax is %on%lusive proof of the
le'islative intent to mae it a taxable person sub?e%t to all taxes"
ex%ept real propert& tax.
Cinall&" even if the petitioner #as ori'inall& not a taxable person for
purposes of real propert& tax" it had alread& be%ome" even if it be
%on%eded to be an 8a'en%&9 or 8instrumentalit&9 of the Novernment" a
taxable person for su%h purpose in vie# of the #ithdra#al in the last
para'raph of @e%tion =3> of exemptions from the pa&ment of real
propert& taxes applies to the GCIAA.
)*TA1 + distinction should also be made between the phrases
28ational >overnment3 and 25epublic of the ;hilippines3, as they are
not interchangeable.25epublic of the ;hilippines3 is broader and
synonymous with 2>overnment of the 5epublic of the ;hilippines3
defned as the 2corporate governmental entity through which the
functions of government are exercised throughout the ;hilippines,
including, save as the contrary appears from the context, the various
arms through which political authority is made aMective in the
;hilippines, whether pertaining to the autonomous regions, the
provincial, city, municipal or barangay subdivisions or other forms of
local government.3 These 2autonomous regions, provincial, city,
municipal or barangay subdivisions3 are the political subdivisions. 9n
the other hand28ational >overnment3 refers 2to the entire machinery
of the central government, as distinguished from the diMerent forms of
local governments.3 The 8ational >overnment then is composed of the
three great departments! the executive, the legislative and the .udicial.
+n 2agency3 of the >overnment refers to 2any of the various units of
the >overnment, including a department, bureau, o'ce,
instrumentality, or government$owned or controlled corporation, or a
local government or a distinct unit therein.3 +n 2instrumentality3 refers
to 2any agency of the 8ational >overnment, not integrated within the
department framework, vested with special functions or .urisdiction by
law, endowed with some if not all corporate powers, administering
special funds, and en.oying operational autonomy, usually through a
charter. This term includes regulatory agencies, chartered institutions
and government$owned and controlled corporations.9
CIR v Rber!sn
Cran Robertson #as an Ameri%an %iti:en born in the Philippines and
repatriated to the 7@ #here he resided (Ion' ;ea%h" California) and #as
emplo&ed at the 7@ )av&. Fe #as eventuall& assi'ned to @ubi%" *lon'apo
due to his #or.
Oames" his brother" #as also born in the Philippines and resided in the
%ountr& until repatriated to the 7@. Fe #as also assi'ned to @ubi%" *lon'apo
due to his #or in the )av&.
Robert Cathe& #as a 7@.born %iti:en #ho be%ame a 7@ )av& emplo&ee
stationed in Gaati" GG #hile Oohn Narrison" a Phil.born Ameri%an %iti:en"
#as assi'ned to @ubi% after bein' repatriated to the 7@ and ?oinin' the
militar&.
TF7@" the& #ere all %iti:ens of the 7nited @tates" holders of Ameri%an
passports and admitted as @pe%ial Temporar& Bisitors under @e%tion K (a)
visa of the Philippine Immi'ration A%t of <K>0" as amended.
The& #ere %ivilian emplo&ees in the 7.@. Gilitar& ;ase in the Philippines in
%onne%tion #ith its %onstru%tion" maintenan%e" operation" and defense, and
in%omes #ere solel& derived from salaries from the 7.@. 'overnment b&
reason of their emplo&ment in the 7.@. ;ases in the Philippines.
The CIR 0led a petition for revie# #$ the @C" %ontendin' that the CTA erred
in holdin' that Robertson" et%. #ere" b& virtue of Arti%le JII" Par = of the RP.
7@ Gilitar& ;ases A'reement of <K>D" exempt from Philippine in%ome tax.
CIR ar'ues that the la#s 'rantin' tax exemptions must be %onstrued stri%tl&
a'ainst the taxpa&er" and that the burden of proof is on Robertson" et%. to
establish that their residen%e in the %ountr& is b& reason onl& of their
emplo&ment in %onne%tion #ith the %onstru%tion" maintenan%e" operation or
defense of the 7.@. ;ases in the Philippines (as provided for under Arti%le
JII" Par. = of the RP.7@ Gilitar& ;ases A'reement of <K>D).
A%%ordin' to CIR" the& failed to dis%har'e this burden" 'iven that the& o#n
residential properties in the Phils in their names.
I1 2$n the& are exempted
R1 EA@" the& are exempted.
An examination of the #ords used and %ir%umstan%es in the A'reement
sho#s the basi% intent Sto exempt all 7.@. %iti:ens #orin' in the Gilitar&
;ases from the burden of pa&in' Philippine In%ome Tax #ithout distin%tion
as to #hether born lo%all& or born in their %ountr& of ori'in.S
In this %ase" respondents and their families upon repatriation in <K>5 had
sin%e a%-uired domi%ile and residen%& in the 7nited @tates" and obtained
emplo&ment #ith the 7nited @tates Cederal @ervi%e.
It #as not until after several &ears of a hiatus that the& returned to the
Philippines b& reason of duties #ith the 7@ militar& bases in the Philippines
#here the& #ere 'ainfull& emplo&ed b& the 7.@. Cederal Novernment.
The situation of the petitioners is of no di/erent mold as of the rest of the
7.@. %ivilian emplo&ees #ho %ontinued to en?o& the bene0ts of tax
exemption under the A'reement" PetitionersV %ir%umstan%es before the
-uestioned rulin' remained obtainin' thru the taxable &ears <KPK.<KD=.
This Court %annot depart from the plain meanin' of the tax exemption
provision. This does not however foreclose the possibility of respondentsR
coming to roost in the country contingent upon the termination of their tour
of duty, but only then may the bridge be crossed for tax purposes.
.asc v PAGCOR
PANC*R #as %reated b& virtue of P.6. <0PD and 'ranted a fran%hise to
establish" operate and maintain 'amblin' %asinos on land or #ater
#ithin the territorial ?urisdi%tion of the Philippines.
Its operation #as ori'inall& %ondu%ted in the #ell no#n ]oatin' %asino
SPhilippine Tourist.S The operation #as %onsidered a su%%ess for it
proved to be a potential sour%e of revenue to fund infrastru%ture and
so%io.e%onomi% pro?e%ts.
@ubse-uentl&"PANC*R #as %reated under P.6. <4PK to enable the
Novernment to re'ulate and %entrali:e all 'ames of %han%e authori:ed
b& existin' fran%hise or permitted b& la# .. parti%ularl& to establish
%lubs and amusement 'ames in order to raise revenues for pro?e%ts
lie ]ood %ontrol pro'rams" beauti0%ation" se#era'e and se#a'e
pro?e%ts" Tulun'an n' ;a&an Centers" )utritional Pro'rams" Population
Control" et%.
PANC*R is the 3rd lar'est sour%e of 'overnment revenue" next to the
;IR and ;*C.
;as%o" et%. then 0led a petition seein' to annul the PANC*R Charter $
P6 <4PK be%ause it is alle'edl& %ontrar& to morals" publi% poli%& and
order.
Parti%ularl&" the& alle'e that it #aived the Ganila %it& 'ovVs ri'ht to
impose taxes and li%ense fees" #hi%h is re%o'ni:ed b& la#" and that
be%ause it intrudes into the lo%al 'ovVs ri'ht to impose lo%al taxes and
li%ense fees" it violates the %onstitutionall& enshrined prin%iple of lo%al
autonom&.
;ased on the P6 <4PK" PANC*R as fran%hise holder is exempt from
pa&in' tax of an& ind" ex%ept for a fran%hise tax of 55 'ross revenues
$ earnin's derived b& the Corporation.
I1 2$n P6 <4PK %reatin' PANC*R is valid
R1 EA@.
;as%o" et%.Vs %ontention that P.6. <4PK %onstitutes a #aiver of the ri'ht
of the Cit& of Ganila to impose taxes and le'al fees and violates the
prin%iple of lo%al autonom& is 2ITF*7T GARIT.
<) The Cit& of Ganila" bein' a mere
Guni%ipal %orporation has no inherent ri'ht to impose taxes. Its Spo#er
to taxS therefore must al#a&s &ield to a le'islative a%t #hi%h is superior
havin' been passed upon b& the state itself #hi%h has the Sinherent
po#er to tax.S
=) Con'ress has the po#er of %ontrol over
lo%al 'overnments. If Con'ress %an 'rant the Cit& of Ganila the po#er
to tax %ertain matters" it %an also provide for exemptions or even tae
ba% the po#er. TF7@" the Charter of the Cit& of Ganila is sub?e%t to
%ontrol b& Con'ress.
3) The Cit& of GanilaVs po#er to impose
li%ense fees on 'amblin'" has lon' been revoed. As earl& as <KD5" the
po#er of lo%al 'overnments to re'ulate 'amblin' thru the 'rant of
Sfran%hise" li%enses or permitsS #as #ithdra#n b& P.6. )o. DD< and #as
vested ex%lusivel& on the )ational Novernment.
>) Io%al 'overnments have no po#er to
tax instrumentalities of the )ational Novernment. PANC*R is a N*CC
#$ an ori'inal %harter" P6 <4PK. All of its shares of sto%s are o#ned
b& the )ational Novernment" and it also exer%ises re'ulator& po#ers
(to re'ulate 'amblin' %asinos).
5) ;as%o" et%. also ar'ues that the Io%al
Autonom& Clause of the Constitution #ill be violated b& P.6. <4PK" but
this is also #ithout merit. The po#er of lo%al 'overnment to Simpose
taxes and feesS is al#a&s sub?e%t to SlimitationsS #hi%h Con'ress ma&
provide b& la#. @in%e P6 <4PK remains an SoperativeS la# until
Samended" repealed or revoedS" its Sexemption %lauseS remains as an
ex%eption to the exer%ise of the po#er of lo%al 'overnments to impose
taxes and fees. It %annot therefore be violative but rather is %onsistent
#ith the prin%iple of lo%al autonom&.
P) ;esides" the prin%iple of lo%al autonom& under the <K4D Constitution
simpl& means Sde%entrali:ation.S It does not mae lo%al 'overnments
soverei'n #ithin the state.
J9W C+(6 68464 Lpero hindi related, wala lang haha reminiscent of
consti#! >ambling is generally immoral, and this is precisely so when
the gambling resorted to is excessive. This excessiveness necessarily
depends not only on the fnancial resources of the gambler and his
family but also on his mental, social, and spiritual outlook on life.
Jowever, the mere fact that some persons may have lost their
material fortunes, mental control, physical health, or even their lives
does not necessarily mean that the same are directly attributable to
gambling. >ambling may have been the antecedent, but certainly not
necessarily the cause. or the same conseFuences could have been
preceded by an overdose of food, drink, exercise, work, and even sex.
Republic v IAC
The ;IR initiated an a%tion in the CCI of Ganila to %olle%t de0%ien%&
in%ome taxes from the @pouses Pastor for the &ears <K55 to <K5K in
the amount of about P<D! #ith 55 sur%har'e and <5 interest" #ith
%osts.
After their Gotion to 6ismiss #as denied" the& 0led an Ans#er"
admittin' that there #as an assessment a'ainst them in the
aforementioned amount but that the& had availed of the TAX
A-NESTE under PD Ns. B<, B8< an" <@D" pa&in' the
%orrespondin' amnest& taxes to be able to remove their liabilities.
The Novernment onl& 0led the a%tion a'ainst the spouses <0 &ears
after the assessment on the de0%ient in%ome taxes #ere made.
The CCI ruled in favor of the spouses" sa&in' that their tax liabilities
#ere deemed settled under P6 =<3 (and not the other P6s) as sho#n
in the Amnest& In%ome Tax Returns3 @ummar& @tatement and the Tax
Pa&ment A%%eptan%e *rder #hi%h %ontain the assessment for the
-uestioned &ears.
;& a%%eptin' pa&ment" the Novernment has therefore 6AI2ED ITS
RIGHT to re%over further de0%ien%& in%ome taxes under existin'
assessments a'ainst them.
The Nov 0led an appeal #$ the IAC" alle'in' that the spouses #ere )*T
-uali0ed to avail of the tax amnest& be%ause the bene0ts %ould onl& be
availed of b& persons 2ITF*7T pendin' assessment a'ainst them
(a%%ordin' to Revenue Re'ulations )os. 4.D= and D.D3).
IAC dismissed the appeal" rullin' that RR D.D3 #as null and void for
bein' %ontrar& to$restri%tive of P6 =<3.
I1 2$n pa&ment of de0%ien%& in%ome taxes under a tax amnest& la#
operates to divest the 'overnment of the ri'ht to re%over a'ainst the
taxpa&er even if there is an existin' assessment a'ainst the latter
R1 EA@.
2hat #as 'ranted under P6 =<3 is not ?ust an exemption but an
amnest&" and the Novernment is estopped from %olle%tin' the
di/eren%e bet#een the de0%ien%& tax assessment and the amount
alread& paid b& them as amnest& tax.
;ein' in the nature of a 'eneral pardon$intentional overlooin' of the
@tate of its authorit& to impose penalties on persons other#ise 'uilt& of
evasion or lie violations" it %onstitutes absolute for'iveness or a
#aiver b& the Novernment of its ri'ht to %olle%t #hat #ould other#ise
be due it.
The 0ndin's of respondent appellate %ourt that the de0%ien%& in%ome
taxes #ere paid b& the spouses and a%%epted b& the 'overnment
under P6 =<3 are entitled the hi'hest respe%t. In %ase of doubt" tax
statutes are to be %onstrued stri%tl& a'ainst the Novernment and
liberall& in favor of the taxpa&er.
CIR v CA N ROH M>an BD, 8??PJ
Au'ust <3" <K4P" CIR assessed R*F Auto Produ%ts" In%. #ith in%ome
de0%ien%& and business taxes for 0s%al &ears that ended @eptember
30" <K4< and @eptember 30" <K4= in an a''re'ate amount of
P<"><0"<5D.D<.
Au'ust ==" <K4P" #hen the President still has le'islative po#ers"
promul'ated EO N. C8" de%larin' a one"ti!e tax a!nest# on unpaid
inco!e taxes$ later a!ended to include estate and donor%s taxes
and taxes on &usiness$ for the taxa&le #ears '()' to '()*.
R*F Auto Produ%ts" In%. availed the amnest& and paid the %orrespondin'
amnest& taxes due. And re-uested the CIR throu'h a letter that the
de0%ien%& tax noti%e should be %an%elled and #ithdra#n.
CIR denied the re-uest on the 'round that Revenue Gemorandum *rder )o.
>.4D" dated 0K Cebruar& <K4D" implementin' A* )o. ><" had %onstrued !$e
a#nes!& cvera'e ! inclu"e nl& assess#en!s issue" b& !$e
.ureau ) In!ernal Revenue a)!er !$e pr#ul'a!in ) !$e e%ecu!ive
r"er n BB Au'us! 8?R9 an" n! ! assess#en!s !$ere!)re
#a"e.
ROH appeale" !$e "enial ! CTA" and ruled in favor of the taxpa&er. The
CTA ruled that provisions in the statute 'rantin' tax amnest& for unpaid
taxes from <K4<.<K45 " to mae taxpa&ers still ans#erable for a tax liabilit&
#hi%h" throu'h the statute" should have been erased #ith the proper
availment of the amnest&.
CA aLr#e" the de%ision of the CTA. Tax Amnest& is to 'ive tax evaders"
#ho #ish to relent and are #illin' to reform" a %han%e to do so b& availin' of
the amnest& provided for b& the statute and thereb& be%ome a part of the
ne# so%iet& #ith a %lean slate.
I1 2$) Revenue Gemorandum *rder )o. >.4D" promul'ated to implement
A.*. )*. ><" is validc
R1 )*.
The authorit& of the Ginister of Cinan%e (no# the @e%retar& of Cinan%e)" in
%on?un%tion #ith the Commissioner of Internal Revenue" to promul'ate all
needful rules and re'ulations for the e/e%tive enfor%ement of internal
revenue la#s %annot be %ontroverted. )either %an it be disputed that su%h
rules and re'ulations" as #ell as administrative opinions and rulin's"
ordinaril& should deserve #ei'ht and respe%t b& the %ourts. -uc$ #re
)un"a#en!al !$an ei!$er ) !$e abve, $=ever, is !$a! all suc$
issuances #us! n! verri"e, bu! #us! re#ain cnsis!en! an" in
$ar#n& =i!$, !$e la= !$e& see0 ! appl& an" i#ple#en!.
A"#inis!ra!ive rules an" re'ula!ins are in!en"e" ! carr& u!,
nei!$er ! supplan! nr ! #"i)&, !$e la=.
EO C8 "i" n! prvi"e )r !$e assess#en! #a"e prir ! i!s
pr#ul'a!in in !$e e%clusinar& clause" as CIR ar'ued. The %on%lusion
is %lear" and it is that the exe%utive order has been desi'ned to be in the
nature of a 'eneral 'rant of tax amnest& sub?e%t onl& to the %ases
specifcally ex%epted b& it.
(ec. N. 6xceptions. & The following taxpa#ers !a# not avail
the!selves of the a!nest# herein granted:
a# Those falling under the provisions of
6xecutive 9rder 8os. ", % and "N-
b# Those with income tax cases already
fled in Court as of the eMectivity
hereof-
c# Those with criminal cases involving
violations of the income tax already
fled in court as of the eMectivity fled
in court as of the eMectivity hereof-
d# Those that have withholding tax
liabilities under the 8ational 0nternal
5evenue Code, as amended, insofar
as the said liabilities are concerned-
e# Those with tax cases pending
investigation by the Bureau of
0nternal 5evenue as of the eMectivity
hereof as a result of information
furnished under (ection K"H of the
8ational 0nternal 5evenue Code, as
amended-
f# Those with pending cases involving
unexplained or unlawfully acFuired
wealth before the (andiganbayan-
g# Those liable under Title (even,
Chapter Three Lrauds, 0llegal
6xactions and Transactions# and
Chapter our L:alversation of ;ublic
unds and ;roperty# of the 5evised
;enal Code, as amended.
Republic v Ca'uia
In <KK=" Con'ress RA N. @BB@ or the ;A@A@ C*)BAR@I*) A)6
6ABAI*PGA)T ACT *C <KK= #hi%h" amon' other thin's" %reated the
@ubi% @pe%ial A%onomi% and Creeport Xone (@@AX) and the @ubi% ;a&
Getropolitan Authorit& (@;GA).
RA )o. D==D provided in%entives su%h as tax and dut&.free
importations of ra# materials" %apital and e-uipment.
Fo#ever" exportation from the @@AX to the other parts of the Philippine
territor& shall be sub?e%t to %ustoms duties and taxes under the
Customs and Tari/ Code and other relevant tax la#s.
It also provided that in lieu of pa&in' taxes" 35 of the 'ross in%ome
earned b& all businesses and enterprises #ithin the @@AX shall be
remitted to the )ational Novernment" <5 ea%h to the lo%al 'overnment
units a/e%ted b& the de%laration of the :one in proportion to their
population area" and other fa%tors.
In addition" it established a development fund of <5 of the 'ross
in%ome earned b& all businesses and enterprises #ithin the @@AX to be
utili:ed for the development of muni%ipalities outside the Cit& of
*lon'apo and the Guni%ipalit& of @ubi%" and other muni%ipalities
%onti'uous to be base areas.
Pursuant to the la#" respondent %ompanies (Indi'o 6istribution" @tar
Tradin'" et%) applied for and #ere 'ranted Certi0%ates of Re'istration
and Tax Axemption b& the @;GA. The Certi0%ate entitled them to tax
and dut&.free importation of materials for use solel& #ithin the @ubi%
;a& Creeport Xone.
Con'ress" ho#ever" subse-uentl& passed R.A. N. ?<<C #$% stated
that !$e i#pr!a!in ) ci'ars an" ci'are!!es, "is!ille" spiri!s,
)er#en!e" li;urs an" =ines in! !$e P$ilippines, even i)
"es!ine" )r !a% an" "u!& )ree s$ps, s$all be sub(ec! ! all
applicable !a%es, "u!ies, c$ar'es, inclu"in' e%cise !a%es "ue
!$eren. This shall appl& to those brou'ht dire%tl& into the freeports
of the @@AX" under RA )o. D==D.
;e%ause of this" @;GA issued a Gemorandum dire%tin' the
departments %on%erned to re-uire lo%ators$importers in the @;C to pa&
the %orrespondin' duties and taxes on their importations of %i'ars"
%i'arettes" li-uors" and #ines before said items are %leared and
released from the freeport.
In line #$ this" the )IRC #as amended (@e% <3<0 #$% also provided that
taxes and %har'es shall apply to the importation of %i'arettes" li-uor"
#ine" et%.
*n the basis of the said amendment" @;GA issued a Gemorandum
de%larin' that all importations of %i'ars" %i'arettes" distilled spirits"
fermented li-uors and #ines into the @;C shall be treated as ordinar&
importations sub?e%t to all appli%able taxes" duties and %har'es"
in%ludin' ex%ise taxes.
Respondent %ompanies #rote to the Colle%tor of Customs and the
@;GA Administrator re-uestin' for a re%onsideration of the dire%tives
on the imposition of su%h.
6espite this" the& #ere not allo#ed to 0le an& #arehousin' entr& for
their shipments. Thus" the& brou'ht the a%tion before the RTC" #$%
ruled in their favour.
I1 2$n RA K33> e/e%tivel& #ithdre# the tax exemption of respondent
%ompanies.
R1 EA@" the %ompanies are )*T exempt from tax.
Clo#in' from the basi% pre%ept of %onstitutional la# that no la# is
irrepealable" Con'ress" in the le'itimate exer%ise of its la#main'
po#ers" %an ena%t a la# #ithdra#in' a tax exemption ?ust as
eL%a%iousl& as it ma& 'rant the same under @e%tion =4(>) of Arti%le BI
of the Constitution (There is no vested ri'ht in a tax exemption" more
so #hen the latest expression of le'islative intent renders its
%ontinuan%e doubtful.).
TF7@" Con'ress %an amend @e%tion <3< of the )IRC in a manner it sees
0t" as it did #hen it passed R.A. )o. K33>.
T$e ri'$!s 'ran!e" un"er !$e Cer!i,ca!es ) Re'is!ra!in an"
Ta% E%e#p!in ) priva!e respn"en!s are n! abslu!e an"
uncn"i!inal as ! cns!i!u!e ri'$!s in esse ( those %learl&
founded on or 'ranted b& la# or is enfor%eable as a matter of la#.
These %erti0%ates 'rantin' private respondents a 8permit to operate9
their respe%tive businesses are in the nature of li%enses" #hi%h the bul
of ?urispruden%e %onsiders as neither a propert& nor a propert& ri'ht.
The li%ensee taes his li%ense sub?e%t to su%h %onditions as the 'rantor
sees 0t to impose" in%ludin' its revo%ation at pleasure. A li%ense %an
thus be revoed at an& time sin%e it does not %onfer an absolute ri'ht.
2hile the tax exemption %ontained in the Certi0%ates of Re'istration of
private respondents ma& have been part of the indu%ement for
%arr&in' on their businesses in the @;C" this exemption" nevertheless"
is far from bein' %ontra%tual in nature in the sense that the non.
impairment %lause of the Constitution %an ri'htl& be invoed.
Iastl&" #hatever ri'ht ma& have been a%-uired on the basis of the
Certi0%ates of Re'istration and Tax Axemption must &ield to the @tate3s
valid exer%ise of poli%e po#er. The said la# #as passed to %urb the
pra%ti%e of tain' advanta'e of tax exemption privile'es to smu''le
'oods.
S#ar! C##unica!ins, Inc. v Ci!& ) Dava
The Tax Code of the Cit& of 6avao imposes a tax on businesses
en?o&in' a fran%hise in the amount of d of <5 of the 'ross annual
re%eipts for the pre%edin' %alendar &ear. This is based on the in%ome $
re%eipts reali:ed #ithin its territorial ?urisdi%tion" not#ithstandin' an&
exemption 'ranted b& an& la# or other spe%ial la#.
@GART 0led for de%larator& relief" %ontendin' that1
o Its tele%enter in the aforementioned %it& #as exempted from
pa&ment of su%h fran%hise taxes pursuant to its fran%hise
under RA D=K>
o RA D<P0 (The Io%al Novernment Code) onl& applies to
exemptions alread& existin' at the time of its e/e%tivit& and
)*T to future exemptions
o The po#er of the Cit& of 6avao to impose a fran%hise tax is
sub?e%t to statutor& limitations su%h as the 8in lieu of all
taxes9 %lause found in @e%tion K of R.A. )o. D=K>
o @u%h fran%hise tax imposed b& the Cit& of 6avao violates the
%onstitutional provision a'ainst impairment of %ontra%ts.
The Cit& of 6avao opposed" invoin' the po#er 'ranted b& the
Constitution to lo%al 'overnment units to %reate their o#n sour%es of
revenue.
TC ruled a'ainst @mart" on the 'round that tax la#s are stri%tl&
%onstrued a'ainst the taxpa&er" and that IN7s are empo#ered to tax
b& a valid dele'ation of le'islative po#er and the dire%t authorit&
'ranted to it b& the fundamental la#" hen%e not violative of the non.
impairment %lause.
I1 2$n @GART is liable for fran%hise tax
R1 EA@" @GART is liable.
@e%tion <3D" in relation to @e%tion <5< of the Io%al Novernment Code
(RA D<P0) allo#s lo%al 'overnments to impose fran%hise taxes" #hile
@e%tion <K3 thereof #ithdre# all tax exemption privile'es 'ranted to
fran%hises prior to its issuan%e" ex%ept lo%al #ater distri%ts"
%ooperatives dul& re'istered under RA )o. PK34" non.sto% and non.
pro0t hospitals and edu%ational institutions.
@in%e @mart3s fran%hise (RA D=K>) #as 'ranted t#o months ACTAR the
issuan%e of the Io%al Novernment Code" its tax exemption privile'es
are )*T deemed #ithdra#n b& the Io%al Novernment Code.
Fo#ever" the phrase 8in lieu of all taxes9 in RA D=K> must be
%onstrued in the %ontext of the #hole A%t 'rantin' the fran%hise to
@mart.
Tax statutes" and exemptions 'ranted therein" are %onstrued stri%tl&
a'ainst the taxpa&er and liberall& in favor of the Novernment.
In this %ase" the 35 tax on all 'ross re%eipts 8in lieu of all taxes9
provision in RA D=K> #as )*T %lear #hether it applies to both national
and lo%al taxes.
Thus" this provision must be %onstrued stri%tl& a'ainst @mart #hi%h
%laims the exemption. @mart has the burden of provin' that" aside from
the imposed 35 fran%hise tax" Con'ress intended it to be exempt from
all inds of fran%hise taxes . #hether lo%al or national. Fo#ever" @mart
failed in this re'ard.
The #as also no violation of the non.impairment %lause of the
Constitution. In fa%t" aside from the ambi'uous 8in lieu of all taxes9
phrase in the fran%hise" it also has an express %ondition that it is
sub?e%t to amendment" alteration" or repeal.
NATURE, CONSTRUCTION, APP/ICATION AND SOURCES OF TAX /A6S
Hila" v CIR
Amilio Filado 0led his in%ome tax return for <K5< #ith the treasurer of
;a%olod Cit& #herein he %laimed" amon' other thin's" the amount of
P<=! as a dedu%tible item from his 'ross in%ome pursuant to Neneral
Cir%ular B.<=3 issued b& the CIR. (This %ir%ular #as issued pursuant to
%ertain rules laid do#n b& the @e%retar& of Cinan%e.)
*n the basis of said return" an assessment noti%e demandin' the
pa&ment of PK! #as sent to Filado" #ho paid the tax in monthl&
installments.
Gean#hile" the @e%retar& of Cinan%e" throu'h the CIR issued Neneral
Cir%ular B.<3K #hi%h not onl& revoed and de%lared void his 'eneral
Cir%ular B. <=3 but laid do#n the rule that losses of propert& #hi%h
o%%urred durin' the period of 2orld 2ar II from 0res" storms" ship#re%
or other %asualt&" or from robber&" theft" or embe::lement are
dedu%tible in !$e &ear ) ac!ual lss r "es!ruc!in ) sai"
prper!&.
As a %onse-uen%e" the amount of P<=! #as disallo#ed as a dedu%tion
from Filado3s 'ross in%ome for <K5<.
Conse-uentl&" the CIR demanded from him P3! as de0%ien%& in%ome
tax for said &ear.
2hen the petition for re%onsideration 0led b& Filado #as denied" he
0led a petition for revie# #$ CTA.
CTA aLrmed CIR3s assessment" so Filado 0led an appeal #$ the @C.
I1 2$n CIR3s assessment #as %orre%t
R1 EA@" CIR #as %orre%t.
<) Assumin' that the amount %laimed as a loss represents a portion of
the D55 of his #ar dama'e %laim #hi%h #as not paid" the same #ould
NOT be "e"uc!ible as a lss in 8?P8 be%ause" a%%ordin' to Filado"
the last installment he re%eived from the 2ar 6ama'e Commission #as
in 8?PD. Thus" dedu%tion %ould onl& be made from his <K50 'ross
in%ome.
Also" the amount %annot be %onsidered a 8business asset9 #hi%h %an
be dedu%ted as a loss be%ause its %olle%tion is )*T enfor%eable as a
matter of ri'ht" but is dependent merel& upon the 'enerosit& of the 7@
'overnment.
=) As of the end of <K>5" there #as absolutel& no la# under #hi%h
Filado %ould %laim %ompensation for the destru%tion of his properties
durin' the battle for the liberation of the Philippines.
3) 7nder the Philippine Rehabilitation A%t of <K>P" the pa&ments of
%laims b& the 2ar 6ama'e Commission merel& depended upon its
dis%retion to be exer%ised in the manner it ma& see 0t" but the non.
pa&ment of #hi%h %annot 'ive rise to an& enfor%eable ri'ht.
Also" the se%ond Nen %ir%ular" #$% nulli0ed the 0rst is %onsistent #$ the
)IRC (@e%. 30)" #hi%h provides that that losses sustained are allo#able
as dedu%tion onl& #ithin the %orrespondin' taxable &ear.
>) Philippine internal revenue la#s are not politi%al in nature and as
su%h #ere %ontinued in for%e durin' the period of enem& o%%upation
and in e/e%t #ere a%tuall& enfor%ed b& the o%%upation 'overnment. As
a matter of fa%t" in%ome tax returns #ere 0led durin' that period and
in%ome tax pa&ment #ere e/e%ted and %onsidered valid and le'al.
@u%h tax la#s are deemed to be the la#s of the o%%upied territor& and
not of the o%%up&in' enem&.
5) The @e%retar& of Cinan%e is vested #ith authorit& to revoe" repeal or
abro'ate the a%ts or previous rulin's of his prede%essor in oL%e
be%ause the %onstru%tion of a statute b& those administerin' it is )*T
bindin' on their su%%essors.
Thus" in the present %ase" #hen the Commissioner determined in <K3D
that the petitioner #as not exempt and never had been" it #as his dut&
to determine" assess and %olle%t the tax due for all &ears not barred b&
the statutes of limitation. The %on%lusion rea%hed and announ%ed b&
his prede%essor in <K=> #as )*T bindin' upon him. It did not exempt
Filado from tax.
Neneral Cir%ular B.<=3" havin' been issued on a #ron' %onstru%tion of
the la#" %annot 'ive rise to a vested ri'ht that %an be invoed b& a
taxpa&er. A vested ri'ht %annot sprin' from a #ron' interpretation.
CivCode also provides that 8no vested or a%-uired ri'ht %an arise from
a%ts or omissions #hi%h are a'ainst the la# or #hi%h infrin'e upon the
ri'hts of others.9

K-isa#is Orien!al Asscia!in ) Cc Tra"ers v Depar!#en! ) Finance
Secre!ar&
-isa#is Orien!al Asscia!in ) Cc Tra"ers v. Dep!. ) Finance
Secre!ar&
The )IRC exempts from BAT the sale of a'ri%ultural non.food produ%ts
in their ori'inal state if the sale is made b& the primar& produ%er or
o#ner of the land from #hi%h the same are produ%ed.
The sale made b& an& other person $ entit&" lie a trader or dealer" is
)*T exempt from the tax.
A revenue memorandum %ir%ular #as issued" re%lassif&in' C*PRA into
an a'ri%ultural non.food produ%t.
Gisamis *riental" #$% #as en'a'ed in the bu&in' and sellin' of %opra"
%laimed that the memorandum %ir%ular #as dis%riminator& and
violative of the e-ual prote%tion %lause be%ause #hile %o%onut farmers
and %opra produ%ers are exempt" TRA6AR@ and 6AAIAR@ are )*T"
althou'h both sell %opra in its ori'inal state.
I1 2$n there #as a violation of e-ual prote%tion.
R1 )*" it #as not violative of APC
so lon' as there is a RAA@*)A;IA basis for %lassif&in' them di/erentl&.
In this %ase" there is a material or substantial di/eren%e bet#een
%o%onut farmers and %opra produ%ers" on the one hand" and %opra
traders and dealers" on the other.
The farmers$ produ%ers PR*67CA and @AII %opra" #hile traders and
dealers merel& @AII %opra.
so lon' as there is a reasonable basis for %lassif&in' them di/erentl&.
CIR v CA an" A/AHA-.RA
AIFAG;RA I)67@TRIA@" I)C. #as en'a'ed in the manufa%ture and sale of
%i'ar and %i'arette produ%ts.
CIR assessed it for de0%ien%& ad valorem tax on the removal of %i'arette
produ%ts from their pla%e of produ%tion from )ov <KK0 to Oan <KK<.
Alhambra 0led a protest for the #ithdra#al and %an%ellation of proposed
assessment. CIR denied its protest statin' that the de%ision #as 0nal.
Alhambra re-uested for a re%onsideration but #as also denied. It then paid
under protest and 0led a petition for revie# #ith the CTA.
The dispute arose from the dis%repan%& in the taxable base on #hi%h the
ex%ise tax is to appl& on a%%ount of t#o in%on'ruous ;IR Rulin's1
o 8J .IR Rulin' C@<4RR dated > Oc!ber 8?RR #hi%h
ex%luded the BAT from the tax base in %omputin' the <55
ex%ise tax due
o This #as issued b& the 6eput& Commissioners to Eebana
Toba%%o Corporation allo#in' the said Corp to ex%lude BAT in
the determination of the 'ross sellin' pri%e for purposes of
%omputin' the ad valorem tax of its %i'ar and %i'arette
produ%ts in a%%ordan%e #ith @e%. <=D of the Tax Code as
amended b& A*=D3
o =) .IR Rulin' D8@4?8 dated << Februar& 8??8 #hi%h
in%luded ba% the BAT in %omputin' the tax base for <55 ad
valorem tax.
o CIR issued this rulin' to Insular.Eebana Toba%%o Corp.
revoin' ;IR Rulin' >D3.44 for bein' violative of @e%.<>= of
the Tax Code
o This is the %orre%t interpretation sin%e se% <=D applies in
NA)ARAI T* 6*GA@TIC PR*67CT@ #hile se% <>= refers
spe%i0%all& to %i'ar and %i'arettes onl&. A%%ordin'l&" se% <>=
must prevail over se%tion <=D #hi%h is a 'eneral provision of
la# insofar as the imposition of the ad valorem tax on %i'ar
and %i'arettes is %on%erned.
Alhambra relied on the <st ;IR Rulin' as a basis for %omputin' the amount of
ad valorem tax.
Fo#ever" CIR sou'ht to appl& the revo%ation retroa%tivel& to Alhambra3s
removals of %i'arettes for )ov <KK0 to Oan <KK< on the 'rounds that the <
st

;IR Rulin' bein' an erroneous interpretation does )*T %onfer an& vested ri'ht
as to exempt it from the retroa%tive appli%ation of =
nd
Rulin'.
Aven if the <
st
rulin' is not erroneous Alhambra still a%ted in bad faith" #hi%h is
an ex%eption to the rule on non.retroa%tivit& of ;IR Rulin's. Alhambra had
no#led'e that @e%. <>= of the Tax Code #as the spe%i0% provision
appli%able to it" &et it applied @e% <=D.
CTA ordered CIR to refund to Alhambra the erroneousl& paid ad valorem tax.
CIR appealed to the CA but CA aLrmed the CTA rulin'" holdin' that the
retroa%tive appli%ation of ;IR Rulin' 0<D.K< CA))*T be allo#ed sin%e
Alhabmra did )*T a%t in bad faith" nor #as it motivated b& fraud.
I1 2$n Alhambra3s relian%e on a void ;IR rulin' %onferred upon it a vested ri'ht
to appl& the same in the %omputation of its ad valorem tax and %laim for tax
refund.
R1 EA@. CIR must refund Alhambra.
@e%. =>P of the Tax Code provides that rulin's #ill )*T have a retroa%tive
e/e%t if it #ould be pre?udi%ial to taxpa&ers. The onl& ex%eptions are1
o A) #here the taxpa&er deliberatel& omits material fa%ts from
his return or an& do%ument re-uired b& the ;IR
o .J #here the fa%ts subse-uentl& 'athered b& the ;IR are
materiall& di/erent from the fa%ts on #hi%h the rulin' is
based or
o C) #here the taxpa&er a%ted in bad faith
In this %ase" there #as )* %onvin%in' eviden%e that Alhambra3s
implementation of the %omputation mandated b& ;IR Rulin' >D3.44 #as ill.
motivated or attended #ith a dishonest purpose.
In fa%t" as a si'n of 'ood faith" Alhambra immediatel& reverted to the
%omputation mandated b& ;IR Rulin' 0<D.K< upon no#led'e of its issuan%e
on << Cebruar& <KK<.
Also" the failure of Alhambra to %onsult ;IR does not impl& bad faith on the
part of the former.
KCIR v /in'a&en Gul)
Iin'a&en Nulf" an ele%tri% po#er plant operator" #as the 'rantee of a
muni%ipal fran%hise to suppl& ele%tri%it& in Pan'asinan. It #as sub?e%t
to a =5 fran%hise tax under the muni%ipal fran%hise.
The CIR assessed Iin'a&en a de0%ien%& fran%hise tax" %omputed at 55"
based on the rate pres%ribed b& the )IRC" instead of the lo#er rates as
provided in the muni%ipal fran%hises.
Iin'a&en re-uested for a reinvesti'ation 'iven that instead of in%urrin'
a de0%ien%& liabilit&" it made an overpa&ment of the fran%hise tax.
This #as denied b& the CIR so Iin'a&en appealed to the CTA.
In the meantime" RA 34>3 #as passed 'rantin' Iin'a&en a le'islative
fran%hise to suppl& ele%tri% %urrent to the publi%" sub?e%t to =5
fran%hise tax.
The CIR %laimed that the la# #as un%onstitutional for bein' violative of
the uniformit& and e-ualit& of taxation %lause of the Constitution sin%e
other similar fran%hises #ere sub?e%t to a 55 fran%hise tax imposed b&
the Tax Code.
CTA dismissed CIR3s %laim and ruled that the provisions of RA 34>3
should appl&.
I1 2$n RA 34>3 violates the rule on uniformit& and e-ualit& of taxation
R1 )o.
ever& pla%e #here the sub?e%t of it is found. 7niformit& means that all
propert& belon'in' to the same %lass shall be taxed alie.
The Ie'islature has the inherent po#er not onl& to sele%t the sub?e%ts
of taxation but to 'rant exemptions. TAJ AJAGPTI*)@ have never been
deemed violative of the e-ual prote%tion %lause.
In this %ase" althou'h Iin'a&en3s muni%ipal fran%hises #ere obtained
under A%t )o. PPD of the Philippine Commission" these ori'inal
fran%hises have been repla%ed b& a ne# le'islative fran%hise" RA 34>3.
Iin'a&en3s po#er plant falls #ithin the %lass of po#er plants %reated b&
A%t )o. 3P3P" as amended b& C.A. )o. <3= and RA 34>3. RA 34>3
merel& transferred the petitionerVs po#er plant from that %lass
provided for in A%t )o. PPD" until the approval of RA 34>3.
Thus" the la# merel& transferred Iin'a&en3s po#er plant from its
former %lass to #hi%h it belon'ed. All po#er plants belon'in' to this
parti%ular %lass #ere sub?e%t to the same =5 tax and therefore" the
rule on uniformit& #as not violated.
A.S4C.N .ra"cas!in' Crp v CTA
A;@.C;) #as en'a'ed in the business of tele%astin' lo%al and forei'n
0lms a%-uired from forei'n %orporations not en'a'ed in trade or
business #ithin the Philippines.
Cor these" A;@ paid rentals after #ithholdin' in%ome tax of 305of Q of
the 0lm rentals.
In so far as the in%ome tax on non.resident %orporations is %on%erned"
se%tion => (b) of the )IRC" amended b& RA =3>3 (Oune =0" <K5K) used
to provide that for forei'n %orporations" a tax of 305 on sour%es of
in%ome shall be %olle%ted in lieu of other taxes (rents" salaries" #a'es"
dividends" et%.)
To implement this" the CIR issued Neneral Cir%ular )o. B.33> #$%
provided that the lo%al distributor should #ithhold <DI ) S ) !$e
,l# ren!als pai" ! !$e nn4resi"en! )rei'n ,l# "is!ribu!r and
pa& the same to this oL%e in a%%ordan%e #ith la# unless the non.
resident forei'n 0lm distributor maes a prior settlement of its in%ome
tax liabilit&.
Pursuant to this" A;@ dutifull& #ithheld and turned over to the ;IR the
amount of 305 of Q of the 0lm rentals paid b& it to forei'n
%orporations until <KP4.
@ubse-uentl&" the CIR issued Revenue Gemorandum Cir%ular )o. >.D<"
revoin' Neneral Cir%ular )o. B.33>" and holdin' that the Nen Cir% #as
Serroneous for la% of le'al basis"S be%ause Sthe tax therein pres%ribed
should be based on 'ross in%ome #ithout dedu%tion #hatever"S
providin' that lo%al 0lms distributors and exhibitors shall dedu%t and
#ithhold KOT of TJ6 68T056 +:9?8T pa&able b& them to non.resident
forei'n %orporations.
CIR issued a'ainst A;@ a letter of assessment re-uirin' them to pa&
de0%ien%& #ithholdin' in%ome tax on the remitted 0lm rentals for the
&ears 8?9P !$ru'$ 8?9R an" ,l# r&al!& as ) !$e en" ) 8?9R
in the total amount of about P5=5!
A;@ re-uested for a re%onsideration and #ithdra#al of the assessment.
Fo#ever" CIR issued a #arrant of distraint and lev& over A;@V personal
as #ell as real properties.
A;@ 0led a Petition for Revie# #ith the CTA" CTA dismissed.
I1 2$n CIR %an appl& Neneral Cir%ular )o. >.D< retroa%tivel& and issue a
de0%ien%& assessment a'ainst petitioner in the amount of P 5=5! as
de0%ien%& #ithholdin' in%ome tax for the &ears <KP5 to <KP4.
R1 )*. @C ruled in favour of A;@.
The Tax Code" #$ the insertion of RA P<<0 provides that an& revo%ation"
modi0%ation" or reversal of and of the rules and re'ulations
promul'ated b& the CIR shall not &e given retroactive application
if the relocation$ !odi+cation$ or reversal will &e pre,udicial to
the taxpa#ers.
The onl& ex%eptions are1
o a) #here the taxpa&er deliberatel& omits material fa%ts from
his return or an& do%ument re-uired of him b& ;IR
o b) #here the fa%ts subse-uentl& 'athered b& ;IR are
materiall& di/erent from the fa%ts on #hi%h the rulin' is
based
o %) axpa&er a%ted in bad faith
It is %lear from the fore'oin' that rulin's or %ir%ulars promul'ated b&
the Commissioner of Internal Revenue have no retroa%tive appli%ation
#here to so appl& them #ould be pre?udi%ial to taxpa&ers.
The pre?udi%e to petitioner of the retroa%tive appli%ation of
Gemorandum Cir%ular )o. >.D< is be&ond -uestion. It #as issued onl&
in <KD<" or three &ears after <KP4" the last &ear that petitioner had
#ithheld taxes under Neneral Cir%ular )o. B.33>.
The assessment and demand on petitioner to pa& de0%ien%&
#ithholdin' in%ome tax #as also made three &ears after <KP4 for a
period of time %ommen%in' in <KP5.
A;@ #as no lon'er in a position to #ithhold taxes due from forei'n
%orporations be%ause it had alread& remitted all 0lm rentals and no
lon'er had an& %ontrol over them #hen the ne# Cir%ular #as issued.
A;@ also does not fall #$in an& of the enumerated ex%eptions.
)*TA1 CIR %laims" ho#ever" that the provision on non.retroa%tivit& is
inappli%able in the present %ase in that Neneral Cir%ular )o. B.33> is a
nullit& be%ause in e/e%t" it %han'ed the la# on the matter. CTA #as
thus %orre%t in %on%ludin' that A;@ did not a%-uire an& vested ri'ht
thereunder as the same #as a nullit&.
P$ilippine .an0 ) C##unica!ins v CIR
Philippine ;an of Communi%ations (P;Com) 0led its -uarterl& in%ome
tax returns for the 0rst and se%ond -uarters of <K45" reported pro0ts"
and paid the total in%ome tax of P5G!.
The taxes due #ere settled b& appl&in' P;ComVs tax %redit memos and
a%%ordin'l&" the ;IR issued Tax 6ebit Gemo for P3G! and P<G!"
respe%tivel&.
@ubse-uentl&" ho#ever" P;Com su/ered losses so that #hen it 0led its
Annual In%ome Tax Returns for the &ear.ended 6e%ember 3<" <K4P" it
reported a net loss of P<>G! and thus de%lared no tax pa&able for the
&ear.
;ut durin' these t#o &ears (<K45 and <K4P)" P;Com earned rental
in%ome from leased properties.
The lessees #ithheld and remitted to the ;IR #ithholdin' %reditable
taxes for both <K4P and <K4P (about P=00! for ea%h of those &ears).
P;Com then re-uested the CIR" amon' others" for a tax %redit of P5G!
representin' the overpa&ment of taxes in the 0rst and se%ond -uarters
of <K45.
3 &rs later" P;Com 0led a %laim for refund of %reditable taxes #ithheld
b& their lessees from propert& rentals in <K45 and <K4P (the P=00!
ea%h)
Pendin' CIR3s investi'ation" P;Com instituted a Petition for Revie#
before the CTA.
CTA denied the re-uest for a tax refund or %redit (P5G!) 'iven that it
#as 0led be&ond the =.&ear re'lementar& period provided for b& la#.
The petitionerVs %laim for refund in <K4P #as lie#ise denied on the
assumption that it #as automati%all& %redited b& P;Com a'ainst its tax
pa&ment in the su%%eedin' &ear.
P;Com ar'ued that its %laims for refund and tax %redits are not &et
barred b& pres%ription rel&in' on the appli%abilit& of Revenue
Gemorandum Cir%ular )o. D.45 issued on April <" <K45.
The RG Cir%ular states that overpaid in%ome taxes are )*T %overed b&
the t#o.&ear pres%riptive period under the Tax Code and that taxpa&ers
ma& %laim refund or tax %redits for the ex%ess -uarterl& in%ome tax
#ith the ;IR #ithin ten <0 &ears under Arti%le <<>> of the Civil Code.
I1 2$n the tax refund should be denied on the 'round of pres%ription"
despite P;Com3s relian%e on RGC )o. D.45" %han'in' the pres%riptive
period of = &ears to <0 &ears.
R1 )o. The relaxation of revenue re'ulations b& RGC D.45 is not
#arranted as it disre'ards the t#o.&ear pres%riptive period set b& la#.
The )IRC states that the taxpa&er ma& 0le a %laim for refund or %redit
#ith the CIR #$in = &ears after pa&ment of tax" before an& suit in CTA is
%ommen%ed.
The =.&ear pres%riptive period should be %omputed from the time of
0lin' the Ad?ustment Return and 0nal pa&ment of the tax for the &ear.
Clearl&" the pres%riptive period of = &ears should %ommen%e to run onl&
from the time that the refund is as%ertained" #hi%h %an onl& be
determined after a 0nal ad?ustment return is a%%omplished.
2hen the A%tin' CIR issued RGC D.45" %han'in' the pres%riptive period
of = &ears to <0 &ears on %laims of ex%ess -uarterl& in%ome tax
pa&ments" su%h %ir%ular %reated a %lear in%onsisten%& #ith the
provision of the )IRC.
In so doin'" the ;IR did not simpl& interpret the la#, rather it le'islated
'uidelines %ontrar& to the statute passed b& Con'ress. Rules and
re'ulations issued b& administrative oL%ials to implement a la#
%annot 'o be&ond the terms and provisions of the latter.
Art. 4 of the Civil Code re%o'ni:es ?udi%ial de%isions" appl&in' or
interpretin' statutes as part of the le'al s&stem of the %ountr&.
;ut administrative de%isions do not en?o& that level of re%o'nition.
A memorandum.%ir%ular of a bureau head %ould not operate to vest a
taxpa&er #ith shield a'ainst ?udi%ial a%tion. Cor there are no vested
ri'hts to spea of respe%tin' a #ron' %onstru%tion of the la# b& the
administrative oL%ials and su%h #ron' interpretation %ould not pla%e
the Novernment in estoppel to %orre%t or overrule the same.
Goreover" the non.retroa%tivit& of rulin's b& the CIR is not appli%able in
this %ase be%ause the nullit& of RGC )o. D.45 #as de%lared b&
respondent %ourts and not b& the CIR.
Iastl&" a %laim for refund is in the nature of a %laim for exemption and
should be %onstrued in stri%tissimi ?uris a'ainst the taxpa&er.
CERTAIN DOCTRINES IN TAXATION
PO6ER TO TAX IN2O/2ES PO6ER TO DESTROE
CIR v T0& S$ippin' C, /!".
To&o @hippin' is a forei'n %orporation (represented b& @oriamont

@teamship A'en%ies in the Philippines) #hi%h o#ns and operates
tramper vessel G$B Nardenia.
In 6e%ember <K40" )A@7TRA

%hartered G$B Nardenia to load <P"500
metri% tons of ra# su'ar in the Philippines.

Gr. Adilberto Iisin'" the operations supervisor of @oriamont A'en%&"

paid the re-uired in%ome and %ommon %arrierVs taxes totallin' about
P<0D! based on the expe%ted 'ross re%eipts of the vessel.
7pon arrivin'" ho#ever" at Nuimaras Port of Iloilo" the vessel found no

su'ar for loadin'.
)A@7TRA and @oriamont mutuall& a'reed to have the vessel sail for
Oapan #ithout an& %ar'o.
Claimin' the pre.pa&ment of in%ome and %ommon %arrierVs taxes as

erroneous sin%e no re%eipt #as reali:ed from the %harter a'reement"
To&o @hippin' instituted a %laim for tax %redit or refund of P<0D!
before CIR.
CIR failed to a%t promptl& on the %laim" so To&o 0led a petition for
revie# before CTA. CTA ruled in favour of To&o.
CIR 0led a petition %ontendin' that To&o had the burden of proof to
support its %laim of refund" To&o failed to prove that it did not reali:e
an& re%eipt from its %harter a'reement and it suppressed eviden%e
#hen it did not present its %harter a'reement.
I1 2$n To&o is entitled to a refund or tax %redit for amounts

representin' pre.pa&ment of in%ome and %ommon %arrierVs taxes under
the )IRC
R1 EA@. CTA de%ision aLrmed.
@e%=> (b=) of the )IRC provides that a %orporation or'ani:ed under

forei'n la# but doin' business in the Phils shall be taxable upon the
total net in%ome derived in the pre%edin' taxable &ear from all sour%es
#ithin the Philippines" PR*BI6A6 that international %arriers shall pa& a
!a% ) B 8+BI n !$eir 'rss P$ilippine billin's. (S>ross
;hilippine Billings@ include gross revenue reali*ed from uplifts
anywhere in the world by any international carrier doing business in
the ;hilippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo or mail
originates from the ;hilippines. The gross revenue reali*ed from the
said cargo or mail include the gross freight charge up to fnal
destination.)
Pursuant to this" a resident forei'n %orporation en'a'ed in the

transport of %ar'o is liable for taxes dependin' on the amount of
in%ome it derives from sour%es #ithin the Philippines.
TF7@" before su%h a tax liabilit& %an be enfor%ed" the taxpa&er must be
sho#n to have earned in%ome sour%ed from the Philippines.
A %laim for refund is in the nature of a %laim for exemption and should
be %onstrued in strictissimi .uris a'ainst the taxpa&er. The taxpa&er has
the burden of proof to sho# that he is entitled to refund.
I) TFI@ CA@A" there #as suL%ient eviden%e sho#n b& To&o that it
derived no re%eipt from its %harter a'reement #ith )A@7TRA..
6o%uments presented #ere the Clearan%e Bessel to a Corei'n Port

issued b& the 6istri%t Colle%tor of Customs" Port of Iloilo and the
Certi0%ation b& the *L%er.in.Char'e" Axport 6ivision of the ;ureau of
Customs Iloilo. The %orre%tness of the %ontents of these do%uments
re'ularl& issued b& oL%ials of the ;ureau of Customs %annot be
doubted as indeed" the& have not been %ontested b& the petitioner.
Taxpa&ers o#e honest& to 'overnment ?ust as 'overnment o#es

fairness to taxpa&ers. The %ourt be#ails the un&ieldin' stan%e taen b&
the 'overnment in refusin' to refund the sum of P<0D"<>=.D5
erroneousl& prepaid b& private respondent. T$e 'vern#en!
"ela&e" i!s re)un" )r 8P &ears an" !$us ren"ere" !$e re)un"
(us! =r!$ a "a#a'e" nic0el. This is not the ind of su%%ess the
'overnment" espe%iall& the ;IR" needs to in%rease its %olle%tion of
taxes. Cair deal is expe%ted b& our taxpa&ers from the ;IR and the dut&
demands that ;IR should refund #ithout an& unreasonable dela& #hat
it has erroneousl& %olle%ted.
In 5oxas v. CT+, the po#er of taxation is sometimes %alled also the

po#er to destro&. Therefore it should be exer%ised #ith %aution to
minimi:e in?ur& to the proprietar& ri'hts of a taxpa&er. It must be
exer%ised fairl&" e-uall& and uniforml&" lest the tax %olle%tor ill the
Shen that la&s the 'olden e''.S And" in order to maintain the 'eneral
publi%Vs trust and %on0den%e in the Novernment this po#er must be
used ?ustl& and not trea%herousl&.
Re&es v Al#an*r
O;I" Admundo and Gila'ros Re&es are o#ners of par%els of land in
Ganila #hi%h are leased and o%%upied as d#ellin' sites b& tenants for
monthl& rentals not ex%eedin' P300.
In <KD<" RA P35K #as passed prohibitin' an in%rease of monthl&
rentals of d#ellin' units or of land on #hi%h another d#ellin' is lo%ated
for one &ear after e/e%tivit& for rentals not ex%eedin' P300 but
allo#in' an in%rease of rent thereafter b& not more than <05.
The A%t also suspended the operation of Arti%le <PD3 of the Civil Code
(e?e%tment of lessess).
P6 =0 amended RA P35K b& absolutel& prohibitin' the in%rease and
inde0nitel& suspendin' Arti%le <PD3.
The Re&eses" thus" #ere pre%luded from raisin' the rentals and from
e?e%tin' the tenants.
In <KD3" the Cit& Assessor of Ganila re%lassi0ed and reassessed the
value of the properties based on the s%hedule of maret values dul&
revie#ed b& the @e%retar& of Cinan%e.
As it entailed an in%rease of the %orrespondin' tax rates" the Re&eses
0led a memorandum of disa'reement #ith the ;oard of Tax
Assessment Appeals and averrin' that the reassessments #ere
ex%essive" un#arranted" une-uitable" %on0s%ator& and un%onstitutional
inasmu%h as the taxes imposed ex%eeded the annual in%ome derived
from their properties.
The& also ar'ued that the 8in%ome approa%h9 should have been used
in determinin' land values instead of the 8%omparative sales
approa%h9 #hi%h the assessor adopted.
I1 2$n the assessment of the ;oard #as proper
R1 )*. @C ruled in favor of Re&eses and board #as asesd to mae re.
assessment.
Taxation is e-uitable #hen its burden falls on those better able to pa&.
Taxation is pro'ressive #hen its rate 'oes up depen0n' on the
resour%es of the person a/e%ted. Taxes are uniform #hen all taxable
arti%les or inds of propert& of the same %lass are taxed at the same
rate.
%lassi0%ation for purposes of taxation. Ia#s should operate e-uall& and
uniforml&" ho#ever" on all persons under similar %ir%umstan%es.
7nder the Real Propert& Tax Code (P6 >P>)" propert& must be
appraised at its %urrent and fair maret value.
The maret value of the properties %overed b& P6 =0" thus %annot be
e-uated #ith the maret value of properties not so %overed. The
propert& %overed b& P6 =0 has naturall& a mu%h lesser maret value in
vie# of the rental restri%tions.
The fa%tors determinant of the assessed value of the properties under
the 8%omparable sales approa%h9 #ere not presented b& the
;oard$Assessors1
<) that the sale must represent a bonafde armVs len'th transa%tion
bet#een a #illin' seller and a #illin' bu&er
=) the propert& must be %omparable propert&.
)othin' %an ?ustif& their vie# as it is of ?udi%ial noti%e that for
properties %overed b& P.6. =0 espe%iall& durin' the time in -uestion"
there #ere hardl& an& #illin' bu&ers. As a 'eneral rule" there #ere no
taers so that there %an be no reasonable basis for the %on%lusion that
these properties #ere %omparable #ith other residential properties not
burdened b& P.6. =0.
Also" althou'h taxes are the lifeblood of the 'overnment and should be
%olle%ted #ithout unne%essar& hindran%e" su%h %olle%tion should be
made in a%%ordan%e #ith la# as an& arbitrariness #ill ne'ate the ver&
reason for 'overnment itself.
In this %ase" sin%e the Re&eses are burdened b& the Rent Cree:e Ia#s
(RA P35K and P6 =0)" the& should not be penali:ed b& the same
'overnment b& the imposition of ex%essive taxes the& %annot ill a/ord
and #ould eventuall& result in the forfeiture of their properties" under
the prin%iple of so%ial ?usti%e.
KC##issiner ) In!ernal Revenue v. Al'ue
The Phil. @u'ar Astate 6evelopment Compan& (P@A6C) appointed
Al'ue" In%." a famil& %orporation" as its a'ent" authori:in' it to sell its
land" fa%tories" and oil manufa%turin' pro%ess.
Pursuant to this authorit&" 0ve members of the famil& %orporation
formed the Be'etable *il Investment Corp. and indu%ed other persons
to invest in it.
The ne#l& formed %orporation then pur%hased the P@A6C properties.
Cor this sale" P@A6C 'ave Al'ue" In%. a %ommission of P<=5"000.
Crom this amount" Al'ue In%. paid the 0ve famil& members PD5"000 as
promotional fees.
Al'ue" In%. de%lared this PD5"000 as a dedu%tion from its in%ome tax as
a le'itimate business expense.
The CIR -uestioned the dedu%tion" %laimin' that it #as not an ordinar&"
reasonable" or ne%essar& expense and #as merel& an attempt to evade
pa&ment of taxes.
I1 2$n the PD5"000 is tax.dedu%tible as a le'itimate business expense
of Al'ue" In%.
R1 Ees" the PD5"000 promotional fee is tax.dedu%tible.
@e%. 30 of the Tax Code provides that ordinar& and ne%essar& expenses
in%urred durin' the taxable &ear in %arr&in' on an& trade or business"
personal servi%es a%tuall& rendered are tax.dedu%tible.
Fo#ever" the burden in provin' the validit& of a %laimed dedu%tion
belon's to the taxpa&er. In this %ase" the burden has been satisfa%toril&
dis%har'ed b& the taxpa&er Al'ue" In%.
Al'ue" In%. #as able to prove that the promotional fees #ere not
0%titious and #ere in fa%t paid periodi%all& to the 0ve famil& members.
Goreover" the amount of the promotional fees #as reasonable"
%onsiderin' that the 0ve pa&ees a%tuall& performed a servi%e for Al'ue"
In%. b& main' the sale of the properties of P@A6C possible.
As a result of this sale" Al'ue" In%. earned a net %ommission of P50"000.
Taxes are #hat #e pa& for %ivili:ed so%iet&. 2ithout taxes" the
'overnment #ould be paral&:ed for la% of the motive po#er to
a%tivate and operate it.
Fen%e" despite the natural relu%tan%e to surrender part of one3s hard.
earned in%ome" ever& person #ho is able to must %ontribute his share
in runnin' the 'overnment. The 'overnment" for its part" is expe%ted to
respond in the form of ;A)ACIT@ for 'eneral #elfare. This s&#bi!ic
rela!ins$ip is !$e ra!inale ) !a%a!in and should dispel the
erroneous notion that it is an arbitrar& exa%tion b& those in the seat of
po#er.
Fo#ever" it should also be exer%ised reasonabl& and in a%%ordan%e
#ith the pres%ribed pro%edure. If it is not" the taxpa&er has a ri'ht to
%omplain to the %ourts.
SET4OFF OF TAXES
P$ile% -inin' Crp v CIR
;IR sent a letter to Philex asin' it to settle its tax liabilities for <KK< to
<KK= .
Philex protested that it has pendin' %laims for BAT input %redit$refund
for the taxes it paid for <K4K and that the refund should be applied
a'ainst the tax liabilities.
;IR replied that the pendin' %laims have )*T &et been established so
it follo#s that no le'al %ompensation %an tae pla%e" hen%e" the
reiteration of the demand for pa&ment.
Philex raised the issue to the CTA.
Pendin' pro%eedin' in CTA" ;IR issued a Tax Credit Certi0%ate <3G
#hi%h" #hen applied to the total tax liabilities of Philex of P<=3G
e/e%tivel& lo#ered the PhilexVs tax obli'ation.
6espite the redu%tion" CTA denied Philex3s petition for revie# and still
ordered Philex to pa& the remainin' balan%e of P<<0G plus interest"
sa&in' that for le'al %ompensation to tae pla%e" both obli'ations must
be liFuidated and demandable.
The liFuidated debt of the Philex to the 'overnment %annot" therefore"
be set.o/ a'ainst the unliFuidated claim #hi%h Philex %on%eived to
exist in its favour. It also invoed the prin%iple that Staxes %annot be
sub?e%t to set.o/ on %ompensation sin%e %laim for taxes is not a debt or
%ontra%t.S
Philex appealed to the CA" #hi%h denied su%h appeal and its GR.
A fe# da&s after the denial of GR" Philex obtained its BAT input
%redit$refund not onl& for <K4K to <KK< but also for <KK= and <KK>.
TF7@" Philex %ontended that the same should o/.set its ex%ise tax
liabilities sin%e both had alread& be%ome Sdue and demandable" as #ell
as full& li-uidated9 and le'al %ompensation %an properl& tae pla%e.
I1 <) 2$n le'al %ompensation bet#een the BAT input %redit$refund and
tax liabilit& %ould tae pla%e. )*
=) 2$n the imposition of interest and sur%har'e is un?usti0ed ( )*" it is
?usti0ed
3) 2$n ;IR violated @e%tion <0P of the )IRC #hen it 'ave the refunds
onl& in <KKP ( EA@
R1
<) Ta%es cann! be sub(ec! ! c#pensa!in. Novernment and the
taxpa&er are not %reditors and debtors of ea%h other. 6ebts are due to
the Novernment in its %orporate %apa%it&" #hile taxes are due to the
Novernment in its soverei'n %apa%it&. )ational Revenue Code of <K3K
provided for o/settin' but su%h provision #as dropped in the )IRC of
<KKD.
=) I#psi!in ) surc$ar'es an" in!eres!s are (us!i,e". The lo'i%
of su%h imposition is the prin%iple that taxes are the lifeblood of the
'overnment and so should be %olle%ted #ithout unne%essar&
hindran%e. Tax is that it is %ompulsor& and does not depend upon the
%onsent of the taxpa&er. Tax Code of <KDD1 The pa&ment of the
sur%har'e is mandator& and the ;IR is not vested #ith an& authorit& to
#aive the %olle%tion thereof.
<J .IR, $=ever, vila!e" Sec!in 8D9 ) !$e NIRC. ;IR violated
the )IRC" #hi%h re-uires the refund of input taxes #ithin P0 da&s" #hen
it too them 5 EAAR@ to 'rant Philex3 tax %laim for BAT input
%redit$refund. *n%e the %laimant has submitted all the re-uired
do%uments it is the fun%tion of the ;IR to assess these do%uments #ith
purposeful dispat%h. After all" sin%e taxpa&ers o#e honestl& to
'overnment it is but ?ust that 'overnment render fair servi%e to the
taxpa&ers.
The po#er of taxation is sometimes %alled also the po#er to destro&.
Therefore it should be exer%ised #ith %aution to minimi:e in?ur& to the
proprietar& ri'hts of a taxpa&er.
;7T althou'h it is admission of the lethar'i% manner b& #hi%h the ;IR
handled PhilexVs tax %laim" the @tate is not bound b& the ne'le%t of its
a'ents and oL%ers.
Francia v IAC
An'ra%io Cran%ia #as the re'istered o#ner of a residential lot and a =.
stor& house in Pasa& Cit&.
@ubse-uentl&" a <=5.s-m portion of Cran%ia3s propert& #as
expropriated b& the Republi% of the Philippines for the sum of P>!
representin' the estimated amount e-uivalent to the assessed value of
the aforesaid portion. This #as be%ause of Cran%ia3s failure to pa& taxes
for <> &ears.
The propert& #as then sold at publi% au%tion pursuant to @e%tion D3 of
P6 >P> no#n as the Real Propert& Tax Code. Cernande: #as the
hi'hest bidder for the propert&.
Cran%ia #as not present durin' the au%tion sale sin%e he #as in Ili'an
Cit& at that time helpin' his un%le ship bananas.
Cran%ia then re%eived a noti%e of hearin' of an IRC Case" #here
Cernande: sou'ht to %an%el Cran%ia3s TCT and issue a ne# one in his
name.
Cran%ia thus 0led a %omplaint to annul the au%tion sale" alle'in' that1
o his tax liabilit& should have been o/set #ith the mone& paid
to him b& the 'overnment #hen the& expropriated his other
propert&
o Fe #as not dul& noti0ed of the au%tion sale
o the pri%e at #hi%h his propert& #as sold #as 'rossl&
inade-uate #ith that of the propert&3s a%tual value
(8sho%in' to the senses9)
Io#er %ourt and IAC dismissed the %omplaint.
I1 2$n the au%tion #as valid
R1 EA@" it #as valid
;& le'al %ompensation" obli'ations of persons" #ho in their o#n ri'ht
are re%ipro%all& debtors and %reditors of ea%h other" are extin'uished
(Art. <=D4" Civil Code).
The %ir%umstan%es of the %ase do not satisf& the re-uirements provided
b& Arti%le <=DKY
o (<) that ea%h one of the obli'ors be bound prin%ipall& and
that he be at the same time a prin%ipal %reditor of the
other..xxx
o (3) that the t#o debts be due.
There %an be no o/.settin' of taxes a'ainst the %laims that the
taxpa&er ma& have a'ainst the 'overnment. A person %annot refuse to
pa& a tax on the 'round that the 'overnment o#es him an amount
e-ual to or 'reater than the tax bein' %olle%ted. The %olle%tion of a tax
%annot a#ait the results of a la#suit a'ainst the 'overnment.
The 'overnment and taxpa&er are )*T mutuall& %reditors and debtors
of ea%h other.
In this %ase" the tax #as due to the %it& 'overnment #hile the
expropriation #as e/e%ted b& the national 'overnment.
Goreover" the amount of P>! paid b& the national 'overnment for the
lot #as deposited #$ the P); I*)N ;AC*RA the au%tion of the
remainin' propert&.
*TFAR@1 Cran%ia %annot den& re%eivin' noti%e of the sale be%ause he
I) CACT admitted in his testimon& that he re%eived a letter re'ardin'
the sale" and it #as ne'li'en%e on his part #hen he i'nored su%h
noti%e, As a 'eneral rule" 'ross inade-ua%& of pri%e is not material
#hen the la# 'ives the o#ner the ri'ht to redeem as #hen a sale is
made at publi% au%tion" upon the theor& that the lesser the pri%e" the
easier it is for the o#ner to e/e%t redemption.
Republic ) !$e P$ils v -a#bula /u#ber C
Gambulao Iumber Compan& o#ed the Republi% of the Philippines a
total sum of about P>! (plus P5 le'al interest from the date of the
0lin' of the %omplaint) for forest %har'es %overin' the period from
@eptember <0" <K5= to Ga& =>" <K53.
The liabilit& #as %overed b& a bond exe%uted b& Neneral Insuran%e [
@uret& Corporation for the Compan& in favor of the Republi%.
The Compan& did not disput that it did have liabilities totalin' about
PC0T. F*2ABAR" as a defense" it also %laimed to have paid to the RP
P?0T )r Fre)res!a!in c$ar'esG from Oul& <K>4 to 6e%ember
<K5P and April <K>D to Oune <K>4.
These #ere paid in pursuan%e of RA <<5 #$% provides that there shall
be %olle%ted" in addition to the re'ular forest %har'es provided under
the )IRC" the amount of PD cen!s on ea%h %ubi% meter of timber %ut
out and removed from an& publi% forest for %ommer%ial purposes.
(purpose1 reforestation of #ater sheds" denuded areas" et%.)
The Compan& %ontended that sin%e the Republi% had not made use of
those reforestation %har'es %olle%ted" Republi% should refund them" so
it re-uested a refund from the 6ire%tor of Corestr& (that the amt be
%redited #$ reforestation %har'es imposed on them) so that the amount
if paid %ould be set.o/
I1 2$n the PK! paid b& the Compan& as reforestation %har'es ma& be
@AT *CC #ith the P>! forest %har'es due them
R1 )*" the& %annot be set.o/.
<) There is nothin' in the la# #hi%h re-uires that the amount %olle%ted
as reforestation %har'es should be used exclusively for the
reforestation of the area covered by the license of a li%ensee or
%on%essionaire" and that if not so used" the same should be refunded to
him.
The amount paid b& a li%ensee as reforestation %har'es is in the nature
of a tax #hi%h forms a part of the Reforestation Cund" pa&able b& him
irrespe%tive of #hether the area %overed b& his li%ense is reforested or
not. @aid fund" as the la# expressl& provides" shall be expended in
%arr&in' out the purposes provided for thereunder" namel&" the
reforestation or a/orestation" amon' others" of denuded areas needin'
reforestation or a/orestation.
=) 7nder Arti%le <=D4" )CC" %ompensation should tae pla%e #hen t#o
persons are CRA6IT*R@ and 6A;T*R@ of ea%h other.
In this %ase" RP and the Compan& are )*T mutual %reditors and
debtors of ea%h other. @aid amount are in the %o/ers of the
'overnment as tax %olle%ted. @in%e the& are not mutuall& %reditors and
debtors of ea%h other. Conse-uentl&" the la# on %ompensation is
inappli%able.
A %laim for taxes is )*T a debt" demand" %ontra%t or ?ud'ment as is
allo#ed to be set.o/ under the statutes of set.o/" #hi%h are %onstrued
uniforml&" in the li'ht of publi% poli%&" to ex%lude the remed& in an
a%tion or an& indebtedness of the state or muni%ipalit& to one #ho is
liable to the state or muni%ipalit& for taxes.
The 'eneral rule" based on 'rounds of publi% poli%& is #ell.settled that
no set.o/ is admissible a'ainst demands for taxes levied for 'eneral or
lo%al 'overnmental purposes. 2h&c Taxes are )*T in the nature of
%ontra%ts bet#een the part& and part& but 'ro# out of a dut& to" and
are the positive a%ts of the 'overnment. Gain' and enfor%in' them
does )*T re-uire C*)@A)T of taxpa&ers.
TAXPAEER SUIT
An!i4Gra)! /ea'ue ) !$e P$ils v San >uan
President Gar%os issued P6 )o. PD>" establishin' the Te%hnolo'i%al
Colle'es of Ri:al. The P6" amon' others" dire%ted the ;oard to provide
funds for the pur%hase of a site and the %onstru%tion of the ne%essar&
stru%tures thereon.
A%tin' upon an authorit& 'ranted b& the oL%e of the President" the
Provin%e #as able to ne'otiate #ith *rti'as [ Co." Itd. (*rti'as) for the
a%-uisition of > par%els of land in 7'on' )orte" Pasi'.
The pro?e%ted %onstru%tion" ho#ever" never materiali:ed be%ause of
the de%imation of the Provin%eVs resour%es brou'ht about b& the
%reation of the Getro Ganila Commission (GGC) in <KDP.
<= &rs later" #ith the propert& l&in' idle and the Provin%e needin'
funds to propel its 5.&ears Comprehensive 6evelopment Pro'ram" the
then in%umbent ;oard passed Resolution )o. 4D.=05 authori:in' the
Novernor to sell the same.
The said propert& #as eventuall& sold to Balle& Bie# Realt&
6evelopment Corporation (Balle& Bie#) for P<35G!" #here P30G #as
'iven as do#npa&ment.
;e%ause of this" *rti'as 0led a %ase of res%ission a'ainst the Provin%e
be%ause the Provin%e violated the provisions of their %ontra%t #hi%h
#as that the land #ould be used for the %onstru%tion of the Ri:al
Te%hnolo'i%al Colle'es and Ri:al Provin%ial Fospital.
)e# oL%ials then assumed oL%e and the ;oard adopted Resolution
)o. 44.P5 #hi%h provided for the res%ission of the deed of sale
bet#een the Provin%e and Balle& Bie# on the 'round that the sale pri%e
#as ex%eedin'l& lo# and" thus" pre?udi%ial to the Provin%e.
;e%ause of this" Balle& Bie# then 0led a %omplaint a'ainst the Provin%e
for spe%i0% performan%e and dama'es. (There are no# t#o %ases
a'ainst the board1 spe%i0% performan%e and dama'es b& Balle& Bie#
and res%ission of %ontra%t b& *rti'as)
The %ases a'ainst the Provin%e #as resolved b& enterin' into
%ompromise a'reements. 2ith Balle& Bie#" the Provin%e a'reed to
return the 30G do#npa&ment. 2ith *rti'as" the Provin%e a'reed to
re%onve& the > par%els of land to *rti'as for at PB,BPD + s;#. This
amount is hi'her than the maret values separatel& determined b&
Asian Appraisal" In%. and the Provin%ial Appraisal Committee #hi%h
respe%tivel& pe''ed the pri%e of the sub?e%t properties at P8,RDD an"
PB,BDD+s;#.
The Anti.Nraft Iea'ue 0led a petition to nullif& the a'reement as
taxpa&ers #ith le'al standin'.
I1 2$n this #as a taxpa&erVs suit $ 6oes petitioner possess the le'al
standin' to -uestion the transa%tion entered into b& the Provin%ial
;oard of Ri:al #ith private respondent *rti'asc
R1 )*" )*T A TAJPAEAR @7IT A)6 )* IANAI @TA)6I)N.
To %onstitute a taxpa&erVs suit" t#o re-uisites must be met1
o <) that publi% funds are disbursed b& a politi%al subdivision or
instrumentalit& and in doin' so" a la# is violated or some
irre'ularit& is %ommitted" and
o =) petitioner is dire%tl& a/e%ted b& the alle'ed ultra vires a%t.
In this %ase" disbursement of publi% funds #as onl& made in <KD5 #hen
the Provin%e bou'ht the lands from *rti'as at P<<0 per s-uare meter
in line #ith the ob?e%tives of P.6. PD>.
The ANI never referred to su%h pur%hase as an ille'al disbursement of
publi% funds but fo%used on the alle'ed fraudulent re%onve&an%e of
said propert& to *rti'as be%ause the pri%e paid #as lo#er than the
prevailin' maret value of nei'hborin' lots. The 0rst re-uirement"
therefore" #hi%h #ould mae this petition a taxpa&erVs suit is absent.
As to the =
nd
'round (#$n petitioner is dire%tl& a/e%ted)" undeniabl&" as
a taxpa&er" ANI #ould someho# be adversel& a/e%ted b& an ille'al
use of publi% mone&.
2hen" ho#ever" no su%h unla#ful spendin' has been sho#n" as in the
%ase at bar" ANI" even as a taxpa&er" %annot -uestion the transa%tion
validl& exe%uted b& and bet#een the Provin%e and *rti'as for the
simple reason that it is not priv& to said %ontra%t.
In other #ords" ANI has absolutel& no %ause of a%tion" and
%onse-uentl& no locus standi" in the instant %ase. The -uestion in
standin' is #hether su%h parties have Salle'ed su%h a personal stae in
the out%ome of the %ontrovers& as to assure that %on%rete adverseness
#hi%h sharpens the presentation of issues upon #hi%h the %ourt so
lar'el& depends for illumination of diL%ult %onstitutional -uestions.
>&a v Presi"en!ial C##issin n G" Gvern#en!
Gateo A.T. Caparas" then Chairman of PCNN" #rote then President
Cora:on C. A-uino" re-uestin' her for authorit& to si'n the proposed
Consi'nment A'reement bet#een the Republi% of the Philippines
throu'h PCNN and ChristieVs of )e# Eor.
President A-uino" throu'h former Axe%utive @e%retar& Catalino
Ga%arai'" Or." authori:ed PCNN Chairman to si'n the Consi'nment
A'reement allo#in' ChristieVs of )e# Eor to au%tion o/ the 4= *ld
Gasters Paintin's and anti-ue silver#are sei:ed from Gala%aean' and
the Getropolitan Guseum of Ganila alle'ed to be part of the ill.'otten
#ealth of the late President Gar%os" his relatives and %ronies.
Petitioners Oo&a" et%. 0led a petition for Gandamus #ith Pra&er for
Preliminar& In?un%tion and$or Restrainin' *rder to en?oin PCNN from
pro%eedin' #ith the au%tion sale.
After the oral ar'uments" the @C issued a resolution den&in' the
appli%ation for preliminar& in?un%tion.
The sale pushed throu'h and the \<3G! pro%eeds #ere turned over to
the ;ureau of Treasur&.
Petitioners %laim that as Cilipino %iti:ens" taxpa&ers and artists deepl&
%on%erned #ith the preservation and prote%tion of the %ountr&Vs artisti%
#ealth" the& have the le'al personalit& to restrain respondents from
a%tin' %ontrar& to their publi% dut& to %onserve the artisti% %reations as
mandated b& the <K4D Constitution and R.A. >4>P $ The Cultural
Properties Preservation and Prote%tion A%t.
The& also an%hor their %ase on the premise that the paintin's and
silver#are are publi% properties %olle%tivel& o#ned b& them and b& the
people in 'eneral to vie# and en?o& as 'reat #ors of art. The& alle'e
that #ith the unauthori:ed a%t of PCNN in sellin' the art pie%es"
petitioners have been deprived of their ri'ht to publi% propert& #ithout
due pro%ess of la# in violation of the Constitution.
I1 2$n petitioners had le'al standin' to 0le the petition
R1 )*" the& did not.
SIe'al standin'S means a personal and substantial interest in the %ase
su%h that the part& has sustained or #ill sustain dire%t in?ur& as a result
of the 'overnmental a%t that is bein' %hallen'ed.
The term SinterestS is material interest" an interest in issue and to be
a/e%ted b& the de%ree" as distin'uished from mere interest in the
-uestion involved" or a mere in%idental interest.
Goreover" the interest of the part& plainti/ must be personal and not
one based on a desire to vindi%ate the %onstitutional ri'ht of some third
and related part&.
There are %ertain instan%es ho#ever #hen this Court has allo#ed
ex%eptions to the rule on le'al standin'" as #hen a %iti:en brin's a
%ase for mandamus to pro%ure the enfor%ement of a publi% dut& for the
ful0llment of a publi% ri'ht re%o'ni:ed b& the Constitution" and #hen a
taxpa&er -uestions the validit& of a 'overnmental a%t authori:in' the
disbursement of publi% funds.
-anda!us .uit: Althou'h a%tion is also one of mandamus 0led b&
%on%erned %iti:ens" it does not ful0ll the %riteria for a mandamus suit.
A #rit of mandamus ma& be issued to a %iti:en onl& #hen the publi%
ri'ht to be enfor%ed and the %on%omitant dut& of the state are
une-uivo%abl& set forth in the Constitution.
In this %ase" petitioners are not after the ful0llment of a positive dut&
re-uired of respondent oL%ials under the <K4D Constitution. 2hat the&
see is the en?oinin' of an oL%ial a%t be%ause it is %onstitutionall&
in0rm.
Also" the %laim for the %ontinued en?o&ment and appre%iation b& the
publi% of the art#ors is at most a PRIBIIANA and )*T a %onsti ri'ht.
Taxpa#er/s .uit: A taxpa&erVs suit %an prosper onl& if the
'overnmental a%ts bein' -uestioned involve disbursement of publi%
funds upon the theor& that the expenditure of publi% funds b& an
oL%er is GI@APPIIA6" #hi%h ma& be en?oined at the re-uest of a
taxpa&er.
*bviousl&" petitioners are not %hallen'in' an& expenditure involvin'
publi% funds but the disposition of #hat the& alle'e to be publi%
properties.
Petitioners even admit that the paintin's and anti-ue silver#are #ere
a%-uired from private sour%es and not #ith publi% mone&.
/*a"a v CO-E/EC
A petition for mandamus #as 0led b& Oose Gari Io:ada and Romeo I'ot
as a representative suit for and in behalf of those #ho #anted to
parti%ipate in the ele%tion irrespe%tive of part& aLliation.
The& 0led the petition to %ompel the respondent C*GAIAC to %all a
spe%ial ele%tion to 0ll up existin' va%an%ies numberin' t#elve (<=) in
!$e In!eri# .a!asan' Pa#bansa.
The petition is based n Sec!in PMBJ, Ar!icle 2III ) !$e 8?@<
Cns!i!u!in #$% provides that #hen a vacancy arises in the L5egular#
Batasang ;ambansa "S months or more before a regular election, the
C9:6)6C shall call a special election to be held w=in HC days after the
vacancy occurs to elect the :ember to serve the unexpired term.
Io:ada %laimed that he is a taxpa&er and a bona0de ele%tor of Cebu
Cit& and a transient voter of Mue:on Cit&" Getro Ganila" #ho desires to
run for the position in the ;atasan Pambansa.
I'ot alle'es that" as a taxpa&er" he has standin' to petition b&
mandamus the %allin' of a spe%ial ele%tion as mandated b& the <KD3
Constitution.
C*GAIAC opposed the petition alle'in'" substantiall&" that <)
petitioners la% standin' to 0le the instant petition for the& are not the
proper parties to institute the a%tion, =) the Court has no ?urisdi%tion to
entertain this petition, and 3) @e%tion 5(=)" Arti%le BIII of the <KD3
Constitution does not appl& to the Interim ;atasan Pambansa.
I1 2$n pe!i!iners as !a%pa&ers an" v!ers #a& ,le !$is ins!an!
pe!i!in. U NOV
2*) GA)6AG7@ ma& be 0led #ith re'ard to the appropriation of
publi% fund. ( )*
R1
<) As taxpa&ers" petitioners ma& not 0le the instant petition" for
no#here therein is it alle'ed that tax mone& is bein' ille'all& spent.
The a%t %omplained of is the ina%tion of the C*GAIAC to %all a spe%ial
ele%tion" as is alle'edl& its ministerial dut& under the %onstitutional
provision above %ited" and therefore" involves no expenditure of publi%
funds.
It is onl& #hen an a%t %omplained of" #hi%h ma& in%lude a le'islative
ena%tment or statute" involves the ille'al expenditure of publi% mone&
that the so.%alled taxpa&er suit ma& be allo#ed.
2hat the %ase at bar sees is one that entails expenditure of publi%
funds #hi%h GAE ;A ille'al be%ause it #ould be spent for a purpose
that of %allin' a spe%ial ele%tion has no authorit& either in the
Constitution or a statute.
=) As voters" neither have petitioners the re-uisite interest or
personalit& to -ualif& them to maintain and prose%ute the present
petition.
The un%hallen'ed rule is that the person #ho impu'ns the validit& of a
statute must have a personal and substantial interest in the %ase su%h
that he has sustained" or #ill sustain" dire%t in?ur& as a result of its
enfor%ement.
In this %ase" the alle'ed ina%tion of the C*GAIAC to %all a spe%ial
ele%tion to 0ll.up the existin' va%an%ies in the ;atasan Pambansa"
standin' alone" #ould adversel& a/e%t onl& the 'enerali:ed interest of
all %iti:ens.
3) It is obvious that the holdin' of spe%ial ele%tions in several re'ional
distri%ts #here va%an%ies exist" #ould entail hu'e expenditure of
mone&. *nl& the ;atasan Pambansa %an mae the ne%essar&
appropriation for the purpose" and this po#er of the ;atasan Pambansa
ma& neither be sub?e%t to mandamus b& the %ourts mu%h less ma&
C*GAIAC %ompel the ;atasan to exer%ise its po#er of appropriation.
Crom the role ;atasan Pambansa has to pla& in the holdin' of spe%ial
ele%tions" #hi%h is to appropriate the funds for the expenses thereof" it
#ould seem that the initiative on the matter must %ome from said
bod&" not the C*GAIAC" even #hen the va%an%ies #ould o%%ur in the
re'ular not interim ;atasan Pambansa.
The po#er to appropriate is the sole and ex%lusive prero'ative of the
le'islative bod&" the exer%ise of #hi%h ma& not be %ompelled throu'h a
petition for mandamus
*TFAR1 @e%tion 5(=)" Arti%le BIII of the <KD3 Constitution refers to the
re'ular ;atasan' Pambansa (;P) and not the interim ;P. Therefore"
their %laim to hold spe%ial ele%tions to 0ll in the va%an%ies in the
interim ;P #ill fail for there is no basis for su%h in the Transitor&
Provisions of the Constitution 'overnin' pro%edures in the interim ;P.
INCO-E TAX
A. IN GENERA/
-a"ri'al v Ra5er!&
Bi%ente Gadri'al and @usana Paterno #ere married prior to
Oanuar& <" <K<>. The marria'e #as %onta%ted under the provisions of la#
%on%ernin' %on?u'al partnerships.
*n Cebruar& <K<5" Bi%ente Gadri'al 0led a s#orn de%laration
#$ the CIR sho#in' that his total net in%ome for the &ear <K<> is P=KP.
@ubse-uentl&" Gadri'al submitted the %laim that the P=KP
did )*T represent his in%ome for <K<>" ;7T it #as in fa%t the in%ome of the
%on?u'al partnership" and that in %omputin' and assessin' the additional
in%ome tax provided for b& the A%t of Con'ress of *%t. 3" <K<3" the in%ome
de%lared should be divided1 Q from Gadri'al and Q from Paterno.
This -uestion #as submitted to the Att&. Neneral" #ho in an
opinion ruled in favour of Gadri'al.
The revenue oL%ers #ere still unsatis0ed" so the& for#arded
this opinion to 2ashin'ton for a de%ision b& the 7@ Treasur& 6ept.
The 7@ CIR reversed the opinion of the Att&. Neneral.
Gadri'al paid under protest" then he 0led an a%tion in CCI
Ganila a'ainst CIR and 6eput& CIR for re%over& of P3.D. alle'ed to have
been #ron'full& and ille'all& assessed and %olle%ted b& the CIR" under the
In%ome Tax Ia#.
CIR ar'ued that the taxes imposed b& the In%ome Tax Ia# are
taxes upon I)C*GA and )*T upon %apital and propert&. The fa%t that
Gadri'al3s marria'e #as under %on?u'al partnership has no bearin' on
in%ome %onsidered as in%ome.
The answer of the defendants sets forth the basis of
defendantsR stand in the following way! The income of :adrigal and ;aterno
for the year "G"N was made up of K items!
". KH%k V profts made by :adrigal in coal and shipping business
%. Nk V profts made by ;aterno in her embroidery business
K. "Hk V profts made by :adrigal in pawnshop business
N. >ross income L;KSKk# :08?( general deductions L;SHk#A 8et income
L;%GHk#
I1 2$) the additional in%ome tax should be divided into = e-ual parts
be%ause of the %on?u'al partnership existin' bet#een them. ()*
;NR*7)61 In%ome tax la# of 7@ extended to Phils #as for the purpose of
miti'atin' the evils arisin' from ine-ualities of #ealth throu'h a pro'ressive
s%heme of taxation" #$% pla%es a burden on those #ho are able to pa&.
In%ome tax is supposed to rea%h the earnin's of the entire non.
'overnmental propert& of the %ountr&.
In%ome as %ontrasted #ith %apital or propert& is to be the test.
The essential di/eren%e bet#een %apital and in%ome is that capi!al is a
FUND, inc#e is a F/O6.
CAPITA/ is a fund of propert& existin' at an instant of time.
INCO-E is a ]o# of servi%es rendered b& that %apital b& the pa&ment of
mone& from it or an& other bene0t rendered b& a fund of %apital in relation
to su%h fund throu'h a period of time.
CAPITA/ is #ealth" #hile INCO-E is servi%e of #ealth.
@C of Neor'ia1 8The fa%t that propert& is a tree" in%ome is the fruit, labor is
a tree" in%ome is a fruit, %apital is a tree" in%ome is a fruit. A tax on in%ome
is not a tax on propert&. In%ome" as here used %an be de0ned as PR*CIT@ or
NAI)@.
In this %ase" @usana Paterno has an in%hoate ri'ht in the propert& of her
husband durin' the life of the %on?u'al partnership.
@he has an interest in the ultimate propert& ri'hts and in the o#nership of
propert& a%-uired as in%ome ACTAR @7CF I)C*GA FA@ ;AC*GA CAPITAI.
@he has )* A;@*I7TA RINFT to *)A.FAIC TFA I)C*GA of the %on?u'al
partnership.
As she has no estate and in%ome a%tuall& and le'all& vested in her and
entirel& distin%t from her husband3s propert&" the in%ome CA))*T properl&
be %onsidered @APARATA I)C*GA of the #ife for the purposes of additional
tax.
Goreover" the In%ome Tax Ia# does not loo on the spouses as individual
partners in an ordinar& partnership. The husband and #ife are onl& entitled
to the exemption of 4" 'ranted b& la#. The hi'her s%hedules of the
additional tax dire%ted at in%omes of the #ealth& ma& not be partiall&
defeated b& relian%e on the provisions in our Civil Code dealin' #ith the
%on?u'al partnership and havin' no appli%ation to the In%ome Tax Ia#. The
aims and purposes of the In%ome Tax Ia# must be 'iven e/e%t.
The onl& o%%asion for a #ife main' a return is #here she has in%ome from
a sole and separate estate in ex%ess of \3"000" but to'ether the& have an
in%ome in ex%ess of \>"000" in #hi%h the latter event either the husband or
#ife ma& mae the return but not both.
In all instan%es the in%ome of husband and #ife #hether from separate
estates or not" is taen as a 2F*IA for the purpose of the )*RGAI TAJ.
2here the #ife has in%ome from a separate estate maes return made b&
her husband" #hile the in%omes are added to'ether for the purpose of the
normal tax the& are taen @APARATAIE for the purpose of the additional tax.
In this %ase" ho#ever" the #ife has no separate in%ome #ithin the
%ontemplation of the In%ome Tax Ia#.
Fis$er v Trini"a"
The Philippine Ameri%an 6ru' Compan& (PA6C) #as a %orporation dul&
or'ani:ed and existin' under Phil la# and Cisher #as a sto%holder in
the %oproration.
PA6C" as result of the business for that &ear" de%lared a Ssto%
dividend.S The proportionate share of the said sto% divided of the
Cisher as P=>"400" su%h amount bein' issued to Cisher.
Iater on" Cisher" upon demand of the CIR" paid under protest the sum
of about P44K as in%ome tax on the said sto% dividend.
CIR demurred to the petition upon the 'round that it did not state fa%ts
suL%ient to %onstitute %ause of a%tion. The demurrer #as sustained" so
Cisher appealed.
Cisher %ited 7@ @C de%isions to sustain his %laim #here in ea%h of the
%ases" an e/ort #as made to %olle%t an Sin%ome taxS upon Ssto%
dividendsS and it #as held that Ssto% dividendsS #ere CAPITAI and
)*T in%ome and therefore )*T sub?e%t to the Sin%ome taxS la#.
CIR ar'ued that althou'h in Aisner v Ga%omber" a Ssto% dividend is
)*T in%ome"S said A%t )o. =433" in imposin' the tax on the sto%
dividend" does not violate the provisions of the Oones Ia#" and that 7@
statutes providin' for tax on sto% dividends are di/ from Phil statutes.
In the 7@ (Chapter >P3" A%t of Con'ress)" the term SdividendsS pertains
to an& distribution made $ ordered to be made b& a %orporation.. sto%
dividend shall be %onsidered in%ome" to the amount of its %ash value.
In the Phils" A%t )o. =433" the term SdividendsS pertains to an&
distribution made $ ordered to be made b& a %orporation" . . . out of its
earnin's or pro0ts a%%rued sin%e Gar%h <" <K<3 and pa&able to its
shareholders" #hether in %ash or in sto% of the %orporation" . . . . @to%
dividend shall be %onsidered in%ome" to the amount of the earnin's or
pro0ts distributed.
I1 2$n Ssto% dividendsS are Sin%omeS and taxable under the provisions
of A%t =433
R1 )*" the& are not.
In this %ase" @C 0rst determined the de0nition of 8sto% dividends.9
@to% dividends represent undistributed in%rease in the %apital of
%orporations$ entities for a parti%ular period. The& are used to sho# the
in%reased interest or proportional shares in the %apital of ea%h
sto%holder.
In other #ords" the inventor& of the propert& of the %orporation" et%."
for parti%ular period sho#s an in%rease in its %apital" so that the sto%
theretofore issued does )*T sho# the real value of the sto%holderVs
interest" and additional sto% is issued sho#in' the in%rease in the
a%tual %apital" or propert&" or assets of the %orporation" et%.
;la%3s Ia#1 An in%ome is the return in mone& from oneVs business"
labor" or %apital invested, 'ains" pro0t or private revenue.
Ousti%e Fu'hes of 7@ @C de0ned in%ome as %ash $ its e-uivalent. IT
6*A@ )*T mean %hoses in a%tion$ unreali:ed in%rements in the value
of the propert&
The sto%holder #ho re%eives a sto% dividend has re%eived nothin'
but a representation of his in%reased interest in the %apital of the
%orporation" but AII TFA PR*PARTE $ CAPITAI of the %orp @TIII
;AI*)N@ to the %orp. There has been no separation of the interest of
the sto%holder from the 'eneral %apital of the %orporation.
Thus" a cer!i,ca!e ) s!c0 represen!e" b& !$e s!c0 "ivi"en" is
si#pl& a s!a!e#en! ) $is prpr!inal in!eres! r par!icipa!in
in !$e capi!al ) !$e crpra!in.
The Ie'islature" #hen it provided for an Sin%ome tax"S intended to tax
onl& the Sin%omeS of %orporations" 0rms or individuals" as that term is
'enerall& used in its %ommon a%%eptation. The& 6I6 )*T intend that at
a mere in%rease in the value of the %apital or assets of a %orporation"
0rm" or individual" should be taxed as Sin%ome.S @u%h propert& %an be
rea%hed under the ordinar& from of taxation.
There is a 6I@TI)CTI*) bet#een an e%!rar"inar& cas$ "ivi"en"" no
matter #hen earned" and s!c0 "ivi"en"s de%lared.
AC6 is a disbursement to the sto%holder of a%%umulated earnin's" and
the %orp parts #$ AI I)TARA@T on it.
@6" on the other hand" involves )* disbursement and parts #$
)*TFI)N.
The sto%holder re%eives )*T an a%tual dividend but %erti0%ate of
sto% #hi%h simpl& eviden%es his interest in the entire %apital"
in%ludin' su%h as b& investment of a%%umulated pro0ts has been
added to the ori'inal %apital. The& are not in%ome to him" but
represent additions to the sour%e of his in%ome" namel&" his invested
%apital.
7ntil the dividend is de%lared and paid" the %orporate pro0ts still
belon' to the %orporation" not to the sto%holders" and are liable for
%orporate indebtedness
Ousti%e 2ilin1 SA dividend is a %orporate pro0t set aside" de%lared" and
ordered b& the dire%tors to be paid to the sto%holders on demand or
at a 0xed time. 7ntil the dividend is de%lared" these %orporate pro0ts
belon' to the %orporation" )*T to the sto%holders" and are liable for
%orporate indebtedness.
A %areful readin' of ACT =433 #ill sho# that" #hile it permitted a tax
upon in%ome" the same provided that inc#e s$all inclu"e 'ains,
pr,!s, an" inc#e "erive" )r# salaries, =a'es, r
c#pensa!in )r persnal services, as =ell as )r# in!eres!,
ren!, "ivi"en"s, securi!ies, e!c.
Thus" in%ome re%eived as dividends I@ taxable as an in%ome but an
in%ome from SdividendsS is a ver& di/erent thin' from re%eipt of a
Ssto% dividend.S I)C*GA CR*G 6IBI6A)6@ is the a%tual re%eipt of
pro0ts #hile @T*CU 6IBI6A)6 is the a re%eipt of a representation of the
in%reased value of the assets of %orporation.
/i#pan Inves!#en! Crp v CIR
Iimpan Investment Corporation (Iimpan) #as a domesti% %orporation
dul& re'istered sin%e <K55. It #as en'a'ed in the business of leasin'
real properties.
It prin%ipal sto%holders #ere the spouses Iim (Isabelo and
Puri0%a%ion)" #ho o#ned and %ontrolled KK5 of its total paid.up
%apital. Isabelo Iim #as also the president and %hairman of the board.
Iimpan3s real properties %onsisted of several lots and buildin's" mostl&
situated in Ganila and in Pasa& Cit&" a%-uired from Isabelo and his
mother.
Iimpan dul& 0led its <K5P and <K5D in%ome tax returns" reportin'
therein net in%omes of about P3! and P<<! respe%tivel&" for #hi%h it
paid the %orrespondin' taxes for su%h.
Iater on" the ;IR %ondu%ted an investi'ation of the said in%ome tax
returns and dis%overed that Iimpan had underde%lared its rental
in%omes b& P=0 and P4< durin' the said &ears" and had %laimed
ex%essive depre%iation of its buildin's in the sums of P>! and P<P!
%overin' the same period.
CIR thus issued its letter.assessment and demand for pa&ment of
de0%ien%& in%ome tax and sur%har'e a'ainst Iimpan" in the amount of
P30!.
Iimpan ased CIR for re%onsideration of the assessment" but CIR
denied.
Iimpan 0led its petition for revie# before the CTA. 6urin' the trial" it
%ame out that Iimpan had unde%lared more than Q of the amount
(P<="<00.00 out of P=0"<KK.00) found b& the ;IR examiners as
unreported rental in%ome for the &ear <K5P and more than <$3 of the
amount (P=K"350.00 out of P4<"PK0.00) as%ertained b& the same
examiners as unreported rental in%ome for the &ear <K5D durin' the
trial. Thus" CTA upheld CIR3s assessment.
I1 2$n CTA #as %orre%t in holdin' that Iimpan had unreported rental
in%omes for the &ears <K5P and <K5D
R1 EA@.
Iimpan admitted throu'h its o#n #itness (@e%retar&.Treasurer @olis)
that it had unde%lared more than one.half Q of the amount found b&
;IR examiners and more than <$3 as%ertained b& the same examiners
as unreported rental in%ome for the &ear <K5D" %ontrar& to its ori'inal
%laim to the revenue authorities. TF7@" it had the burden to of
establishin' %lear and %onvin%in' eviden%e to the %ontrar&" #$% it failed
to do.
The ex%use that Isabelo and his mother retained o#nership of the lands
and onl& later transferred the o#nership to Iimpan to ?ustif& the
alle'ed verbal a'reement #hereb& the& #ould turn over to Iimpan P5
of the value of its properties to be applied to the rentals of the land and
in ex%han'e for #hatever rentals the& ma& %olle%t from the tenants
#ho refused to re%o'ni:e the ne# o#ner or vendee of the buildin's" is
not onl& unusual but un%orroborated b& the alle'ed transferors" or b&
an& do%ument or unbiased eviden%e.
Iimpan3s denial and explanation of the non.re%eipt of the remainin'
unreported in%ome for <K5D is not substantiated b& satisfa%tor&
%orroboration.
AI@*" Isabelo #as not presented as #itness nor #as his <K5D personal
in%ome tax return submitted in %ourt to establish that the rental
in%ome #hi%h he alle'edl& %olle%ted and re%eived in <K5D #ere
reported therein.
The #ithdra#al in <K54 of the deposits in %ourt pertainin' to the <K5D
rental in%ome is no suL%ient ?usti0%ation for the non.de%laration of
said in%ome in <K5D" sin%e the deposit #as resorted to due to the
refusal of Iimpan to a%%ept the same" and #as not the fault of its
tenants, hen%e" Iimpan is deemed to have %onstru%tivel& re%eived
su%h rentals in <K5D. The pa&ment b& the sub.tenant in <K5D should
have been reported as rental in%ome in said &ear" sin%e it is in%ome
?ust the same re'ardless of its sour%e.
6epre%iation is a -uestion of fa%t and is not measured b& theoreti%al
&ardsti%" but should be determined b& a %onsideration of a%tual fa%ts.
Cindin's of the CTA should not be disturbed.
Cn=i v CTA
Petitioners Con#i" et%. #ere Cilipino %iti:ens and emplo&ees of Pro%ter
and Namble (P[N)" Philippine Ganufa%turin' Corporation #hi%h is a
subsidiar& of P[N" Cin%innati" *hio.
In the &ear <KD0 and <KD<" the& #ere assi'ned" for %ertain periods" to
other subsidiaries of P[N outside of the Philippines and #ere earnin'
7@ dollars.
2hen the& 0led their in%ome tax returns" the& %omputed their tax due
b& appl&in' the dollar.peso %onversion rates on the basis of the ]oatin'
rate ordained b& the .IR rulin' N. @D4B@.
The said rulin' states that1
o CR*G Oan..Ceb. <KD0 the %onversion rate is P3.K0
o CR*G Ceb..6e%. <KD0 the %onversion rate is PP.=5
Petitioners from the se%ond %ase also 0led usin' the same %onversion
rate but amended their in%ome tax returns in <KD3 and used the par
value of the peso as pres%ribed in @e%tion >4 of RA =P5 in relation to
CA PKK.
The said %omputation resulted in the alle'ed overpa&ments and their
%laim for refund.
Petitioners 0led petition for revie# before the CTA.
CTA held that the proper %onversion rate for the purpose of reportin'
and pa&in' the Philippine in%ome tax on the dollar earnin's of the
petitioners are the rates pres%ribed under Revenue -e#ran"u#
Circulars Ns. @4@8 an" C84@8M)ree #ar0e! ra!e ) cnversinJ.
Thus" their %laims #ere denied.
I1 2$n petitioners are entitled to refund
R1 )*" the& are not.
Petitioners are %orre%t as to their %laim that their dollar earnin's are
not re%eipts derived from forei'n ex%han'e transa%tions be%ause
forei'n ex%han'e transa%tions refer to those transa%tions #here there
is %onversion of an amount of mone& or %urren%& of one %ountr& into
an e-uivalent amount of mone& or %urren%& of another.
The& #ere earnin' in their assi'ned nation3s %urren%& and also
spendin' in said %urren%&" and thus" there #as no forei'n ex%han'e
involved. Thus" the Commissioner erred in %on%ludin' that their in%ome
taxes fell under Central ;an Cir%ular )o. >=.
Noin' to the issue of #hat rate of ex%han'e shall be used" the
petitioners %ontended that sin%e their in%omes are not in the form of
forei'n ex%han'e transa%tions, that there are no a%tual in#ard
remittan%es" the& are not in%luded in the %overa'e of C; Cir%ular )o.
=4K #hi%h provides for spe%i0% instan%es #hen the par value of the
peso shall )*T be the %onversion rate used and thus" the& %laim that
the par value of the Philippine peso should be used.
F*2ABAR" @C a'reed #$ Commissioner3s ar'ument that the said C;
Cir%ular speas of receip!s ) )rei'n e%c$an'e r )rei'n
brr=in's an" inves!#en!s, bu! NOT inc#e !a%. Thus" he had
to use the prevailin' free maret rate of ex%han'e in these %ases
be%ause of the need to as%ertain the true and %orre%t amount of
in%ome in Philippine peso of dollar earners.
The in%ome of the petitioners" as Cilipino %iti:ens temporaril& residin'
abroad" is still sub?e%t to in%ome tax as stated in @e%. =< of the )IRC.
To implement su%h" @e%. 334 of the )IRC empo#ers the @e%retar& of
Cinan%e to 8promul'ate all needful rules and re'ulations9 to e/e%tivel&
enfor%e its provisions.
Thus" Revenue Gemorandum Cir%. )os. D.D< and ><.D< #ere
promul'ated to pres%ribe a uniform rate of ex%han'e from 7@ dollars to
Philippine pesos for I)TAR)AI RABA)7A TAJ P7RP*@A@ for the &ears
<KD0 and <KD<" respe%tivel&. These %ir%ulars #ere validl& promul'ated
and are presumed to be valid until revoed b& the @e%retar& of Cinan%e
himself. Thus" the petitioners #ere %orre%tl& taxed b& the
Commissioner.
@in%e the& have alread& paid their <KD0 and <KD< in%ome taxes under
the uniform rate of ex%han'e pres%ribed b& the said %ir%ulars" there is
no reason for the Commissioner to refund them of an& taxes.
)*TA1 In%ome + an amount of mone& %omin' to a person or
%orporation #ithin a spe%i0ed time" #hether as pa&ment for servi%es"
interest or pro0t from investment, %ash or its e-uivalent, a ]o# of the
fruits of one3s labor
.. General Principles
SEC. B<. 0eneral rinciples of Inco!e Taxation in the
hilippines. (
Ax%ept #hen other#ise provided in this Code1
(A) A %iti:en of the Philippines residin' therein is taxable on all
inc#e derived from sour%es #ithin and #ithout the Philippines,
(;) A nonresident %iti:en is taxable onl& on inc#e "erive" )r#
surces =i!$in !$e P$ilippines,
(C) An individual %iti:en of the Philippines #ho is #orin' and
derivin' in%ome from abroad as an overseas %ontra%t #orer is
taxable onl& on in%ome derived from sour%es #ithin the
Philippines1
;rovided, That a seaman #ho is a %iti:en of the Philippines
and #ho re%eives %ompensation for servi%es rendered abroad as a
member of the %omplement of a vessel en'a'ed ex%lusivel& in
international trade shall be treated as an overseas %ontra%t #orer,
(6) An alien individual" #hether a resident or not of the Philippines"
is taxable onl& on in%ome derived from sour%es #ithin the
Philippines,
(A) A domesti% %orporation is taxable on all in%ome derived from
sour%es #ithin and #ithout the Philippines, and
(C) A forei'n %orporation" #hether en'a'ed or not in trade or
business in the Philippines" is taxable onl& on in%ome derived from
sour%es #ithin the Philippines.
C. Inc#e !a% n in"ivi"uals
De,ni!ins
Resident citi1ens and resident aliens
@e% == (C) The term 2resident alien2 means an individual #hose residen%e
is #ithin the Philippines and #ho is not a %iti:en thereof.
Garrisn v CA
Petitioners Narrison" et% . #ere 7@ %iti:ens emplo&ed in the 7@ )aval
;ase in *lon'apo.
The& re%eived separate noti%es from Iadislao Cirma%ion" 6istri%t
Revenue *L%er stationed at *lon'apo Cit&" informin' them that the&
had not 0led their respe%tive in%ome tax returns for the &ear <KPK" as
re-uired b& @e%tion >5 of the )IRC" and dire%tin' them to 0le the said
returns #ithin <0 da&s from re%eipt of the noti%e.
Petitioners refused to 0le their in%ome tax returns" %laimin' that the&
are )*T resident aliens but onl& spe%ial temporar& visitors. The& also
%laimed to be exempt b& virtue of the 7@.RP Gilitar& ;ases A'reement.
CCI ho#ever found the petitioners 'uilt& of violatin' @e%tion >5 of the
)IRC. This #as aLrmed b& CA" rulin' that Sph&si%al or bodil& presen%eS
in the %ountr& is suL%ient b& itself to -ualif& the petitioners as resident
aliens despite the fa%t that the& #ere not SresidentsS of the Philippines
immediatel& before their emplo&ment b& the 7@ Novernment at @ubi%
)aval ;ase and that their presen%e durin' the period %on%erned #as
di%tated b& their respe%tive #or as emplo&ees of the 7@ )aval ;ase.
I1 2$n petitioners are resident aliens" hen%e not exempt from @e%tion
>5 of the )IRC
R1 EA@" the& are. Thus" the& are not exempt from tax.
@e% >5 )IRC provides that an alien residin' in the Phils #ho has a 'ross
in%ome of at least P<"400 for the taxable &ear is re-uired to 0le an
in%ome tax return. This is re'ardless of #hether 'ross in%ome #as
derived from sour%es #$in or outside the Phils.
This provision is also %ontained in the Gilitar& ;ases A'reement
bet#een the Phils and 7@" #$% provides that no national of the 7@
servin' $ emplo&ed in the Phils in %onne%tion #$ the %onstru%tion"
maintenan%e" et% of bases shall be liable to pa& in%ome tax" AJCAPT for
in%ome derived from PFIIIPPI)A @*7RCA@ $ sour%es other than 7@
sour%es.
In this %ase" the petitioners fall #ithin the letter of the %odal that an
8alien residin' in the Philippines9 is obli'ed 8to 0le an in%ome tax
return.9
)one of them ma& be %onsidered a non.resident alien" 8a mere
transient or so?ourner"9 #ho is not under an& le'al dut& to 0le an
in%ome tax return under the Philippine Tax Code.
This is made %lear b& Revenue Re'ulations )o. = of the 6epartment of
Cinan%e (Ceb <K>0) #$% provides that an alien a%tual present in the
Philippines #ho is not a mere transient or so?ourner I@ a resident of the
Philippines for purposes of in%ome tax.
2hether he is a transient or not is determined b& his intentions #ith
re'ard to the len'th and nature of his sta&. If he lives in the Philippines
and has no de0nite intention as to his sta&" he is a resident.
*ne #ho %omes to the Philippines for a de0nite purpose #hi%h in its
nature ma& be promptl& a%%omplished is a transient.
Also" looin' at the ;ases A'reement" it is %lear that for Ameri%an
nationals residin' in the %ountr& ma& be relieved of the dut& to pa&
in%ome tax for an& 'iven &ear" it is in%umbent on them to sho# ;IR
that in that &ear the& had derived in%ome ex%lusivel& from their
emplo&ment in %onne%tion #ith the 7@ bases" and none #hatever
8from Philippine sour%es or sour%es other than the 7@ sour%es.9
Non"resident citi1ens
(A) The term @nonresident citi*en@ means1
(<) A %iti:en of the Philippines #ho establishes to the
satisfa%tion of the Commissioner the fa%t of his ph&si%al
presen%e abroad #ith a de0nite intention to reside therein.
(=) A %iti:en of the Philippines #ho leaves the Philippines
durin' the taxable &ear to reside abroad" either as an
immi'rant or for emplo&ment on a permanent basis.
(3) A %iti:en of the Philippines #ho #ors and derives in%ome
from abroad and #hose emplo&ment thereat re-uires him to
be ph&si%all& present abroad most of the time durin' the
taxable &ear.
(>) A %iti:en #ho has been previousl& %onsidered as
nonresident %iti:en and #ho arrives in the Philippines at an&
time durin' the taxable &ear to reside permanentl& in the
Philippines shall lie#ise be treated as a nonresident %iti:en
for the taxable &ear in #hi%h he arrives in the Philippines #ith
respe%t to his in%ome derived from sour%es abroad until the
date of his arrival in the Philippines.
(5) The taxpa&er shall submit proof to the Commissioner to
sho# his intention of leavin' the Philippines to reside
permanentl& abroad or to return to and reside in the
Philippines as the %ase ma& be for purpose of this @e%tion.
RR 84@? M>anuar& R, 8?@?J U di ra# mahanapc
RR P4D8 M>ul& <8, BDD8J U see separate do% (from Nreta)
.IR Rulin' <<4DD MSep! P, BDDDJ
INCO-E TAXW Overseas Cn!rac! 6r0er . @e%tion =3(C) of the Tax
Code of <KKD provides that an individual %iti:en of the Philippines #ho
is #orin' and derivin' in%ome from abroad as an overseas %ontra%t
#orer is taxable onl& on in%ome from sour%es #ithin the Philippines.
Corollar& thereto" @e%tion ==(A)(3) of the same Code provides that a
%iti:en of the Philippines #ho #ors and derives in%ome from abroad
and #hose emplo&ment thereat re-uires him to be ph&si%all& present
abroad most of the time durin' the taxable &ear.
Thus" for purposes of exemption from in%ome tax" a %iti:en must be
derivin' forei'n.sour%ed in%ome for bein' a non.resident %iti:en or for
bein' an overseas %ontra%t #orer (C2).
All emplo&ees #hose servi%es are rendered abroad for bein' se%onded
or assi'ned for at least <43 da&s ma& fall under the 0rst %ate'or& and
are therefore exempt from pa&ment of Philippine in%ome tax. The
p$rase X#s! ) !$e !i#eX shall mean that the said %iti:en shall
have sta&ed abroad for at least <43 da&s in a taxable &ear. (@e%. (=)(%)"
Revenue Re'ulations )o. <.DK)
The same exemption applies to an overseas %ontra%t #orer but as
su%h #orer" the time spent abroad is not material for tax exemption
purposes. All that is re-uired is for the #orerVs emplo&ment %ontra%t
to pass throu'h and be re'istered #ith the Philippine *verseas
Amplo&ment A'en%& (P*AA). (;IR Rulin' )o. 033.=000 dated
@eptember 05" =000)
Non"resident aliens engaged in &usiness in the hilippines
@e%. == (N) The term @nonresident alien@ means an individual #hose residen%e is
not #ithin the Philippines and #ho is not a %iti:en thereof.
@e%. 5 [ P" RR = ( di ra# mahanap c
-ini!u! wage earner
Added b& RA K50> on Oune <D" =0041
@e% ==.
(NN) The term Fs!a!u!r& #ini#u# =a'eG earner shall refer to rate 0xed b&
the Re'ional Tripartite 2a'e and Produ%tivit& ;oard" as de0ned b& the ;ureau of
Iabor and Amplo&ment @tatisti%s (;IA@) of the 6epartment of Iabor and
Amplo&ment (6*IA)
(FF) The term F#ini#u# =a'e earnerG shall refer to a #orer in the private
se%tor paid the statutor& minimum #a'e,
or to an emplo&ee in the publi% se%tor #ith %ompensation in%ome of not more
than the statutor& minimum #a'e in the non.a'ri%ultural se%tor #here he$ she is
assi'ned.
3ependent
@e% 35 (;)" Tax Code . Additional Axemption for 6ependents.
There shall be additional exemption of P=5"000 for ea%h dependent )*T
ex%eedin' >.
The additional exemption for dependents shall be %laimed b& onl& *)A of the
spouses in the %ase of married individuals.
In %ase of le'all& separated spouses" additional exemptions ma& be %laimed
*)IE b& the spouse #ho has C7@T*6E of the %hildren $ %hildren1
PR*BI6A6" that the total amount of additional exemptions that ma& be %laimed
b& both shall not ex%eed the maximum additional exemptions allo#ed.
Cor purposes of this @ubse%tion" a X"epen"en!X means a le'itimate" ille'itimate
or le'all& adopted %hild %hie]& dependent upon and livin' #ith the taxpa&er if
su%h dependent is not more than t#ent&.one (=<) &ears of a'e" unmarried and
not 'ainfull& emplo&ed or if su%h dependent" re'ardless of a'e" is in%apable of
self.support be%ause of mental or ph&si%al defe%t.
Kinc#e !a% n!es see 0in"s ) inc#e !a%Y
PERSONA/ AND ADDITIONA/ EXE-PTIONS
Pansacla v CIR
Carmelino C. Pansa%ola 0led his in%ome tax return for the taxable &ear
<KKD that re]e%ted an overpa&ment of P5"K50. In it" he %laimed the
in%reased amounts of personal and additional exemptions under @e%
35 of the )IRC" althou'h his %erti0%ate of in%ome tax #ithheld on
%ompensation indi%ated the lesser allo#ed amounts on these
exemptions.
Thus" he %laimed the P5! refund #$ ;IR" but ;IR denied.
CTA also denied his %laim" sa&in' it #ould be absurd to allo# the
dedu%tion from a taxpa&er3s 'ross in%ome earned on a %ertain &ear of
exemptions availin' on a di/erent taxable &ear. Pansa%ola sou'ht
re%onsideration" but it #as denied.
CA also denied his petition" rulin' that the )IRC too e/e%t on Oanuar&
<" <KK4" thus the in%reased exemptions #ere e/e%tive onl& to %over
taxable &ear <KK4 and CA))*T be applied retroa%tivel&.
I1 2$n the exemptions under @e%tion 35 of the )IRC" #hi%h too e/e%t
on Oanuar& <" <KK4" %ould be availed of for the taxable &ear <KKD (thus
main' Pansa%ola entitled to refund)
R1 )*T
Personal and additional exemptions under @e%tion 35 of the )IRC are
0xed amounts to #hi%h %ertain individual taxpa&ers (%iti:ens" resident
aliens) are entitled. Persnal e%e#p!ins are the theoreti%al
personal" livin' and famil& expenses of an individual allo#ed to be
dedu%ted from the 'ross or net in%ome of an individual taxpa&er. The&
are 0xed amounts in the sense that the amounts have been
predetermined b& our la#maers (@e% 35" A and ;).
The )IRC (@e% D5" 6) provides that personal and additional exemptions
shall be determined in a%%ordan%e #ith the main provisions in Title II"
)IRC .
T$e NIRC "e,nes X!a%able inc#eX as the pertinent items of 'ross
in%ome spe%i0ed in the )IRC" less the dedu%tions and$or personal and
additional exemptions" if an&" authori:ed for su%h t&pes of in%ome b&
the )IRC or other spe%ial la#s. (@e% 3<)
*n the other hand" X!a%able &earX means the %alendar &ear" upon the
basis of #hi%h the net in%ome is %omputed under Title II of the )IRC
(@e% ==" P).
Goreover" the taxable in%ome of an individual shall be %omputed on
the basis of the %alendar &ear (@e% >3) in #hi%h the& are Spaid or
a%%ruedS or Spaid or in%urred9 (@e% >5).
T$ere)re, !$e inc#e sub(ec! ! inc#e !a% is !$e !a%pa&er:s
inc#e as "erive" an" c#pu!e" "urin' !$e CA/ENDAR ER, $is
!a%able &ear. 4(ection %N L+# L"# La# in relation to (ections K" and %%
L;# and (ections NK, NO and PG LJ##
C/EAR/E, #hat the la# should %onsider for the purpose of
determinin' the tax due from an individual taxpa&er is his status and
-uali0ed dependents at the clse of the taxable &ear and )*T at the
time the return is 0led and the tax due thereon is paid.
The )IRC (@e% 35 C) allo#s a taxpa&er to s!ill clai# the %orrespondin'
full amount of exemption for a taxable &ear" e.'. if he marries" has
additional dependents, he" his spouse" or an& of his dependents die,
and if an& of his dependents marr&" turn =< &ears old, or be%ome
'ainfull& emplo&ed. It is as if the %han'es in his or his dependents3
status too pla%e at the %lose of the taxable &ear. Conse-uentl&" his
%orre%t taxable in%ome and his %orrespondin' allo#able dedu%tions had
alread& been determined as of the end of the %alendar &ear.
In the %ase of petitioner" the availabilit& of the aforementioned
dedu%tions if he is thus entitled" #ould be re]e%ted on his tax return
0led on or before the April <5" <KKK as mandated b& @e%tion 5< (C) (<).
@in%e the )IRC too e/e%t on >anuar& 8, 8??R" the in%reased amounts
of personal and additional exemptions under @e%tion 35" %an onl& be
allo#ed as dedu%tions from the individual taxpa&er3s 'ross or net
in%ome" as the %ase ma&be" for the taxable &ear <KK4 to be 0led in
<KKK.
The )IRC made )* RACARA)CA that the personal and additional
exemptions shall appl& on in%ome earned before Oanuar& <" <KK4.
OTHERS7 Petitioner3s relian%e in 7mali is mispla%ed. In 7mali" @C
noted that despite bein' 'iven authorit& b& the )IRC (@e% =K) to ad?ust
these exemptions" no ad?ustments #ere made to %over <K4K. RA D<PD
is entitled SAn A%t Ad?ustin' the ;asi% Personal and Additional
Axemptions Allo#able to Individuals for In%ome Tax Purposes to the
Povert& Threshold Ievel" Amendin' for the Purpose @e%tion =K"
Para'raph (I)" Items (<) and (=) (A)" of the )ational Internal Revenue
Code" As Amended" and Cor *ther Purposes.S Thus" the ad?ustment
provided b& RA D<PD e/e%tive <KK=" should %onsider the povert&
threshold level in <KK<" the time it #as ena%ted. And #e observed
therein that sin%e the exemptions #ould espe%iall& bene0t lo#er and
middle.in%ome taxpa&ers" the exemption should be made to %over the
past &ear <KK<. To su%h an extent" Rep. A%t )o. D<PD #as a so%ial
le'islation intended to remed& the non.ad?ustment in <K4K (le'islative
intent).
F*2ABAR" in this %ase" there is )*TFI)N in the )IRC that expresses
an& su%h intent. It is not a so%ial le'islation.
At the time petitioner 0led his <KKD return and paid the tax due
thereon in April <KK4" the in%reased amounts of personal and
additional exemptions in @e%tion 35 #ere not &et available. It has )*T
EAT a%%rued as of 6e%ember 3<" <KKD" the last da& of his taxable &ear.
Petitioner3s taxable in%ome %overs his in%ome for the %alendar &ear
<KKD. The la# %annot be 'iven retroa%tive e/e%t be%ause nothin' in
the la# provides for su%h.
Personal and additional exemptions are %onsidered as dedu%tions from
'ross in%ome. 6edu%tions for in%ome tax purposes partae of the
nature of tax exemptions" hen%e stri%tl& %onstrued a'ainst the
taxpa&er and %annot be allo#ed unless 'ranted in the most expli%it
and %ate'ori%al lan'ua'e too plain to be mistaen.
-.E. Hl"in's Crp v CIR N CTA
RA D>3=" other#ise no#n as +n +ct to :aximi*e the Contribution of
(enior Citi*ens to 8ation Building, >rant Benefts and (pecial ;rivileges
and for 9ther ;urposes #as passed on April =3" <KK=.
It 'ranted" amon' others" a =05 sales dis%ount on pur%hases of
medi%ines b& -uali0ed senior %iti:ens.
In April <5" <KKP" petitioner G.A. Foldin' Corporation (G.A.) 0led its
<KK5 Corporate Annual In%ome Tax Return" %laimin' the =05 sales
dis%ount it 'ranted to -uali0ed senior %iti:ens.
G.A. treated the dis%ount as dedu%tions from its 'ross in%ome
purportedl& in a%%ordan%e #ith Revenue Re'ulation (RR) =.K>" @e%tion
=(i) of the ;IR issued in Au'ust =3" <KK3 #$% de0nes TAJ CRA6IT as
the amount representin' the =05 dis%ount 'ranted to senior %iti:ens
(for establishments relatin' to restos" dru'stores" theaters" et%.) ( the
said "iscun! s$all be "e"uc!e" b& !$e sai" es!ablis$#en!s
)r# !$eir 'rss inc#e )r inc#e !a% purpses and from their
'ross sales for value.added tax or other per%enta'e tax purposes.
GA %laimed dedu%tions amountin' to about PP00! but later 0led the
RAT7R) under PR*TA@T" ar'uin' that the dis%ount to senior %iti:ens
should be treated as tax %redit under @e%. >(a) of RA D>3=" and )*T as
mere dedu%tions from GA3s 'ross in%ome as provided under RR =.K>.
@e% >" RA D>3= states that senior %iti:ens shall be entitled to a =05
dis%ount on establishments (relative to transporation" hotels" meds"
et%.)" provided that
priva!e es!ablis$#en!s #a& clai# !$e cs! as !a% cre"i! ()*TA"
but not in %asea !a% cre"i! is a re%o'nition of partial pa&ment
alread& made to#ards taxes due)
@ubse-uentl&" GA sent ;IR a letter.%laim statin' that it overpaid its
in%ome tax be%ause of ;IR3s erroneous interpretation of @e%. >(a) of RA
D>3=.
6ue to ;IR3s ina%tion" GA 0led an appeal before the CTA.
CTA de%ided in favor of GA 'rantin' its %laim for refund partiall&
(P<==!)" representin' overpaid in%ome tax for <KK5. CTA said that
the =05 sales dis%ount 'ranted to -uali0ed senior %iti:ens should be
treated as tax %redit and )*T as a dedu%tible item from 'ross in%ome $
sales" as pointed out b& RA D>3=. RA D>3= is a la# #$% prevails over an
administrative issuan%e su%h as RR =.K>.
Nrant #as partial be%ause GA failed to support the rest of the %laimed
dis%ount #$ %orrespondin' %ash slips.
GA 0led an GR attributin' its failure to submit the %ash slips to the
inadverten%e of its independent auditor" and the %ourt should have
a%%epted other eviden%e presented su%h as spe%ial re%ord boos. It
also ar'ued that the tax %redit should be based on the a%tual dis%ount
and not on the a%-uisition %ost of the medi%ines.
CTA denied the GR" appl&in' the CA rulin' in C05 v. 6lmas 4rug
Corporation #here the term 8%ost of dis%ount9 pertained onl& to
6IRACT ACM7I@IT*) C*@T" ex%ludin' administrative and other
in%remental %osts.
CA on appeal a'reed #$ CTA on this point. It also said that %laims for
refund" bein' in the nature of a %laim for exemption" should be
%onstrued in strictissimi .uris a'ainst the taxpa&er. GA thus elevated
%ase to @C.
I1 <) 2$n lo#er %ourts erred in not appre%iatin' other do%uments
provin' the amt of dis%ounts 'ranted to senior %iti:ens (other than the
%ash slips) ( )*" lo#er %ourts #ere %orre%t
=) 2$n the term 8%ost9 under @e%>A of RA D>3= is e-uivalent *)IE to
ACM7I@ITI*) C*@T ( )*" GA is entitled to the C7II amount of sales
dis%ount" not ?ust to a%-uisition %ost
R1
=05 sales dis%ount ma& be %laimed as a TAJ CRA6IT" per RA D>3=.
<) Cindin's of fa%t of the TC" parti%ularl& #hen aLrmed b& the CA" are
bindin' upon the @C" unless there is stron' eviden%e to merit
other#ise. 2hile it ma& be true that the authenti%ated spe%ial re%ord
boos &ield the same data found in the %ash slips" the& %annot be
%onsidered b& the %ourts to %orroborate pie%es of eviden%e that have"
in the 0rst pla%e" been disallo#ed.
G.A. o/ered the disallo#ed %ash slips as eviden%e onl& after the CTA
had rendered its assailed de%ision. Also" proofs presented entitlin' a
taxpa&er to an exemption must be @TRICTIE s%rutini:ed.
=) Bicolandia 4rug Corporation v. C05! the term 8%ost9 as found in RA
D>3= #as interpreted b& @C to mean the =05 dis%ount extended b& a
private establishment to senior %iti:ens in their pur%hase of medi%ines.
@C also said that N*B should C7IIE @F*7I6AR the %ost of the sales
dis%ount 'ranted to senior %iti:ens.
Thus" the CA de%ision %onstruin' the #ord 8%ost9 as the a%-uisition
%ost of medi%ines #as RABAR@A6 and @AT A@I6A. A%%ordin'l&" G.A. is
entitled to a tax %redit e-uivalent to the a%tual =05 sales dis%ount it
'ranted to -uali0ed senior %iti:ens.
F*2ABAR" @C did )*T a'ree #$ lo#er %ourts on #hat GA is entitled to.
RA D>3= expressl& provides that the sales dis%ount ma& be %laimed as
TAJ CRA6IT" not as tax refund.
In this %ase" GA ori'inall& pra&ed for a tax refund for its tax
overpa&ment for <KK5. The CTA and the CA 'ranted the desired refund"
albeit at a lo#er amount due to their interpretation" erroneous as it
turned out to be" of the term 8%ost.9
It must be noted that on Ceb =P" =00>" RA K=5D" or The 6xpanded
(enior Citi*ens +ct of %CCK" amendin' RA D>3=" #as si'ned into la#"
usherin' in" upon its e/e%tivit& on Gar%h =<" =00>" a ne# tax
treatment for sales dis%ount pur%hases of -uali0ed senior %iti:ens of
medi%ines.
@aid la# provides that senior %iti:ens shall be entitled to a =05
dis%ount on establishments and the establishments ma& %laim
dis%ounts as !a% "e"uc!in based on the net %ost of the 'oods sold or
servi%es rendered.
TF7@" startin' taxable &ear =00>" the =05 sales dis%ount 'ranted b&
establishments to -uali0ed senior %iti:ens is to be treated as tax
dedu%tion" no lon'er as tax %redit.
TJ?(, C05 ordered to issue a tax credit certifcate in favor of :6
amounting to ;"O", %C".P"

>. Inc#e Ta% n Resi"en! Frei'n Crpra!ins
.RANCH PROFIT RE-ITTANCE TAX
.an0 ) A#erica NT N SA v CA
;an of Ameri%a #as a forei'n %orporation dul& li%ensed to en'a'e in
business in the Philippines.
It paid <55 bran%h pro0t remittan%e tax on pro0t from its re'ular
banin' unit operations (about PDG!) and on pro0t from its forei'n
%urren%& deposit unit operations (about P>>5!). The tax #as based
on net pro0ts after in%ome tax #$o dedu%tin' the amount
%orrespondin' to the <55 tax.
Iater" ;an of Ameri%a %laimed a refund from the ;IR of the portion of
pa&ment %orrespondin' to the <55 bran%h pro0t remittan%e tax" 'iven
that the tax should have been %omputed on the basis of pro0ts
ACT7AIIE remitted" and )*T on the amount ;AC*RA pro0t remittan%e
tax.
CTA upheld petitioner ban in its %laim for refund" but CA set aside CTA
de%ision.
I1 2$n CA #as %orre%t in reversin' CTA3s de%ision (#hat is the %orre%t
tax base for the ;RA)CF pro0t remittan%e taxc) ( )*" CTA #as %orre%t.
R1 CTA #as %orre%t, ban %an %laim refund be%ause tax base should be
the PR*CIT remitted abroad" )*T that #$% is applied for.
2hat is appli%able is still Rev Rulin' of Oan =<" <K40.
)othin' in the la# indi%ates that the <55 tax on bran%h pro0t
remittan%e is on the total amount of pro0t to be remitted abroad #hi%h
shall be %olle%ted and paid in a%%ordan%e #ith the tax #ithholdin'
devi%e provided in @e%tions 53 and 5> of the Tax Code.
The Tax Code provides that SA)E pro0t remitted abroad b& a bran%h to
its head oL%e shall be sub?e%t to a tax of <55.S
)*2FARA is there said of Sbase on the total amount ACT7AIIE
APPIIA6 for b& the bran%h #ith the Central ;an of the Philippines.
T$e !er# Xan& pr,! re#i!!e" abra"X can nl& #ean suc$
pr,! as is X)r=ar"e", sen!, r !rans#i!!e" abra"X as !$e
=r" Xre#i!!e"X is c##nl& an" ppularl& accep!e" an"
un"ers!".
In the <55 remittan%e tax" the la# spe%i0es its o#n tax base to be on
the Spro0t remitted abroad.S There is absolutel& nothin' e-uivo%al or
un%ertain about the lan'ua'e of the provision.
The tax is imposed on the amount @A)T A;R*A6" and the la# (then in
for%e) %alls for nothin' further. The taxpa&er is a sin'le entit&" and it
should be understandable if" su%h as in this %ase" it is the lo%al bran%h
of the %orporation" usin' its o#n lo%al funds" #hi%h remits the tax to
the Philippine Novernment.
The remittan%e tax #as %on%eived in an attempt to e-uali:e the
in%ome tax burden on forei'n %orporations maintainin'" on the one
hand" lo%al bran%h oL%es and or'ani:in'" on the other hand" subsidiar&
domesti% %orporations #here at least a ma?orit& of all the latterVs
shares of sto% are o#ned b& su%h forei'n %orporations.
CIR v .urru'$s /!"
;urrou'hs Itd #as a forei'n %orporation doin' business in the
Philippines #$ a bran%h in Gaati.
In <KDK" ;urrou'hs applied #ith the Central ;an for authorit& to remit
their bran%h pro0ts to their parent %ompan& abroad amountin' to
PD.PG.
It paid the <55 bran%h pro0t remittan%e tax based on the prior amount
(P<.<>DG) but a%tuall& remitted to the head oL%e onl& approximatel&
PP.5G1
^ amount applied for (PD.PG) ( bran%h pro0t (<55 of D.PG) + P.5G
The& 0led a %laim for a tax refund" sa&in' that the <55 remittan%e tax
should have been based on the AG*7)T ACT7AIIE RAGITTA6 and )*T
the amount ;AC*RA a%tual remittan%e. The tax should have amounted
to PKD>"KKK.4K.
The CTA a'reed #ith ;urrou'hs Iimited and ordered the CIR to issue a
tax %redit in their favor.
CIR 0led a petition #$ the @C to determine the appropriate tax base to
be used in %omputin' the <55 bran%h pro0t remittan%e tax.
I1 2$n the tax base is the amount applied for remittan%e or the pro0t
a%tuall& remitted after dedu%tin' the <55 pro0t remittan%e tax. 6HAT
IS ACTUA//E RE-ITTED
2$) ;urrou'hs Iimited is entitled to the tax refund .EES, THEE ARE
R1 )IRC @e% => provides that an& pro0t remitted abroad b& the bran%h
to its head oL%e shall be sub?e%t to a tax of <55.
;ased on this" the 8?RD .IR Rulin' also provided (%$o Comnissioner
Plana) that the <55 #ould be imposed on the bran%h pro0ts a%tuall&
remitted and not on the total bran%h pro0ts out of #hi%h the
remittan%e is to be made.
In the present %ase" the CIR ar'ues that the 8?RD .IR Rulin' #as
superseded b& 8?RB -e#ran"u# Circular N. R4RB (Gar%h <D"
<K4=) #hi%h states that the tax #ill be based on the pro0t remittan%e
a%tuall& applied for be%ause the tax is %olle%ted at the sour%e.
Fo#ever" the %ourt ruled that the bran%h pro0ts #ere a%tuall& remitted
in <KDK" main' the appli%able interpretation that of the <K40 ;IR
Rulin' and )*T the <K4= Gemorandum Cir%ular.
@e%. 3=D of the )IRC states that rulin's %annot be 'iven retroa%tive
e/e%t if the& #ould %ause pre?udi%e to the taxpa&er" ex%ept in the
follo#in' ex%eptions1
a# where the taxpayer deliberately misstates or omits
material facts from his return or in any document reFuired of
him by the Bureau of 0nternal 5evenue
Lb# where the facts subseFuently gathered by the Bureau of
0nternal 5evenue are materially diMerent from the facts on
which the ruling is based, or
Lc# where the taxpayer acted in bad faith.
In this %ase" main' the <K4= Gemorandum Cir%ular retroa%tive #ould
pre?udi%e ;urrou'hs Iimited" and the& do not fall into an& of the
ex%eptions of @e%. 3=D.
Appl&in' the ;IR rulin'" ;urrou'hs #as %orre%t in %laimin' it made an
overpa&ment" so the remittan%e tax should be %omputed as follo#s1
Pro0ts a%tuall& remitted (PP.5G) ^ remittan%e tax rate (<55) + PKD0!
)*TA1 NIA)) sa&s that @ir said thereVs somethin' #ron' #ith this
%ase. ItVs a double appli%ation of the <55 .. &ou appl& <55 to the
bran%h pro0t and #hen &ou 'et the sum" &ou still appl& the remittan%e
tax rate
C#pania General Tbacs "e Filipinas v CIR U CTA Case
Compania #as a forei'n %orp doin' business in the Phils throu'h a
bran%h oL%e.
It paid <55 bran%h pro0t remittan%e and later %laimed a refund for
overpa&ment.
Compania %ontended that the %orre%t tax base for %omputin' the
bran%h pro0t remittan%e tax should be the pro0t ACT7AIIE remitted
abroad net of in%ome alread& sub?e%ted to 0nal tax.
To support its %ontention" Compania brou'ht to the attention CIR v vs.
;urrou'hs in Oan =<" <K40 #$% provides that <55 remittan%e tax should
be imposed on amt ACT7AIIE remitted.
CIR on the other hand %ontends that the %ase of ;urrou'hs is not
appli%able to the instant %ase be%ause of Revenue Gemorandum
Cir%ular )o. 4.4=" dated Gar%h <D" <K4=" #hi%h states that sin%e the
Stax is imposed and %olle%ted at sour%e" ne%essaril& the tax base
should be the amount a%tuall& applied for b& the bran%h #ith the
Central ;an of the Philippines as pro0t to be remitted abroad.S
As the latter rulin' seems to have 'iven rise to some mis%on%eption
that it modi0ed ;IR Rulin' )o. 0<P.DK #ith respe%t to the manner of
%omputation of the <55 bran%h pro0t remittan%e tax" this OLce
issue" a clari,ca!r& rulin' n Oc!ber B<, 8?R8 e%plainin' Z
The above rulin' (of Oanuar& =<" <K40) merel& AGPFA@IXA6 the
distin%tion bet#een the total bran%h pro0t #hi%h is remittable and that
portion of the bran%h pro0t a%tuall& remitted #ithout dedu%tion on
a%%ount of the tax to be paid.
The phrase Xan& pr,! re#i!!e" abra"X s$ul" be cns!rue" !
#ean !$e pr,! ! be re#i!!e". Fen%e" there must be an ac!ual
re#i!!ance" as distin'uished from pro0t #hi%h is remittable.
AJAGPIA1 If the total bran%h pro0t is P<<5 but the amount to be
remitted is P<00" then tax base should be P<00.
Goreover" the <55 pro0t remittan%e tax imposed b& @e%tion => (b)(=)
of the Tax Code is an in%ome tax" it is therefore %lear that the same is
non.dedu%tible from the 'ross (pro0t) in%ome. Inasmu%h as the tax is
an exa%tion on pro0t reali:ed for remittan%e abroad" the dedu%tion
thereof as an expense is not sustained b& la# no#here in @e%tion 30 of
the Tax Code is it provided that the same is dedu%tible. ;esides
dedu%tions from 'ross in%ome are masters of le'islative 'ra%e" #hat is
not expressl& 'ranted b& the la# is deemed #ithheld.
Considerin' that the <55 bran%h pro0t remittan%e tax is imposed and
%olle%ted at sour%e" ne%essaril& the tax base should be the amount
a%tuall& applied for b& the bran%h #ith the Central ;an of the
Philippines as pro0t to be remitted abroad.
It is desired that this Cir%ular be 'iven as #ide publi%it& as possible.
Re#i!!e" [ refers to the total bran%h pro0ts #$% #ould be sent abroad
and )*T total pro0ts of the bran%h (not all of #$% need to be sent
abroad)
TF7@" the %ompan& is entitled to a refund or tax %redit in the amount
of P<5="PK0.P< %orrespondin' to overpaid bran%h pro0t remittan%e
taxes durin' the &ears from <K4< to <K43.
As to the <K4> and <K45 bran%h pro0t remittan%e taxes" no refund or
tax %redit is due the petitioner sin%e the latter did not present an&
proof of passive in%ome it re%eived durin' the period.
H. Inc#e Ta% n Nn4resi"en! Frei'n Crpra!ins
CIR v SC >$nsn an" Sn, Inc.
@C Oohnson and @on" In%." a domesti% %orporation (6C)" entered into a
li%ense a'reement #ith the @C Oohnson and @on" 7@A" a non.resident
forei'n %orporation ()RCC)" #here @C Oohnson #as 'ranted the ri'ht to
use" amon' others" the trademar" patents and te%hnolo'& o#ned b&
the )RCC.
In return" the 6C obli'ed to pa& @C Oohnson 7@A ro&alties based on a
per%enta'e of net sales and sub?e%ted the same to =55 #ithholdin'
tax on ro&alt& pa&ments #hi%h respondent paid to the ;ureau of
Internal Revenue (;IR).
@ubse-uentl&" the 6C %laimed from the ;IR a refund of overpaid
#ithholdin' tax on ro&alties ar'uin' that the preferential rate of <05
(instead of =55) should appl& to the respondent be%ause ro&alties paid
b& it to @C Oohnson 7@A is onl& sub?e%t to <05 #ithholdin' tax
PURSUANT TO THE -OST FA2ORED C/AUSE of the RP.7@ Tax
Treat& in relation to the RP.Nerman& Tax Treat&.
The RP.7@ Tax Treat& provides that1
o Ro&alties derived b& a resident of one of the Contra%tin'
@tates from sour%es #ithin the other Contra%tin' @tate ma&
be taxed b& both Contra%tin' @tates.
o Fo#ever" the tax imposed b& that Contra%tin' @tate shall not
ex%eed1
o In the %ase of the 7nited @tates" <55 of the 'ross amount of
the ro&alties" and in the %ase of the Philippines" the least of
=55 of the 'ross amount of the ro&alties"
o <55 of the 'ross amount of the ro&alties" #here the ro&alties
are paid b& a %orporation re'istered #ith the Philippine ;oard
of Investments and en'a'ed in preferred areas of a%tivities,
and
o The lowest rate of hilippine tax that !a# &e i!posed
on ro#alties of the sa!e 5ind paid under si!ilar
circu!stances to a resident of a third .tate.
The RP.Nerman& Tax Treat& provides that such royalties may also be
taxed in the Contracting (tate in which they arise, and according to
the of that (tate, but the tax so charged shall not exceed "CT of the
gross amount of royalties from the use of a patent, trademakrk, etc.
The RP.2est Nerman& Tax Treat& also allo#s tax %redit of =05 of the
'ross amount of su%h ro&alties a'ainst Nerman in%ome and %orporation
tax for the taxes pa&able in the Philippines on su%h ro&alties #here the
tax rate is redu%ed to <0 to <55 under su%h treat&.
I1 2$) @C Oohnson 7@A is entitled to the 8most favored nation9 tax rate
of <05 on ro&alties as provided in the RP.7@ Tax Treat& in relation to
the RP.Nerman& Tax Treat&
R1 )*.
The %on%essional tax rate of <05 provided for in the RP.Nerman& Tax
Treat& should appl& if the tax imposed upon ro&alties in the RP.7@ Tax
Treat& and in the RP.Nerman& Tax Treat& are paid under similar
%ir%umstan%es.
This #ould mean that respondent @C Oohnson must proved that the RP.
7@ Tax Treat& 'rants similar tax reliefs to residents of the 7@ in respe%t
of the taxes imposable upon ro&alties earned from sour%es #ithin the
Philippines as those allo#ed to their Nerman %ounterparts under the
RP.Nerman& Tax Treat&.
The RP.7@ and RP.Nerman& Tax Treaties do not %ontain similar
provisions on tax %reditin'. Arti%le => of the RP.Nerman& Tax Treat&
expressl& allo#s %reditin' a'ainst in%ome and %orporation tax of =05
of the 'ross amount of ro&alties paid under the la# of the Philippines.
*n the other hand" Arti%le =3 of the RP.7@ Tax Treat&" #hi%h is the
%ounterpart provision #ith respe%t to relief for double taxation" does
not provide for similar %reditin' of =05 of the 'ross amount of ro&alties
paid.
The purpose of the most favored nation %lause is to 'rant to the
%ontra%tin' part& treatment not less favorable than that #hi%h has
been or ma& be 'ranted to the most favored amon' other %ountries. It
is intended to establish the prin%iple of e-ualit& of international
treatment providin' that the %iti:ens or sub?e%ts of the %ontra%tin'
nations ma& en?o& the privile'es a%%orded b& either part& to those of
the most favored nation.
The essen%e of the prin%iple is to allo# the taxpa&er in one state to
avail of more liberal provisions 'ranted in another tax treat& to #hi%h
the %ountr& of residen%e of su%h taxpa&er is also a part& provided that
the sub?e%t matter of taxation" in this %ase ro&alt& in%ome" is the same
as that in eh tax treat& under #hi%h the taxpa&er is liable.
;oth Arti%les <3 of the RP.7@ Tax Treat& and Arti%le <= of the RP.
Nerman& Tax Treat& speas of tax on ro&alties for the use of trademar"
patent" and te%hnolo'&. The entitlement of the <05 rate of 7@ 0rms
despite the absen%e of a mat%hin' %redit (=05 for ro&alties) #ould
dero'ate from the desi'n behind the most 'rant e-ualit& of
international treatment sin%e the tax burden laid upon the in%ome of
the investor is not the same in the t#o %ountries. TFA @IGIIARITE I)
TFA CIRC7G@TA)CA@ *C PAEGA)T *C TAJA@ I@ A C*)6ITI*) C*R TFA
A)O*EGA)T *C G*@T CAB*RA6 )ATI*) TRAATGA)T PRACI@AIE T*
7)6AR@C*RA TFA )AA6 C*R AM7AIITE *C TRAATGA)T.
RP.7@ Tax Treat& DOES NOT GI2E A -ATCHING CREDIT OF BDI
FOR THE TAXES PAID TO THE PHI/IPPINES ON ROEA/TIES AS
A//O6ED UNDER the RP.2est Nerman& Tax Treat&" @C Oohnson
%annot be deemed entitled to the <05 'ranted under the latter treat&
for the reason that there is no pa&ment of taxes on ro&alties under
similar %ir%umstan%es.
Tax refunds are in the nature of tax exemptions. As su%h the& are
re'arded as in dero'ation of soverei'n authorit& and to be %onstrued
strictissimi .uris a'ainst the person or entit& %laimin' exemption. The
burden of proof is upon him #ho %laims exemption in his favor and he
must be able to ?ustif& his %laim b& the %learest 'rant of or'ani% or
statute la#. @C Oohnson is %laimin' for a refund of the alle'ed
overpa&ment of tax on ro&alties, ho#ever" there is nothin' on re%ord to
support a %laim that the tax on ro&alties under the RP.7@ Tax Treat& is
paid under similar %ir%umstan%es as the tax on ro&alties under the RP.
2est Nerman& Treat&.
-arubeni v CIR
Garubeni Corporation of Oapan has e-uit& investments in AN[P of
Ganila. Cor the 0rst -uarter of <K4< endin' Gar%h 3<" AN[P de%lared
and paid %ash dividends to petitioner in the amount of P4>K"D=0 and
#ithheld the %orrespondin' <05 0nal dividend tax thereon. @imilarl&"
for the third -uarter of <K4< endin' @eptember 30" AN[P de%lared and
paid P4>K"D=0 as %ash dividends to petitioner and #ithheld the
%orrespondin' <05 0nal dividend tax thereon.
AN[P dire%tl& remitted the %ash dividends to petitionerVs head oL%e in
To&o" Oapan" net not onl& of the <05 0nal dividend tax in the amounts
of PDP>"D>4 for the 0rst and third -uarters of <K4<" but also of the
#ithheld <55 pro0t remittan%e tax based on the remittable amount
after dedu%tin' the 0nal #ithholdin' tax of <05. These taxes #ere
paid b& AN[P to the ;IR as eviden%ed b& Central ;an Re%eipts.
Petitioner" sou'ht a rulin' from the ;ureau of Internal Revenue on
#hether or not the dividends petitioner re%eived from AN[P are
e/e%tivel& %onne%ted #ith its %ondu%t or business in the Philippines as
to be %onsidered bran%h pro0ts sub?e%t to the <55 pro0t remittan%e
tax imposed under @e%tion => (b) (=) of the )ational Internal Revenue
Code as amended b& Presidential 6e%rees )os. <D05 and <DD3.
In repl& to petitionerVs -uer&" A%tin' Commissioner Ruben An%heta
ruled that the dividends re%eived b& Garubeni from AN[P are not
in%ome arisin' from the business a%tivit& in #hi%h Garubeni is
en'a'ed. A%%ordin'l&" said dividends if remitted abroad are not
%onsidered bran%h pro0ts for purposes of the <55 pro0t remittan%e tax
imposed b& @e%tion => (b) (=) of the Tax Code" as amended.
Petitioner %laimed for the refund or issuan%e of a tax %redit
Srepresentin' pro0t tax remittan%e erroneousl& paid on the dividends
remitted b& AN[P to the head oL%e in To&o.
Commissioner of Internal Revenue denied petitionerVs %laim for
refund$%redit. The Court of Tax Appeals aLrmed. Fen%e" the instant
petition for revie#.
It is the ar'ument of petitioner %orporation that follo#in' the prin%ipal.
a'ent relationship theor&" Garubeni Oapan is lie#ise a resident forei'n
%orporation sub?e%t onl& to the <0 5 inter%orporate 0nal tax on
dividends re%eived from a domesti% %orporation in a%%ordan%e #ith
@e%tion =>(%) (<) of the Tax Code of <KDD.
Publi% respondents" ho#ever" are of the %ontrar& vie# that Garubeni"
Oapan" bein' a non.resident forei'n %orporation and not en'a'ed in
trade or business in the Philippines" is sub?e%t to tax on in%ome earned
from Philippine sour%es at the rate of 35 5 of its 'ross in%ome under
@e%tion => (b) (<) of the same Code but expressl& made sub?e%t to the
spe%ial rate of =55 under Arti%le <0(=) (b) of the Tax Treat& of <K40
%on%luded bet#een the Philippines and Oapan. Thus" taxes #ithheld of
<0 5 as inter%orporate dividend tax and <5 5 as pro0t remittan%e tax
totals (si%) =5 5" the amount refundable o/sets the liabilit&" hen%e"
nothin' is left to be refunded.
I1 2*) Garubeni Oapan is a resident or a non.resident forei'n
%orporation under Philippine la#s.
R1 EA@
The alle'ed overpaid taxes #ere in%urred for the remittan%e of
dividend in%ome to the head oL%e in Oapan #hi%h is a separate and
distin%t in%ome taxpa&er from the bran%h in the Philippines. There %an
be no other lo'i%al %on%lusion %onsiderin' the undisputed fa%t that the
investment (totallin' =43.=P0 shares in%ludin' that of nominee) #as
made for purposes pe%uliarl& 'ermane to the %ondu%t of the %orporate
a/airs of Garubeni Oapan" but %ertainl& not of the bran%h in the
Philippines. It is thus %lear that petitioner" havin' made this
independent investment attributable onl& to the head oL%e" %annot
no# %laim the in%rements as ordinar& %onse-uen%es of its trade or
business in the Philippines and avail itself of the lo#er tax rate of <0 5.
;ut #hile publi% respondents %orre%tl& %on%luded that the dividends in
dispute #ere neither sub?e%t to the <5 5 pro0t remittan%e tax nor to
the <0 5 inter%orporate dividend tax" the re%ipient bein' a non.
resident sto%holder" !$e& 'rssl& erre" in $l"in' !$a! n re)un"
=as )r!$c#in' ! !$e pe!i!iner because !$e !a%es !$us
=i!$$el" !!alle" !$e BP I ra!e i#pse" b& !$e P$ilippine4
>apan Ta% Cnven!in pursuan! ! Ar!icle 8D MBJ MbJ.
o T si#pl& a"" !$e != !a%es ! arrive a! !$e BP I !a%
ra!e is ! "isre'ar" a basic rule in !a%a!in !$a! eac$
!a% $as a "i5eren! !a% basis. 2hile the tax on dividends is
dire%tl& levied on the dividends re%eived" Sthe tax base upon
#hi%h the <5 5 bran%h pro0t remittan%e tax is imposed is the
pro0t a%tuall& remitted abroad.S
Publi% respondents lie#ise erred in automati%all& imposin' the =5 5
rate under Arti%le <0 (=) (b) of the Tax Treat& as if this #ere a ]at rate.
A %loser loo at the Treat& reveals that the tax rates 0xed b& Arti%le <0
are the maximum rates as re]e%ted in the phrase Sshall not ex%eed.S
This means that an& tax imposable b& the %ontra%tin' state %on%erned
should not ex%eed the =5 5 limitation and that said rate #ould appl&
onl& if the tax imposed b& our la#s ex%eeds the same. In other #ords"
b& reason of our bilateral ne'otiations #ith Oapan" #e have a'reed to
have our ri'ht to tax limited to a %ertain extent to attain the 'oals set
forth in the Treat&.
Petitioner" bein' a non.resident forei'n %orporation #ith respe%t to the
transa%tion in -uestion" the appli%able provision of the Tax Code is
@e%tion => (b) (<) (iii) in %on?un%tion #ith the Philippine.Oapan Treat& of
<K40
o Petitioner" bein' a non.resident forei'n %orporation" as a
'eneral rule" is taxed 35 5 of its 'ross in%ome from all
sour%es #ithin the Philippines. f@e%tion => (b) (<)g.
o H=ever, a "iscun!e" ra!e ) 8PI is 'iven !
pe!i!iner n "ivi"en"s receive" )r# a "#es!ic
crpra!in MAGNPJ n !$e cn"i!in !$a! i!s "#icile
s!a!e M>apanJ e%!en"s in )avr ) pe!i!iner, a !a%
cre"i! ) n! less !$an BD I ) !$e "ivi"en"s receive".
This =0 5 represents the di/eren%e bet#een the re'ular tax
of 35 5 on non.resident forei'n %orporations #hi%h petitioner
#ould have ordinaril& paid" and the <5 5 spe%ial rate on
dividends re%eived from a domesti% %orporation.
It is readil& apparent that the <5 5 tax rate imposed on the dividends
re%eived b& a forei'n non.resident sto%holder from a domesti%
%orporation under @e%tion => (b) (<) (iii) is easil& #ithin the maximum
%eilin' of =5 5 of the 'ross amount of the dividends as de%reed in
Arti%le <0 (=) (b) of the Tax Treat&.
N.2. Ree"eri( FA#s!er"a#G an" R&al In!ercean /ines v CIR
G.B. Amstelmeer and G.B. SAmstelroon9" vessels of ).B. Reederi?
SAmsterdamS ()BRA)" %alled on Philippine ports to load %ar'o to be
shipped to forei'n destinations.
The frei'ht fees #ere paid abroad in the amount of 7@\K4"<D5.00 in
<KP3 for the former and 7@\<3D"<K3.00 in <KP> for the latter.
Ro&al Intero%ean Iines (RII) a%ted as husbandin' a'ent for the vessels
for a fee or %ommission. )o in%ome tax appears to have been paid b&
)BRA on the frei'ht re%eipts.
The CIR assessed )BRA3s de0%ien%& in%ome taxes as Sa non.resident
forei'n %orporation not en'a'ed in trade or business in the Philippines9
under @e%tion => (b) (<) of the then Tax Code.
*n the other hand" RII" on the assumption that )BRA is a forei'n
%orporation en'a'ed in trade or business in the Philippines" 0led an
in%ome tax return in the amount of a<"435.5= and aK">>4.K>"
respe%tivel&" pursuant to @e%tion => (b) (=) in relation to @e%tion 3D (;)
(e) of the )IRC and @e%tion <P3 of Revenue Re'ulations )o. =" and
%omputed at the ex%han'e rate of a=.00 + \<.00.
;oth )BRA and RII 0led a protest a'ainst the CIR3s assessment" #hi%h
#as denied.
*n appeal to the Court of Tax Appeals" the assessments #ere modi0ed
b& eliminatin' the 505 fraud %ompromise penalties imposed upon
petitioners. A motion for re%onsideration #as 0led but it #as denied b&
the %ourt.
I1 2$n )BRA" a forei'n %orporation not havin' an& oL%e or pla%e of
business in the Philippines" be %onsidered" for tax purposes" as a
forei'n %orporation not en'a'ed in trade or business in the Philippines
(non.resident %orporation) *R a forei'n %orporation en'a'ed in trade
or business in the Philippines (resident %orporation)
R1 )BRA is a forei'n %orporation n! au!$ri*e" r license" ! "
business in !$e P$ilippines.
In fa%t" i! nl& #a"e != calls in P$ilippine pr!s M8?9< an"
8?9CJ.
Cor a forei'n %orporation ! be cnsi"ere" en'a'e" in !ra"e r
business in !$e P$ilippines )r !a%a!in purpses, i!s business
!ransac!ins in !$e cun!r& #us! be cn!inuus, an" n!
casual, as in this %ase.
The then Tax Code (and the present )IRC) taxes forei'n %orporations
on their in%ome onl& from sour%es #ithin the Philippines (domesti%
%orporations are taxed on their in%ome from sour%es #ithin and outside
the Philippines).
A resident %orporation (a forei'n %orporation doin' business in the
Philippines) is permitted to dedu%tions from 'ross in%ome but onl& to
the extent %onne%ted #ith in%ome earned in the Philippines pursuant to
@e%tion => (b) (=) in relation to @e%tion 3D (;) (e) of the Code.
*n the other hand" a nn4resi"en! crpra!in Ma )rei'n
crpra!in n! "in' business in !$e P$ilippinesJ is !a%able n
inc#e )r# all surces =i!$in !$e P$ilippines, as in!eres!,
"ivi"en"s, ren!s, salaries, =a'es, pre#iu#s, annui!ies
C#pensa!ins, re#unera!ins, e#lu#en!s, r !$er ,%e" r
"e!er#inable annual r peri"ical r casual 'ains, pr,!s an"
inc#e an" capi!al 'ainsX
T$e !a% is <DI Mn= <PIJ ) suc$ 'rss inc#e pursuan! !
Sec!in BC MbJ M8J ) !$e !$en Ta% C"e.
@in%e N2RA is a nn4resi"en! )rei'n crpra!in" or'ani:ed and
existin' under the la#s of The )etherlands #ith prin%ipal oL%e in
Amsterdam an" n! license" ! " business in !$e P$ilippines,
!$e la!!er prvisin s$ul" appl&.
This means that N2RA s$ul" be !a%e" a! !$e ra!e ) <PI ) i!s
'rss inc#e re'ar"less ) i!s a#un!. (A resident %orporation is
taxed at a rate of =55 upon the amount but #hi%h taxable net in%ome
does not ex%eed a<00"000.00" and 355 upon the amount but #hi%h
taxable net in%ome ex%eeds a<00"000.00.)
/. I#prperl& Accu#ula!e" Earnin's Ta% MIAETJ
T$e -anila 6ine -erc$an!s, Inc. v CIR
Ganila 2ine Ger%hants" #hi%h #as or'ani:ed in <K3D" #as en'a'ed in
the importation and sale of #hise&" #ines" li-uor" and distilled spirits.
Its ori'inal paid up %apital #as P500.
At one point" the& redu%ed their %apital to P=50 #ith the approval of
the @AC but this redu%tion #as never implemented.
2hen business be'an to ]ourish" the& in%reased their %apital to P<G
a'ain #ith @AC approval in <K54.
2ine Ger%hants invested in several %ompanies in%ludin' A%me
Commer%ial Co. 7nion Insuran%e of Canton" and bou'ht shares in 2a%
2a% Nolf and Countr& Club. 2ine Ger%hants also a%-uired 7@A
Treasur& ;ills valued at around P3>D
The CIR examined the boos of 2ine Ger%hants and found that it had
unreasonabl& a%%umulated a surplus of P>=4 from <K>D.<K5D in
ex%ess of the reasonable needs of business sub?e%t to the surtax of =5
imposed b& @e%tion =5 of the Tax Code.
CIR then demanded pa&ment for the Improperl& A%%umulated Aarnin's
Tax (IAAT). 2ine Ger%hant appealed to the Court of Tax Appeals (CTA).
CTA ruled that the pur%hase of shares in 2a% 2a%" 7nion Insuran%e"
and A%me Commer%ial #ere harmless and not sub?e%t to =55 surtax.
Fo#ever" the pur%hase of 7@ T.;ills #as in no #a& related to the
business of importin' and sellin' #ines and ordered 2ine Ger%hants to
pa& IAAT on the T.;ills.
2ine Ger%hants appealed. The& %ontend that it #ill be used to 0nan%e
their importation" a dollar reserve #ould be useful in meetin' ur'ent
orders of %ustomers" and the mone& #ill be used for future expansion
b& bu&in' its o#n lot and oL%e buildin'.
I1 2$n the investment of the 7@ Treasur& ;ills should be %onsidered an
investment in unrelated business.
R1 EA@" it is unrelated.
8Reasnable nee"sG #eans !$e i##e"ia!e nee"s ) !$e
business. I) !$e crpra!in cann! prve !$is, !$en i!s n! an
i##e"ia!e nee".
Also" Ameri%an %ases have held that investment of earnin's of a
%orporation in sto% se%urities of an unrelated business usuall&
indi%ates an a%%umulation be&ond the reasonable need of the
business.
To determine the 8reasonable needs9 of the business in order to ?ustif&
an a%%umulation of earnin's" the 7@ Courts have developed the
i##e"iac& !es! #hi%h %onstrued the #ords reasnable nee"s of the
business to mean the i##e"ia!e nee"s ) !$e business" and it #as
'enerall& held that if the %orporation did not prove an immediate need
for the a%%umulation of the earnin's and pro0ts" the a%%umulation #as
not for the reasonable needs of the business and the penalt& tax #ould
appl&.
The cn!rllin' in!en!in ) !$e !a%pa&er is that #hi%h is
#ani)es!e" AT THE TI-E ) accu#ula!in and NOT subse;uen!l&
"eclare" in!en!ins #hi%h are merel& the produ%t of afterthou'ht. A
spe%ulative and inde0nite purpose #ill not suL%e.
CIR v Tuasn
In <K4<" CIR assessed Antonio Tuason" In%. =55 surtax on
unreasonable a%%umulation of surplus for the &ears <KD5 to <KD4 b&
virtue of @e%tion =5 of the Tax Code" #hi%h levies an additional tax on
%orporation improperl& a%%umulatin' pro0ts or surplus.
CIR based his determination on the 'round that1
a. Antonio Tuason" In%. #as a mere holdin' or investment %ompan&
for the %orporation did not involve itself in the development of
subdivisions but merel& subdivided its o#n lots and sold them for
bi''er pro0ts. It derived its in%ome mostl& from interest" dividends
and rental reali:ed from the sale of realt&.
b. KK.KK5 in value of the outstandin' sto% of Antonio Tuason" In%."
is o#ned b& Antonio Tuason himself.
CIR S%on%lusivel& presumedS that #hen the %orporation a%%umulated
(instead of distributin' to the shareholders) a surplus of over P3 million
from its earnin's in <KD5 up to <KD4" the purpose #as to avoid the
imposition of the pro'ressive in%ome tax on its shareholders.
Tuason In%. protested the assessment on the =55 surtax on the 'round that
the a%%umulation of surplus pro0ts durin' the &ears in -uestion #as solel& for
the purpose of expandin' its business operations as real estate broer
(surplus pro0ts set aside to build suL%ient %apital to %onstru%t an apartment
buildin'" %ondo unit" et%). It 6A)IA6 that its purpose #as to evade pa&ment.
Fo#ever" it #as found out that the %orporation did not reall& use up its surplus
pro0ts. It alle'ation that P<.5G! #as spent for the %onstru%tion of an
apartment buildin' and P<.DG! for the pur%hase of a %ondominium unit in
7rdaneta Billa'e in <K40 #as RAC7TA6 b& the 6e%laration of Real Propert& on
the apartment buildin' #hi%h sho#s that its maret value is onl& P>=K!" and
the Tax 6e%laration on the %ondominium unit #hi%h re]e%ts a maret value of
P=K3! onl& (total is P DD3"D=0).
The enormous dis%repan%& bet#een the alle'ed investment %ost and the
de%lared maret value of these pie%es of real estate #as not denied nor
explained b& Tuason.
I1 2$n Tuason is a holdin' %ompan& and$or investment %ompan&" a%%umulated
surplus and is liable for =55 surtax on undue a%%umulation of surplus( EA@
R1 CIR3s assessment of a =55 surtax a'ainst the Antonio Tuason" In%. is
reinstated" but onl& on the latterVs unspen! a%%umulated surplus pro0ts of
P=">4K"545.44. The P DD3"D=0 invested in its business operations (apartment
and %ondominium unit) is not sub?e%t to the =55 surtax.
<) Tua:on I@ a holdin' $ investment %ompan& be%ause it did not involve itself
in the development of subdivisions but merel& @7;6IBI6A6 its o#n lots and
sold them for bi''er pro0ts. It derived its in%ome from interest" dividends and
rental reali:ed from the sale of realt&.
The tou%hstone of liabilit& is the P7RP*@A behind the a%%umulation of the
in%ome and )*T the C*)@AM7A)CA@ of the a%%umulation. Thus" failure !
pa& "ivi"en"s ! s!c0$l"ers #us! be )r !$e purpse ) usin'
un"is!ribu!e" earnin's an" pr,!s )r reasnable nee"s ) !$e
business. *!$er=ise, !$e c#pan& =ul" be liable )r unreasnable
accu#ula!in ) surplus.
In this %ase" it is plain to see that the %ompan&Vs failure to distribute dividends
to its sto%holders #as for reasons other than the reasonable needs of the
business.
=) Tua:on is liable for the =55 surtax be%ause KK.K5 in value of the
outstandin' sto% of Tua:on is o#ned b& Antonio Tua:on himself. This 'ives
the %on%lusive presumption that the purpose of a%%umulated earnin's #as to
avoid the in%ome tax of its shareholder.
Also" that the amount spent for %onstru%tion of the bld' and amount for
pur%hase of the %ondo has a ;IN 6I@CRAPA)CE sho#s that it #as be&ond the
reasonable needs re-uirement.
All presu!ptions are in favor of the correctness of petitioner%s
assess!ent against the private respondent. It is incu!&ent upon the
taxpa#er to prove the contrar#. ?nfortunately, the private respondent
failed to overcome the presumption of correctness of the CommissionerIs
assessment and the presumption that its failure to distribute surplus profts is
for the reasonable needs of the business.
C&ana#i" P$ils v CA
C&anamid Philippines" In%. is a %orporation or'ani:ed under
Philippine la#s and a #holl& o#ned subsidiar& of Ameri%an C&anamid Co.
based in Gaine" 7@A.
It is en'a'ed in the manufa%ture of pharma%euti%al produ%ts
and %hemi%als" a #holesaler of imported 0nished 'oods" and an
importer$indentor.
CIR sent an assessment letter to C&anamid and demanded
the pa&ment of de0%ien%& in%ome tax of P<<K! for taxable &ear <K4<.
C&anamid protested the assessments parti%ularl&" (<) the
=55 @urtax Assessment of P3"DD>"4PD.50, (=) <K4< 6e0%ien%& In%ome
Assessment of P<<K"4<D.00, and <K4< 6e0%ien%& Per%enta'e Assessment of
P4"4>P.D=.
The CIR in a letter addressed to @NB [ Co." refused to allo#
the %an%ellation of the assessment noti%es and rendered its resolution and
ruled that the said availment does not result in %an%ellation of assessments.
C&anamid appealed to CTA" %laimin' that CIRVs assessment
representin' the =55 surtax on its a%%umulated earnin's for the &ear <K4<
had no le'al basis for the follo#in' reasons1
o (a) C&anamid a%%umulated its earnin's and pro0ts
for reasonable business re-uirements to meet #orin' %apital needs
and retirement of indebtedness
o (b) C&anamid is a #holl& o#ned subsidiar& of
Ameri%an C&anamid Compan&" a %orporation or'ani:ed under the la#s
of the @tate of Gaine" in the 7nited @tates of Ameri%a" #hose shares of
sto% are listed and traded in )e# Eor @to% Ax%han'e.
o TF7@" there #ere no individual shareholder in%ome
taxes b& C&anamidVs a%%umulation of earnin's and pro0ts" instead of
distribution of the same.
CTA denied the petition" sa&in' that C&anamid is still liable.
I1 2$n the %orporation liable is for the a%%umulated earnin's
tax for the &ear <K4<
R1 EA@" %orp is liable.
<) @e%. =5 of the old )IRC of <KDD states that if an&
%orporation is formed for the purpose of preventin' the imposition of the
tax upon its shareholders $ members or the shareholders $ members of
another %orporation" throu'h the medium of permittin' its 'ains and pro0ts
to a%%umulate instead of bein' divided or distributed" there is levied and
assessed a'ainst su%h %orporation" for ea%h taxable &ear" a tax e-ual to
=55 of the undistributed portion of its a%%umulated pro0ts or surplus.
This shall be in A66ITI*) to the tax imposed b& @e%=>" and
shall be %omputed" %olle%ted and paid in the same manner and sub?e%t to
the same provisions of la#" in%ludin' penalties" as that tax.
T$e prvisin "iscura'e" !a% avi"ance !$ru'$
crpra!e surplus accu#ula!in. 2hen %orporations do not de%lare
dividends" in%ome taxes are not paid on the unde%lared dividends re%eived
b& the shareholders.
T$e !a% n i#prper accu#ula!in ) surplus is
essen!iall& a penal!& !a% desi'ned to c#pel %orporations to distribute
earnin's so that the said earnin's b& shareholders %ould" in turn" be taxed.
The amendator& provision of @e%tion =5 of the <KDD )IRC"
#hi%h #as P6 <D3K" enumerated the %orporations e%e#p! from the
imposition of improperl& a%%umulated tax1 (a) bans, (b) non.ban 0nan%ial
intermediaries, (%) insuran%e %ompanies, and (d) %orporations or'ani:ed
primaril& and authori:ed b& the Central ;an of the Philippines to hold
shares of sto%s of bans.
C&anamid does n! )all amon' those exempt %lasses.
;esides" the rule on enumeration is that the express mention of one person"
thin'" a%t" or %onse-uen%e is %onstrued to ex%lude all others.h
=) C&anamid CA))*T rel& on the ;AR6AFI formula" #$%
allo#ed retention" as #orin' %apital reserve" suL%ient amounts of li-uid
assets to %arr& the %ompan& throu'h one operatin' %&%le. In this %ase" it
%ontended that it had %onsiderable li-uid funds based on the =1=<1< ratio of
%urrent assets to %urrent liabilities.
7sin' this formula" C&anamid needed at least P33. as
#orin' %apital. As of <K4<" its li-uid asset #as onl& P=5! so it still had a
de0%it of about PD!. Therefore" the PK! a%%umulated in%ome as of <K4<
ma& be validl& a%%umulated to in%rease its #orin' %apital for the
su%%eedin' &ear.
F*2ABAR" the %ompanies #here the S;ardahlS formula #as
applied" had pera!in' c&cles #uc$ s$r!er !$an !$a! ) C&ana#i".
o In +tlas Tool Co." 0nc" vs. C05"
=0
%ompan&3s
operatin' %&%le #as onl& 3.33 months or =D.D55 of the &ear
o In Cataphote Corp. of :ississippi vs. ?nited (tates
the %orporationVs operatin' %&%le #as onl& 5P.4D da&s" or <5.545 of
the &ear.
o In the %ase of C&anamid" the operatin' %&%le #as
=44.35 da&s" or D4.555 of a &ear" re]e%tin' that petitioner #ill need
suL%ient li-uid funds" of at least three -uarters of the &ear" to %over
the operatin' %osts of the business.
As ) 8?R8 !$e =r0in' capi!al ) C&ana#i" =as
PBP0T, r #re !$an !=ice i!s curren! liabili!ies. Plus" the #orin'
%apital #as expe%ted to in%rease further #hen more funds #ere 'enerated
from the su%%eedin' &earVs sales.
There #as )* RAA@*) to expe%t a S#orin' %apital de0%itS
#hi%h %ould have ne%essitated an in%rease in #orin' %apital" as
rationali:ed b& C&anamid.
-. Ta%4e%e#p! crpra!ins
CIR v Sinc E"uca!inal Crp
In <K>K" Bi%ente N. @in%o (@in%o) established and operated an
edu%ational institution no#n as the Coundation Colle'e of 6uma'uete.
In <K5<" in vie# of the re-uirement of the 6epartment of Adu%ation
that as far a pra%ti%able" s%hools and %olle'es re%o'ni:ed b& the
'overnment should be in%orporated" @in%o and the members of his
immediate famil& or'ani:ed a non.sto% %orporation no#n as the 2.G.
Sinc E"uca!inal Ins!i!u!in Inc., #hi%h #as %apitali:ed b& @in%o
and his famil&.
This %orporation %ontinued the operations of the Coundation Colle'e of
6uma'uete.
@in%o a%ted as %hairman of the board of dire%tors" president of the
%olle'e" and as a tea%her" but did not %olle%t his salar&.
The %olle'e derived its in%ome solel& from the tuition fees paid b&
students enrolled and reali:ed pro0ts out of its operation but did not
distribute an& dividend or pro0t to its sto%holders.
An investi'ation %ondu%ted b& the ;IR revealed that the %olle'e
reali:ed a taxable net in%ome for the &ear <K>K and for the &ear <K50.
The in%ome tax returns of the %olle'e for the &ears <K5< to <K53 have
&et been veri0ed but the %olle'e reported taxable net pro0ts in <K5<"
losses in <K5=" and pro0ts in <K53.
The Colle%tor of Internal Revenue (CIR) assessed a'ainst the %olle'e an
in%ome tax for the &ears <K50 and <K5<" #hi%h the %olle'e paid.
= &rs later" the %orporation %ommen%ed an a%tion in the CCI of )e'ros
*riental for the refund of the amounts paid" %laimin' that it is exempt
from the pa&ment of the in%ome tax be%ause it is or'ani:ed and
maintained ex%lusivel& for the edu%ational purposes and no part of its
net in%ome inures to the bene0t of an& private individual.
CIR said that part of the net in%ome a%%umulated b& the %orporation
inured to the bene0t of @in%o" president and founder of the %orporation"
and therefore it is not entitled to the exemption pres%ribed b& the la#.
I1 2$n the %orporation should be exempt from pa&ment of in%ome
taxes.
R1 EA@" the %orp is a non.pro0t institution.
Pa&#en! ) -ODERATE salaries ! !$se =$ =r0 )r a sc$l
r clle'e as a re#unera!in )r !$eir services is NOT
cnsi"ere" as "is!ribu!in ) pr,! as =ul" #a0e !$e sc$l
ne cn"uc!e" )r pr,!.
In this %ase" sin%e its or'ani:ation" the %orp never distributed an&
dividend or pro0t to its sto%holders. Althou'h part of its in%ome #ent
to the pa&ment of its tea%hers or professors and to the other expenses
of the %olle'e" this #as incident to an edu%ational institution. @till" none
of the in%ome has ever been %hanneled to the bene0t of an& individual
sto%holder.
It #as unfair to %on%lude that part of the in%ome of the %orporation as
an institution inured to the bene0t of one of its sto%holders simpl&
be%ause part of the in%ome #as %arried in its boos as a%%umulated
salaries of its president and tea%her.
Gu%h less %an it be said that the pa&ments made b& the %olle'e to the
Communit& Publishers" In%. redounded to the personal bene0t of @in%o
simpl& be%ause he is one of its sto%holders.
:ayor and Common Council of Borough of ;rinceton vs. (tate Board of
Taxes D +ssessments, et al.! The principal o'cer of the school was
formerly its owner and principal and such principal he was given a
salary for his services. The court held that school is not conducted for
proft merely because moderate salaries were paid to the principal and
to the teachers. 9f course, it is not denied that the corporation charges
tuition fees and other fees for the diMerent services it renders to the
students and in fact it is its only source of income, but such fact does
not in itself make the school a proft$making enterprise that would
place it beyond the purview of the law.
Aver& responsible or'ani:ation must be so run as to" at least" insure its
existen%e" b& operatin' #ithin the limits of its o#n resour%es"
espe%iall& its re'ular in%ome. In other #ords" it should al#a&s strive"
#henever possible" to have a surplus. 7pon the other hand" the CIR3s
pretense #ould limit the bene0ts of the exemption" under said se%tion
=D (e)" to institutions #hi%h do not hope" or propose" to have su%h
surplus. 7nder this vie#" the exemption #ould appl& onl& to s%hools
#hi%h are on the ver'e of banrupt%&" for Y unlie the 7nited @tates"
#here a substantial number of institutions of learnin' are dependent
upon voluntar& %ontributions and still en?o& e%onomi% stabilit&" su%h as
Farvard" the trust fund of #hi%h has been steadil& in%reasin' #ith the
&ears Y there are" and there have al#a&s been" ver& fe# edu%ational
enterprises in the Philippines #hi%h are supported b& donations" and
these or'ani:ations usuall& have a ver& pre%arious existen%e.
The 0nal result of the CIR3s %ontention" if adopted" #ould be to
dis%oura'e the establishment of %olle'es in the Philippines" #hi%h is
pre%isel& the opposite of the ob?e%tive %onsistentl& sou'ht b& our la#s.
RETIRE-ENT .ENEFITS, PENSIONS, GRATUITIES, e!c.
CIR v CA M8??BJ
NCI Retirement Plan #as an emplo&eesV trust maintained b& the
emplo&er" NCI In%." to provideretirement" pension" disabilit& and death
bene0ts to its emplo&ees.
The Plan as submitted #as approved and -uali0ed as exempt from
in%ome tax b& the CIR.
In <K4>" NCI made investments and earned interest in%ome from
#here <55 tax #as #$held as imposed b& P6 <K5K.
NCI thus 0led #$ the CIR %laims for refund in the amounts #$held b&
Ans%or Capital Investment Corp and Commer%ial ;an of Ganila.
NCI said in a letter that it disa'reed #ith the %olle%tion of the <55 0nal
#ithholdin' tax from the interest in%ome as it is an entit& full& exempt
from in%ome under RA >K<D in relation to @e%tion 5P(b) of the Tax
Code.
CIR denied the re-uest so %ase #as elevated to CTA and CTA ruled in
favor of NCI.
I1 2$n NCI Plan is exempt from the 0nal #ithholdin' tax on interest
in%ome from mone& pla%ements and pur%hase of treasur& bills re-uired
b& Pres. 6e%ree )o. <K5K
R1 EA@" NCI Plan is exempt.
NCI Plan #as -uali0ed as exempt from in%ome tax b& the
Commissioner of Internal Revenue in a%%ordan%e #ith RA >K<D" #$%
provides that any provision of law to the contrary notwithstanding, the
re!ire#en! bene,!s re%eived b& oL%ials and emplo&ees of private
0rms" #hether individual or %orporate" in a%%ordan%e #ith a reasonable
private bene0t plan maintained b& the emplo&er s$all be exe!pt
fro! all taxes.
This provision should be taen in relation to then @e%tion 5P(b) (no#
53fbg) of the Tax Code" #$% speci,call& e%e#p!e" e#pl&ee\s
!rus!s )r# inc#e !a%.
The reason for the %reation of emplo&eesV trusts or bene0t plans is to
provide e%onomi% assistan%e to emplo&ees upon the o%%urren%e of
%ertain %ontin'en%ies" parti%ularl&" old a'e retirement" death" si%ness"
or disabilit&. 2hat is more" it is established for their e%clusive bene,!
and for no other purpose.
Amplo&ees3 trusts are exempt in order to en%oura'e the formation and
establishment of su%h private Plans for the bene0t of laborers and
emplo&ees outside of the @o%ial @e%urit& A%t.
*ther#ise" taxation of those earnin's #ould result in a diminution
a%%umulated in%ome and redu%e #hatever the trust bene0%iaries
#ould re%eive out of the trust fund. This #ould run afoul of the ver&
intendment of the la#.
6eletion in P6 <K5K of the provisos re'ardin' tax exemption and
preferential tax rates under the old la#" therefore" %an not be deemed
to extent to emplo&eesV trusts.
@aid 6e%ree" bein' a 'eneral la#" %an not repeal b& impli%ation a
spe%i0% provision" @e%tion 5P(b) no# 53 fbg) in relation to RA >K<D
'rantin' exemption from in%ome tax to emplo&eesV trusts.
CIR v CA M8??8J
Afren P. Castaneda retired from the 'overnment servi%e as revenue
atta%hi in the Philippine Ambass& in Iondon" An'land.
7pon retirement" he re%eived" amon' other bene0ts" terminal.leave
pa& from #$% CIR #ithheld about P<=!" alle'edl& representin'
in%ome tax thereon.
Castaneda 0led a formal #ritten %laim #ith CIR for a refund of the said
amount" sa&in' that he %ash e-uivalent of his terminal leave is exempt
from in%ome tax.
To %ompl& #ith the t#o.&ear pres%riptive period #ithin #hi%h %laims for
refund ma& be 0led" Castaneda 0led #ith the CTA Petition for Revie#"
seein' the refund of in%ome tax #ithheld from his terminal leave.
CTA ruled in favor of Castaneda and ordered CIR to refund him.
CIR thus appealed to @C sa&in' that the terminal.leave pa& is I)C*GA $
part of %ompensation for servi%es rendered. There %an thus be no
8%ommutation of salar&9 #hen a 'overnment retiree applies for
terminal leave" be%ause he is not re%eivin' it as salar&. 2hat he applies
for is a 8%ommutation of leave %redits.9 Thus" it is taxable.
I1 2$n it terminal leave pa& re%eived b& a 'ov emplo&ee is taxable
R1 )*. Terminal leave pa& is )*T sub?e%t to #ithholdin' in%ome tax.
Oesus ). ;orromeo v. The Fon. Civil @ervi%e Commission1 Ter#inal
leave pa& is a RETIRE-ENT .ENEFIT, an" is !$us n! sub(ec! !
inc#e !a%.
Commutation of leave %redits" more %ommonl& no#n as terminal
leave" is applied for b& an oL%er or emplo&ee #ho retires" resi'ns or is
separated from the servi%e throu'h no fault of his o#n.
In the exer%ise of sound personnel poli%&" the 'overnment en%oura'es
unused leaves to be a%%umulated. The 'overnment re%o'ni:es that for
most publi% servants" retirement pa& is al#a&s less than 'enerous if
not mea'er and s%rimp&.
A modest nest e''" #hi%h the senior %iti:en ma& loo for#ard to" is
thus avoided. Terminal leave pa&ments are 'iven not onl& at the same
time but also for the same poli%& %onsiderations 'overnin' retirement
bene0ts.
RE7 RE1UEST OF ATTE. .ERNARDO AIA/CITA
@C passed a resolution re'ardin' the amounts %laimed b& Att&. Xial%ita
durin' his retirement. @C said that terminal leave pa& of Att&. Xial%ita
re%eived b& virtue of his %ompulsor& retirement %an )ABAR be
%onsidered a part of his salar& sub?e%t to the pa&ment of in%ome tax.
Rather" it falls under the phraseV !$er si#ilar bene,!s re%eived b&
retirin' emplo&ees and #orers" #ithin the meanin' of @e%tion < of P6
)o. ==0 and is thus exempt from the pa&ment of in%ome tax.
P6 K45 also maes it %lear that the ac!ual service is the period of
time for #hi%h pa& has been re%eived" e%clu"in' !$e peri" cvere"
b& !er#inal leave.
CIR throu'h @olNen moved for re%onsideration.
@C" ho#ever" denied the GR and held that the mone& value of the
a%%umulated leave %redits of Att&. ;ernardo Xial%ita are )*T taxable.
@in%e terminal leave is applied for b& an oL%er or emplo&ee #ho has
alread& severed his %onne%tion #ith his emplo&er and is no lon'er
#orin'" then it follo#s that the terminal leave pa&" #hi%h is the %ash
value of his a%%umulated leave %redits" is n ln'er c#pensa!in
)r services ren"ere". It CA))*T be vie#ed as salar&.
EO 8D@@7 An& oL%er $ 'ov emplo&ee #ho voluntaril& resi'ns or is
separa!e" )r# service !$ru'$ n )aul! ) $is =n and #hose
leave bene0ts are )*T %overed b& spe%ial la#" shall be entitled to the
c##u!a!in ) all !$e accu#ula!e" vaca!in an"+r sic0
leaves ! $is cre"i!, ex%lusive of @aturda&s" @unda&s and holida&s"
#ithout limitation as to the number of da&s of va%ation and si% leaves
that he ma& a%%umulate.
NIRC, Sec BR7 Retirement bene0ts" pensions and 'ratuities re%eived
b& 'ov oL%ials and emplo&ees shall )*T be in%luded in 'ross in%ome.
In the %ase of Att&. Xial%ita" he rendered 'overnment servi%e from <KP=
to <KK0" until he rea%hed the %ompulsor& retirement a'e of P5 &ears.
7pon his %ompulsor& retirement" he is entitled to the %ommutation of
his a%%umulated leave %redits to its mone& value.
Compulsor& retirement ma& be %onsidered as a S%ause be&ond the
%ontrol of the said oL%ial or emplo&eeS.
Conse-uentl&" the amount that he re%eived b& #a& of %ommutation of
his a%%umulated leave %redits as a result of his %ompulsor& retirement"
or his terminal leave pa&" falls #ithin the enumerated ex%lusions from
'ross in%ome and is therefore not sub?e%t to tax.
The terminal leave pa& of Att&. Xial%ita ma& lie#ise be vie#ed as a
Sretirement 'ratuit& re%eived b& 'overnment oL%ials and emplo&eesS
#hi%h is also another ex%lusion from 'ross in%ome as provided for in
the @e% =4" )IRC.
The %ase of Att&. ;ernardo Xial%ita is merel& an administrative matter
involvin' an emplo&ee of the @C #ho applied for retirement bene0ts
and #ho -uestioned the dedu%tions on the bene0ts 'iven to him.
Fen%e" the resolution applies onl& to emplo&ees of the Oudi%iar&. It
%annot be extended to other 'ov emplo&ees be%ause in e/e%t" @C
#ould be renderin' an advisor& opinion.
The Chief of the Cinan%e 6ivision lie#ise sou'ht %lari0%ation #ith
respe%t to the appli%abilit& of the resolution to emplo&ees of the
@upreme Court to those #ho1
o avail of optional retirement
o resi'n$ are separated from the servi%e throu'h no fault of
their o#n
The t#o 'roups mentioned above are also entitled to terminal leave
pa& in a%%ordan%e #ith the Revised Admin Code" @e% =4P.
INCO-E DERI2ED .E FOREIGN GO2ERN-ENT
CIR v -ITSU.ISHI -ETA/ CORP
Gitsubishi #here it #as provided that Gitsubishi #ould IA)6 Atlas
\=0G for the installation of a ne# %on%entrator for %opper produ%tion.
In turn" Atlas #ould @AII to Gitsubishi all the %opper %on%entrates
\=0G.
%ondition that Gitsubishi #ould use the amount as loan to Atlas and as
#ithholdin' tax.
R7 )*" interest in%ome is )*T exempt from tax.
)IRC provides that in%ome re%eived from loans in the Phils extended b&
0nan%ial institutions o#ned" %ontrolled or 0nan%ed b& forei'n 'ovs are
exempt from tax. Gitsubishi and Atlas thus %laim that interest in%ome
from the loan falls under su%h exemption be%ause Gitsubishi #as
merel& an a'ent of Aximban" a 0nan%in' institution o#ned"%ontrolled
and 0nan%ed b& the Oap 'ov.
F*2ABAR" Gitsubishi #as )*T a mere a'ent of Aximban. It entered
into the a'reement #ith Atlas in its o#n independent %apa%it&.
T$e !ransac!in be!=een -i!subis$i an" A!las n ne $an",
AND -i!subis$i an" E%i#ban0 n !$e !$er, =ere separa!e an"
"is!inc!.
repa&ment.
Ia#s 'rantin' exemption from tax are %onstrued stri%tissimi ?uris
dis%ussion.
1. DEDUCTIONS
CIR v ISA.E/A CU/TURA/ CORP
Isabela Cultural Corporation (ICC)" a domesti% %orp" re%eived from
the CIR an assessment letter demandin' pa&ment of the amounts
of P333! and P>! as de0%ien%& in%ome tax and expanded
#ithholdin' tax in%lusive of sur%har'e and interest" respe%tivel&"
for the <K4P.
ICC re-uested re%onsideration in a letter. Fo#ever" it re%eived a
0nal noti%e before sei:ure demandin' pa&ment of the amounts
stated in the said noti%es.
ICC thus 0led a petition for revie# #$ CTA.
CTA rendered a de%ision %an%elin' and settin' aside the
assessment noti%es issued a'ainst ICC. It held that the %laimed
dedu%tions for professional and se%urit& servi%es #ere properl&
%laimed b& ICC in <K4P be%ause it #as onl& in the said &ear #hen
the bills demandin' pa&ment #ere sent to ICC.
Fen%e" even if some of these professional servi%es #ere rendered
to ICC in <K4> or <K45" it %ould not de%lare the same as dedu%tion
for the said &ears as the amount thereof %ould not be determined
at that time.
CT+ also held that 0CC did not understate its interest income on
the sub.ect promissory notes. 0t found that it was the B05 which
made an overstatement of said income when it compounded the
interest income receivable by 0CC from the promissory notes of
5ealty 0nvestment, 0nc., 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 .ustify the application of compounded interest.
CA aLrmed this.
I1 2$n CA %orre%tl&1 (<) sustained the dedu%tion of the expenses
for professional and se%urit& servi%es from ICC3s 'ross in%ome,
and (=) held that ICC did not understate its interest in%ome from
the promissor& notes of Realt& Investment" In%, and that ICC
#ithheld the re-uired <5 #ithholdin' tax from the dedu%tions for
se%urit& servi%es.
R1 EA@.
The re-uisites for the dedu%tibilit& of ordinar& and ne%essar&
trade" business" or professional expenses" lie expenses paid for
le'al and auditin' servi%es" are1
o (a) the expense must be ordinar& and ne%essar&,
o (b) it must have been paid or in%urred durin' the taxable
&ear,
o (%) it must have been paid or in%urred in %arr&in' on the
trade or business of the taxpa&er, and
o (d) it must be supported b& re%eipts" re%ords or other
pertinent papers
A%%ountin' methods for tax purposes %omprise a set of rules for
determinin' #hen and ho# to report in%ome and dedu%tions. In
the instant %ase" the a%%ountin' method used b& ICC is the
accrual #e!$".
The a%%rual method relies upon the taxpa&er3s ri'ht to re%eive
amounts or its obli'ation to pa& them" in opposition to a%tual
re%eipt or pa&ment" #hi%h %hara%teri:es the %ash method of
a%%ountin'. Amounts of in%ome a%%rue #here the ri'ht to re%eive
them be%ome 0xed" #here there is %reated an enfor%eable liabilit&.
@imilarl&" liabilities are a%%rued #hen 0xed and determinable in
amount" #ithout re'ard to indetermina%& merel& of time of
pa&ment.
Cor a taxpa&er usin' the a%%rual method" the determinative
-uestion is" #hen do the fa%ts present themselves in su%h a
manner that the taxpa&er must re%o'ni:e in%ome or expensec The
a%%rual of in%ome and expense is permitted #hen the all.events
test has been met. This test re-uires1 (<) 0xin' of a ri'ht to
in%ome or liabilit& to pa&, and (=) the availabilit& of the reasonable
a%%urate determination of su%h in%ome or liabilit&.
The propriet& of an a%%rual must be ?ud'ed b& the fa%ts that a
taxpa&er ne#" or %ould reasonabl& be expe%ted to have no#n"
at the %losin' of its boos for the taxable &ear. A%%rual method of
a%%ountin' presents lar'el& a -uestion of fa%t, su%h that the
taxpa&er bears the burden of proof of establishin' the a%%rual of
an item of in%ome or dedu%tion.
In this %ase" the expenses for professional fees %onsist of
expenses for le'al and auditin' servi%es. The expenses for le'al
servi%es pertain to the <K4> and <K45 le'al and retainer fees of
the la# 0rm ;en':on Xarra'a )ar%iso Cudala Pe%son A:%una [
;en'son" and for reimbursement of the expenses of said 0rm in
%onne%tion #ith ICC3s tax problems for the &ear <K4>.
As testi0ed b& the Treasurer of ICC" the 0rm has been its %ounsel
sin%e the <KP03s. Crom the nature of the %laimed dedu%tions and
the span of time durin' #hi%h the 0rm #as retained" ICC %an be
expe%ted to have reasonabl& no#n the retainer fees %har'ed b&
the 0rm as #ell as the %ompensation for its le'al servi%es. The
failure to determine the exa%t amount of the expense durin' the
taxable &ear #hen the& %ould have been %laimed as dedu%tions
%annot thus be attributed solel& to the dela&ed billin' of these
liabilities b& the 0rm.
Cor one" ICC" in the exer%ise of due dili'en%e %ould have in-uired
into the amount of their obli'ation to the 0rm" espe%iall& so that it
is usin' the a%%rual method of a%%ountin'. Cor another" it %ould
have reasonabl& determined the amount of le'al and retainer fees
o#in' to its familiarit& #ith the rates %har'ed b& their lon' time
le'al %onsultant.
In the same vein" the professional fees of @NB [ Co. for auditin'
the 0nan%ial statements of ICC for the &ear <K45 %annot be validl&
%laimed as expense dedu%tions in <K4P. This is so be%ause ICC
failed to present eviden%e sho#in' that even #ith onl&
Sreasonable a%%ura%&"S as the standard to as%ertain its liabilit& to
@NB [ Co. in the &ear <K45" it %annot determine the professional
fees #hi%h said %ompan& #ould %har'e for its servi%es.
ICC thus failed to dis%har'e the burden of provin' that the %laimed
expense dedu%tions for the professional servi%es #ere allo#able
dedu%tions for the taxable &ear <K4P
CIR v GENERA/ FOODS MPHI/SJ INC.
Neneral Coods In%." #hi%h is en'a'ed in the manufa%ture of bevera'es
su%h as 8Tan'"9 8Calumet9 and 8Uool.Aid"9 0led its in%ome tax return
for the 0s%al &ear endin' Cebruar& =4" <K45.
In said tax return" NenCoods %laimed as dedu%tion" amon' other
business expenses" the amount of PKG! for media advertisin' for
8Tan'.9
CIR disallo#ed 505 or P>G! of the dedu%tion and assessed the %orp a
de0%ien%& in%ome taxes in the amount of P=G!.
Corp 0led an GR but #as denied so it appealede to CTA.
CTA dismissed the appeal" so %orp 0led a petition for revie# #$ CA.
CA reversed CTA de%ision" rulin' in favour of %orp.
I1 2$n the sub?e%t media advertisin' expense for 8Tan'9 in%urred b&
respondent %orporation #as an ordinar& and ne%essar& expense full&
dedu%tible under the )ational Internal Revenue Code ()IRC)
R1 )*" it is )*T 6A67CTI;IA.
6edu%tions for in%ome tax purposes partae of the nature of tax
exemptions, hen%e" if tax exemptions are stri%tl& %onstrued" then
dedu%tions must also be stri%tl& %onstrued.
@e%tion 3> (A) (<)" formerl& @e%tion =K (a) (<) (A)" of the )IRC provides
that there shall be allo#ed as dedu%tion from 'ross in%ome all ordinar&
and ne%essar& expenses paid or in%urred durin' the taxable &ear in
%arr&in' on" or #hi%h are dire%tl& attributable to" the development"
mana'ement" operation and$or %ondu%t of the trade" business or
exer%ise of a profession.
@impl& put" to be dedu%tible from 'ross in%ome" the sub?e%t advertisin'
expense must %ompl& #ith the follo#in' re-uisites1
o (a) the expense must be ordinar& and ne%essar&
o (b) it must have been paid or in%urred durin' the taxable
&ear,
o (%) it must have been paid or in%urred in %arr&in' on the trade
or business of the taxpa&er, and
o (d) it must be supported b& re%eipts" re%ords or other
pertinent papers.
The parties are in a'reement that the sub?e%t advertisin' expense #as
paid or in%urred #ithin the %orrespondin' taxable &ear and #as
in%urred in %arr&in' on a trade or business. Fen%e" it #as ne%essar&.
Fo#ever" their vie#s %on]i%t as to #hether or not it #as ordinar&. To
be dedu%tible" an advertisin' expense should not onl& be ne%essar&
but also ordinar&. These t#o re-uirements must be met.
There is &et to be a %lear.%ut %riteria or 0xed test for determinin' the
reasonableness of an advertisin' expense. There bein' no hard and
fast rule on the matter" the ri'ht to a dedu%tion depends on a number
of fa%tors.
In the %ase at bar" the PKG! %laimed as media advertisin' expense for
8Tan'9 alone #as almost one.half of its total %laim for 8maretin'
expenses.9
Aside from that" %orporation also %laimed P=G! as 8other advertisin'
and promotions expense9 and another P<G! for %onsumer promotion.
Curthermore" the sub?e%t PKG! media advertisin' expense for 8Tan'9
#as almost double the amount of %orporation3s P>G! 'eneral and
administrative expenses.
The sub?e%t expense for the advertisement of a sin'le produ%t is
inordinatel& lar'e.
Advertisin' is 'enerall& of t#o inds1 (<) advertisin' to stimulate the
current sale of mer%handise or use of servi%es and (=) advertisin'
desi'ned to stimulate the future sale of mer%handise or use of
servi%es. The se%ond t&pe involves expenditures in%urred" in #hole or
in part" to %reate or maintain some form of 'ood#ill for the taxpa&er3s
trade or business or for the industr& or profession of #hi%h the
taxpa&er is a member.
If the expenditures are for the advertisin' of the 0rst ind" then" ex%ept
as to the -uestion of the reasonableness of amount" there is no doubt
su%h expenditures are dedu%tible as business expenses. If" ho#ever"
the expenditures are for advertisin' of the se%ond ind" then normall&
the& should be spread out over a reasonable period of time.
In this %ase" the sub?e%t advertisin' expense #as of the se%ond ind.
)ot onl& #as the amount sta''erin', the respondent %orporation itself
also admitted" in its letter protest to the Commissioner of Internal
Revenue3s assessment" that the sub?e%t media expense #as in%urred in
order to prote%t the %orporation3s brand fran%hise.
The %orporation3s venture to prote%t its brand fran%hise #as
tantamount to e/orts to establish a reputation. This #as ain to the
a%-uisition of %apital assets and therefore expenses related thereto
#ere not to be %onsidered as business expenses but as %apital
expenditures.
AGUINA/DO v CIR
A'uinaldo Industries Corp. #as en'a'ed in t#o lines of business1 the
manufa%ture of 0shin' nets" handled b& its Fis$ Ne! Divisin" and the
manufa%ture of furniture" #hi%h in turn #as handled b& its Furni!ure
Divisin.
Cor a%%ountin' purposes" ea%h division ept separate boos of
a%%ounts as re-uired b& the 6epartment of Cinan%e. The net in%omes
for the Cish )et 6ivision and the Curniture 6ivision #ere %omputed
separatel&.
A'uinaldo Industries had previousl& a%-uired land in Guntinlupa for its
0shin' net fa%tor&" but #hen it a%-uired more suitable land for the
purpose" it sold the Guntinlupa propert& for a pro0t" #hi%h #as entered
in its boos as mis%ellaneous in%ome as distin'uished from its tax
exempt in%ome.
In <K5<" A'uinaldo Industries 0led separate returns for its 0shin' and
furniture divisions.
The ;IR investi'atin' oL%ers found that AIC Cish )et dedu%ted from its
'ross in%ome the amount of P< as additional renumeration paid to the
oL%ers of A'uinaldo Industries.
The examiner found that this mone& #as taen from the sale of the
Guntinlupa propert&" an isolated transa%tion not in the usual %ourse of
business. Thus" the examiner re%ommended that the amount be
disallo#ed as a dedu%tion.
AIC %ontends that the mone& #as paid as an allo#an%e or bonus to its
oL%ers as provided in its b&.la#s.
CTA upheld the CIR3s de%ision and held A'uinaldo Industries liable for
<D in ba% taxes.
AIC ar'ues that the pro0t derived from the sale of the Guntinlupa land
is not taxable for it is tax exempt under RA K0< as a ne# and
ne%essar& industr&.
I1 2$n the bonus 'iven to A'uinaldo3s oL%ers #as an ordinar& and
ne%essar& business expense and therefore dedu%tible
R1 )o" it #as not dedu%tible.
The re%ords sho# that the sale e/e%ted throu'h a broer #ho 'ot a
%ommission and there is no eviden%e of an& servi%e rendered b& the
oL%er.
In %omputin' net in%ome" there shall be allo#ed as dedu%tions 8all
ordinar& and ne%essar& expenses paid or in%urred durin' the taxable
&ear in %arr&in' on an& trade or business in%ludin' reasonable
allo#an%es for personal servi%es a%tuall& in%urred.9
In the basis of the for'oin' standard" the bonus %annot be deemed as a
dedu%tible expense for tax purposes" even thou'h the sale %ould be
%lassi0ed as a transa%tion for %arr&in' on the trade or business of the
%orporation.
There is no a%tual eviden%e that the oL%ers a%tuall& rendered some
servi%e in the perfe%tion of the sale
Cor bonuses to be dedu%tible it must ans#er t#o -uestions1
o Cirst" has personal servi%e a%tuall& been rendered b& the
oL%ersc
o @e%ond" if so" is it a reasonable allo#an%e thereforec
In this %ase" the shares in the pro0t #ere extraordinar& and unusual
expenses and as su%h" %annot be deemed as ne%essar& expenses.
A'uinaldo #as also held liable to pa& sur%har'e and interest on the
ba% taxes.
AT/AS CONSO/IDATED -INING N DE2 CORP v CIR
Atlas is a minin' %ompan& and CIR assessed it for de0%ien%& in%ome
taxes of about P500! in <K5D and P=00! in <K54.
This #as based on an understandin' that onl& 'old mines #ere tax.
exempt (RA K0K).
Atlas protested and ased for its re%onsideration.
Iater" a rulin' #as issued b& the @e%retar& of Cinan%e" #ho %lari0ed
that the exemption in RA K0K applied to all mines" not ?ust 'old mines.
The CIR re%omputed the assessment. It eliminated the P5>P
de0%ien%& and redu%ed the P=<5 de0%ien%& to P3K.
Atlas still appealed to the CTA and assailed the disallo#an%e of the
follo#in' items as dedu%tible from their 'ross in%ome1 transfer a'ent3s
fee" s!c0$l"er:s rela!in service )ee, 7@ sto% listin' expenses"
sui! e%penses and prvisin )r cn!in'encies.
The CTA allo#ed the aforementioned dedu%tions except for the items
titled sto%holder3s relation servi%es and suit expenses (onl& partial
disallo#an%e" from P=3 to P<3 to 0nall&" as dedu%ed b& the CTA"
PP).
@in%e the exemption #as onl& 'ood until the 0rst -uarter of <K54" d of
the net taxable in%ome of petitioner is sub?e%t to in%ome tax. Fen%e" it
assessed d of Atlas3 promotion fees (amountin' to P=5 for the #hole
&ear) #ith in%ome tax.
;oth parties appealed to the @C re'ardin' the de%ision of the CTA.
I$ R1
<. 6ere !$e e%penses pai" )r !$e services ren"ere" b& a PR
,r# ! be cnsi"ere" all=able "e"uc!in as business
e%penseQ
)*" it is %onsidered a %apital expenditure. This is based on 7@
?urispruden%e #here it #as held that expenses in%urred to %reate a
favorable ima'e does )*T mae it a business expense.
Test of dedu%tibilit&1 <) expense must be ordinar& [ ne%essar& =) it
must be paid or in%urred n %arr&in' on a trade or business 3) it must
be proven b& eviden%e
=. 6as !$e US s!c0 lis!in' )ee ! be cnsi"ere" all=able
"e"uc!inQ
EA@" be%ause it is made annuall& to the sto% ex%han'e for the
privile'e of havin' its sto% listed. It is therefore ordinar& [ ne%essar&.
An expense is ne%essar& . #hen it is appropriate [ helpful in the
development of the taxpa&erVs business. It is ordinar& . #hen it is
normal in relation to the business of the taxpa&er. ;ut there is no hard
[ fast rule on this. I)TA)TI*) is also important
3. 6ere sui! e%penses ! be cnsi"ere" all=able "e"uc!inQ
)*"liti'ation expenses in%urred in defense or prote%tion of title are
CAPITAI in nature and not dedu%tible. It is %onsidered a part of the
%ost of the propert&.
ROXAS v CTA
Antonio" Aduardo and Oose formed a partnership" Roxas & Compania" to
mana'e the <K"000 he%tares a'ri%ultural lands in )asu'bu" ;atan'as" a
residential lot in Galate" Ganila and shares of sto%s in di/erent
%orporations a%-uired from their an%estors.
After the 22II" the Novernment persuaded the Roxas brothers and a'reed
to sell <3"500 he%tares of their propert& in ;atan'as to be distributed b& the
'overnment to the a%tual o%%upants as part of the 'overnment3s land
reform pro'ram" for P="0DK"0>4.>D plus P300"000.00 for surve& and
subdivision expenses.
Fo#ever" the 'overnment did not have enou'h funds to pa& them. @o the&
mae arran'ement for the Rehabilitation Cinan%e Corp. to advan%e <.5G as
loan #ith the land as %ollateral. Roxas & Cia. #ill then pa& its loan from the
pro%eeds of the &earl& amorti:ations paid b& the farmers.
Antonio and Aduardo 'ot married" leavin' Oose to sta& in the house for
#hi%h he paid rentals to Roxas & Cia. the amount of P4000$&r.
The CIR assessed the %ompan& de0%ien%ies in real estate dealer3s tax on
the house rentals from Oose" se%urities dealer3s tax from pro0ts from the
pur%hase and sale of se%urities and the unreported net pro0ts from the sale
of the ;atan'as Iand. It also disallo#ed dedu%tions %laimed b& the
brothers. Roxas protested the assessment.
Issues1
<. 2$) Roxas & Cia. is liable for pa&ment of 0xed real estate dealer3s taxc
EA@
=. 2$) the pro0t derived from the sale of ;atan'as land %onsidered an
ordinar& 'ain <005 taxablec)*
3. 2$) the expenses %laimed %an be in%luded as dedu%tionsc
R1 The Roxas & Cia. is liable to pa& 0xed tax as real estate
dealer from the rentals of Oose but the ;atan'as land is %onsidered a %apital
asset 505 taxable onl&. The %ontributions to the Ganila Poli%e trust fund
#as allo#ed as dedu%tions. The Christmas funds to Pasa& Poli%e" Pasa&
Cireman" ;a'uio Poli%e #ere not allo#ed as dedu%tions. As #ell as the
%ontributions to %ivi% or'." *ur lad& of Catima Chapel.
Ra!inale7
1. @e%tion <K> of the Tax Code" in %onsiderin' as real estate dealers
o#ners of real estate re%eivin' rentals of at least P3"000.00 a &ear"
does not provide an& -uali0%ation as to the persons pa&in' the rentals.
Z. SReal estate dealerS in%ludes an& person en'a'ed in
the business of bu&in'" sellin'" ex%han'in'" leasin' or
rentin' propert& on his o#n a%%ount as prin%ipal and
holdin' himself out as a full or part.time dealer in real
estate or as an owner of rental property or properties
rented or oMered to rent for an aggregate amount of
three thousand pesos or more a year1 . ..9.
2. The sale of the ;atan'as land is onl& an isolated transa%tion and it #as
done at the re-uest of the 'overnment for la% of funds to pa& the said
propert&. The Guni%ipalit& of )asu'bu even passed a resolution
expressin' 'ratitude to the Roxas & Cia. 9In +ne$ Roxas # Cia.
cannot &e considered a real estate dealer for the sale in
6uestion. 7ence$ pursuant to .ection 89 of the Tax Code the
lands sold to the far!ers are capital assets$ and the gain
derived fro! the sale thereof is capital gain$ taxa&le onl# to
the extent of *:;.9
3. 6edu%tions must be proven b& the taxpa&er to be reasonable" ordinar&
and ne%essar& and must be in%urred in %onne%tion to the business.
Ti%ets for ban-uet in Fonor of @er'io *smena ( no %onne%tion to
the business
Civi% Nroups (or'ani:ed b& Ferald) for need& ( Ferald not a
%orporation but an asso%iation for %harit&
Contributions (*ur Iad& of Catima at CA7) ( CA7 'ives dividends
and Catima has not sho#n to belon' to Chur%h
A %ontribution to the 'overnment entit& is valid as dedu%tions if used
AJCI7@IBAIE for publi% purposes.
Christmas Cunds (Pasa& [ ;a'uio Poli%e" Pasa& Cireman) ( )ot for
publi% purpose" 'ifts to families of publi% oL%ials
Contributions (Ganila Poli%e Trust Cund) ( intended to be used for
publi% purpose
AA-ORA v CIR
Gariano Xamora" o#ner of the ;a& Bie# Fotel and Carma%ia Xamora" Ganila"
0led his in%ome tax returns the &ears <K5< and <K5=. The Colle%tor of Internal
Revenue found that he failed to 0le his return of the %apital 'ains derived from
the sale of %ertain real properties and %laimed dedu%tions #hi%h #ere not
allo#able. The %olle%tor re-uired him to pa& the de0%ien%& in%ome tax for the
&ears <K5< and <K5=. *n appeal b& Xamora" the CTA modi0ed the de%ision
appealed from and ordered him to pa& the redu%ed total sum of P30"=54.00
(P=="K40.00 and PD"=D4.00" as de0%ien%& in%ome tax for the &ears <K5< and
<K5=" respe%tivel&)" pursuant to se%tion 5<(e)" Int. Revenue Code. 2ith %osts
a'ainst petitioner. Favin' failed to obtain a re%onsideration of the de%ision"
Gariano Xamora appealed.
It is alle'ed b& Gariano Xamora that the CTA erred in disallo#in'
P<0">D4.50 as promotion expenses in%urred b& his #ife for the promotion of the
;a& Bie# Fotel and Carma%ia Xamora. Fe %ontends that the #hole amount of
P=0"K5D.00 as promotion expenses in his <K5< in%ome tax returns" should be
allo#ed and not merel& one.half of it" on the 'round that" #hile not all the
itemi:ed expenses are supported b& re%eipts" the absen%e of some supportin'
re%eipts has been suL%ientl& and satisfa%toril& established. Cor the said amount
#as spent b& Grs. Asperan:a A. Xamora (#ife of Gariano)" durin' her travel to
Oapan and the 7nited @tates to pur%hase ma%hiner& for a ne# Tii.Tii plant" and
to observe hotel mana'ement in modern hotels.
The CTA" ho#ever" found that for said trip Grs. Xamora obtained onl& the
sum of P5"000.00 from the Central ;an and that in her appli%ation for dollar
allo%ation" she stated that she #as 'oin' abroad on a %ombined medi%al and
business trip" #hi%h fa%ts #ere not denied b& Gariano Xamora. )o eviden%e had
been submitted as to #here Gariano had obtained the amount in ex%ess of
P5"000.00 'iven to his #ife #hi%h she spent abroad. )o explanation had been
made either that the statement %ontained in Grs. XamoraVs appli%ation for dollar
allo%ation that she #as 'oin' abroad on a %ombined medi%al and business trip"
#as not %orre%t. The alle'ed expenses #ere not supported b& re%eipts. Grs.
Xamora %ould not even remember ho# mu%h mone& she had #hen she left
abroad in <K5<" and ho# the alle'ed amount of P=0"K5D.00 #as spent.
Issue7 2hether the CTA erred in (<) disallo#in' P<0">D4.50" as promotion
expenses in%urred b& his #ife for the promotion of the ;a& Bie# Fotel and
Carma%ia Xamora (#hi%h is Q of P=0"K5D.00" supposed business expenses), (=)
disallo#in' 3.Q5 per annum as the rate of depre%iation of the ;a& Bie# Fotel
;uildin'
Hel"7 Petition is dismissed. 6e%ision appealed from is aLrmed.
Ra!i7
@e%tion 30" of the Tax Code" provides that in %omputin' net in%ome" there
shall be allo#ed as dedu%tions all the ordinar& and ne%essar& expenses paid
or in%urred durin' the taxable &ear" in %arr&in' on an& trade or business
o @in%e promotion expenses %onstitute one of the dedu%tions in
%ondu%tin' a business" same must testif& these re-uirements.
Claim for the dedu%tion of promotion expenses or entertainment
expenses must also be substantiated or supported b& re%ord
sho#in' in detail the amount and nature of the expenses in%urred.
o Considerin' that the appli%ation of Grs. Xamora for dollar
allo%ation sho#s that she #ent abroad on a %ombined medi%al and
business trip" not all of her expenses %ame under the %ate'or& of
ordinar& and ne%essar& expenses, part thereof %onstituted her
personal expenses.
o There havin' been no means b& #hi%h to as%ertain #hi%h expense
#as in%urred b& her in %onne%tion #ith the business of Gariano
Xamora and #hi%h #as in%urred for her personal bene0t" the
Colle%tor and the CTA in their de%isions" %onsidered 505 of the
said amount as business expenses and the other 505" as her
personal expenses. The allo%ation is ver& fair to Gariano Xamora"
there havin' been no re%eipt #hatsoever" submitted to explain the
alle'ed business expenses" or proof of the %onne%tion #hi%h said
expenses had to the business or the reasonableness. 2hile in
situations lie the present" absolute %ertaint& is usuall& no
possible" the CTA should mae as %lose an approximation as it %an"
bearin' heavil&" if it %hooses" upon the taxpa&er #hose
inexa%tness is of his o#n main'.
Representation expenses fall under the %ate'or& of business expenses
#hi%h are allo#able dedu%tions from 'ross in%ome" if the& meet the
%onditions pres%ribed b& la#" parti%ularl& se%tion 30 (a) f<g" of the Tax Code,
that to be dedu%tible1
o ;usiness expenses must be ordinar& and ne%essar& expenses paid
or in%urred in %arr&in' on an& trade or business.
o Those expenses must also meet the further test of reasonableness
in amount.
o That #hen some of the representation expenses %laimed b& the
taxpa&er #ere eviden%ed b& vou%hers or %hits" but others #ere
#ithout vou%hers or %hits" do%uments or supportin' papers.
o There is no more than oral proof to the e/e%t that pa&ments have
been made for representation expenses alle'edl& made b& the
taxpa&er and about the 'eneral nature of su%h alle'ed expenses.
o A%%ordin'l&" it is not possible to determine the a%tual amount
%overed b& supportin' papers and the amount #ithout supportin'
papers" the %ourt should determine from all available data" the
amount properl& dedu%tible as representation expenses.
o In vie# hereof" the CTA did not %ommit error in allo#in' as
promotion expenses of Grs. Xamora %laimed in Gariano XamoraVs
<K5< in%ome tax returns" merel& one.half.
Petitioner Gariano Xamora alle'es that the CTA erred in disallo#in' 3.Q5
per annum as the rate of depre%iation of the ;a& Bie# Fotel ;uildin' but
onl& =.Q5. In ?ustif&in' depre%iation dedu%tion of 3.Q5" Gariano Xamora
%ontends that (<) the Armita 6istri%t" #here the ;a& Bie# Fotel is lo%ated" is
no# be%omin' a %ommer%ial distri%t, (=) the hotel has no room for
improvement, and (3) the %han'in' modes in ar%hite%ture" st&les of
furniture and de%orative desi'ns" Smust meet the taste of a 0%le publi%S. It
is a fa%t" ho#ever" that the CTA" in estimatin' the reasonable rate of
depre%iation allo#an%e for hotels made of %on%rete and steel at =.Q5" the
three fa%tors ?ust mentioned had been taen into a%%ount alread&.
o )ormall&" an avera'e hotel buildin' is estimated to have a useful
life of 50 &ears" but inasmu%h as the useful life of the buildin' for
business purposes depends to a lar'e extent on the suitabilit& of
the stru%ture to its use and lo%ation" its ar%hite%tural -ualit&" the
rate of %han'e in population" the shiftin' of land values" as #ell as
the extent and maintenan%e and rehabilitation. It is allo#ed a
depre%iation rate of =.Q5 %orrespondin' to a normal useful life of
onl& >0 &ears. Conse-uentl&" the stand of the petitioners %annot
be sustained.
EXPENSES
C.-. Hs0ins N C, Inc.
CG Fosins is a domesti% %orporation en'a'ed in the real estate
business as broers" mana'in' a'ents" [ administrators.
Gr. C.G. Fosins o#ns KK.P5 of the %orp and #as the %ompan&
President.
Fe #as also Chairman of the ;oard and re%eived salar& and bonuses
and 'ot 505 share of the sales %ommissions earned b& the %ompan&.
Fe also 'ot 505 of the supervision fees re%eived b& the %ompan& as
mana'in' a'ents of Paradise Carms subdivision.
CG Fosins 0led its in%ome tax return #$ net in%ome of about PK=!.
After pa&in' the latter" CIR veri0ed the tax returns and 6I@AII*2A6 >
items of dedu%tion [ assessed it de0%ien%& in%ome taxes.
The Tax Court set aside 3 of the disallo#an%es" but upheld CIR3s
disallo#an%e of the 505 supervision fees earned b& Gr. Fosins.
(PKK!)
I1 2$n the 505 share of Gr. Fosins in the supervision fees re%eived b&
the %ompan& %an be %onsidered as dedu%tions (CIR %laims that this
amount is inordinatel& lar'e" bearin' a ver& %lose relationship to the
Gr. FosinVs dominant sto%holdin's and therefore amounted in la# to
a distribution of its earnin's and pro0ts)
R1 )*.
In this %ase" Fosins #as1
o Chairman of the board of dire%tors of CG Fosins" #$% bears
his name
o o#ned KK.P5 of its total authori:ed %apital sto%
o #as salesman.broer for his %ompan&" re%eivin' a 505 share
of the sales %ommissions earned b& petitioner" besides his
monthl& salar& of P3"D50.00 amountin' to an annual
%ompensation of P>5"000.00 and an annual salar& bonus of
P>0"000.00
o plus free use of the %ompan& %ar and re%eipt of other similar
allo#an%es and bene0ts
Thus" the Tax Court %orre%tl& ruled that the pa&ment b& CG Fosins to
Fosins 505 share of the 45 supervision fees re%eived b& CG Fosins
as mana'in' a'ents of the real estate" subdivision pro?e%ts of Paradise
Carms" In%. and Realt& Investments" In%. #as inordinatel& lar'e and
%ould not be %onsidered a dedu%tion.
If su%h pa&ment #ere to be allo#ed as a dedu%tible item" then Fosins
#ould re%eive on these three items alone (salar&" bonus and
supervision fee) a total of P<4K!" #hi%h #ould be double the
petitionerVs reported net in%ome for the &ear.
2hile a *)A.time fee %ould be %onsidered fair [ dedu%tible as an
expense" in this %ase" Gr.Fosins #as re%eivin' these supervisor& fees
ABARE EAAR re'ardless of #hether servi%es #ere a%tuall& rendered b&
him.
If it #as allo#ed" his total %ompensation #ould be 6*7;IA the
%ompan&Vs o#n net in%ome.
The fa%t that su%h pa&ment #as authori:ed b& a standin' resolution of
CG FosinsVs board of dire%tors" sin%e SFosins had personall&
%on%eived and planned the pro?e%tS %annot %han'e the pi%ture. There
%ould be no -uestion that as Chairman of the board and pra%ti%all& an
absolutel& %ontrollin' sto%holder of petitioner" holdin' KK.P5 of its
sto%" Fosins #ielded tremendous po#er and in]uen%e in the
formulation and main' of the %ompan&Vs poli%ies and de%isions.
Test of Reasonableness for ;onuses1 (CPR)
o <) the pa&ment of bonuses is in fa%t %ompensation
o =) it must be for personal servi%es a%tuall& rendered
o 3) the bonuses" #hen added to the salaries" are reasonable
#hen measured b& the amount [ -ualit& of the servi%es
performed #ith relation to the business of the taxpa&er.
Fopins fails to pass the test.
*n the ri'ht of the emplo&er as a'ainst CIR to 0x the %ompensation of
its oL%ers and emplo&ees" the -uestion of the allo#an%e or
disallo#an%e thereof as dedu%tible expenses for in%ome tax purposes
is sub?e%t to determination b& CIR" unless the& are reasonable.
Calanc v CIR
The @o%ial 2elfare Commission (@2C) issued a soli%itation permit to
Calano% in order to soli%it and re%eive %ontributions for the rp$ans
an" "es!i!u!e c$il"ren of the C$il" 6el)are 6r0ers Club of the
Commission.
Calano% then 0nan%ed and promoted a boxin' and #restlin' exhibition
at the Ri:al Gemorial @tadium for the said %haritable purpose.
;efore the exhibition too pla%e" Calan%o applied #$ CIR for exemption
from pa&ment of the a#use#en! !a%" rel&in' on the provisions of
@e%tion =P0 of the )ational Internal Revenue Code.
CIR ans#ered that the exemption depended upon Calano%Vs
%omplian%e #ith the re-uirements of la#.
After the said exhibition" CIR investi'ated the tax %ase of Calano%" and
from the statement of re%eipts #hi%h #as furnished the a'ent" CIR
found that the 'ross sales amounted to P=P!, the expenditures
in%urred #as P=5! and the ne! pr,! =as nl& P8,<@P.
7pon examination of the said re%eipts" the a'ent also found the
follo#in' items of expenditures1 (a) P>P<.P5 for plice pr!ec!in, (b)
P>P0.00 for 'ifts, (%) P<"440.05 for parties, and (d) several items for
representation.
*ut of the pro%eeds of the exhibition" onl& P<.3! #as remitted to the
@2C for the said %haritable purpose for #hi%h the permit #as issued.
CIR demanded from Calano% the pa&ment of the amount of 533.00, the
expenditures in%urred #as P=5"<5D.P=, and the net pro0t #as onl&
P<"3D5"34.
CIR thus 6A)IA6 the exemption and demanded pa&ment of
amusement taxes. This #as authori:ed b& the @e%retar& of Cinan%e"
'iven that net pro%eeds are not substantial or #here the expenses are
exorbitant
)ot satis0ed #ith the assessment imposed upon him" Calano% brou'ht
this %ase to the CTA" but CTA ruled in favor of CIR.
I1 2$n Calano% is exempt from pa&in' the amusement tax.
R1 )o" Calano% must pa& the assessed tax
T$e Cur! e%a#ine" !$e recr"s ) !$e case an" a'ree" =i!$
!$e l=er cur! !$a! #s! ) !$e i!e#s ) e%pen"i!ures
cn!aine" in !$e s!a!e#en! sub#i!!e" ! !$e a'en! are ei!$er
e%rbi!an! r n! suppr!e" b& receip!s.
The expenditures for the 'ifts" parties and other items for
representation are rather ex%essive" %onsiderin' that the purpose of
the exhibition #as for a %haritable %ause.
Also" Calano% denies havin' re%eived the stadium fee of P< #hi%h is
not in%luded in the re%eipts" and %laims that if he did" he %an not be
made to pa& almost seven times the amount as amusement tax.
F*2ABAR" eviden%e sho#ed that #hile he did not re%eive said stadium
fee" amount #as paid b& the *.@* ;evera'es dire%tl& to the stadium
for advertisement privile'es in the evenin' of the entertainments.
Thus" Calano% had no ri'ht to in%lude it as expense items. IT seems
that the P< #ent into his po%et and #as )*T a%%ounted for.
Calano% also admitted that he %ould not ?ustif& the other expenses"
su%h as those for poli%e prote%tion and 'ifts. Fe %laims further that the
a%%ountant #ho prepared the statement of re%eipts is alread& dead
and %ould no lon'er be -uestioned on the items %ontained in said
statement.
G*RA*BAR" !$e pa&#en! ) PC98.9P )r plice pr!ec!in is
ille'al as it is a %onsideration 'iven b& the Calano% to the poli%e for
the performan%e b& the latter of the fun%tions re-uired of them to be
rendered b& la#.
Huen*le S!rei5 v CIR
Uuen:le [ @trei/" In% is a domesti% %orporation en'a'ed in the importation of
textiles" hard#are" sundries" %hemi%als" pharma%euti%als" lumbers" 'ro%eries"
#ines and li-uor, in insuran%e and lumber, and in some exports.
2hen Uuen:le 0led its In%ome Tax Return #ith CIR" it dedu%ted from its 'ross
in%ome %ertain items #hi%h #ere the1
1. salaries" dire%torsV fees and bonuses of its non.resident president
[ BP,
2. bonuses of its resident oL%ers and emplo&ees, and
3. interests on earned but unpaid salaries and bonuses of its oL%ers
and emplo&ees.
CIR ho#ever 6I@AII*2A6 the dedu%tions of all 3 items enumerated above
and assessed Uuen:le for de0%ien%& in%ome taxes.
Uuen:le re-uested for the re.examination of this assessment and %ontended
that the 3 items enumerated are treated as 4eductions from gross income
invoin' se%3> of )IRC. @pe%i0%all&" the salaries and fees of the non.resident
president and BP as #ell as the bonuses of resident oL%ers and emplo&ees
fall under EXPENSES =$ic$ are r"inar& an" necessar& e%penses pai"
r incurre" "urin' !$e !a%able &ear in %arr&in' on an& trade or business"
personal servi%es a%tuall& rendered.
CIR modi0ed its assesment b& all=in' as "e"uc!ible all items %omprisin'
dire%torsV fees and salaries of the non.resident president and BP" ;7T
"isall=in'7
o bonuses to be dedu%ted insofar as the& ex%eed the salaries of
the re%ipients"
o interests on earned but unpaid salaries and bonuses to be
dedu%ted as #ell
CTA1 upheld the assessment made b& the CIR. CTA ruled that #hile the
bonuses 'iven to the non.resident oL%ers are reasonable" bonuses 'iven to
the resident oL%ers and emplo&ees are" -uite AJCA@@IBA.
I$R1
<) 2$n the reasonableness of the amount of bonuses 'iven to resident oL%ers
and emplo&ees should follo# the same pattern for determinin' the
reasonableness of the amount of bonuses 'iven to non.resident oL%ers. EA@
NR1 ;onuses to emplo&ees made in 'ood faith and as additional %ompensation
for the servi%es a%tuall& rendered b& the emplo&ees are dedu%tible" provided
su%h pa&ments" #hen added to the stipulated salaries" do )*T ex%eed a
RAA@*)A;IA %ompensation for the servi%es rendered.
The %ondition pre%edents to the dedu%tion of bonuses to emplo&ees are1 (CPR)
(<) the pa&ment of the bonuses is in fa%t compensation,
(=) it must be for personal servi%es a%tuall& rendered, and
(3) the bonuses" #hen added to the salaries" are reasonable #hen
measured b& the amount and -ualit& of the servi%es performed #ith
relation to the business of the parti%ular taxpa&er
There is no 0xed test for determinin' the reasonableness of a 'iven bonus as
%ompensation. Fo#ever" in determinin' #hether the parti%ular salar& or
%ompensation pa&ment is reasonable" the situation must be %onsidered as a
#hole.
In this %ase" Uuen:le %ontended that it is error to appl& the same measure of
reasonableness to both resident and non.resident oL%ers be%ause the nature"
extent and -ualit& of the servi%es performed b& ea%h #ith relation to the
business of the %orporation #idel& di/er.
A%%ordin' to the %orp3s mana'ement" the non.resident oL%ers rendered the
same amount of eL%ient personal servi%e and %ontribution to deserve e;ual
treatment in %ompensation and other emoluments.
@in%e the non.resident president and BP 'ave the sa#e amount of duties and
servi%es as %ompared to resident oL%ers and emplo&ees (nonresidents gave
their full time and attention to the services of the corporation, directed and
supervised the business operations, were policy$makers, etc.)" there is )*
@PACIAI RAA@*) for 'rantin' 'reater bonuses to the lo#er ranin' oL%ers
than those 'iven to non.resident president and BP.
=) 2$n bonuses 'iven in AJCA@@ of the &earl& salaries of the emplo&ees %an
be allo#able as dedu%tions ( EA@
This is be%ause of the determination of RAA@*)A;IA)A@@ CACT*R@1
o a) post.#ar poli%& of the %orporation in 'ivin' salaries at lo#
levels be%ause of the unsettled %onditions resultin' from #ar
o b) the imposition of 'overnment %ontrols on imports and
exports and on the use of forei'n ex%han'e #hi%h resulted in
the diminution of the amount of business and the %onse-uent
loss of pro0ts on the part of the %orporation
o C) pa&ment of bonuses in amounts a little more than the
&earl& salaries re%eived %onsiderin' the prevailin'
%ir%umstan%es is in our opinion reasonable.
3) 2$n the pa&ment of interests on earned but unpaid salaries and bonuses
%an be %onsidered dedu%tions. )*
In order that interest ma& be dedu%tible" it must be paid Son indebtednessS.
Fere the items involved are un%laimed salaries and bonus parti%ipation #$%
CA))*T %onstitute indebtedness be%ause even if the& %onstitute an obli'ation
on the part of the %orporation" it is not the %orp3s fault if the& remained
un%laimed. @in%e the %orporation had at all times suL%ient funds to pa& the
salaries of its emplo&ees" #hatever an emplo&ee ma& fail to %olle%t is )*T an
indebtedness. It is the emplo&ee3s %on%ern to %olle%t it in due time.
INTEREST
Paper In"us!ries Crp ) !$e P$ils v CA
The Paper Industries Corporation of the Philippines (SPi%opS)" is a
Philippine %orporation re'istered #ith the ;oard of Investments (S;*IS)
as a preferred pioneer enterprise #ith respe%t to its inte'rated pulp
and paper mill" and as a preferred non$pioneer enterprise #ith respe%t
to its inte'rated pl&#ood and veneer mills.
In <KPK" <KD= and <KDD" Pi%op obtained loans from forei'n %reditors in
order to 0nan%e the pur%hase of ma%hiner& and e-uipment needed for
its operations.
Pi%op also issued promissor& notes of about P=30G" on #$% it paid
P>5G in interest.
In its <KDD In%ome Tax Return" Pi%op %laimed the interest pa&ments on
the loans as 6A67CTI*)@ from its <KDD 'ross in%ome.
The CIR disallo#ed this dedu%tion upon the 'round that" be%ause the
loans had been in%urred for the pur%hase of ma%hiner& and e-uipment"
the interest pa&ments on those loans should have been %apitali:ed
instead and %laimed as a depreciation deduction tain' into a%%ount
the ad?usted basis of the ma%hiner& and e-uipment (ori'inal
a%-uisition %ost plus interest %har'es) over the useful life of su%h
assets.
I1 2$n the interest pa&ments %an be dedu%ted from 'ross in%ome ( EA@
transa%tion tax
R1
The <KDD )IRC does not prohibit the dedu%tion of interest on a loan
in%urred for a%-uirin' ma%hiner& and e-uipment. )either does our
<KDD )IRC %ompel the %apitali:ation of interest pa&ments on su%h a
loan.
The <KDD Tax Code is simpl& silent on a taxpa&erVs ri'ht to ele%t one or
the other tax treatment of su%h interest pa&ments. A%%ordin'l&" the
'eneral rule that interest pa&ments on a le'all& demandable loan are
dedu%tible from 'ross in%ome must be applied.
In this %ase" the CIR does not dispute that the interest pa&ments #ere
made b& Pi%op on loans incurred in connection with the carrying on of
the registered operations of ;icop" i.e." the 0nan%in' of the pur%hase of
ma%hiner& and e-uipment a%tuall& used in the re'istered operations of
Pi%op. )either does the CIR den& that su%h interest pa&ments #ere
legally due and demandable under the terms of su%h loans" and in fa%t
paid b& Pi%op durin' the tax &ear <KDD.
The CIR has been unable to point to an& provision of the <KDD Tax Code
or an& other @tatute that re-uires the disallo#an%e of the interest
pa&ments made b& Pi%op.
TFI@ PART 6I U* @7PAR GANAT@1
The CIR invoes @e%tion DK of Revenue Re'ulations )o. = #$% provides
that 0nterest %al%ulated for %ost.eepin' or other purposes on a%%ount
of %apital or surplus invested in the business" which does not represent
a charge arising under an interest$bearing obligation" is not allo#able
dedu%tion from 'ross in%ome.
It is %laimed b& the CIR that @e%tion DK of Revenue Re'ulations )o. =
#as Spatterned afterS para'raph <.=PP.< (b)" entitled STaxes and
Carr&in' Char'es Char'eable to Capital A%%ount and Treated as Capital
ItemsS of the 7.@. In%ome Tax Re'ulations" #hi%h para'raph reads as
follo#s1
(;) Taxes and Carrying Charges. Y The items thus %har'eable
to %apital a%%ounts are Y
(<<) In the %ase of real propert&" #hether improved or
unimproved and #hether produ%tive or nonprodu%tive.
(a) Interest on a loan (but not theoreti%al interest of a
taxpa&er usin' his o#n funds).
B8
The trun%ated ex%erpt of the 7.@. In%ome Tax Re'ulations -uoted b& the CIR
needs to be related to the relevant provisions of the 7.@. Internal Revenue Code"
#hi%h provisions deal #ith the 'eneral topi% of ad?usted basis for determinin'
allo#able 'ain or loss on sales or ex%han'es of propert& and allo#able
depre%iation and depletion of %apital assets of the taxpa&er1
;resent 5ule. The Internal Revenue Code" and the Re'ulations
promul'ated thereunder provide that S8o deduction shall be
allowed for amounts paid or a%%rued for su%h taxes and
carrying charges as" under re'ulations pres%ribed b& the
@e%retar& or his dele'ate" are %har'eable to %apital a%%ount
#ith respe%t to propert&" if the taxpayer elects" in a%%ordan%e
#ith su%h re'ulations" to treat such taxes or charges as so
chargeable.S
At the same time" under the ad?ustment of basis provisions
#hi%h have ?ust been dis%ussed" it is provided that
ad?ustment shall be made for all Sexpenditures" re%eipts"
losses" or other itemsS properl& %har'eable to a %apital
a%%ount" thus in%ludin' taxes and %arr&in' %har'es, ho#ever"
an exception exists" in which event such ad.ustment to the
capital account is not made, with respect to taxes and
carrying charges which the taxpayer has not elected to
capitali*e but for which a deduction instead has been taken.
The S%arr&in' %har'esS #hi%h ma& be %apitali:ed under the above
-uoted provisions of the 7.@. Internal Revenue Code in%lude" as the CIR
has pointed out" interest on a loan S(but not theoreti%al interest of a
taxpa&er usin' his o#n funds).S 2hat the CIR failed to point out is that
such Scarrying chargesS may" at the ele%tion of the taxpa&er" either be
La# capitali*ed in #hi%h %ase the %ost basis of the %apital assets" e.'."
ma%hiner& and e-uipment" #ill be ad?usted b& addin' the amount of
su%h interest pa&ments or alternativel&" be Lb# deducted from gross
income of the taxpa&er. @hould the taxpa&er ele%t to dedu%t the
interest pa&ments a'ainst its 'ross in%ome" the taxpa&er %annot at the
same time %apitali:e the interest pa&ments. In other #ords" the
taxpa&er is not entitled to both the deduction from gross income and
the ad.usted Lincreased# basis for determinin' 'ain or loss and the
allo#able depre%iation %har'e. The 7.@. Internal Revenue Code does
not prohibit the deduction of interest on a loan obtained for pur%hasin'
ma%hiner& and e-uipment a'ainst 'ross in%ome" unless the taxpa&er
has also or previously capitali*ed the same interest payments and
thereb& ad?usted the %ost basis of su%h assets.
CIR v 2"a. De Prie!
In <K>5" Consuelo de Prieto %onve&ed b& #a& of 'ifts to her four
%hildren real propert& #ith a total assessed value of about P4K0.
After the 0lin' of the 'ift tax returns" CIR appraised the real propert&
donated for 'ift tax purposes at P<G! and assessed the total sum of
about P<<D as donorVs 'ift tax" interest and %ompromises due thereon.
The donorVs tax #as paid b& de Preito" but sin%e the sum of about P55
represnted the total interest on a%%ount of deli-uen%&" she %alimed the
P55 as dedu%tion from her in%ome tax return.
CIR" ho#ever" disallo#ed the %laim and assessed de Prieto de0%ien%&
in%ome tax due on the P55" sur%har'e and %ompromise for the late
pa&ment.
I1 2$n interest on IATA PAEGA)T of donorVs tax be %laimed as
dedu%tion in in%ome tax return
R1 EA@.
7nder the la#" for interest to be dedu%tible" it must be sho#n that1
o there be an indebtedness
o there should be interest upon it
o #hat is %laimed as an interest dedu%tion should have been
paid or a%%rued #ithin the &ear.
Fere" it is %on%eded that the interest paid b& de Preito #as in
%onse-uen%e of the late pa&ment of her donorVs tax" and the same #as
paid #ithin the &ear it is sou'ht to be de%lared.
The onl& -uestion to be determined" as stated b& the parties" is
#hether or not su%h interest #as paid upon an indebtedness #ithin the
%ontemplation of se%tion 30 (b) (<) of the Tax Code #$% provides that In
%omputin' net in%ome there shall be allo#ed as dedu%tions the amount
of interest paid #ithin the taxable &ear on indebtedness" ex%ept on
indebtedness in%urred or %ontinued to pur%hase or %arr& obli'ations the
interest upon #hi%h is exempt from taxation as in%ome under this Title.
The term SindebtednessS as used in the Tax Code of the 7nited @tates
%ontainin' similar provisions as in the above.-uoted se%tion has been
de0ned as an un%onditional and le'all& enfor%eable obli'ation for the
pa&ment of mone&.
2ithin the meanin' of that de0nition" it is apparent that a tax ma& be
%onsidered an indebtedness. The term SdebtS is properl& used in a
%omprehensive sense as embra%in' not merel& mone& due b& %ontra%t
but #hatever one is bound to render to another" either for %ontra%t" or
the re-uirement of the la#.
2here statute imposes a personal liabilit& for a tax" the tax be%omes"
at least in a board sense" a debt.
It follo#s that the interest paid b& herein respondent for the late
pa&ment of her donorVs tax is dedu%tible from her 'ross in%ome under
se%tion 30(b) of the Tax Code above -uoted.
TAXES
CIR v /e"nic0&
^)*TA1 There are 3 %ases involved here" all of #hi%h #ere elevated to the @C and
#ere de%ided ?ointl& 'iven that the& involve the same parties and issues. The
Tax Court de%ided for the spouses" but @C reversed the de%ision.
GR 8RBR97 B. A. Iedni%& and Garia Balero Iedni%&" #ere husband and #ife"
both Ameri%an %iti:ens residin' in the Philippines" and have derived all their
in%ome from Philippine sour%es. In <K5D" the spouses 0led their in%ome tax
return for <K5P and %orrespondin'l& paid taxes amountin' to about P3=0!. In
<K5K" the spouses 0led an amended in%ome tax return for <K5P. The
amendment %onsisted in a %laimed dedu%tion paid in <K5P to the 7@ 'overnment
as federal in%ome tax for <K5P. @imultaneousl& #ith the 0lin' of the amended
return" the spouses re-uested the refund. 2hen the Commissioner of Internal
Revenue failed to ans#er the %laim for refund" the spouses 0led a petition #ith
the Court of Tax Appeals.
GR 8R89?7 The same thin' #as done in <K5P" #hen the spouses 0led their
domesti% in%ome tax return for <K55 and later on 0led an amended in%ome tax
return. *n the basis of this amended return" the spouses paid about P5D0!.
After audit" the Commissioner determined a de0%ien%& of P<P!" #hi%h amount
the spouses paid.
;a% in <K55" ho#ever" the spouses 0led #ith the 7@ Internal Revenue A'ent in
Ganila their Cederal in%ome tax return for the &ears <K>D" <K5<" <K5=" <K53 and
<K5> on in%ome from Philippine sour%es on a %ash basis. Pa&ment of these
federal in%ome taxes" in%ludin' penalties and delin-uen%& interest in the amount
of \=P>"544.4=" #ere made in <K55 to the 7@ 6ire%tor of Internal Revenue"
;altimore" Gar&land" throu'h the )ational Cit& ;an of )e# Eor" Ganila ;ran%h.
In <K54" the spouses amended their Philippines in%ome tax return for <K55 to
in%ludin' 7@ Cederal in%ome taxes" interest a%%ruin' up to <5 Ga& <K55" and
ex%han'e and ban %har'es" totalin' P5<P! and 0led a %laim for refund.
GR B8C<C 1 The fa%ts are similar to above %ases but refer to the spouses3 in%ome
tax returns for <K5D" 0led in <K54" for #hi%h the spouses paid a total sum of
P<KP"DKK.P5. In <K5K" the& 0led an amended return for <K5D" %laimin' dedu%tion
of P<K0"D55.40" representin' taxes paid to the 7@ Novernment on in%ome
derived #holl& from Philippine sour%es. The spouses also 0led a %laim for refund
of overpa&ment.
Issue7 2$n a 7@ %iti:en" residin' in the Phils #ho derived all his in%ome from the
Phils %an dedu%t from his in%ome tax the amount of in%ome taxes paid to the 7@
'overnment
Hel"+ Ra!i7 )*.
<. The %onstru%tion and #ordin' of Sec!in <D McJ M8J M.J ) !$e
In!ernal Revenue Ac! sho#s the la#3s intent that the ri'ht to dedu%t
in%ome taxes paid to forei'n 'overnment from the taxpa&er3s 'ross
in%ome is 'iven onl& as an alternative or substitute to his ri'ht to %laim
a tax %redit for su%h forei'n in%ome taxes under se%tion 30 (%) (3) and
(>). Thus" unless the alien resident has a ri'ht to %laim su%h tax %redit
if he so %hooses" he is pre%luded from dedu%tin' the forei'n in%ome
taxes from his 'ross in%ome.
=. The purpose of the la# is to prevent the taxpa&er from %laimin' t#i%e
the bene0ts of his pa&ment of forei'n taxes" b& dedu%tion from 'ross
in%ome and b& tax %redit. This dan'er of double %redit %ertainl& %an not
exist if the taxpa&er %an not %laim bene0t under either of these
headin's at his option" so that he must be entitled to a tax %redit (the
spouses admittedl& are not so entitled be%ause all their in%ome is
derived from Philippine sour%es)" or the option to dedu%t from 'ross
in%ome disappears alto'ether.
3. 6ouble taxation be%omes obnoxious onl& #here the taxpa&er is taxed
t#i%e for the bene0t of the same 'overnmental entit&. In the present
%ase" #hile the taxpa&ers #ould have to pa& t#o taxes on the same
in%ome" the Philippine 'overnment onl& re%eives the pro%eeds of one
tax. As bet#een the Philippines" #here the in%ome #as earned and
#here the taxpa&er is domi%iled" and the 7nited @tates" #here that
in%ome #as not earned and #here the taxpa&er did not reside" it is
indisputable that ?usti%e and e-uit& demand that the tax on the in%ome
should a%%rue to the bene0t of the Philippines. An& relief from the
alle'ed double taxation should %ome from the 7nited @tates" and not
from the Philippines" sin%e the 7@3s ri'ht to burden the taxpa&er is
solel& predi%ated on his %iti:enship" #ithout %ontributin' to the
produ%tion of the #ealth that is bein' taxed.
>. To allo# an alien resident to dedu%t from his 'ross in%ome #hatever
taxes he pa&s to his o#n 'overnment amounts to %onferrin' on the
latter po#er to redu%e the tax in%ome of the Philippine 'overnment
simpl& b& in%reasin' the tax rates on the alien resident. Aver& time the
rate of taxation imposed upon an alien resident is in%reased b& his o#n
'overnment" his dedu%tion from Philippine taxes #ould %orrespondin'l&
in%rease" and the pro%eeds for the Philippines diminished" thereb&
subordinatin' our o#n taxes to those levied b& a forei'n 'overnment.
@u%h a result is in%ompatible #ith the status of the Philippines as an
independent and soverei'n state.
/OSSES
PICOP v CA
The Paper Industries Corporation of the Philippines (SPi%opS)" is a
Philippine %orporation re'istered #ith the ;oard of Investments (S;*IS)
as a preferred pioneer enterprise #ith respe%t to its inte'rated pulp
and paper mill" and as a preferred non$pioneer enterprise #ith respe%t
to its inte'rated pl&#ood and veneer mills.
In <KDD" Pi%op entered into a mer'er a'reement #ith Rustan Pulp [
Paper Gills [ Rustan Ganfu%turin' Corp (both also ;*I.re'istered).
;ut before the mer'e" Rustan had a%%umulated losses of P 4< million
#hile Pi%op had a pro0t of P K million.
Pi%op %laimed P >> million of RustanVs a%%umulated losses as dedu%tion
a'ainst its <KDD 'ross in%ome. It used the )*IC* as basis.
The CIR disallo#ed it sa&in' that previous losses #ere in%urred b&
A)*TFAR TAJPAEAR" not Pi%op.
I1 2$n Pi%op #as entitled to dedu%tions for net operatin' losses
in%urred b& Rustan Pulp [ Paper Gills
R1 )o.
As a 'eneral rule" )et *peratin' Iosses CA))*T be %arried over for
those %orps that are )*T re'istered #ith the ;*I as a preferred pioneer
enterprise. Iosses ma& be dedu%ted from 'ross in%ome *)IE IC su%h
lossess #ere a%tuall& sustained in the @AGA EAAR that the& are
dedu%ted.
RA 5<4P (Investment In%entives A%t) #as 'iven as a ver& spe%ial
in%entive *)IE to re'istered pioneer 0rms and *)IE #ith respe%t to
their re'istered operations.
The purpose is to allo# these 0rms to a%%umulate its losses in the earl&
&ears of its business and o/set the losses in the later &ears #hen the&
are alread& earnin'.
This privile'e is 'iven onl& to the @AGA A)TARPRI@A en'a'ed in the
@AGA RANI@TARA6 *PARATI*)@.
In the instant %ase" to allo# the dedu%tion %laimed b& Pi%op #ould be
to permit one %orp" Pi%op" to bene0t from the operatin' losses
a%%umulated b& another %orporation or enterprise" RPPG.
RPPG far from bene0tin' from the tax in%entive 'ranted b& the ;*I
statute" in fa%t 'ave up the stru''le and #ent out of existen%e and its
former sto%holders ?oined the mu%h lar'er 'roup of Pi%opVs
sto%holders.
To 'rant Pi%opVs %laimed dedu%tion #ould be to permit Pi%op to shelter
its other#ise taxable in%ome (an ob?e%tive #hi%h Pi%op had from the
ver& be'innin') #hi%h had not been earned b& the re'istered
enterprise #hi%h had su/ered the a%%umulated losses.
.AD DE.TS
P$ile% -inin' c CIR
Philex Ginin' and ;a'uio Nold entered into an a'reement #herein the
Philex #ould mana'e and operate ;a'uio Nold3s minin' %laim" the @to.
)ieo mine. The a'reement #as denominated as a @pe%ial Po#er of
Attorne&.
In the %ourse of mana'in' and operatin' the pro?e%t" Philex Ginin'
made advan%es of %ash and propert& in #ith the a'reement.
Fo#ever" the mine su/ered %ontinuin' losses over the &ears #hi%h
resulted Philex3s #ithdra#al as mana'er of the mine and in the
eventual %essation of mine operations.
Thereafter" the parties exe%uted a SCompromise #ith 6ation in
Pa&mentS #herein ;a'uio Nold admitted an indebtedness to Philex in
the amount of P<DKG! and a'reed to pa& the same in three se'ments
b& 0rst assi'nin' ;a'uio NoldVs tan'ible assets to Philex" transferrin'
to Philex its e-uitable title in its Philodrill assets and 0nall& settlin' the
remainin' liabilit& throu'h properties that ;a'uio Nold ma& a%-uire in
the future.
@ubse-uentl&" Philex #rote o/ in its <K4= boos of a%%ount the
remainin' outstandin' indebtedness of ;a'uio Nold b& %har'in' P<<=G
to allo#an%es and reserves that #ere set up in <K4< and
P="4P0"DP4.00 to the <K4= operations.
In its <K4= annual in%ome tax return" Philex dedu%ted from its 'ross
in%ome the amount of P<<=G as Sloss on settlement of re%eivables
from ;a'uio Nold a'ainst reserves and allo#an%es.S
Fo#ever" the ;IR disallo#ed the amount as dedu%tion for bad debt and
assessed petitioner de0%ien%& in%ome tax.
Philex protested" ar'uin' that the dedu%tion must be allo#ed sin%e all
re-uisites for a bad debt dedu%tion #ere satis0ed" to #it1 (a) there #as
a valid and existin' debt, (b) the debt #as as%ertained to be #orthless,
and (%) it #as %har'ed o/ #ithin the taxable &ear #hen it #as
determined to be #orthless.
I1 2$n advan%es made b& Philex to ;a'uio Nold %an be %onsidered a
bad debt and be dedu%tible. )*
R1 Advan%es #ere in the nature of an I)BA@TGA)T and )*T a loan"
therefore not dedu%tible.
A readin' of the a'reement sho#s denominated as the @PA indi%ates
that the parties had intended to %reate a partnership and establish a
%ommon fund for the purpose.
The& also had a ?oint interest in the pro0ts of the business as sho#n b&
a 50.50 sharin' in the in%ome of the mine.
The @PA %learl& provides that Philex #ould onl& be entitled to the
return of a proportionate share of the mine assets to be %omputed at a
ratio that the mana'erVs a%%ount had to the o#nerVs a%%ount. 6xcept
to provide a basis for claiming the advances as a bad debt deduction,
there is no reason for Baguio >old to hold itself liable to ;hilex under
the compromise agreements, for any amount over and above the
proportion agreed upon in the (;+.
In this %ase" the advan%es #ere not SdebtsS of ;a'uio Nold to petitioner
inasmu%h as ;a'uio #as under no un%onditional obli'ation to return
the same to the former under the @PA.
As for the amounts that Philex paid as 'uarantor to ;a'uio NoldVs
%reditors" the tax %ourt #as %orre%t in sa&in' that ;a'uio NoldVs debts
#ere not &et due and demandable at the time that Philex paid the
same. Beril&" Philex pre.paid ;a'uio NoldVs outstandin' loans to its
ban %reditors and this %on%lusion is supported b& the eviden%e on
re%ord.
Thus" Philex %annot %laim the advan%es as a bad debt dedu%tion from
its 'ross in%ome. 6edu%tions for in%ome tax purposes partae of the
nature of tax exemptions and are stri%tl& %onstrued a'ainst the
taxpa&er" #ho must prove b& %onvin%in' eviden%e that he is entitled to
the dedu%tion %laimed. I
n this %ase" petitioner failed to substantiate its assertion that the
advan%es #ere subsistin' debts of ;a'uio Nold that %ould be dedu%ted
from its 'ross in%ome.
P$il Re,nin' C v CA
Philippine Re0nin' Compan& (PRC) #as assessed b& Commissioner of
Internal Revenue (Commissioner) to pa& a de0%ien%& tax for the &ear
<K45.
PRC protested the assessment based on the erroneous disallo#an%es
of Sbad debtsS and Sinterest expenseS althou'h the same are both
allo#able and le'al dedu%tions.
CIR" ho#ever" issued a #arrant of 'arnishment a'ainst the deposits of
PRC at a bran%h of Cit& Trust ;an" in Gaati" Getro Ganila.
PRC a%%ordin'l& 0led a petition for revie# #ith the Court of Tax Appeals
(CTA) on the same assi'nment of error.
The Tax Court reversed and set aside the CommissionerVs disallo#an%e
of the interest expense but maintained the disallo#an%e of the
supposed bad debts of <3 (out of <P) debtors.
PRC then elevated the %ase to respondent Court of Appeals #hi%h
denied due %ourse to the petition for revie#.
I1 2$) the bad debts %an be dedu%ted.
R7 @aid a%%ounts have not satis0ed the re-uirements of the
S#orthlessness of a debtS.
Gere testimon& of the Cinan%ial A%%ountant of PRC explainin' the
#orthlessness of said debts is nothin' more than a self.servin'
exer%ise #hi%h la%s probative value. There #as no iota of
do%umentar& eviden%e to 'ive support to the testimon& of an
emplo&ee of PRC.
Collector vs. 0oodrich International Ru&&er Co., for debts to be
%onsidered as S#orthless"S and thereb& -ualif& as Sbad debtsS main'
them dedu%tible" the taxpa&er should sho# that1
o (<) there is a valid and subsistin' debt.
o (=) the debt must be a%tuall& as%ertained to be #orthless and
un%olle%tible durin' the taxable &ear,
o (3) the debt must be %har'ed o/ durin' the taxable &ear, and
o (>) the debt must arise from the business or trade of the
taxpa&er
Additionall&" before a debt %an be %onsidered #orthless" the taxpa&er
must also sho# that it is indeed un%olle%tible even in the future.
Curthermore" it must be sho#n that the taxpa&er AJARTA6 6IIINA)T
ACC*RT@ to %olle%t debts. (<) sendin' of statement of a%%ounts, (=)
sendin' of %olle%tion letters, (3) 'ivin' the a%%ount to a la#&er for
%olle%tion, and (>) 0lin' a %olle%tion %ase in %ourt.)
In this %ase" PRC %laims that1 <) one %ustomerVs store #as burnt do#n
#ith nothin' left that %an be 'arnished =) one %ustomer #as murdered
[ left no assets 3) one %ustomerVs 'oods #ere hi.?a%ed >) a former
emplo&ee #ho o#es them mone& %anVt be found 5) one %ustomer lost
his sto%s throu'h robber& and be%ame banrupt P) one %ustomer is a
forei'n %orp and it #ould be more %ostl& to sue them in their o#n
%ountr& D) one %ustomer is a 'overnment a'en%& so that PRC did not
0le suit a'ainst it all instan%es sho#ed that no eviden%e #as presented
to sho# proof of its e/ort to %olle%t the debt.
F*2ABAR" no eviden%e #as presented to sho# proof of its e/ort to
%olle%t the debt.
The Court vehemently re.ects the absurd thesis of petitioner that
despite the supervening delay in the tax payment, nothing is lost on
the part of the >overnment because in the event that these debts are
collected, the same will be returned as taxes to it in the year of the
recovery.
;etitioner also Fuestions the imposition of the %OT surcharge and %OT
delinFuency interest due to delay in its payment of the tax assessed.
The fact that petitioner appealed the assessment to the CT+ and that
the same was modifed does not relieve petitioner of the penalties
incident to delinFuency.
Fernan"e* Her#ans v CIR
Cernande: is a domesti% %orp en'a'ed in
business as an investment %ompan&. The& #ere assessed de0%ien%&
in%ome taxes due to some dis%repan%ies on their dedu%tible %laims.
The& %laimed losses on #orthlessness of shares of sto% in -a!i
/u#ber sin%e it #as no lon'er in operation.
The& %laimed bad debts on Pala=an -ines =$ic$ had re-uested
0nan%ial help to enable it to resume its minin' operation. The
%ompan& lent it mone& on the %ondition that Pala#an #ill pa& it <55 of
its net pro0ts. ;ut after 5 &ears of %ash advan%es" Pala#an still
su/ered losses so that 0nall&" the Cernande: be%ame %onvin%ed that it
%ould no lon'er re%over the %ash advan%es and #rote them o/ as bad
debts even if Pala#an #as @TIII I) *PARATI*).
The& %laimed losses in its operation of .ala#ban Cal -ines. The
mine #as a%tuall& abandoned in <K5=. Fo#ever" Cernande: had
%laimed the losses in <K50 [ 5< sa&in' that sin%e the road to the mine
#as not %onstru%ted" it %ould not and did not sell an& %oal durin' these
&ears.
The& %laimed a depre%iation allo#an%e for its buil"in's at an annual
rate of <05. ;ut the CIR said the reasonable rate should have been
35
The& had an in%rease in net #orth %omin' from an error in its insuran%e
%ompan&Vs boos so that it appeared that its liabilit& to %reditors #as
a%tuall& I*2AR. The CIR %laimed this to be taxable.
@in%e Pala#an Gines %ould not repa& its debt" it transferred its
C*)TRACT7AI RINFT@ to Cernande: as partial pa&ment. The %ompan&
then dedu%ted <$5th of the amount as 6APIATI*) CFARNA %laimin' as
basis their en'ineerVs estimate that the mine #ould be exhausted in 5
&ears. The CIR disallo#ed this.
Is $ R1
<. Can !$e lsses in -a!i /u#ber be "e"uc!e"Q @in%e the o#ner
of Gati had been proven to have left for @pain and died there and had
left no assets. . EA@" there #as suL%ient eviden%e.
=. Can !$e cas$ a"vances ! Pala=an be cnsi"ere" ba" "eb!sQ
@in%e the %ompan& 'ave advan%es to Pala#an 2ITF*7T expe%tation of
repa&ment..)*" be%o: these advan%es are %onsidered I)BA@TGA)T@"
not I*A)@. The re%ord sho#ed that the t#o %ompanies had the @AGA
;*AR6 *C 6IRACT*R@. Also" the a'reement %learl& sho#s that it did
not expe%t to be repaid. And 0nall&" there %annot be a PARTIAI
dedu%tion of bad debts.
3. Can !$e clai#s )r lsses be "e"uc!ible in 8?PD N P8Q Or
s$ul" i! be in 8?PB =$en !$e #ine =as aban"ne"Q4)*" it %an
onl& be %laimed in <K5= be%ause some de0nite event must 0x the time
#hen the loss is sustained. The event is the abandonment of the mine.
>. 6as !$e 8DI per annu# "eprecia!in ra!e e%cessiveQ .EA@"
there #as no eviden%e to ?ustif& that the buildin's had a useful life of
onl& <0 &ears.
5. 6as !$e apparen! increase in ne! =r!$ !a%ableQ @in%e it
arose from the insuran%e %ompan&Vs booeepin' errorc .)*" the
in%rease #as not the result of re%eipt b& the %ompan& of unreported or
unexplained taxable in%ome. It #as merel& the result of the %orre%tion
of erro relatin' to its indebtedness to its %reditors. It %annot be
%onsidered in%ome and therefore is not taxable.
P. Can i! "e"uc! 8+P!$ ) !$e value ) !$e cn!rac!ual ri'$!s
E2EN IF i! $a" n! ac!uall& use" !$e #ine nr sl" !$e
pr"uc!sQ .)*" the exhaustion must be ;E PR*67CTI*). The Tax
Code provides allo#an%e for depletion of mines *)IE for that #hi%h
has been mined and and the produ%ts a%tuall& sold durin' the &ear.
DEPRECIATION
.asilan Es!a!es, Inc v CIR
;asilan Astates is a Philippine %orporation en'a'ed in %o%onut industr&.
It 0led its in%ome tax returns and #as %har'ed de0%ien%& in%ome tax
due to disallo#ed depre%iation" travellin' expenses" mis%ellaneous
expenses and unreasonabl& a%%umulated pro0ts.
6ue to the nonpa&ment of the amount" a #arrant of lev& #as issued
but #as not exe%uted be%ause ;asilan #as able to 'et the 6eput& of
CIR to hold exe%ution and maintain %onstru%tive embar'o instead.
)oti%e #as then served that the lev& #ould be exe%uted.
Thus" ;asilan 0led before the CTA a petition for revie# of the
Commisioner3s assessment alle'in' pres%ription of period for
assessment and %olle%tion" error in disallo#in' %laimed depre%iations"
travelin' and mis%ellaneous expenses and error in 0ndin' the
existen%e of unreasonabl& a%%umulated pro0ts but CA aLrmed he
de0%ien%& assessment.
I1 2$n the de0%ien%& assessments #ere proper
R1 EA@" the& #ere proper.
6epre%iation is the 'radual diminution in useful value of tan'ible
propert& resultin' from #ear and tear. An o#ner is entitled to see that
from his earnin's the value of the propert& invested is ept unimpaired
so that at the end of a& 'iven term of &ears the ori'inal investment
remains as it #as in the be'innin'.
Thus the la# permits taxpa&er to re%over 'raduall& his %apital
investment free from in%ome tax. 7nder the tax %ode" a dedu%tion is
allo#ed from 'ross in%ome for depre%iation but )*T be&ond the
a%-uisition %ost. If be&ond the a%-uisition %ost" the o#ner #ould also
be able to re%over pro0t.
In this %ase" ;asilan %laimed dedu%tions for depre%iation of its assets
up to <K>K on the basis of their a%-uisition %ost. In <K50" it %han'ed
the depre%iable value of said assets b& in%reasin' it to %onform #ith
the in%rease in %ost for their repla%ement (P5<"=5=.K4). Thus" the CIR
#as %orre%t in allo#in' it depre%iation based on the @AGA *I6 A@@AT@
onl&" and )*T the reappraised value.
An&thin' be&ond the a%-uisition %ost is alread& %onsidered PR*CIT.
?pon investigation, the C05 found that the reappraised assets in "GOK
were the same ones which depreciation was claimed in "GO%. +nd in
"GO% the commissioner had already determined the depreciation
allowable on the said assets in the amount of ;KH,SN%.CN. Thus the
depreciation beyond ;KH,SN%.CN is not allowed.
/i#pan Inves!#en! Crp v CIR
Iimpan" a domesti% %orporation dul& re'istered" is en'a'ed in the
business of leasin' real properties. Its prin%ipal sto%holders are the
spouses Isabelo P. Iim and Puri0%a%ion Ceei:a de Iim" #ho o#n and
%ontrol KK5 of its total paid.up %apital.
Its president and %hairman of the board is the same Isabelo Iim.
The %orp dul& 0led its <K5P and <K5D in%ome tax returns and
respe%tivel& paid %orrespondin' taxes.
@ubse-uentl&" the ;IR %ondu%ted an investi'ation of the %orp3s in%ome
tax returns and as%ertained that Iimpan had underde%lared its rental
in%omes durin' these taxable &ears and had %laimed ex%essive
depre%iation of its buildin's in the %overin' the same period.
*n the basis of these 0ndin's" CIR issued its letter.assessment and
demand for pa&ment of de0%ien%& in%ome tax and sur%har'e a'ainst
petitioner %orporation.
Iimpan ased for re%onsideration re'ardin' the assessment" but it #as
denied.
I1 2$n Iimpan is liable for pa&ment of de0%ien%&.
R1 EA@" Iimpan is liable for de0%ien%&.
Iimpan admitted throu'h its o#n #itness (Bi%ente N. @olis ( Corporate
@e%retart&.Treasurer)" that it had unde%lared more than one.half (<$=)
of the amount (P<="<00.00 out of P=0"<KK.00) found b& the ;IR
examiners as unreported rental in%ome for the &ear <K5P and more
than one.third (<$3) of the amount (P=K"350.00 out of P4<"PK0.00)
as%ertained b& the same examiners as unreported rental in%ome for
the &ear <K5D" %ontrar& to its ori'inal %laim to the revenue authorities"
it #as in%umbent upon it to establish the remainder of its pretensions
b& %lear and %onvin%in' eviden%e" that in the %ase is la%in'.
The ex%use that Iim retained o#nership of the lands and onl& later
transferred or disposed of the o#nership of the buildin's existin'
thereon to the %orporation" so as to ?ustif& the alle'ed verbal
a'reement #hereb& the& #ould turn over to the %orporation P5 of the
value of its properties to be applied to the rentals of the land and in
ex%han'e for #hatever rentals the& ma& %olle%t from the tenants #ho
refused to re%o'ni:e the ne# o#ner or vendee of the buildin's" is not
onl& unusual but un%orroborated b& the alle'ed transferors" or b& an&
do%ument or unbiased eviden%e.
Also" Iim #as not presented as #itness to %orraborate the testimon&
@olis nor #as his <K5D personal in%ome tax return submitted in %ourt to
establish that the rental in%ome #hi%h he alle'edl& %olle%ted and
re%eived in <K5D #ere reported therein.
Iastl&" the Court held that Sdepre%iation is a -uestion of fa%t and is not
measured b& theoreti%al &ardsti%" but should be determined b& a
%onsideration of a%tual fa%tsS" and the 0ndin's of the Tax Court in this
respe%t should not be disturbed #hen not sho#n to be arbitrar& or in
abuse of dis%retion" and Iim has not sho#n an& arbitrariness or abuse
of dis%retion in the part of the Tax Court in 0ndin' that petitioner
%laimed ex%essive depre%iation in its returns.
It appearin' that the Tax Court applied rates of depre%iation in
a%%ordan%e #ith ;ulletin SCS of the 7.@. Cederal Internal Revenue
@ervi%e" #hi%h this Court pronoun%ed as havin' stron' persuasive
e/e%t in this ?urisdi%tion" for havin' been the result of s%ienti0% studies
and observation for a lon' period in the 7nited @tates" after #hose
In%ome Tax Ia# ours is patterned" the fore'oin' error is devoid of
merit.
DEP/ETION
Cnsli"a!e" -ines, Inc v CTA
Consolidated Gines (CG)" en'a'ed in minin'" had 0led its in%ome tax
returns for <K5<" <K5=" <K53 and <K5P.
In <K5D" examiners of the ;ureau of Internal Revenue investi'ated the
in%ome tax returns 0led b& the Compan& be%ause on Au'ust <0" <K5>"
its auditor" Celipe *llada %laimed the refund of the sum of P<0D">D=.00
representin' alle'ed overpa&ments of in%ome taxes for the &ear <K5<.
After the investi'ation the examiners reported that CG had overstated
its %laim for depletion.
The CIR then assessed CG for de0%ien%& taxes. CG appealed this
assessment to the CTA. CG then -uestioned the ?ud'ment of the CTA
re'ardin' the rate of depletion it adopted.
I1 2$n CG overstated its rate of depletion, 2$n the rate of depletion
adopted b& the CTA #as proper
R1 Ees" CG overstated its rate of depletion.
The rate of depletion per ton of the ore deposit mined and sold b& the
Compan& is P0.P<KP per ton
>K
not P0.5K<4K as %ontended b& the
Commissioner nor P<.0<KD as %laimed b& the Compan&,
The Tax Code provides that in %omputin' net in%ome there shall be
allo#ed as dedu%tion" in the %ase of mines" a reasonable allo#an%e for
depletion thereof not to ex%eed the maret value in the mine of the
produ%t thereof #hi%h has been mined and sold durin' the &ear for
#hi%h the return is made f@e%. 30(') (<) (;)g.
The formula for %omputin' the rate of depletion is1
Cost of Gine Propert&
............................ + Rate of 6epletion
Astimated *re 6eposit
The Commissioner and the Compan& do not a'ree as to the 0'ures
%orrespondin' to either fa%tor that a/e%ts the rate of depletion per unit. The
0'ures a%%ordin' to the Commissioner are1
P="P>P"4D4.>> (mine %ost)
............................ + P0.5K<4K (Rate of 6epletion)
>">D<"4K= tons (Astimated *re 6eposit)
#hile the Compan& insists the& are1
P>"=34"KD>.5D (mine %ost)
............................ + P<.0<KD (Rate of 6epletion)
>"<5P"444 tons (Astimated *re 6eposit)
The& a'ree" ho#ever" that the S%ost of the mine propert&S %onsists of (<) mine
%ost, and (=) expenses of development before produ%tion. As to mine %ost" the
parties are pra%ti%all& in a'reement Y the Commissioner sa&s it is P="5<5"000
(the Compan& puts it at P="500"000). As to expenses of development before
produ%tion the Commissioner and the Compan& #idel& di/er. The Compan&
%laims it is P<"D34"KD>.5P" #hile the Commissioner sa&s it is onl& P<3<"4D4.>>.
As an in%ome tax %on%ept" depletion is #holl& a %reation of the statute
B8
Y
Ssolel& a matter of le'islative 'ra%e.S
BB
Fen%e" the taxpa&er has the burden of
?ustif&in' the allo#an%e of an& dedu%tion %laimed.
B<
As in %onne%tion #ith all
other tax %ontroversies" the burden of proof to sho# that a disallo#an%e of
depletion b& the Commissioner is in%orre%t or that an allo#an%e made is
inade-uate is upon the taxpa&er" and this is true #ith respe%t to the value of the
propert& %onstitutin' the basis of the dedu%tion.
(The follo#in' dis%ussion is about the di/eren%e bet#een the expenses of
development before produ%tion)
As proof that the amount spent for developin' the mines #as P<"D34"KD>.5P" the
Compan& relies on the testimon& of Ali'io @. Nar%ia and on Axhibits <" 3< and 34.
Axhibit I is the Compan&Vs report to its sto%holders for the &ear <K>D. It %ontains
the Compan&Vs balan%e sheet as of 6e%ember 3<" <K>P (Axhibit I.<). Amon' the
assets listed is SGines" Improvement [ 6ev.S in the amount of P>"=34"KD>.5D
(%osts of mine propert&)" #hi%h" a%%ordin' to the Compan&" %onsisted of
P="500"000" pur%hase pri%e of the mine" and P<"D34"KD>.5P" %ost of developin'
it. The Compan& has not explained in detail in #hat amount or the lesser amount
of P<"D34"KD>.5P %onsisted. )or has it explained ho# that bi''er amount
be%ame P<"D34"KD>.5P in the balan%e sheet for 6e%ember 3<" <K>P. (@impl& put"
CG #as not able to explain #hat the P<.Dm %onsisted.)
C- cul" n! prve !$e au!$en!ici!& ) !$e PC.B# a#un! because !$e&
#erel& base" !$e a#un! )r# a balance s$ee!" #hi%h the& failed to
produ%e in %ourt. @o the %ourt relied instead on the Commissioner3s tae on the
%ost of mine propert& #hi%h is P="P>P"4D4.>>. To prove the %ommissioner3s %ost
of mine propert&" it presented Axhibit 3<. This is a memorandum #hi%h pointed
out that CG failed to tae into a%%ount the di/eren%e bet#een depre%iable and
depletiable expenditures. (Ua&a narea%h n' CG &un' P>m na amount asi
inonsider nila na an' depletiable at depre%iable expenses a& one and the same.
Ua&a tumaas &un' %ost of mine propert& be%ause of this. Uapa' tinan''al &un'
depre%iable expenses" bababa &un' %ost of mine propert& a&a P=m na lan' as
per assessment of the Commissioner.)
)o# as to the se%ond part of the %osts of mine propert&" the Court relied on the
Commissioner3s assessment #hi%h is P<3<" 4D4.>> asi ma& mas basis si&a
%ompared to CG. @in%e &un' %omputation ni CG (&un' sa taas) is #ron'" the
%ourt %annot rel& on it so the& relied on the Commissioner3s assessment. Findi
na tinan''ap &un' P<.Dm na assessment n' CG asi #alan' basis.
As to the estimated ore deposit" the Compan&Vs 0'ure is S>"<5P"444 tons"S #hile
that of the Commissioner is the lar'er 0'ure S>">D<"4K= tons.S The di/eren%e of
3<5"00> tons #as due to the fa%t that the Commissioner too into a%%ount all
the ore that %ould probabl& be removed and mareted b& the Compan&" utili:in'
the total tonna'e shipped before and after the #ar (K33"<40 tons) and the total
reserve of shippin' material pe''ed at 3"543"D<= tons. This is #ron'T The
Commissioner should not have in%luded the pie%es of ore that had broen loose
and be%ome deta%hed b& erosion from their ori'inal position %ould hardl& be
vie#ed as still formin' part of the total estimated ore deposit. Favin' alread&
been broen up into numerous small pie%es and pra%ti%all& rendered useless for
minin' purposes" the same %ould not appre%iabl& in%rease the ore potentials of
the Compan&Vs mines. The follo#in' are the %orre%t 0'ures.
The %orre%t 0'ures therefore are1
P="5<5"000.00 (mine %ost proper) ! P<3<"4D4.>>
(development %ost)
>"=D<"4K= (estimated ore deposit)
or
P="P>P"4D4.>> (mine %ost) + P0.P<KP (rate of depletion
deposit)
>"=D<"4K= (estimated ore per ton)
RESEARCH AND DE2E/OP-ENT
<- P$ils v CIR
Fac!s7
3G Philippines" In%." a subsidiar& of 3G.@t. Paul" is a non.resident forei'n
%orporation #ith prin%ipal oL%e in @t. Paul" Ginnesota" 7@A. It is the ex%lusive
importer" manufa%turer" #holesaler" and distributor in the Philippines of all
produ%ts of the latter. To enable it to manufa%ture" pa%a'e" promote" maret"
sell and install the hi'hl& spe%iali:ed produ%ts of its parent %ompan&" and render
the ne%essar& post.sales servi%e and maintenan%e to its %ustomers" petitioner
entered into a S@ervi%e Information and Te%hni%al Assistan%e A'reementS and a
SPatent and Trademar Ii%ense A'reementS #ith the latter under #hi%h the
petitioner a'reed to pa& to 3G.@t. Paul a te%hni%al servi%e fee of 35 and a
ro&alt& of =5 of its net sales. ;oth a'reements #ere submitted to" and approved
b&" the Central ;an of the Philippines.
In its in%ome tax return for the 0s%al &ear ended *%tober 3<" <KD>" the petitioner
%laimed the follo#in' dedu%tions as business expenses1
(a) ro&alties and te%hni%al servi%e fees of P 3"050"P>P.00,
and
(b) pre.operational %ost of tape %oater of PKD">45.04.
*n the ,rs! i!e#" the respondent Commissioner of Internal Revenue allo#ed a
dedu%tion of aDKD"0>P.0K onl& as te%hni%al servi%e fee and ro&alt& for locally
manufactured produ%ts" but disallo#ed the sum of a="3=3"5KK.0= alle'ed to
have been paid b& the petitioner to 3G.@t. Paul as te%hni%al servi%e fee and
ro&alt& on a>P">D<"KK4.00 worth of fnished products imported b& the petitioner
from the parent %ompan&" on the 'round that the fee and ro&alt& should be
based onl& on lo%all& manufa%tured 'oods. The improper dedu%tion #as treated
b& respondent as a dis'uised dividend or in%ome.
*n the secn" i!e#" respondent allo#ed a<K"5>>.DD or one.0fth (<$5) of
petitionerVs %apital expenditure of aKD"0>P.0K for its tape %oater #hi%h #as
installed in <KD3 be%ause su%h expenditure should be amorti:ed for a period of
0ve (5) &ears" hen%e" pa&ment of the disallo#ed balan%e of aDD"D>0.34 should
be spread over the next four (>) &ears. Respondent ordered petitioner to pa&
a4>0"5>0 as de0%ien%& in%ome tax on its <KD> return" plus a353"0=P.40 as <>5
interest per annum from Cebruar& <5" <KD5 to Cebruar& <5" <KDP" or a total of
a","GK,OHH.SC.
Petitioner protested the assessment in a letter dated Gar%h D" <K40. The
respondent Commissioner did not ans#er the protest. Instead" he issued
#arrants of distraint and lev& on *%tober <" <K4>. *n *%tober =3" <K4>"
petitioner appealed to the Court of Tax Appeals b& petition for revie# #ith a
pra&er for the issuan%e of a #rit of preliminar& in?un%tion to stop the
enfor%ement of the #arrants of distraint and lev&. The #rit #as issued upon
petitioner postin' a a<"450"000 bond.The Tax Court rendered a de%ision on
Au'ust <>" <K4D upholdin' the CommissionerVs rulin'. PetitionerVs motion for
re%onsideration of the de%ision #as denied b& the Tax Court on April P" <K44.
Fen%e" this petition.
Issue7 2hether or not the rulin' of CIR is properc
Hel"1 Cindin' no reversible error in the de%ision of the Court of Tax Appeals" the
petition for revie# is denied.
;e%ause remittan%es to forei'n li%ensors of te%hni%al servi%e fees and ro&alties
are made in forei'n ex%han'e" C; Cir%ular )o. 3K3 (Re'ulations Novernin'
Ro&alties$Rentals) dated 6e%ember D" <KD3 #as promul'ated b& the Central
;an as an ex%han'e %ontrol re'ulation to %onserve forei'n ex%han'e and avoid
unne%essar& drain on the %ountr&Vs international reserves @e%tion. 3.C of the
%ir%ular provides that ro&alties shall be paid onl& on
%ommodities manufactured b& the li%ensee under the ro&alt& a'reement.
Clearl&" no ro&alt& is pa&able on the #holesale pri%e of 0nished produ%ts
imported b& the li%ensee from the li%ensor. Fo#ever" petitioner ar'ues that the
la# appli%able to its %ase is onl& @e%tion =K(a)(<) of the Tax Code #hi%h provides1
(a) Axpenses. Y (<) Business expenses. Y (A) In 'eneral. Y +ll
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, in%ludin' a
reasonable allo#an%e for salaries or other %ompensation for
personal servi%es a%tuall& rendered, travellin' expenses #hile
a#a& from home in the pursuit of a trade" profession or business"
rentals or other payments reFuired to be made as a condition to
the continued use or possession, for the purpose of the
trade, profession or business" for propert& to #hi%h the taxpa&er
has not taen or is not tain' title or in #hi%h he has no e-uit&.
Petitioner points out that the Central ban Shas no sa& in the assessment and
%olle%tion of internal revenue taxes as su%h po#er is lod'ed in the ;ureau of
Internal Revenue"S that the Tax Code Snever mentions Cir%ular 3K3 and there is
no la# or re'ulation 'overnin' dedu%tion of business expenses that refers to
said %ir%ular.S The ar'ument is spe%ious" for" althou'h the Tax Code allo#s
pa&ments of ro&alt& to be dedu%ted from 'ross in%ome as business expenses" it
is C; Cir%ular )o. 3K3 that de0nes #hat ro&alt& pa&ments are proper. Fen%e"
improper pa&ments of ro&alt& are not dedu%tible as le'itimate business
expenses.
ESSO S!an"ar" Eas!ern v CIR
Fac!s7 A@@* dedu%ted from its 'ross in%ome for <K5K" as part of its ordinar& and
ne%essar& business expenses" the amount it had spent for drillin' and
exploration of its petroleum %ons%essions. The Commissioner disallo#ed the
%laim on the 'round that the expenses should be %apitali:ed and mi'ht be
#ritten o/ as a loss onl& #hen a 8dr& hole9 should result. Fen%e" A@@* 0led an
amended return #here it ased for the refund of P3=3"=D0 b& reason of its
abandonment" as dr& holes" of several of its oil #ells. It also %laimed as ordinar&
and ne%essar& expenses in the same return amount representin' mar'in fees it
had paid to the Central ;an on its pro0t remittan%es to its )e# Eor *L%e.
Issue7 2hether the mar'in fees ma& be %onsidered ordinar& and ne%essar&
expenses #hen paid.
Hel"7 Cor an item to be dedu%tible as a business expense" the expense must
ebe ordinar& and ne%essar&, it must be paid or in%urred #ithin the taxable &ear,
and it must be paid or in%urred in %arr&in' on a trade or business. In addition"
the taxpa&rer must substantiall& prove b& eviden%e or re%ords teh dedu%tions
%laimed under la#" other#ise" the same #ill be disallo#ed. There has been no
attempt to de0ne 8ordinar& and ne%essar&9 #ith pre%ision. Fo#ever" as 'uidin'
prin%iple in the proper ad?udi%ation of %on]i%tin' %laims" an expenses is
%onsidered ne%essar& #here the expenditure is appropriate and helpdul in the
development of the taxpa&er3s business. It is ordinar& #hen it %onnotes a
pa&ment #hi%h is normal in relation to the business of the taxpa&er and the
surroundin' %ir%umstan%es. Assumin' that the expenditure is ordinar& and
ne%essar& in the operation of the taxpa&er3s business, the expenditure" to be an
allo#able dedu%tion as a business expense" must be determined from the nature
of the expenditure itself" and on the extent and permanen%& of the #or
a%%omplished b& the expenditure. Ferein" A@@* has not sho#n that the
remittan%e to the head oL%e of part of its pro0ts #as made in furtheran%e of its
o#n trade or business. The petitioner merel& presumed that all %orporate
expenses are ne%essar& and appropriate in the absen%e of a sho#in' that the&
are ille'al or ultra vires, #hi%h is erroneous. Claims for dedu%tions are a matter
of le'islative 'ra%e and do not turn on mere e-uitable %onsiderations.
CAPITA/ ASSETS
Calasan* v CIR
7rsula Calasan: (#ife of Tomas) inherited from her father a par%el of land in
Cainta" Ri:al. In order to li-uidate her inheritan%e" she had the land surve&ed"
and subdivided into lots" and put up improvements su%h as roads" draina'e"
li'htin'" et%." to mae it more saleable. After#ards" the lots #ere sold. @he and
her husband in the same &ear 0led a ?oin in%ome tax return #ith the ;IR"
dis%losin' a pro0t of P 3<" 0P0. 0P from the sale of the lots" and reported 505 or
P<5"530.03 as taxable %apital 'ains. Fo#ever upon audit and revie#" the& #ere
ad?ud'ed as petitioners en'a'ed in real estate business and #ere thus assessed
real estate dealer3s tax and de0%ien%& in%ome tax on ordinar& 'ain.
The spouses Calasan: %ontended that inherited land is a %apital asset #ithin the
meanin' of @e%tion 3> of the Tax Code and that an heir #ho li-uidates his
inheritan%e %annot be said to have en'a'ed in real estate business and ma& not
be denied the preferential tax treatment 'iven to 'ains from sale of %apital
assets" merel& be%ause he disposed of it in the onl& possible and advanta'eous
#a&. The& also averred that the land #as sold be%ause of their intention to e/e%t
a li-uidation" it3s bein' divided into smaller lots made it easier to dispose of.
Fo#ever the& also admitted that the improvements the& introdu%ed to the land
#ere added to fa%ilitate its sale.
*n the other hand" respondent Commissioner maintained that the imposition of
the taxes in -uestion is in a%%ordan%e #ith la# sin%e petitioners are deemed to
be in the real estate business for havin' been involved in a series of real estate
transa%tions pursued for pro0t. Respondent ar'ued that propert& a%-uired b&
inheritan%e ma& be %onverted from an investment propert& to a business
propert& if" as in the present %ase" it #as subdivided" improved" and
subse-uentl& sold and the number" %ontinuit& and fre-uen%& of the sales #ere
su%h as to %onstitute Sdoin' business.S Respondent lie#ise %ontended that
inherited propert& is b& itself neutral and the fa%t that the ultimate purpose is to
li-uidate is of no moment for the important in-uir& is #hat the taxpa&er did #ith
the propert&. Respondent %on%luded that sin%e the lots are ordinar& assets" the
pro0ts reali:ed therefrom are ordinar& 'ains" hen%e taxable in full.
Issue7 2hether or not petitioners are real estate dealers liable for real estate
dealer3s 0xed tax
2hether the 'ains reali:ed from the sale are taxable in full as ordinar& in%ome or
%apital 'ains taxable at %apital 'ain rates
Hel"7 The Court de%ided in favor of the respondent. Petitioners en'a'ed in the
real estate business and a%%ordin'l&" the 'ains from the sale of the lots are
ordinar& in%ome taxable in full.
Ra!i7 The assets of a taxpa&er are %lassi0ed for in%ome tax purposes into
ordinar& assets and %apital assets. @e%tion 3>fag f<g of the )ational Internal
Revenue Code broadl& de0nes %apital assets as follo#s1
f<g Capital assets..The term V%apital assetsV means propert& held b& the taxpa&er
f#hether or not %onne%ted #ith his trade or businessg" but does not in%lude"
sto% in trade of the taxpa&er or other propert& of a ind #hi%h #ould properl&
be in%luded" in the inventor& of the taxpa&er if on hand at the %lose of the
taxable &ear" or propert& held b& the taxpa&er primaril& for sale to %ustomers in
the ordinar& %ourse of his trade or business" or propert& used in the trade or
business of a %hara%ter #hi%h is sub?e%t to the allo#an%e for depre%iation
provided in subse%tion ffg of se%tion thirt&, or real propert& used in the trade or
business of the taxpa&er.
If an asset is not amon' the ex%eptions" it is a %apital asset, %onversel&" assets
fallin' #ithin the ex%eptions are ordinar& assets. And ne%essaril&" an& 'ain
resultin' from the sale or ex%han'e of an asset is a %apital 'ain or an ordinar&
'ain dependin' on the ind of asset involved in the transa%tion.
Fo#ever there is no 0xed formula or rule #hi%h %an determine #hether a
propert& sold b& a taxpa&er #as sold in the ordinar& %ourse of business or
#hether it #as sold as a %apital asset. The fa%ts and %ir%umstan%es of ea%h %ase
must be anal&:ed to determine that. A propert& initiall& %lassi0ed as a %apital
asset ma& be treated as an ordinar& asset if a %ombination of the fa%tors sho#
that the a%tivit& #as in furtheran%e of or in the %ourse of the taxpa&erVs trade or
business. Thus" a sale of inherited real propert& usuall& 'ives %apital 'ain or loss
even thou'h the propert& has to be subdivided or improved or both to mae it
saleable. Fo#ever" if the inherited propert& is substantiall& improved or ver&
a%tivel& sold or both it ma& be treated as held primaril& for sale to %ustomers in
the ordinar& %ourse of the heirVs business.
7pon an examination of the fa%ts on re%ord" the a%tivities of petitioners are
indistin'uishable from those invariabl& emplo&ed b& one en'a'ed in the
business of sellin' real estate. This is primaril& due to the development of the
real propert&. The petitioners did not sell the land in the %ondition the& a%-uired
it. It #as ori'inall& a'ri%ultural land" #hi%h the& turned into a residential area"
introdu%in' numerous improvements in order to enti%e bu&ers. The %ost of the
improvements amounted to a lar'e amount" and the extensive improvements
indi%ate that the seller held the propert& primaril& for sale to %ustomers in the
ordinar& %ourse of business.
The existen%e of %ontra%t re%eivables" and the si:able amount of the re%eivables
in %omparison of the sales volume durin' the same period sho#s that lots #ere
sold on instalment basis" and su''ests the number" %ontinuit&" and fre-uen%& of
the sales. Another indi%ator of parti%ipatin' in real estate business is the
%ir%umstan%e that the lots #ere advertised
8<
for sale to the publi% and that sales
and %olle%tion %ommissions #ere paid out durin' the period in -uestion.
Petitioners" lie#ise" ur'e that the lots #ere sold solel& for the purpose of
li-uidation. The fa%t that propert& is sold for purposes of li-uidation does not
fore%lose a determination that a Strade or businessS is bein' %ondu%ted b& the
seller. The real propert& %an be sold #ithout losin' the bene0ts of the %apital
'ain provision" unless he enters the real estate business and %arries on the sale
in the manner in #hi%h su%h a business is ordinaril& %ondu%ted. In that event"
the li-uidation %onstitutes a business and a sale in the ordinar& %ourse of su%h a
business and the preferred tax status is lost.
ORDINARE INCO-E
Tuasn v /in'a"
In <K>4 the petitioner inherited from his mother several tra%ts of land" amon'
#hi%h #ere t#o %onti'uous par%els situated on Pure:a and @ta. Gesa streets in
Ganila" #ith an area of 3<4 and PD"P4> s-uare meters" respe%tivel&.
2hen the petitionerVs mother #as &et alive she had these t#o par%els
subdivided into t#ent&.nine lots. T#ent&.ei'ht #ere allo%ated to their then
o%%upants #ho had lease %ontra%ts #ith the petitionerVs prede%essor at various
times from <K00 to <K03" #hi%h %ontra%ts expired on 6e%ember 3<" <K53. The
=Kth lot (hereinafter referred to as Iot =K)" #ith an area of >4"000 s-uare
meters" more or less" #as not leased to an& person. It needed 0llin' be%ause of
its ver& lo# elevation" and #as planted to kangkong and other %rops.
After the petitioner too possession of the mentioned par%els in <K50" he
instru%ted his attorne&.in.fa%t" O. Antonio Araneta" to sell them.
There #as no diL%ult& en%ountered in sellin' the =4 small lots as their
respe%tive o%%upants bou'ht them on a <0.&ear installment basis. Iot =K %ould
not ho#ever be sold immediatel& due to its lo# elevation.
@ometime in <K5= the petitionerVs attorne&.in.fa%t had Iot =K 0lled" then
subdivided into small lots and paved #ith ma%adam roads. The small lots #ere
then sold over the &ears on a uniform <0.&ear annual amorti:ation basis. O.
Antonio Araneta" the petitionerVs attorne&.in.fa%t" did not emplo& an& broer nor
did he put up advertisements in the matter of the sale thereof.
In <K53 and <K5> the petitioner reported his in%ome from the sale of the small
lots (P<0="050.DK and P<03">P4.5P" respe%tivel&) as lon'.term %apital 'ains. *n
Ga& <D" <K5D the Colle%tor of Internal Revenue upheld the petitionerVs treatment
of his 'ains from the said sale of small lots" a'ainst a %ontrar& rulin' of a
revenue examiner.
*n the basis of the <K5D opinion of the Colle%tor of Internal Revenue" the
revenue examiner approved the petitionerVs treatment of his in%ome from the
sale of the lots in -uestion. #hi%h #as %on%urred in b& the Commissioner of
Internal Revenue.
*n Oanuar& K" <KP3" ho#ever" the Commissioner reversed himself and
%onsidered the petitionerVs pro0ts from the sales of the mentioned lots as
ordinar& 'ains. *n Oanuar& =4" <KP3 the petitioner re%eived a letter from the
;ureau of Internal Revenue advisin' him to pa& de0%ien%& in%ome tax for <K5D
Issue7
<.)2$n he #as en'a'ed in the business of leasin' the lots he inherited from his
mother as #ell other real properties
=.)2$n his subse-uent sales of the mentioned lots %annot be re%o'ni:ed as sales
of %apital assets but of Sreal propert& used in trade or business of the taxpa&er
Hel"7
the ?ud'ment of the Court of Tax Appeals is aLrmed" ex%ept the portion thereof
that imposes 55 sur%har'e and <5 monthl& interest" #hi%h is hereb& set aside.
)o %osts.
Ra!inale7
As thus de0ned b& la#" the term S%apital assetsS in%ludes all the
properties of a taxpa&er #hether or not %onne%ted #ith his trade or business"
ex%ept1 (<) sto% in trade or other propert& in%luded in the taxpa&erVs inventor&,
(=) propert& primaril& for sale to %ustomers in the ordinar& %ourse of his trade or
business, (3) propert& used in the trade or business of the taxpa&er and sub?e%t
to depre%iation allo#an%e, and (>) real propert& used in trade or business. If the
taxpa&er sells or ex%han'es an& of the properties above.enumerated" an& 'ain
or loss relative thereto is an ordinar& 'ain or an ordinar& loss, the 'ain or loss
from the sale or ex%han'e of all other properties of the taxpa&er is a %apital 'ain
or a %apital loss.
7nder se%tion 3>(b) (=) of the Tax Code" if a 'ain is reali:ed b& a
taxpa&er (other than a %orporation) from the sale or ex%han'e of %apital assets
held for more than t#elve months" onl& 505 of the net %apital 'ain shall be
taen into a%%ount in %omputin' the net in%ome.
2hen the petitioner obtained b& inheritan%e the par%els in -uestion"
transferred to him #as not merel& the dut& to respe%t the terms of an& %ontra%t
thereon" but as #ell the %orrelative ri'ht to re%eive and en?o& the fruits of the
business and propert& #hi%h the de%edent had established and maintained.
@

Goreover" the re%ord dis%loses that the petitioner o#ned other real properties
#hi%h he #as puttin' out for rent" from #hi%h he periodi%all& derived a
substantial in%ome" and for #hi%h he had to pa& the real estate dealerVs tax
7nder the %ir%umstan%es" the petitionerVs sales of the several lots
formin' part of his rental business %annot be %hara%teri:ed as other than sales
of non.%apital assets.
The sales %on%luded on installment basis of the subdivided lots
%omprisin' Iot =K do not deserve a di/erent %hara%teri:ation for tax purposes.
Cir%umstan%es sho# that he #as en'a'ed in the real estate business
This Court notes" ho#ever" that in orderin' the petitioner to pa& the
de0%ien%& in%ome tax" the Tax Court also re-uired him to pa& a 55 sur%har'e
plus <5 monthl& interest. In our opinion this additional re-uirement should be
eliminated be%ause the petitioner relied in 'ood faith upon opinions rendered b&
no less than the hi'hest oL%ials of the ;ureau of Internal Revenue" in%ludin' the
Commissioner himself.
C$ina .an0in' Crp v CA
@ometime in <K40" petitioner China ;anin' Corporation made a 535 e-uit&
investment in the Cirst C;C Capital (Asia) Itd." a Fon'on' subsidiar& en'a'ed
in 0nan%in' and investment #ith Sdeposit.tain'S fun%tion. The investment
amounted to P<P"==D"45<.40" %onsistin' of <0P"000 shares #ith a par Balue of
P<00 per share.
In the %ourse of the re'ular examination of the 0nan%ial boos and investment
portfolios of petitioner %ondu%ted b& Bangko (entral in <K4P" it #as sho#n that
Cirst C;C Capital (Asia)" Itd." has be%ome insolvent. 2ith the approval of
Bangko (entral" petitioner #rote.o/ as bein' #orthless its investment in Cirst
C;C Capital (Asia)" Itd." in its <K4D In%ome Tax Return and treated it as a bad
debt or as an ordinar& loss dedu%tible from its 'ross in%ome.
Respondent Commissioner of internal Revenue disallo#ed the dedu%tion and
assessed petitioner for in%ome tax de0%ien%& in the amount of P4"533"3=4.0>"
in%lusive of sur%har'e" interest and %ompromise penalt&. The disallo#an%e of
the dedu%tion #as made on the 'round that the investment should not be
%lassi0ed as bein' S#orthlessS and that" althou'h the Fon'on' ;anin'
Commissioner had revoed the li%ense of Cirst C;C Capital as a Sdeposit.tapin'S
%ompan&" the latter %ould still exer%ise" ho#ever" its 0nan%in' and investment
a%tivities. Assumin' that the se%urities had indeed be%ome #orthless"
respondent Commissioner of Internal Revenue held the vie# that the& should
then be %lassi0ed as S%apital loss"S and not as a bad debt expense there bein'
no indebtedness to spea of bet#een petitioner and its subsidiar&.
Petitioner %ontested the rulin' of respondent Commissioner before the CTA. The
tax %ourt sustained the Commissioner" holdin' that the se%urities had not indeed
be%ome #orthless and ordered petitioner to pa& its de0%ien%& in%ome tax for
<K4D of P4"533"3=4.0> plus =05 interest per annum until full& paid. 2hen the
de%ision #as appealed to the Court of Appeals" the latter upheld the CTA. In its
instant petition for revie# on certiorari" petitioner ban assails the CA de%ision.
The petition must fail.
The %laim of petitioner that the shares of sto% in -uestion have be%ome
#orthless is based on a Pro0t and Ioss A%%ount for the Eear.And 3< 6e%ember
<K4D" and the re%ommendation of Bangko (entral that the e-uit& investment be
#ritten.o/ due to the insolven%& of the subsidiar&. 2hile the matter ma& not be
indubitable (%onsiderin' that %ertain %lasses of intan'ibles" lie fran%hises and
'ood#ill" are not al#a&s 'iven %orrespondin' values in 0nan%ial statements"
there ma& reall& be no need" ho#ever" to 'o of len'th into this issue sin%e" even
to assume the #orthlessness of the shares" the dedu%tibilit& thereof #ould still
be nil in this parti%ular %ase. At all events" the Court is not prepared to hold that
both the tax %ourt and the appellate %ourt are utterl& devoid of substantial basis
for their o#n fa%tual 0ndin's.
@ub?e%t to %ertain ex%eptions" su%h as the %ompensation in%ome of individuals
and passive in%ome sub?e%t to 0nal tax" as #ell as in%ome of non.resident aliens
and forei'n %orporations not en'a'ed in trade or business in the Philippines" the
tax on in%ome is imposed on the net in%ome allo#in' %ertain spe%i0ed
dedu%tions from 'ross in%ome to be %laimed b& the taxpa&er. Amon' the
dedu%tible items allo#ed b& the )ational Internal Revenue Code (S)IRCS) are
ba" "eb!s and lsses.
An e-uit& investment is a capi!al" not ordinar&" asse! of the investor the sale or
ex%han'e of #hi%h results in either a %apital 'ain or a %apital loss. The 'ain or
the loss is r"inar& =$en the propert& sold or ex%han'ed is n! a %apital asset.
A %apital asset is de0ned ne'ativel& in @e%tion 33(<) of the )IRC, vi*!
(<) Capital assets. . The term V%apital assetsV means propert& held b& the
taxpa&er (#hether or not %onne%ted #ith his trade or business)" but does not
in%lude sto% in trade of the taxpa&er or other propert& of a ind #hi%h #ould
properl& be in%luded in the inventor& of the taxpa&er if on hand at the %lose of
the taxable &ear" or propert& held b& the taxpa&er primaril& for sale to
%ustomers in the ordinar& %ourse of his trade or business" or propert& used in the
trade or business" of a %hara%ter #hi%h is sub?e%t to the allo#an%e for
depre%iation provided in subse%tion (f) of se%tion t#ent&.nine, or real propert&
used in the trade or business of the taxpa&er.9
Thus" shares of sto%, lie the other se%urities de0ned in @e%tion =0(t) of the
)IRC" #ould be r"inar& asse!s onl& to a "ealer in securi!ies r a persn
en'a'e" in !$e purc$ase an" sale ), r an ac!ive !ra"er M)r $is =n
accun!J in, securi!ies. @e%tion =0(u) of the )IRC de0nes a dealer in
se%urities thus1
S(u) The term Vdealer in se%uritiesV means a mer%hant of sto%s or se%urities"
#hether an individual" partnership or %orporation" #ith an established pla%e of
business" re'ularl& en'a'ed in the pur%hase of se%urities and their resale to
%ustomers, that is" one #ho as a mer%hant bu&s se%urities and sells them to
%ustomers #ith a vie# to the 'ains and pro0ts that ma& be derived therefrom.S
In the hands" ho#ever" of another #ho holds the shares of sto% b& #a& of an
investment" the shares to him #ould be capi!al asse!s. 2hen the s$ares $el"
b& suc$ inves!r bec#e =r!$less, !$e lss is "ee#e" ! be a lss
)r# !$e sale r e%c$an'e ) capi!al asse!s. @e%tion =K(d)(>)(;) of the
)IRC states1
S(;) @e%urities be%omin' #orthless. . If se%urities as de0ned in @e%tion =0
be%ome #orthless durin' the taxS &ear and are %apital assets" the loss resultin'
therefrom shall" for the purposes of his Title" be %onsidered as a loss from the
sale or ex%han'e" on the last da& of su%h taxable &ear" of %apital assets.S
The above provision %onve&s that the loss sustained b& the holder of the
se%urities" #hi%h are %apital assets (to him)" is to be treated as a capi!al lss as
i) incurre" )r# a sale r e%c$an'e !ransac!in. A %apital 'ain or a %apital
loss normall& re-uires the %on%urren%e of t#o %onditions for it to result1 (<)
There is a sale or ex%han'e, and (=) the thin' sold or ex%han'ed is a %apital
asset. 2hen se%urities be%ome #orthless" there is stri%tl& no sale or ex%han'e
but the la# deems the loss an&#a& to be Sa loss from the sale or ex%han'e of
%apital assets.9A similar ind of treatment is 'iven" b& the )IRC on the
retirement of %erti0%ates of indebtedness #ith interest %oupons or in re'istered
form" short sales and options to bu& or sell propert& #here no sale or ex%han'e
stri%tl& exists. In these %ases" the )IRC dispenses" in e/e%t" #ith the standard
re-uirement of a sale or ex%han'e for the appli%ation of the %apital 'ain and loss
provisions of the %ode.
Capi!al lsses are all=e" ! be "e"uc!e" nl& ! !$e e%!en! ) capi!al
'ains, i.e., 'ains "erive" )r# !$e sale r e%c$an'e ) capi!al asse!s,
an" n! )r# an& !$er inc#e ) !$e !a%pa&er.
In the %ase at bar" Cirst C;C Capital (Asia)" Itd." the investee %orporation" is a
subsidiar& %orporation of petitioner ban #hose shares in said investee
%orporation are not intended for pur%hase or sale but as an investment.
7n-uestionabl& then" an& loss therefrom #ould be a %apital loss" not an ordinar&
loss" to the investor.
@e%tion =K(d)(>)(A)" of the )IRC expresses1
S(A) Iimitations. . Iosses from sales or ex%han'es of %apital assets shall be
allo#ed onl& to the extent provided in @e%tion 33.S
The pertinent provisions of @e%tion 33 of the )IRC referred to in the aforesaid
@e%tion =K(d)(>)(A)" read1
S@e%tion 33. Capital 'ains and losses. .
8x x x x x x x x x.
S(%) Iimitation on %apital losses. . /sses )r# sales r e%c$an'e ) capi!al
asse!s s$all be all=e" nl& ! !$e e%!en! ) !$e 'ains )r# suc$ sales
r e%c$an'es. If a ban or trust %ompan& in%orporated under the la#s of the
Philippines" a substantial part of #hose business is the re%eipt of deposits" sells
an& bond" debenture" note" or %erti0%ate r !$er evi"ence ) in"eb!e"ness
issued b& an& %orporation (in%ludin' one issued b& a 'overnment or politi%al
subdivision thereof)" =i!$ in!eres! cupns r in re'is!ere" )r#" an& loss
resultin' from su%h sale shall not be sub?e%t to the fore'oin' limitation an shall
not be in%luded in determinin' the appli%abilit& of su%h limitation to other
losses.9
The ex%lusionar& %lause found in the fore'oin' text of the la# does not in%lude
all forms of se%urities but spe%i0%all& %overs onl& bn"s, "eben!ures, n!es,
cer!i,ca!es r !$er evi"ence ) in"eb!e"ness, =i!$ in!eres! cupns r
in re'is!ere" )r#" #hi%h are the instruments of %redit normall& dealt #ith in
the usual lendin' operations of a 0nan%ial institution. A-uit& holdin's %annot
%ome %lose to bein'" #ithin the purvie# of Sevi"ence ) in"eb!e"nessS under
the se%ond senten%e of the afore-uoted para'raph. Beril&" it is for a lie thesis
that the loss of petitioner ban in its e;ui!& in ves!#en! in !$e Hn'0n'
subsi"iar& %annot also be dedu%tible as a bad debt. The shares of sto% in
-uestion do not %onstitute a loan extended b& it to its subsidiar& (Cirst C;C
Capital) or a debt sub?e%t to obli'ator& repa&ment b& the latter" essential
elements to %onstitute a bad debt" but a lon' term investment made b& C;C.
*ne other item. @e%tion 3>(%)(<) of the )IRC " states that the entire amount of
the 'ain or loss upon the sale or ex%han'e of propert&" as the %ase may be" shall
be rec'ni*e". The %omplete text reads1
8@ACTI*) 3>. 6etermination of amount of and re%o'nition of 'ain or loss..
S(a) Computation of 'ain or loss. . The 'ain from the sale or other disposition of
propert& shall be the ex%ess of the amount reali:ed therefrom over the basis or
ad?usted basis for determinin' 'ain and the loss shall be the ex%ess of the basis
or ad?usted basis for determinin' loss over the amount reali:ed. The amount
reali:ed from the sale or other disposition of propert& shall be to sum of mone&
re%eived plus the fair maret value of the propert& (other than mone&) re%eived.
(As amended b& A.*. )o. 3D)
S(b) ;asis for determinin' 'ain or loss from sale or disposition of propert&. . The
basis of propert& shall be . (<) The %ost thereof in %ases of propert& a%-uired on
or before Gar%h <" <K<3" if su%h propert& #as a%-uired b& pur%hase, or
S(=) The fair maret pri%e or value as of the date of a%-uisition if the same #as
a%-uired b& inheritan%e, or
S(3) If the propert& #as a%-uired b& 'ift the basis shall be the same as if it #ould
be in the hands of the donor or the last pre%edin' o#ner b& #hom it #as not
a%-uired b& 'ift" ex%ept that if su%h basis is 'reater than the fair maret value of
the propert& at the time of the 'ift" then for the purpose of determinin' loss the
basis shall be su%h fair maret value, or
S(>) If the propert&" other than %apital asset referred to in @e%tion =< (e)" #as
a%-uired for less than an ade-uate %onsideration in mone& or mone&s #orth" the
basis of su%h propert& is (i) the amount paid b& the transferee for the propert& or
(ii) the transferorVs ad?usted basis at the time of the transfer #hi%hever is
'reater.
S(5) The basis as de0ned in para'raph (%) (5) of this se%tion if the propert& #as
a%-uired in a transa%tion #here 'ain or loss is not re%o'ni:ed under para'raph
(%) (=) of this se%tion. (As amended b& A.*. )o. 3D)
8(%) Ax%han'e of propert&.
S(<) Neneral rule.. Ax%ept as herein provided" upon the sale or ex%han'e of
propert&" the entire amount of the 'ain or loss" as the %ase ma& be" shall be
re%o'ni:ed.
S(=) Ax%eption. . )o 'ain or loss shall be re%o'ni:ed if in pursuan%e of a plan of
mer'er or %onsolidation (a) a %orporation #hi%h is a part& to a mer'er or
%onsolidation ex%han'es propert& solel& for sto% in a %orporation #hi%h is" a
part& to the mer'er or %onsolidation" (b) a shareholder ex%han'es sto% in a
%orporation #hi%h is a part& to the mer'er or %onsolidation solel& for the sto% in
another %orporation also a part& to the mer'er or %onsolidation" or (%) a se%urit&
holder of a %orporation #hi%h is a part& to the mer'er or %onsolidation
ex%han'es his se%urities in su%h %orporation solel& for sto% or se%urities in
another %orporation" a part& to the mer'er or %onsolidation.
S)o 'ain or loss shall also be re%o'ni:ed if propert& is transferred to a
%orporation b& a person in ex%han'e for sto% in su%h %orporation of #hi%h as a
result of su%h ex%han'e said person" alone or to'ether #ith others" not
ex%eedin' four persons" 'ains %ontrol of said %orporation1 Provided" That sto%s
issued for servi%es shall not be %onsidered as issued in return of propert&.S
The above la# should be taen #ithin %ontext on the 'eneral sub?e%t of the
determination" and re%o'nition of 'ain or loss, it is not pre%lusive of" let alone
renders %ompletel& in%onse-uential" the more spe%i0% provisions of the %ode.
Thus" pursuant" to the same se%tion of the la#" no su%h re%o'nition shall be
made if the sale or ex%han'e is made in pursuan%e of a plan of %orporate mer'er
or %onsolidation or" if as a result of an ex%han'e of propert& for sto%s" the
ex%han'er" alone or to'ether #ith others not ex%eedin' four" 'ains %ontrol of the
%orporation. Then" too" ho# the resultin' 'ain mi'ht be taxed" or #hether or not
the loss #ould be dedu%tible and ho#" are matters properl& dealt #ith else#here
in various other se%tions of the )IRC. At all events" it ma& not be amiss to on%e
a'ain stress that the basi% rule is still that an& capi!al lss can be "e"uc!e"
nl& )r# capi!al 'ains under @e%tion 33(%) of the )IRC.
In sum .
(a) The e-uit& investment in shares of sto% held b& C;C of approximatel& 535
in its Fon'on' subsidiar&" the Cirst C;C Capital (Asia)" Itd." is not an
indebtedness" and it is a capi!al" not an ordinar&" asse!.
(b) Assumin' that the e-uit& investment of C;C has indeed be%ome S#orthless"S
the loss sus!aine" is a capi!al, not an ordinar&" lss.
(%) The %apital loss sustained b& C;C %an onl& be dedu%ted from %apital 'ains if
an& derived b& it durin' the same taxable &ear that the se%urities have be%ome
S#orthless.S
-ERGER + CONSO/IDATION
CIR v Ru,n
This is a petition for review on certiorari of the CTA decision which absolved petitioners from
liability for capital gains tax on stocks received by them from Eastern Theatrical !nc. The
"#finos were ma$ority stockholders of Eastern Theatrical Co. !nc %hereinafter &ld ETC'
which had a corporate term of 2( years which terminated on )an#ary 2( 1*(* president of
which was Ernesto "#fino. &n +ecember , 1*(, the Eastern Theatrical Co !nc.
%hereinafter -ew ETC with a corporate term of (. years' was organi/ed and the "#finos
were also the ma$ority stockholders of the corporation with 0icente "#fino as the 1eneral2
3anager. 4oth ETCs were engaged in the same b#siness.
&ld ETC held a stockholder5s meeting to merge with the -ew ETC on +ecember 16 1*(,
to contin#e its b#siness after the end of &ld ETC5s corporate term. The merger was
a#thori/ed by a board resol#tion. !t was expressly declared that the merger was necessary
to contin#e operating the Capitol and 7yric Theaters in 3anila even after the expiration of
corporate existence to preserve both its booking contracts and to #phold its collective
bargaining agreements. Thro#gh the two "#finos %Ernesto and 0icente' a +eed of
Assignment was exec#ted which conveyed and transferred all the b#siness property
assets and good will of the &ld ETC to the -ew ETC in exchange for shares of stock of
the latter to be iss#ed to the shareholders at the rate of one stock for each stock held in
the &ld ETC. The +eed was to retroact from )an#ary 1 1*(*. -ew ETC5s 4oard approved
the merger and the +eed of Assignment on )an#ary 12 1*(* and all changes d#ly
registered with the 8EC.
The 4!" after examination declared that the merger was not #ndertaken for a bona fide
b#siness p#rpose b#t only to avoid liability for the capital gains tax on the exchange of the
old for the new shares of stock. 9e then imposed deficiency assessments against the
private respondents the "#finos. The "#finos re:#ested for a reconsideration which was
denied. Therefore they elevated their matter to the CTA who reversed the $#dgment of the
C!" saying that they fo#nd that there was ;no taxable gain derived from the exchange of
old stocks simply for new stocks for the -ew Corporation< beca#se it was p#rs#ant to a valid
plan of reorgani/ation. The C!" raised it to the 8C on petition for review on certiorari.
Issue:
=&- there was a valid merger and that there was no taxable gain derived
therefrom>YES, the CTA was correct in ruling that there WAS a merger and
that no taxable gain was deried! CTA decision is A""I#$E%!
#ationale:
0alidity of transfer
!n s#pport of its arg#ment that the "#finos were trying to avoid the payment of
capital gains tax the C!" said that the -ew ETC did not act#ally iss#e stocks in
exchange for the properties of the &ld ETC. The increase in capitali/ation only
happened in 3arch 1*(* or 36 days after the &ld ETC expired. ?rior to
registration the -ew ETC co#ld not have validly performed the transfer. The 8C
r#led that the retroactivity of the +eed of Assignment c#red the defect and there
was no impediment.
Bona Fide 4#siness ?#rpose
The criterion of the law is that the p#rpose of the merger m#st be for a bona fide
b#siness p#rpose and not for the p#rpose of escaping taxes. The case of
Helvering v. Gregory stated that a mere ;operation having no b#siness or
corporate p#rpose>a mere devise which p#t on the form of a corporate
reorgani/ation as a disg#ise for concealing its real character and the sole ob$ect
and accomplishment of which was the cons#mmation of a preconceived plan not
to reorgani/e a b#siness b#t to transfer a parcel of corporate shares.< =hen the
corporation created is nothing more than a contrivance there is no legitimate
b#siness p#rpose. The Co#rt states that there is no s#ch f#rtive intention in this
case. !n fact the -ew ETC contin#es to operate the Capitol and 7yric movie
theaters even #p to 26 years after the merger. There is as yet no dissol#tion so
the "#finos haven5t gained any benefit yet from the merger which makes them
no more liable than the time the merger took place.
The goernment&s remed'@ The merger merely deferred the payment for taxes #ntil the
f#t#re which the government may assert later on when gains are reali/ed and benefits are
distrib#ted among the stockholders as a res#lt of the merger. The taxes are not forfeited b#t
merely postponed and may be imposed at the proper time later on.
.USINESS PURPOSE
Gre'r& v Helverin'
?etitioner 1regory was the owner of all the stock of Anited 3ortgage Corporation which
held among its assets 1... shares of the 3onitor 8ec#rities Corporation. !n order to
proc#re a transfer of these shares to herself and diminish the amo#nt of income tax which
wo#ld res#lt from a direct transfer by way of dividend she so#ght to bring abo#t a
Breorgani/ationB #nder section 112%g' of the "even#e Act of 1*2,.
Averill Corporation was organi/ed #nder the laws of +elaware. Three days later the Anited
3ortgage Corporation transferred to the Averill Corporation the 1... shares of 3onitor
stock for which all the shares of the Averill Corporation were iss#ed to the petitioner.
8#bse:#ently Averill Corporation was dissolved and li:#idated by distrib#ting all its assets
namely the 3onitor shares to the petitioner. -o other b#siness was ever transacted or
intended to be transacted by that company. ?etitioner thereafter paid tax on the capital net
gains when she sold her shares.
The Commissioner of !nternal "even#e being of opinion that the reorgani/ation attempted
was witho#t s#bstance and m#st be disregarded held that petitioner was liable for a tax as
tho#gh the Anited corporation had paid her a dividend consisting of the amo#nt reali/ed
from the sale of the 3onitor shares.
Issue:
=C- there had been a ;reorgani/ation5 within the meaning of the "even#e Act of 1*2, and
therefore make petitioner 1regory liable only to a tax on the capital net gain for the sale of
his shares of stocks #nder the Averill Corporation and not tax on the dividends. -&
(eld:
The $#dgment is ADD!"3E+.
#ationale:
8ection 112 of the "even#e Act of 1*2, %2E A8CA 2112' deals with the s#b$ect of gain or
loss res#lting from the sale or exchange of property. 8#ch gain or loss is to be recogni/ed in
comp#ting the tax except as provided in that section.
'Sec. 112. ... (g) Distribtion of Stoc! on "eorgani#ation. $f t%ere is distribted& in
prsance of a plan of reorgani#ation& to a s%are%older in a corporation a party to
t%e reorgani#ation& stoc! or secrities in sc% corporation or in anot%er
corporation a party to t%e reorgani#ation& 'it%ot t%e srrender by sc%
s%are%older of stoc! or secrities in sc% a corporation& no gain to t%e distribtee
fro( t%e receipt of sc% stoc! of secrities s%all be recogni#ed. ...
'(1) )%e ter( 'reorgani#ation' (eans ... (B) a transfer by a corporation of all or a
part of its assets to anot%er corporation if i((ediately after t%e transfer t%e
transferor or its stoc!%olders or bot% are in control of t%e corporation to '%ic% t%e
assets are transferred. ... '
A transfer made Bin p#rs#ance of a plan of reorgani/ationB %section 112%g' of corporate
b#sinessF and not a transfer of assets by one corporation to another in p#rs#ance of a plan
having no relation to the b#siness of either as plainly is the case here. ?#tting aside then
the :#estion of motive in respect of taxation altogether and fixing the character of the
proceeding by what act#ally occ#rred what do we findG 8imply an operation having no
b#siness or corporate p#rpose2a mere device which p#t on the form of a corporate
reorgani/ation as a disg#ise for concealing its real character and the sole ob$ect and
accomplishment of which was the cons#mmation of a preconceived plan not to reorgani/e
a b#siness or any part of a b#siness b#t to transfer a parcel of corporate shares to the
petitioner. -o do#bt a new and valid corporation was created. 4#t that corporation was
nothing more than a contrivance to the end last described. !t was bro#ght into existence for
no other p#rposeF it performed as it was intended from the beginning it sho#ld perform no
other f#nction. =hen that limited f#nction had been exercised it immediately was p#t to
death.
!n these circ#mstances the facts speak for themselves and are s#sceptible of b#t one
interpretation. The whole #ndertaking tho#gh cond#cted according to the terms of
s#bdivision %4' was in fact an elaborate and devio#s form of conveyance mas:#erading as
a corporate reorgani/ation and nothing else. The r#le which excl#des from consideration
the motive of tax avoidance is not pertinent to the sit#ation beca#se the transaction #pon its
face lies o#tside the plain intent of the stat#te. To hold otherwise wo#ld be to exalt artifice
above reality and to deprive the stat#tory provision in :#estion of all serio#s p#rpose.

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A.

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P[N then 0led a suit in the CCI of Ganila" pra&in'1

TC ruled in favour of the Guni%ipalit&" sa&in' it had the po#er to ena%t

I1 <) 2$n G* > is ultra vires and void. )*" it is BAII6T

=) 2$n P[N is entitled for the reimbursement of ex%ess amount paid..

*rdinan%e )o. > is valid as a muni%ipalit&

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To&o @hippin' is a forei'n %orporation (represented b& @oriamont

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7pon arrivin'" ho#ever" at Nuimaras Port of Iloilo" the vessel found no

Claimin' the pre.pa&ment of in%ome and %ommon %arrierVs taxes as

I1 2$n To&o is entitled to a refund or tax %redit for amounts

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