(3) the gain must not be excluded by law or treaty from
CREBA v. Romulo
Facts: Petitioner assails the validity of the imposition of
minimum corporate income tax (MCIT) on corporations
and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner
argues that the MCIT violates the due process clause
because it levies income tax even if there is no realized
gain. Petitioner also seeks to nullify Sections 2.57.2(J)
(as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of
CWT on the sale of real properties categorized as
ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first,
they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to
collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties
classified as ordinary assets. Petitioner also asserts that
the enumerated provisions of the subject revenue
regulations violate the due process clause because, like
the MCIT, the government collects income tax even
when the net income has not yet been determined.
They contravene the equal protection clause as well
because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.
Issue: Is the imposition of MCIT valid?
Ruling: Yes. Petitioner is correct in saying that income is
distinct from capital. Income means all the wealth
which flows into the taxpayer other than a mere return
on capital. Capital is a fund or property existing at one
distinct point in time while income denotes a flow of
wealth during a definite period of time. Income is gain
derived and severed from capital. For income to be
taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
taxation.
Certainly, an income tax is arbitrary and confiscatory if it
taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at
by deducting the capital spent by a corporation in the
sale of its goods, i.e., the cost of goods and other direct
expenses from gross sales. Clearly, the capital is not
being taxed. Furthermore, the MCIT is not an additional
tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the
amount of net income tax due from a corporation,
pegging the rate at a very much reduced 2% and uses as
the base the corporations gross income. Besides, there
is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the
same time reducing the applicable tax rate.
RR 9-98, in declaring that MCIT should be imposed
whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E).
This means that even if a corporation incurs a net loss in
its business operations or reports zero income after
deducting its expenses, it is still subject to an MCIT of
2% of its gross income. This is consistent with the law
which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the
law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may
well be the case that the MCIT would be less than the
net income of the corporation which posts a zero or
negative taxable income.
Issue: IS the imposition of CWT valid?
Ruling: Yes. Under RR 2-98, the tax base of the income
tax from the sale of real property classified as ordinary
assets remains to be the entitys net income imposed
under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The
CWT is to be deducted from the net income tax payable
by the taxpayer at the end of the taxable year.[71]
Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003
reiterate that the tax base for the sale of real property
classified as ordinary assets remains to be the net
taxable income. Accordingly, at the end of the year, the
taxpayer/seller shall file its income tax return and credit
the taxes withheld (by the withholding agent/buyer)
against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If,
on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its net
income.
The use of the GSP/FMV as basis to determine the
withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold
the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of
the taxable year. Instead, said withholding agents
knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his
basis can only be the GSP or FMV as these are the only
factors reasonably known or knowable by him in
connection with the performance of his duties as a
withholding agent.
FWT is imposed on the sale of capital assets. On the
other hand, CWT is imposed on the sale of ordinary
assets. The inherent and substantial differences
between FWT and CWT disprove petitioners contention
that ordinary assets are being lumped together with,
and treated similarly as, capital assets in contravention
of the pertinent provisions of RA 8424.
South African Airways vs CIR, February 16, 2010
Facts: South African Airways is a foreign corporation
organized and existing under and by virtue of the laws
of the Republic of South Africa. Its principal office is
located at Johannesburg International Airport, South
Africa. In the Philippines, it is an internal air carrier
having no landing rights in the country. South African
Airways, however, has a general sales agent in the
Philippines, Aerotel Limited Corporation (Aerotel).
Aerotel sells passage documents for compensation or
commission for South African Airways’ off-line flights for
the carriage of passengers and cargo between ports or
points outside the territorial jurisdiction of the
Philippines. South African Airways is not registered with
the SEC as a corporation, branch office, or partnership.
It is not licensed to do business in the Philippines. For
the taxable year 2000, South African Airways filed
separate quarterly and annual income tax returns for its
off-line flights. It paid a corporate tax in the rate of 32%
of its gross billings. On February 5, 2003, South African
Airways filed with the BIR a claim for the refund of the
amount of PhP 1,727,766.38 as erroneously paid tax on
Gross Philippine Billings (GPB) for the taxable year 2000.
This claim is based on their contention that its income
should be taxed at the rate of 2 ½% of its gross billings.
This claim was unheeded and South African Airways
filed a Petition for Review with the CTA for the refund of
the said amount.
Issues:
1. Whether South African Airway’s income is
sourced within the Philippines and is to be
taxed at 32% of the gross billings?
2. Whether South African Airways is entitled to a
refund or a tax credit of erroneously paid tax on
Gross Philippine Billings for the taxable year
2000 in the amount of P1,727,766.38?
Ruling:
1. Yes. In the instant case, the general rule is that
resident foreign corporations shall be liable for
a 32% income tax on their income from within
the Philippines, except for resident foreign
corporations that are international carriers that
derive income “from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines” which shall be taxed at 2 1/2% of
their Gross Philippine Billings. Petitioner, being
an international carrier with no flights
originating from the Philippines, does not fall
under the exception. As such, petitioner must
fall under the general rule. This principle is
embodied in the Latin maxim, exception firmat
regulam in casibus non exceptis, which means, a
thing not being excepted must be regarded as
coming within the purview of the general rule.
2. Taxes cannot be subject to compensation for
the simple reason that the government and the
taxpayer are not creditors and debtors of each
other.
Exception: CIR v. CA, CityTrust (234 SCRA
348)SC, however, granted the offsetting of a tax
refund with a tax deficiency on the ground that
such deficiency assessment is intimately related
 to and inextricably intertwined with the right of
CityTrust to claim for a tax refund for the same
year.
a) To award such refund despite the
existence of that deficiency assessment
is an absurdity and a polarity in
conceptual effects. CityTrust cannot be
entitled to refund and at the same time
be liable for a tax deficiency assessment
for the same year.
b) The grant of a refund is founded on the
assumption that the tax return is valid -
the facts stated therein are true and
correct.
c) The deficiency assessment, although
not yet final, created a doubt as to and
constitutes a challenge against the truth
and accuracy of the facts stated in said
return which, by itself and without
unquestionable evidence, cannot be the
basis for the grant of the refund.
d) To avoid multiplicity of suits and
unnecessary difficulties or expenses, it
is both logically necessary and legally
appropriate that the issue of the
deficiency tax assessment against
Citytrust be resolved jointly with its
claim for tax refund, to determine once
and for all in a single proceeding the
true and correct amount of tax due or
refundable.
In determining whether South African Airways is
entitled to the refund of the amount paid, it would be
necessary to determine how much the Government is
entitled to collect as taxes. This would necessarily
include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case
would constitute res judicata on both parties as to all
the matters subject thereof or necessarily involved
therein. Given the finding of the CTA that South African
Airways, although not liable for GPB, is liable for income
tax → the correctness of the return filed by South
African Airways is now put in doubt. Hence, SC cannot
grant the prayer for a refund.
Supreme Court is unable to affirm CTA En
Banc’s decision on the outright denial of petitioner’s
claim for a refund. Even though petitioner is not
entitled to a refund due to the question on the
propriety of petitioner’s tax return subject of the instant
controversy, it would not be proper to deny such claim
without making a determination of South African
Airways’ liability under Sec. 28(A)(1).
 Tax under Sec. 28(A)(3)(a) is based on
GPB, while Sec. 28(A)(1) is based on
taxable income, that is, gross income
less deductions and exemptions, if any.
 It cannot be assumed that South African
Airways’ liabilities under the two
provisions would be the same.
 There is a need to make a
determination of South African Airways’
liability under Sec. 28(A)(1) to establish
whether a tax refund is forthcoming or
that a tax deficiency exists.
Sec. 28(A)(1) of the 1997 NIRC is a general rule that
resident foreign corporations are liable for 32% tax on
all income from sources within the Philippines. Sec.
28(A)(3) is an exception to this general rule.
 South African Airways, being an international
carrier with no flights originating from the
Philippines, does not fall under the exception. As
such, petitioner must fall under the general rule.
If an international air carrier maintains flights to and
from the Philippines, it shall be taxed at the rate of 2
½%of its Gross Philippine Billings, while international
air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other
activities in the country will be taxed at the regular rate
of 32% (now 30%) of such income.
CIR v. CA & Soriano Corp. 301 SCRA 152
Facts: Don Andres Soriano (American), founder of A.
Soriano Corp. (ASC) had a total shareholdings of
185,154 shares. Broken down, the shares comprise of
50,495 shares which were of original issue when the
corporation was founded and 134,659 shares as stock
dividend declarations. So in 1964 when Soriano died,
half of the shares he held went to his wife as her
conjugal share (wife’s “legitime”) and the other half
(92,577 shares, which is further broken down to
25,247.5 original issue shares and 82,752.5 stock
dividend shares) went to the estate. For some time
after his death, his estate still continued to receive stock
dividends from ASC until it grew to at least 108,000
shares.
In 1968, ASC through its Board issued a resolution for
the redemption of shares from Soriano’s estate
purportedly for the planned “Filipinization” of
ASC. Eventually, 108,000 shares were redeemed from
the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR)
issued an assessment against ASC for deficiency
withholding tax-at-source. The CIR explained that when
the redemption was made, the estate profited (because
ASC would have to pay the estate to redeem), and so
ASC would have withheld tax payments from the
Soriano Estate yet it remitted no such withheld tax to
the government.
ASC averred that it is not duty bound to withhold tax
from the estate because it redeemed the said shares for
purposes of “Filipinization” of ASC and also to reduce its
remittance abroad.
ISSUE: Whether or not ASC’s arguments are tenable?
HELD: No. The reason behind the redemption is not
material. The proceeds from a redemption is taxable
and ASC is duty bound to withhold the tax at source.
The Soriano Estate definitely profited from the
redemption and such profit is taxable, and again, ASC
had the duty to withhold the tax. There was a total of
108,000 shares redeemed from the estate. 25,247.5 of
that was original issue from the capital of ASC. The rest
(82,752.5) of the shares are deemed to have been from
stock dividend shares. Sale of stock dividends is taxable.
It is also to be noted that in the absence of evidence to
the contrary, the Tax Code presumes that every
distribution of corporate property, in whole or in part, is
made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were
distributed from the capital of ASC and that the latter is
merely redeeming them as such. The capital cannot be
distributed in the form of redemption of stock dividends
without violating the trust fund doctrine — wherein the
capital stock, property and other assets of the
corporation are regarded as equity in trust for the
payment of the corporate creditors. Once capital, it is
always capital. That doctrine was intended for the
protection of corporate creditors.
CIR v. ST. LUKE'S MEDICAL CENTER, GR No. 203514,
2017-02-13
Facts: St. Luke's Medical Center, Inc.received from the
BIR an Audit Results/Assessment Notice assessing
respondent SLMC deficiency income tax under Section
27(B) of the NIRC. SLMC filed with petitioner CIR an
administrative protest assailing the assessments. SLMC
claimed that as a non-stock, non-profit charitable and
social welfare organization under Section 30(E) and (G)
of the 1997 NIRC, it is exempt from paying income tax.
CIR argues that under the doctrine of stare decisis SLMC
is subject to 10% income tax under Section 27(B) of the
1997 NIRC. SLMC, on the other hand argues that
earning a profit by a charitable, benevolent hospital or
educational institution does not result in the withdrawal
of its tax exempt privilege.
SLMC further claims that the income it derives from
operating a hospital is not income from "activities
conducted for profit."
Issue: Whether SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar as its revenues
from paying patients are concerned
Ruling: SLMC is liable for income tax under Section
27(B) of the 1997 NIRC insofar as its revenues from
paying patients are concerned.
Sec. 27(B) of the NIRC 10% preferential tax rate on the
income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals.
There is no dispute that St. Luke's is organized as a non-
stock and non profit charitable institution. However,
this does not automatically exempt St Luke's from
paying taxes.
Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt To be exempt
from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use
the property 'actually, directly and exclusively' for
charitable purposes. To be exempt from income taxes,
Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively'
for charitable purposes. However, the last paragraph of
Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity
is not tax exempt even as its not-for-profit activities
remain tax exempt.
Thus, even if the charitable institution must be
'organized and operated exclusively' for charitable
purposes, it is nevertheless allowed to engage in
'activities conducted for profit' without losing its tax
exempt status for its nonprofit activities. The only
consequence is that the 'income of whatever kind and
character' of a charitable institution 'from any of its
activities conducted for profit, regardless of the
disposition made of such income, shall be subject to
tax.'
It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not
an institution 'operated exclusively' for charitable
purposes. Clearly, revenues from paying patients are
income received from 'activities conducted for profit.'
To be clear, for an institution to be completely exempt
from income tax, Section 30(E) and (G) of the 1997 NIRC
requires said institution to operate exclusively for
charitable or social welfare purpose. But in case an
exempt institution under Section 30(E) or (G) of the said
Code earns income from its for-profit activities, it will
not lose its tax exemption. However, its income from for
profit activities will be subject to income tax at the
preferential 10% rate pursuant to Section 27(B) thereof.
Republic of the Phil. vs. Soriano
FACTS:
On October 20, 2010, petitioner Republic of the
Philippines, represented by the Department of Public
Works and Highways (DPWH), filed a Complaint for
expropriation against respondent Arlene R. Soriano, the
registered owner of a parcel of land consisting of an
area of 200 square meters. In its Complaint, petitioner
averred that pursuant to Republic Act (RA) No. 8974,
otherwise known as "An Act to Facilitate the Acquisition
of Right-Of-Way, Site or Location for National
Government Infrastructure Projects and for other
Purposes," the property sought to be expropriated shall
be used in implementing the construction of the North
Luzon Expressway (NLEX)- Harbor Link Project (Segment
9) from NLEX to MacArthur Highway, Valenzuela City.
Petitioner duly deposited to the Acting Branch Clerk of
Court the amount of P420,000.00 representing 100% of
the zonal value of the subject property. Consequently,
in an Order dated May 27, 2011, the RTC ordered the
issuance of a Writ of Possession and a Writ of
Expropriation for failure of respondent, or any of her
representatives, to appear despite notice during the
hearing called for the purpose. Furthermore, RTC
ordered the Plaintiff to pay the defendant
consequential damages which shall include the value of
the transfer tax necessary for the transfer of the subject
property from the name of the defendant to that of the
plaintiff. Petitioner claims that contrary to the RTC’s
instruction, transfer taxes, in the nature of Capital Gains
Tax and Documentary Stamp Tax, necessary for the
transfer of the subject property from the name of the
respondent to that of the petitioner are liabilities of
respondent seller and not petitioner.
ISSUE:
In Expropriation proceedings, who should pay the
transfer taxes in the nature of Capital Gains Tax and
Documentary Stamp Tax?
RULING:
CGT-Seller (respondent)
Documentary stamp Tax- Buyer (Republic represented
by DPWH)
Capital gains is a tax on passive income, it is the seller,
not the buyer, who generally would shoulder the tax. As
a general rule, therefore, any of the parties to a
transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree among
themselves on who shall be liable for the same. In this
case, with respect to the capital gains tax, there is merit
in petitioner’s posture that pursuant to Sections 24(D)
and 56(A)(3) of the 1997 National Internal Revenue
Code (NIRC), capital gains tax due on the sale of real
property is a liability for the account of the seller.
There is no agreement as to the party liable for the
documentary stamp tax due on the sale of the land to
be expropriated. But while DPWH rejects any liability
for the same, the Court takes note of petitioner’s
Citizen’s Charter, which functions as a guide for the
procedure to be taken by the DPWH in acquiring real
property through expropriation under RA 8974. The
Citizen’s Charter, issued by DPWH itself on December 4,
2013, explicitly provides that the documentary stamp
tax, transfer tax, and registration fee due on the
transfer of the title of land in the name of the Republic
shall be shouldered by the implementing agency of the
DPWH, while the capital gains tax shall be paid by the
affected property owner.
CIR vs Aquafresh Seafoods
Facts:
On June 7, 1999, respondent Aquafresh Seafoods Inc.
sold to Philips Seafoods, Inc. two parcels of land,
including improvements thereon, located at Barrio
Banica, Roxas City, for the consideration of Three
Million One Hundred Thousand Pesos (Php 3,100,
000.00).
The Bureau of Internal Revenue (BIR) received a report
that the lots sold were undervalued for taxation
purposes. After an investigation, BIR concluded that the
subject properties were commercial with a zonal value
of Php 2,000.00 per square meter. BIR assessed
Aquafresh of Capital Gains Tax (CGT) and Documentary
Stamp Tax (DST) deficiencies in the sum of Php
1,372,171.46 and Php 356,267.62,respectively.
Aquafresh protested the assessments. Aquafresh's
argued that the subject properties were located in
Barrio Banica, Roxas, where the pre-defined zonal value
was Php 650.00 per square meter based on the
“Revised Zonal Values of Real Properties in the City of
Roxas”. Aquafresh argued that since there was already a
pre-defined zonal value for properties located in Barrio
Banica, the BIR officials had no business re-classifying
the subject properties to commercial.
Issue: Is Aquafresh correct in asserting that it should
only pay CGT and DST for the properties based on its
current classification as residential zone?
Ruling: Yes.
Under Section 27(D)(5) of the NIRC of 1997, a CGT of six
(6%) percent is imposed on the gains presumed to have
been realized in the sale, exchange or disposition of
lands and/or buildings which are not actively used in the
business of a corporation and which are treated as
capital assets based on the gross selling price or fair
market value as determined in accordance with Section
6(E) of the NIRC, whichever is higher.
On the other hand, under Section 196 of the NIRC, DST
is based on the consideration contracted to be paid or
on its fair market value determined in accordance with
Section 6(E) of the NIRC, whichever is higher.
Section 6. Power of the Commissioner to Make
Assessments and Prescribe Additional Requirements for
Tax Administration and Enforcement. -
xxxx
(E) Authority of the Commissioner to Prescribe Real
Property Values The Commissioner is hereby authorized
to divide the Philippines into different zones or area and
shall, upon consultation with competent appraisers
both from the private and public sectors, determine the
fair market value of real properties located in each zone
or area. For purposes of computing internal revenue
tax, the value of the property shall be, whichever is
higher of:
(1) the fair market value as determined by the
Commissioner; or
(2) the fair market value as shown in the
schedule of values of the Provincial and City Assessors.
The CIR has the authority to prescribe real property
values and divide the Philippines into zones. But it has
to be done upon consultation with competent
appraisers for both public and private sectors.
Clearly, at the time of the sale of the properties, they
were already classified as residential based on the 1995
Revised Zonal Value of Real Properties. Thus, CIR cannot
unilaterally change the zonal valuation from residential
to commercial without a re-evaluation as provided by
Section 6(E).
Regardless if the properties were actually used as
commercial and not residential, the same remains to be
residential for zonal value purposes. It appears that
actual use is not considered for zonal valuation, but the
predominant use of other classification of properties
located in the zone. To note, the entire Barrio Banica
has been classified as residential.
FAR EAST BANK AND TRUST COMPANY v. CIR
Income from employees’ trust is tax exempt
Facts: Far East Bank is the trustee of various retirement
plans established by several companies for its
employees. As trustee of the retirement plans, Far East
Bank was authorized to hold, manage, invest and
reinvest the assets of these plans. Far East Bank utilized
such authority to invest these retirement funds in
various money market placements, bank deposits,
deposit substitute instruments and government
securities. These investments necessarily earned
interest income. Far East Bank’s claim for refund centers
on the tax withheld by the various withholding agents,
and paid to the CIR for the four (4) quarters of 1993, on
the aforementioned interest income.
Issue: Whether or not Far East Bank is entitled to the
refund claimed.
Ruling: FEBTC is not entitled to the refund.
The same exemption was provided in Republic Act No.
8424, the Tax Reform Act of 1997, and may now be
found under Section 60(B) of the present National
Internal Revenue Code. Such interest income of Far East
Bank for 1993 was not subject to income tax. Still, Far
East Bank did pay the income tax it was not liable for
when it withheld such tax on interest income for the
year 1993. Such taxes were erroneously assessed or
collected, and thus, Section 230 of the National Internal
Revenue Code then in effect comes into full application.
The tax exemption enjoyed by employees’ trusts was
absolute, irrespective of the nature of the tax. There
was no need for Far East Bank to particularly show that
the tax withheld was derived from interest income from
money market placements, bank deposits, other
deposit substitute instruments and government
securities, since the source of the interest income does
not have any effect on the exemption enjoyed by
employees’ trusts. What has to be established is that
the amount sought to be refunded to Far East Bank
actually corresponds to the tax withheld on the interest
income earned from the exempt employees’ trusts. The
need to be determinate on this point especially
militates, considering that Far East Bank, in the ordinary
course of its banking business, earns interest income
not only from its investments of employees trusts, but
on a whole range of accounts which do not enjoy the
same broad exemption as employees trusts.
The submitted certifications from Citibank, the BSP, and
Far East Bank’s own Accounting Department attest only
to the total amount of final withholding taxes remitted
to the BIR. Evidently, the sum includes not only such
taxes withheld from the interest income of the exempt
employees trusts, but also from other transactions
between Far East Bank and the BSP or Citibank which
are not similarly exempt from taxation. For these
certifications to hold value, there is particular need for
them to segregate such taxes withheld from the interest
income of employees’ trusts, and those withheld from
other income sources. Otherwise, these certifications
are ineffectual to establish the present claim for refund.
Miguel J. Osorio Pension Foundation, Inc.(MJOPFI) vs.
CA and CIR GR No 162175
Facts: Petitioner, a non-stock and non-profit
corporation, was organized for the purpose of holding
title to and administering the employees’ trust or
retirement funds (Employees’ Trust Fund) established
for the benefit of the employees of Victorias Milling
Company, Inc. (VMC).
 Petitioner, as trustee, claims that the income
earned by the Employees’ Trust Fund is tax
exempt under Section 53(b) of the National
Internal Revenue Code (Tax Code).
Petitioner bought the MBP lot through VMC. Petitioner
claims that its share in the MBP lot is 49.59%.
Petitioner’s investment manager, the Citytrust Banking
Corporation (Citytrust), in submitting its Portfolio Mix
Analysis, regularly reported the Employees’ Trust Fund’s
share in the MBP lot.
On 26 March 1997, VMC eventually sold the MBP lot to
Metrobank.
 Petitioner claims that it is a co-owner of the
MBP lot as trustee of the Employees’ Trust
Fund, based on the notarized Memorandum of
Agreement. Petitioner maintains that its
ownership of the MBP lot is supported by the
excerpts of the minutes and the resolutions of
petitioner’s Board Meetings.
 Petitioner further contends that there is no
dispute that the Employees’ Trust Fund is
exempt from income tax. Since petitioner, as
trustee, purchased 49.59% of the MBP lot using
funds of the Employees’ Trust Fund, petitioner
asserts that the Employees’ Trust Fund's 49.59%
share in the income tax paid (or P3,037,697.40
rounded off to P3,037,500) should be refunded.
The CTA denied petitioner's claim for refund of
withheld creditable tax of P3,037,500 arising from the
sale of real property of which petitioner claims to be a
co-owner as trustee of the employees' trust or
retirement funds.
 CA agreed with the CTA that pieces of
documentary evidence submitted by petitioner are
largely self-serving and can be contrived easily. The CA
ruled that these documents failed to show that the
funds used to purchase the MBP lot came from the
Employees’ Trust Fund.
Issues: 1. Whether petitioner or the Employees’ Trust
Fund is estopped from claiming that the Employees’
Trust Fund is the beneficial owner of 49.59% of the MBP
lot and that VMC merely held 49.59% of the MBP lot in
trust for the Employees’ Trust Fund? [Not estopped.]
2. If petitioner or the Employees’ Trust Fund is not
estopped, whether they have sufficiently established
that the Employees’ Trust Fund is the beneficial owner
of 49.59% of the MBP lot, and thus entitled to tax
exemption for its share in the proceeds from the sale of
the MBP lot. [Yes]
Ruling: 1. No, petitioner is not stooped from claiming
that that the Employees’ Trust Fund is the beneficial
owner of 49.59% of the MBP lot and that VMC merely
held 49.59% of the MBP lot in trust for the Employees’
Trust Fund .
Article 1452 of the Civil Code provides:
Art. 1452. If two or more persons agree to purchase a
property and by common consent the legal title is taken
in the name of one of them for the benefit of all, a trust
is created by force of law in favor of the others in
proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner
needs to show is that there is “common consent”
among the purchasing co-owners to put the legal title to
the purchased property in the name of one co-owner
for the benefit of all. Once this “common consent” is
shown, “a trust is created by force of law.” The BIR
has no option but to recognize such legal trust as well as
the beneficial ownership of the real owners because the
trust is created by force of law. The fact that the title is
registered solely in the name of one person is not
conclusive that he alone owns the property.
Thus, this case turns on whether petitioner can
sufficiently establish that petitioner, as trustee of the
Employees’ Trust Fund, has a common agreement with
VMC and VFC that petitioner, VMC and VFC shall jointly
purchase the MBP lot and put the title to the MBP lot in
the name of VMC for the benefit petitioner, VMC and
VFC.
The CTA ruled that the documents presented by
petitioner cannot prove its co-ownership over the MBP
lot especially that the TCT, Deed of Absolute Sale and
the Remittance Return disclosed that VMC is the sole
owner and taxpayer. However, the appellate courts
failed to consider the genuineness and due execution of
the notarized Memorandum of Agreement
acknowledging petitioner’s ownership of the MBP lot.
The BIR failed to present any clear and convincing
evidence to prove that the notarized Memorandum of
Agreement is fictitious or has no legal effect. Likewise,
VMC, the registered owner, did not repudiate
petitioner’s share in the MBP lot. Further, Citytrust, a
reputable banking institution, has prepared a Portfolio
Mix Analysis for the years 1994 to 1997 showing that
petitioner invested P5,504,748.25 in the MBP lot.
Absent any proof that the Citytrust bank records have
been tampered or falsified, and the BIR has presented
none, the Portfolio Mix Analysis should be given
probative value.
2. Income from Employees’ Trust Fund is Exempt from
Income Tax
Tax exemption cannot arise by implication and
any doubt whether the exemption exists is strictly
construed against the taxpayer. Further, the findings of
the CTA, which were affirmed by the CA, should be
given respect and weight in the absence of abuse or
improvident exercise of authority.
Section 53(b) and now Section 60(b) of the Tax
Code provides:
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - x x x
(B) Exception. - The tax imposed by this Title shall not
apply to employee’s trust which forms part of a
pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose
of distributing to such employees the earnings and
principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust
instrument it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to
be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive
benefit of his employees: Provided, That any amount
actually distributed to any employee or distributee
shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount
contributed by such employee or distributee.
Petitioner’s Articles of Incorporation state that
its purpose is to hold legal title to, control, invest and
administer in the manner provided, pursuant to
applicable rules and conditions as established, and in
the interest and for the benefit of its beneficiaries
and/or participants,the private pension plan as
established for certain employees of Victorias Milling
Company, Inc., and other pension plans of Victorias
Milling Company affiliates and/or subsidiaries; and The
SC has long been settled the tax-exemption privilege of
income derived from employee's trusts.
The tax-exempt character of the Employees'
Trust Fund has long been settled. It is also settled that
petitioner exists for the purpose of holding title to, and
administering, the tax-exempt Employees’ Trust Fund
established for the benefit of VMC’s employees. As
such, petitioner has the personality to claim tax
refunds due the Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and
Investment Manager of Various Retirement Funds v.
Commissioner of Internal Revenue, the CTA granted
Citytrust’s claim for refund on withholding taxes paid on
the investments made by Citytrust in behalf of the trust
funds it manages, including petitioner.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote
the BIR to request for a ruling exempting it from the
payment of withholding tax on the sale of the land by
various BIR-approved trustees and tax-exempt private
employees' retirement benefit trust funds represented
by Citytrust. The BIR ruled that the private employees
benefit trust funds, which included petitioner, have
met the requirements of the law and the regulations
and therefore qualify as reasonable retirement benefit
plans within the contemplation of Republic Act No.
4917 (now Sec. 28(b)(7)(A), Tax Code). The income from
the trust fund investments is therefore exempt from the
payment of income tax and consequently from the
payment of the creditable withholding tax on the sale of
their real property.
Thus, the documents issued and certified by
Citytrust showing that money from the Employees’
Trust Fund was invested in the MBP lot cannot simply
be brushed aside by the BIR as self-serving, in the light
of previous cases holding that Citytrust was indeed
handling the money of the Employees’ Trust
Fund. These documents, together with the notarized
Memorandum of Agreement, clearly establish that
petitioner, on behalf of the Employees’ Trust Fund,
indeed invested in the purchase of the MBP lot. Thus,
the Employees' Trust Fund owns 49.59% of the MBP lot.
Since petitioner has proven that the income from
the sale of the MBP lot came from an investment by the
Employees' Trust Fund, petitioner, as trustee of the
Employees’ Trust Fund, is entitled to claim the tax
refund of P3,037,500 which was erroneously paid in the
sale of the MBP lot.
HSBC vs. CIR, G.R. No. 166018, June 4, 2014
FACTS: HSBC performs custodial services on behalf of its
investor-clients, corporate and individual, resident or
non-resident of the Philippines, with respect to their
passive investments in the Philippines, particularly
investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the
collection/payment agent with respect to dividends and
other income derived from its investor-clients’ passive
investments. HSBC’s investor-clients maintain Philippine
peso and/or foreign currency accounts, which are
managed by HSBC through instructions given through
electronic messages. The said instructions are standard
forms known in the banking industry as SWIFT, or
"Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and
other investment in securities, the investor-clients
would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency
accounts and to pay the purchase price therefor upon
receipt of the securities. Pursuant to the electronic
messages of its investor-clients, HSBC paid
Documentary Stamp Tax (DST) from September to
December 1997 and also from January to December
1998.
On August 23, 1999, the BIR Commissioner issued BIR
Ruling No. 132-99 to the effect that instructions or
advises from abroad on the management of funds
located in the Philippines which do not involve transfer
of funds from abroad are not subject to DST.
With the BIR Ruling as its basis, HSBC filed an
administrative claim for the refund for the period
covering September to December 1997 and January to
December 1998.
As its claims for refund were not acted upon by the BIR,
HSBC subsequently brought the matter to the CTA.The
CTA ruled that HSBC is entitled to a tax refund or tax
credit because Sections 180 and 181 of the 1997 Tax
Code do not apply to electronic message instructions
transmitted by HSBC’s non-resident investor-clients.
However, the CA reversed both decisions of the CTA
and ruled that the electronic messages of HSBC’s
investor-clients are subject to DST
ISSUE: WON electronic message are considered
transactions pertaining to negotiable instruments that is
subject to DST?
RULING: No. The electronic messages of HSBC’s
investor-clients containing instructions to debit their
respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as
such instructions are "parallel to an automatic bank
transfer of local funds from a savings account to a
checking account maintained by a depositor in one
bank." Electronic messages "cannot be considered
negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred" and
that the said electronic messages are "mere
memoranda" of the transaction consisting of the "actual
debiting of the [investor-client-payor’s] local or foreign
currency account in the Philippines" and "entered as
such in the books of account of the local bank," HSBC.
DST is levied as an excise tax on the privilege of the
drawee to accept or pay a bill of exchange or order for
the payment of money, which has been drawn abroad
but payable in the Philippines, and on the
corresponding privilege of the drawer to have
acceptance of or payment for the bill of exchange or
order for the payment of money which it has drawn
abroad but payable in the Philippines.
In this case, there had been no acceptance of a bill of
exchange or order for the payment of money on the
part of HSBC. There was no bill of exchange or order for
the payment drawn abroad and made payable here in
the Philippines. Thus, there was no acceptance as the
electronic messages did not constitute the written and
signed manifestation of HSBC to a drawer's order to pay
money. As HSBC could not have been an acceptor, then
it could not have made any payment of a bill of
exchange or order for the payment of money drawn
abroad but payable here in the Philippines. Hence, HSBC
could not have been held liable for DST as it is not "a
person making, signing, issuing, accepting, or,
transferring" the taxable instruments under the said
provision.
CIR. v La Tondeña Distillers Inc (Now Ginebra San
Miguel)
G.R. No. 175188
July 15, 2015
Facts:
In 2001, respondent La Tondena entered into a Plan of
Merger with Sugarland Beverage Corp., SMC Juice Inc.,
and Metro Bottled Water Corp of which assets and
liabilities of these three were absorbed by respondent,
newly name Ginebra San Miguel. Respondent requested
from BIR a confirmation of the tax-free nature of the
merger. BIR ruled there shall be no gain or loss
recognized by the absorbed corps., but the transfer of
assets shall be subject to Documentary Stamp Tax (DST)
under Sec. 196 of NIRC. In 2004, Respondent filed an
administrative complaint for tax refund or tax credit for
P14,140,980 for the paid DST for 2001. CTA found
respondent entitle to such. CTA en banc found no
reversible error. Petitioner argued that DST is imposed
on all conveyances of realty, including realty transfer
during a corporate merger. CIR also claimed that
respondent cannot benefit from the subsequent
enactment of RA 9243 as laws apply prospectively.
ISSUES:
1. Is the conveyance of real properties in a merger
exempt from DST?
2. Is La Tondeña entitled to a claim for tax refund or tax
credit?
HELD:
1. Yes. It is already ruled in CIR v. Pilipinas Shell
Petroleum Corp. that Section 196 of the NIRC does not
include the transfer of real property from one
corporation to another pursuant to a merger. The
provision would clearly show it pertains only to sale
transactions where real property is conveyed to a
purchaser for a consideration. The phrase "granted,
assigned, transferred or otherwise conveyed" is
qualified by the word "sold".
In a merger:
- the real properties are not deemed "sold" to the
surviving corporation and;
- the latter could not be considered as "purchaser" of
realty since the real properties subject of the merger
were merely absorbed by the surviving corporation by
operation of law and;
- these properties are deemed automatically transferred
to and vested in the surviving corporation without
further act or deed.
Thus, the transfer of real properties to the surviving
corporation in pursuance of a merger is not subject to
documentary stamp tax which is imposed only on all
conveyances, deeds, instruments or writing where
realty sold shall be conveyed to a purchaser or
purchasers.
Respondent did not file its claim for tax refund or tax
credit based on the exemption found in RA 9243, rather
on the ground that Section 196 of the MRC does not
include the transfer of real property pursuant to a
merger. RA 9243 was mentioned only to emphasize that
"the enactment of the said law now removes any doubt
and had made clear that the transfer of real properties
as a consequence of merger or consolidation is not
subject to [DST]."
Taxes must not be imposed beyond what the law
expressly and clearly declares, as tax laws must be
construed strictly against the State and liberally in favor
of the taxpayer.
2. Yes. CIR's Petition is denied.
Agra v COA
FACTS:
On July 1, 1989, RA 6758 or the Compensation
and Position Classification Act of 1989 took effect.
Section 12 of which states that:
“Section 12. Consolidation of allowances and
compensation – All allowances, except for
representation and transportation allowances; including
clothing and laundry allowances; subsistence allowance
of marine officers and crew on board government
vessels and hospital personnel; hazard pay; allowances
of foreign service personnel stationed abroad; and such
other additional compensation not otherwise specified
herein as may be determined by the DBM, shall be
deemed included in the standardized salary rates herein
prescribed. Such other additional compensation,
whether in cash or in kind, being received by the
incumbents only as of July 1, 1989 not integrated into
the standardized salary rates shall continue to be
authorized.
Thereafter, the DBM, pursuant to its authority
to implement RA 6758, issued DBM-CCC No. 10
otherwise known as the IRR of the said law. Pertinent
provision of the IRR is its Section 5.5 which states that:
“…5.5. The following allowances/fringe benefits
authorized to GOCCs/GFIa pursuant to the
aforementioned issuances ARE NOT likewise integrated
in the basic salary and allowed to be continued only for
incumbents of positions as of June 30, 1989 who are
authorized and actually receiving said
allowances/benefits as of said date, at the same terms
and conditions prescribed in said issuances:
5.5.1 Rice subsidy…”
A group of NEA employees who were hired
after October 31, 1989 claimed that they did not receive
rice allowances which prompted their filing of a special
civil action for mandamus against NEA before the
Regional Trial Court. The RTC rendered a decision in
favor of the NEA Employees on December 15, 1999. The
branch clerk of court issued a certification stating that
such judgement has become final and executory.
NEA filed an appeal to the CA, however the CA
ordered the extinguishment of the funds of NEA. Thus,
NEA filed an appeal before the Supreme Court.
Meanwhile the RTC held in abeyance the execution of
the December 15, 199 decision.
The SC reversed and set aside the CA decision
and reinstated the RTC decision stating, among other
things:
“…Under Commonwealth Act No. 327, as amended, by
Section 26 of P.D. No. 1445, it is the COA which has
primary jurisdiction to examine, audit and settle “all
debts and claims of any sort” due from or owing the
Government or any of its subdivisions, agencies and
instrumentalities, including government-owned or
control corporations and their subsidiaries. With
respect to money claims arising from the
implementation of RA No 6758, their allowance or
disallowance is for the COA to decide, subject only to
the remedy of appeal by petition for certiorari to this
Court…”
Thereafter in 2001 the Office of the
Government Corporate Counsel (OGCC) in response to
the request of the then NEA Administrator stated that
since there was no appeal made in the December 15,
1999 decision by the RTC, such had become the law of
the case which must now be applied. Pursuant to such
opinion, the NEA issued Resolution No. 29 approving
the entitlement of rice allowances to NEA employees
hired after October 31, 1989. However, the resident
auditor of COA did not allow the payment of the rice
allowance for those who are not incumbent as of June
30, 1989.
Motion for reconsideration was filed before the
COA but the same was denied, and hence this petition.
Issue: Whether or not the NEA employees hired after
June 30, 1989 are entitled to rice allowance?
Ruling: No. Section 5.5 of DBM-CCC No. 10 [SEE
PROVISON IN FACTS] is clear that rice subsidy is one of
the benefits that will be granted to employees of
GOCCs or GFIs only if they are incumbents as of July 1,
1989.
The Court has defined an incumbent as a person
who is in present possession of an office; one who is
legally authorized to discharge the duties of an
office.[52] There is no question that petitioners were not
incumbents as of June 30, 1989. The Court has likewise
characterized NEA as a GOCC in National Electrification
Administration v. Morales. Thus, Section 5.5 issued
pursuant to the authority given to the DBM under
Section 12 of Republic Act No. 6758, was correctly
applied by the COA.
As petitioners were hired after June 30, 1989,
the COA was correct in disallowing the grant of the
benefit to them, as they were clearly not entitled to
it. The Court has repeatedly held that under Section 12
of Republic Act No. 6758***, the only requirements for
the continuous grant of allowances and fringe benefits
on top of the standardized salary rates for employees of
GOCCs and GFIs are as follows: (1) the employee must
be an incumbent as of July 1, 1989; and (2) the
allowance or benefit was not consolidated in the
standardized salary rate as prescribed by Republic Act
No. 6758.
*** Section 12. Consolidation of Allowances and
Compensation. - All allowances, except for
representation and transportation allowances; clothing
and laundry allowances; subsistence allowance of
marine officers and crew on board government vessels
and hospital personnel; hazard pay; allowances of
foreign service personnel stationed abroad; and such
other additional compensation not otherwise specified
herein as may be determined by the DBM, shall be
deemed included in the standardized salary rates herein
prescribed. Such other additional compensation,
whether in cash or in kind, being received by
incumbents only as of July 1, 1989 not integrated into
the standardized salary rates shall continue to be
authorized.
Existing additional compensation of any national
government official or employee paid from local funds
of a local government unit shall be absorbed into the
basic salary of said official or employee and shall be
paid by the National Government.