CASE DIGESTS

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01 G.R. No. 160756 March 9, 2010CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., vs. THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO

CORONA, J.:

Chamber of Real Estate and Builders’ Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes, re: and on the following arguments:

that the imposition of minimum corporate income tax (MCIT) on corporations violates the due process clause because it levies income tax even if there is no realized gain.

it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law; that gross income as defined, only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account, thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not “realized gain.”

being imposed and collected even when there is actually a loss, or a zero or negative taxable income

that the creditable withholding tax (CWT) on sales of real properties classified as ordinary assets insofar as the collection of CWT on the sale of real properties categorized as ordinary assets, ignore the different treatment by RA 8424 of ordinary assets and capital assets, that the Secretary of Finance has no authority to collect CWT and to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets, all violate the equal protection clause because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.

Disregarded distinctions: ( a) the revenue regulations use

gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable period.

arbitrarily shifted the tax base of a real estate business’ income tax from net income to GSP or FMV of the property sold

deprives of their property without due process of law because gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned.

ISSUES: imposition of the MCIT on domestic corporations is unconstitutional

and imposition of CWT on income from sales of real properties classified as

ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF MCIT & CWT:(A)MCIT - Republic Act (RA) 8424 :

Section 27 (E) - MCIT on Domestic Corporations: Under the MCIT scheme, a corporation, beginning on its fourth year of

operation, is assessed an MCIT of 2% of its gross income when it has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation. Section 27(A),

If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.

Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.

The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

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mpnanocpa-ue – college of lawtaxation law review Gross Income shall mean gross sales less sales returns, discounts and

allowances and cost of goods sold. “Cost of goods sold” shall include all business expenses directly incurred to

produce the merchandise to bring them to their present location and use.

(B)CWT - RR No. 2-98Section 2.57.2 (J) income payments from the sale, exchange or transfer of real property, other

than capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT.

(as amended) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following schedule:

Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations.

Exempt

With a selling price of five hundred thousand pesos (P500,000.00) or less.

1.50%

With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00).

3.00%

With selling price of more than two million pesos (P2,000,000.00)

5.00%

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment.

HELD: Petition dismissed.

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when paramount public interest is involved. The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.

Concept and Rationale of the MCITTo further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:1. recognizing the birth pangs of businesses and the reality of the need to

recoup initial major capital expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation commenced its operations. This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT.

2. the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years.

3. since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.

(A) MCIT Is Not Violative of Due Process 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. It 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.

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. It 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 corporation’s gross income.

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mpnanocpa-ue – college of lawtaxation law reviewBesides, 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.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

(B) RRs 2-98, 6-2001 and 7-2003 On Secretary of Finance authority to issue RR 2-98:The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. It is well-settled that an administrative agency cannot amend an act of Congress.

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424

Effects of the CWT: The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year. 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.

On Distinctions between Ordinary and Capital Assets:

FWT (6% on the gain of Capital Assets - Section 27(D)(5) of RA 8424)

CWT (GSP or FMV of the real property, Ordinary Assets - RR 2-98)

a) The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.

a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

b)The liability for payment of the tax rests primarily on the payor as a withholding agent.

b) Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income. The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

c) The payee is not required to file an income tax return for the particular income.#

c) The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended.

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax collection.

On Deprivation of Property without Due Process:The CWT does not impose new taxes nor does it increase taxes. It relates entirely to the method and time of payment. CWT is applied only on the amounts actually received or receivable by the real estate entity.

On Violation of Equal Protection:

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mpnanocpa-ue – college of lawtaxation law reviewThe equal protection clause under the Constitution means that “no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.” Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.

Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class.

The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. As compared with those manufacturing enterprises, the real estate business which is engaged in the sale of a real property receives bigger income and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. Manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.

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02 G.R. No. 180356 February 16, 2010SOUTH AFRICAN AIRWAYS vs. COMMISSIONER OF INTERNAL REVENUE

VELASCO, JR., J.:

Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa with principal office is located at International Airport, South Africa. In the Philippines, it is an internal air carrier having no landing rights in the country but with general sales, Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents for compensation or commission for petitioner’s off-line flights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. It is not registered with the Securities and Exchange Commission as a corporation, branch office, or partnership and is not licensed to do business herein.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights based on 2.5% Gross Philippine Billings (GPB) for a total of amount P1,727,766.38 (claimed as refund). But on Feb. 5, 2003, it filed with BIR a claim for refund for the erroneous payment of tax based on GPB, but the same was unheeded by the BIR. So, it filed a petition for review with the CTA for the refund which denied the same and held that it be liable to pay a tax of 32% on its income derived from the sales of passage documents in the Philippines.

legal implication of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB, with the new definition of GPB, it is no longer liable under Sec. 28(A)(3)(a); that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax.

existence of such liability would preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a), thus, off-setting is unavailing.

ISSUES: income derived by petitioner from the sale of passage documents covering

petitioner’s off-line flights is Philippine-source income subject to Philippine

income tax. as an off-line international carrier selling passage documents through an

independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.

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.

HELD: Petition is granted and remanded to CTA for proper determination of the tax refund.

“Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly.”

On the proper taxability of the subject corporation:Sec. 28(A)(3)(a), 1997 NIRC provides that an international carrier doing business in the Philippines shall pay a tax of 2 1/2% on its ‘Gross Philippine Billings’, as to refer to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document….

Sec. 28(A)(1), 1997 NIRC provides for the rates of income tax on Resident Foreign Corporations shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. The logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)(1).

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The general rule in this case at bar 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, thus, it 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.

The correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% 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 rate of 32% of such income.

On the claim for refund:Art. 1279 NCC provides for requisites for compensation may be proper: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. 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.

Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was correct. It would not be proper to deny such claim without making a determination of petitioner’s liability under Sec. 28(A)(1). It must be remembered that the 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 petitioner’s liabilities under the two provisions would be the same. Thus, there is a need to make a determination of petitioner’s liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. There is a necessity to receive evidence to establish such amount vis-à-vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.

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03 G.R. No. 163072 April 2, 2009MANILA INTERNATIONAL AIRPORT AUTHORITY vs. CITY OF PASAY

CARPIO, J.:

Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO 903), the Revised Charter of the Manila International Airport Authority. It owns approximately 600 hectares of land, including the runways, the airport tower, and other airport buildings, all are along the border between Pasay City and Parañaque City.

On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the City of Pasay for the taxable years 1992 to 2001 = Tax Due of P373,466,110.13 + Penalties of P1,016,213,836.33 = TOTAL of P642,747,726.20. The City of Pasay then issued notices of levy and warrants of levy for the NAIA Pasay properties and threatened to sell at public auction the NAIA Pasay properties if the delinquent real property taxes remain unpaid.

On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and injunction with prayer for preliminary injunction or temporary restraining order, which sought to enjoin the City of Pasay from imposing real property taxes on, levying against, and auctioning for public sale the NAIA Pasay properties.

CA dismissed the petition and upheld the power of the City of Pasay to impose and collect realty taxes on the NAIA Pasay properties, on the basis that MIAA as a government-owned corporation, its tax exemption under Section 21 of EO 903 has been withdrawn upon the effectivity of the Local Government Code.

ISSUE: MIAA’s exemption from real property tax.

HELD: Petition is granted and set aside the CA decision. MIAA shall not be subject to LGUs real property tax except insofar as real properties leased to private parties.

On the nature of MIAA:MIAA is not a government-owned or controlled corporation under Section 2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA is a government instrumentality vested with corporate powers and performing essential public services pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code.

Instrumentality refers to any agency of the national Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations.Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic airport for public use.

On its exemption to taxes imposed by LGUs:As a government instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of the Local Government Code because it is not a taxable entity under the said law. Such exception applies only if the beneficial use of real property owned by the Republic is given to a taxable entity.

The Airport Lands and Buildings of MIAA are properties devoted to public use and thus are properties of public dominion. Properties of public dominion are owned by the State or the Republic which are exempt from real estate tax under Section 234(a) of the LGC. Except those real properties leased to taxable persons like private parties shall be taxed.

Section 133(o) of the Local Government Code: Taxes which cannot be imposed by the LGUs:

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(o) taxes, fees and charges of any kind on the national government, its agencies and instrumentalities and LGUs

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04 G.R. No. 155491 September 16, 2008SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO, represented Mayor DUTERTE, and the SANGGUNIANG PANLUNGSOD

NACHURA, J.: On March 27, 1992, Smart obtained its legislative franchise under R.A. No. 7294. Sec. 9 of said law provides that “The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)”On January 1, 1992, the Local Government Code (R.A. No. 7160) took effect. Section 137, in relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the local government units. R.A. No. 7716 or the VAT Law was enacted which specifically expressed under Section 20, repealing provisions of all special laws (that includes the legislative franchise R.A. No. 7294, a special law) relative to the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent with it. It is in effect, rendered ineffective the “in lieu of all taxes” clause in R.A. No. 7294.

Tax Code of the City of Davao, Section 1, Article 10 thereof, provides: “Notwithstanding any exemption granted by any law or other special law, there

is hereby imposed a tax on businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City. Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations under the Tax Code of the City of Davao and contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds:

the issuance of its franchise under Republic Act (R.A.) No. 7294, subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160

that the “in lieu of all taxes” clause in Section 9 of its franchise exempts it from all taxes, both local and national, except the national franchise tax (now VAT), income tax, and real property tax

Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions;

not covered bec. The franchise was granted after the effectivity of the LGC

the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the “ in lieu of all taxes” clause found in Section 9 of R.A. No. 7294; and

only taxes it may be made to bear under its franchise are the national franchise tax (now VAT), income tax, and real property tax

exempt from the local franchise tax because the “in lieu of taxes” clause in its franchise does not distinguish between national and local taxes.

the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts.

franchise is in the nature of a contract between the government and Smart.

Respondent invoked its power granted by the Constitution to local government units to create their own sources of revenue.

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mpnanocpa-ue – college of lawtaxation law reviewRTC denied the petition on the ground that petitioner failed to prove that it is exempt from tax applying strictissimi juris against the taxpayer and liberally in favor of the taxing authority. On the issue of violation of the non-impairment clause of the Constitution, it cited Mactan Cebu International Airport Authority v. Marcos and declared that the city’s power to tax is based not merely on a valid delegation of legislative power but on the direct authority granted to it by the fundamental law. That while such power may be subject to restrictions or conditions imposed by Congress, any such legislated limitation must be consistent with the basic policy of local autonomy. ISSUES:

Exemption from Franchise Tax under Section 9, RA 7294 which contains “in lieu of taxes” clause “In lieu of taxes” clause applies to national taxes or local taxes or both? Violation to the Constitutional prohibition against “impairment of contracts”

HELD: Petition is denied.

On “In lieu of all taxes“ Clause in RA 7294:R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the “in lieu of all taxes” provision in the franchise of Smart would include exemption from local or national taxation. What is clear is that Smart shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal. In this case, the doubt must be resolved in favor of the City of Davao. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. It is clear that the “in lieu of all taxes” clause apply only to taxes under the NIRC and not to local taxes. It is not even applied to income tax, as shown in the provision itself, to wit:

proviso in the first paragraph of Section 9, Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code."

second paragraph of Section 9, speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code."

same paragraph, declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue."

If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes.

It should be noted that the “in lieu of all taxes” clause in R.A. No. 7294 has become functus officio with the abolition of the franchise tax on telecommunications companies. Currently, Smart along with other telecommunications companies pays the uniform 10% value-added tax. The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross receipts derived from the sale or exchange of services, as provided in R.A. No. 7716, as amended by the Expanded Value Added Tax Law (R.A. No. 8241).

On the burden of grant to Tax exemptions: Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of the taxing authority. They can only be given force when the grant is clear and categorical. If the intention of the legislature is open to doubt, then the intention of the legislature must be resolved in favor of the State. On impairment of contracts:There is no violation of Article III, Section 10 of the 1987 Philippine Constitution. The franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision on such exemption under the franchise, we are constrained to rule against it. Due to this ambiguity in the law, the doubt must be resolved against the grant of tax exemption.

Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration.

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05 G.R. No. 171586 July 15, 2009NATIONAL POWER CORPORATION vs. PROVINCE OF QUEZON and MUNICIPALITY OF PAGBILAO

BRION, J.:

NPC is a GOCC mandated by law to undertake, among others, the production of electricity from nuclear, geothermal, and other sources, and the transmission of electric power on a nationwide basis. To pursue this mandate, it entered into an Energy Conversion Agreement (ECA) with Mirant Pagbilao Corporation (Mirant) on November 9, 1991. Based on the agreement, Mirant will build and finance a coal-fired thermal power plant on the lots owned by the NPC in Pagbilao, Quezon for the purpose of converting fuel into electricity and operate and maintain the power plant for 25 years while NPC will supply the necessary fuel to be converted by Mirant into electric power, take the power generated, and use it to supply the electric power needs of the country. At the end of the 25-year term, Mirant will transfer the power plant to the NPC without compensation. whose tax liabilities the NPC has contractually assumed.Among the obligations undertaken by the NPC under the ECA was to contractually assume tax liabilities of Mirant. When an tax assessment came, NPC then filed a petition before the Local Board of Assessment Appeals (LBAA) to Declare Exempt from Payment of Property Tax on Machineries and Equipment Used for Generation and Transmission of Power, under Section 234(c) of RA 7160 [LGC], located at Pagbilao, Quezon.

Section 234. Exemptions from Real Property Tax. – (c) All machineries and equipment that are actually, directly, and exclusively used by local water districts and government-owned or –controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (e) Machinery and equipment used for pollution control and environmental protection.Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including government-owned or –controlled corporations are hereby withdrawn upon the effectivity of the Code.

contends that it is beneficial owner of the plant, since Mirant will acquire ownership thereof at the end of 25 years; that it has the right to control and supervise the construction and operation of the plant, and that Mirant has retained only naked title to it

LBAA however dismissed its petition, which when appealed before the Central Board of Assessment Appeals (CBAA) then to the CTA, both affirmed the LBAAs ruling.

ISSUE: NPC as GOCC is tax-exempt under Section 234 of the LGC.

HELD: Petition is denied.

On the right to protest the assessment:A taxpayer's failure to question the assessment before the LBAA renders the assessment of the local assessor final, executory, and demandable, thus precluding the taxpayer from questioning the correctness of the assessment, or from invoking any defense that would reopen the question of its liability on the merits. Section 226 of the LGC provided 2 entities vested with the personality to contest an assessment: (1) the owner and (2) the person with legal interest in the property.

A person legally burdened with the obligation to pay for the tax imposed on a property has legal interest in the property and the personality to protest a tax assessment on the property.

Rules governing an assessment protest provided below:SECTION 226. Local Board of Assessment Appeals. - Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his

SECTION 250. Payment of Real Property Taxes in Instalments. - The owner of the real property or the person having legal interest therein may pay the basic real property tax xxx due thereon without interest in four (4) equal

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property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of the province or city xxx.

instalments xxx.

The liability for taxes generally rests on the owner of the real property at the time the tax accrues. However, personal liability for realty taxes may also expressly rest on the entity with the beneficial use of the real property, such as the tax on property owned by the government but leased to private persons or entities, or when the tax assessment is made on the basis of the actual use of the property.

In the present case, the NPC is neither the owner nor the possessor/user of the subject machineries because under the ECA, the power plant’s machineries clearly vest their ownership with Mirant, as provide in Article 2.12.…“From the Effective Date until the Transfer Date [that is, the day following the last day of the 25-year period], [Mirant] shall, directly or indirectly, own the Power Station and all the fixtures, fittings, machinery and equipment on the Site or used in connection with the Power Station which have been supplied by it or at its cost….”

Thus, NPC does not have the "legal interest" that the law and jurisprudence require to give it personality to protest the tax imposed by law on Mirant.

On liability for taxes:NPC indeed assumed responsibility for the taxes due on the power plant and its machineries, specifically, "all real estate taxes and assessments, rates and other charges in respect of the site, the buildings and improvements thereon and the [power plant]." The tax liability refers to the liability arising from law that the local government unit can rightfully and successfully enforce, not the contractual liability that is enforceable between the parties to a contract. By law, the tax liability rests on Mirant based on its ownership, use, and possession of the plant and its machineries. NPC’s contractual liability alone cannot be the basis for the enforcement of tax liabilities against it by the local government unit.

In the present case, the NPC is neither the owner, nor the possessor or user of the property taxed. No interest on its part thus justifies any tax liability on its part other than its voluntary contractual undertaking. Under this legal situation, only Mirant as the contractual obligor, not the local government unit, can enforce the tax liability that the NPC contractually assumed. The Municipality of Pagbilao and the Province of Quezon), as third parties to the ECA, cannot demand payment from the NPC on the basis of Article 11.1 of the ECA alone.

Corollarily, the local government units can neither be compelled to recognize the protest of a tax assessment from the NPC, an entity against whom it cannot enforce the tax liability.

On tax exemption:Is completely without merit. The claim exemption under Section 234(c) of the LGC, the GOCC must be the entity actually, directly, and exclusively using the real properties, and the use must be devoted to the generation and transmission of electric power. Neither the NPC nor Mirant satisfies both requirements. Although NPC plant’s machineries are devoted to the generation of electric power, it is Mirant which uses and operates them, which thus manifest that NPC does not actually, directly, and exclusively use them.

Further, based on the clear wording of the law, it is the machineries that are exempted from the payment of real property tax, not the water or electricity that these machineries generate and distribute.

The test of exemption is the use, not the ownership of the machineries devoted to generation and transmission of electric power. The nature of the NPC’s ownership of these machineries only finds materiality in resolving the NPC’s claim of legal interest in protesting the tax assessment on Mirant.

Lastly, from the points of view of essential fairness and the integrity of our tax system, we find it essentially wrong to allow the NPC to assume in its BOT contracts the liability of the other contracting party for taxes that the government can impose on that other party, and at the same time allow NPC to turn around and say that no taxes should be collected because the NPC is tax-exempt as a government-owned and controlled corporation.

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06 G.R. No. 158885 April 2, 2009FORT BONIFACIO DEVELOPMENT CORPORATION vs.COMMISSIONER OF INTERNAL REVENUE, et. al.

TINGA, J.:

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Fort Bonifacio Development Corporation (FBDC) is engaged in the development and sale of real property. On 8 February 1995, FBDC acquired by way of sale from the national government, a vast tract of land that formerly formed part of the Fort Bonifacio military reservation, located in what is now the Fort Bonifacio Global City (Global City) in Taguig City. Since the sale was consummated prior to the enactment of Rep. Act No. 7716, no VAT was paid thereon. FBDC then proceeded to develop the tract of land, and from October, 1966 onwards it has been selling lots located in the Global City to interested buyers.

After the effectivity of Rep. Act No. 7716, real estate transactions of FBDC have since been made subject to VAT, of which remits to BIR output VAT payments it received from the sale. It invoked its right to avail of the transitional input tax credit and accordingly submitted an inventory list of real properties it owned, with a total book value ofP71,227,503,200.00.On the sale of 2 parcels of land, on separate transactions:On 14 October 1996, FBDC executed in favor of Metro Pacific Corporation 2 contracts to sell, separately conveying 2 parcels of land within the Global City in consideration of the purchase prices at P1,526,298,949.00 and P785,009,018.00, both payable in installments.

For the fourth quarter of 1996, FBDC computed VAT as follows:Sales – invoice price P3,498,888,713.60 / 10% VAT 110%Sales – sales price 3,180,807,921.45Output VAT payable (10%) P 318,080,792.14 Less: Input Taxes

Regular Input Tax Credit (10%) P 20,326,539.69 Transitional/presumptive Input Tax Credit (8%) 28,413,783.00

Input VAT Payable P 48,740,322.69 VAT Paid P 269,340,469.45

Between July and October 1997, FBDC sent 2 letters to the BIR requesting appropriate action on whether its use of its presumptive input VAT on its land inventory but the same was disallowed.

On deficiency of VAT payment, 4 th qtr. 1996:

Then, BIR issued Pre-Assessment Notice (PAN) dated 23 December 1997 for deficiency VAT for the 4th quarter of 1996, followed by a letter from the Commissioner disallowing the presumptive input tax credit arising from the land inventory on the basis of Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95. The Assessment Notice shows P45,188,708.08 of deficiency VAT for the 4th quarter of 1996, inclusive of surcharge, interest and penalty.

Before the CTA, affirms the assessment made by BIR, of which the CA affirms CTAs decision but removing the surcharge, interests and penalties,

On availment of the transitional/presumptive input tax credit, 3 rd qtr. 1997: For the third quarter of 1997, FBDC paid P347,741,695.74, out of the sales and lease of lots P3,591,726,328.11, utilizing the regular input tax credit of P19,743,565.73 on purchases of goods and services

It then filed a claim for refund of the amount of P347,741,695.74 on the ground the its input tax credit (with the 8% of the Beg. Inventory transitional input VAT) was more than enough to offset the VAT paid by it for the third quarter of 1997.CTA denied the claim for refund, which was the same affirmed by the CA.

ISSUES: Implication of the Transitional/ Presumption Input VAT on the sale of

real property: Deficiency of payment on the assessment Claim for refund

HELD: This consolidated petitions are granted. The assailed decisions of the CTA and CA are reversed and set aside, and are (a) restrained from collecting from FBDC P 28,413,783.00 representing the transitional input tax credit due, 4th qtr. 1996; and (b) directed to refund to FBDC P347,741,695.74 paid as output VAT, 3rd qtr. 1997 for the third quarter of 1997 in light of the persisting transitional input tax credit available to FBDC

Evolution of the VAT system – Transitional / Presumptive Input Taxes:VAT system was first introduced in the Philippines on 1 January 1988 pursuant to EO 273, with the tax imposable on "any person who, in the course of trade or

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mpnanocpa-ue – college of lawtaxation law reviewbusiness, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods."

Section 25 of E.O. No. 273 provides for the "Transitory Provisions", which were never incorporated in the Old NIRC, provides that:

All VAT-registered persons shall be allowed transitional input taxes which can be credited against output tax in the same manner as provided in Sections 104 of the NIRC, as follows:

(1) The balance of the deferred sales tax credit account as of December 31, 1987 which are accounted for in accordance with regulations prescribed therefor;

(2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit; and

(3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 as goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.

Tax credit prescribed in paragraphs (2) and (3) above shall be allowed only to a VAT-registered person who files an inventory of the goods referred to in said paragraphs as provided in regulations.

On 1 January 1996, RA No. 7716 took effect amending provisions of the Old NIRC (Section 100 NIRC) principally by restructuring the VAT system, of which VAT was also imposed for the first time on the sale of real properties. But Section 105 of the NIRC, on the transitional input tax credit, had remained intact despite its passage.

With the passage of the new NIRC or RA No. 8424, section on the transitional input tax credit was renumbered from Section 105 of the Old NIRC to Section 111(A) of the New NIRC, which provides that:

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eight percent (8%) of the value of such inventory or the actual value-

added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.7 (Emphasis supplied).

(B) Presumptive Input Tax Credits. - (1) Persons or firms engaged in the processing of

sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production…..

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual input taxes therefrom.

Equal application of Section 100 NIRC:RA No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held for lease in the ordinary course of trade or business" that are subject to the VAT, and not when the real estate transactions are engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It equally applies to merchants of other goods or properties available in the market.

Had any differentiation between the treatment of real properties or real estate dealers and the treatment of the transactions involving other commercial goods, then such differing treatment would have constituted in RA No. 7716. Rationale of the Transitional Input Tax:To address the inequity of Section 25 - Transitory provision in EO 273 (shift from Sales Tax to VAT), authorizes

"presumptive input tax” of 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale, the tax on which was not taken up or claimed as deferred sales tax credit", and

a similar “presumptive input tax” of 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit.

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mpnanocpa-ue – college of lawtaxation law reviewHowever, it is not merely “inequity” that is intended to be cured because Congress has reenacted the transitional input tax credit several times, thus, the transitional input tax credit is not confined to the transition from sales tax to VAT. In fact, Section 105 NIRC (old) that it is available to (1) a person who becomes liable to VAT; or (2) any person who elects to be VAT-registered.

The clear language of the law entitles new trades or businesses to avail of the tax credit once they become VAT-registered. The transitional input tax credit, whether under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person such as when a business as it commences operations.

Persons to avail the Presumptive Input Tax:It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies.

There is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction imposed on real estate brokers and their ability to claim the transitional input tax credit based on the value of their real properties. The very idea of excluding the real properties itself from the beginning inventory simply runs counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of goods, whether or not such "goods" take the form of real properties or more mundane commodities.

On conflict between the law and administrative order:In case of conflict between a statute and an administrative order, the former must prevail. The CIR has no power to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC absent statutory authority or basis to make and justify such limitation.

Distinction between presumptive input tax credit and the transitional input tax credit:

07 G.R. No. 172129 September 12, 2008CIR vs. MIRANT PAGBILAO CORPORATION (FORMERLY SOUTHERN ENERGY QUEZON, INC.)

VELASCO JR., J.:

MPC, formerly Southern Energy Quezon, Inc., and also formerly known as Hopewell (Phil.) Corporation, is a domestic firm engaged in the generation of power which it sells to the National Power Corporation (NPC).

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From 1993 to 1996, MPC secured the services of Mitsubishi Corporation (Mitsubishi) of Japan. for the construction of the electrical and mechanical equipment portion of its Pagbilao, Quezon.

In its revised charter, as found in RA No. 6395, it is exempt from all taxes. The following ensued after the sale of the power generation service to NPC, viz:

December 1, 1997 - With the above-mentioned exemption, it filed with the RDO No. 60 in Lucena City an application for Effective Zero Rating covering the construction and operation of its Pagbilao power state under a Build, Operate, and Transfer scheme. This application, it based with Section 108(B)(3) of the Tax Code - Zero-rated for VAT purposes.

January 28, 1998 - Since, no response has been received from the BIR district office (RDO), it refiled the same application before the BIR.

May 13, 1999 - CIR issued VAT Ruling No. 052-99, stating that "the supply of electricity by Hopewell Phil. to the NPC, shall be subject to the zero percent (0%) VAT, pursuant to Section 108 (B) (3) of the NIRC of 1997."

April 14, 1998 - MPC paid Mitsubishi the VAT component for the progress billings from April 1993-September 1996, supported by OR No. 0189 covering P135,993,570.00. Mitsubishi had advanced the VAT component as this serves as its output VAT which is essential for the determination of its VAT payment.

August 25, 1998 - While awaiting approval of its application, it file its quarterly VAT return, 2nd quarter of 1998, reflecting total Input VAT of P148,003,047.62 (inclusive of the P135,993,570.00 VAT component of the progress billings)

December 20, 1999 - MPC filed a claim for refund of the unutilized Input VAT of P148,003,047.62

No action from the CIR as of yet…

It filed a petition for review before the CTA and contends that with the inaction of the CIR, its claim for refund forestall the running of the two-year prescriptive period under Section 229 of the NIRC. CIR asserted that the MPC's claim for refund cannot be granted because MPC's sale of electricity to NPC is not zero-rated for its failure to secure an approved application for zero-rating. CTA

granted MPC's claim for input VAT refund or credit, but only P 10,766,939.48 and ordered the CIR to refund or issued Tax Credit Certificate to MPC. Before the CA, modified CTAs decision by ordering the CIR to make refund or issue a tax credit certificate in favor of MPC of its unutilized input VAT payments directly attributable to its effectively zero-rated sales, 2nd quarter 1998 of P146,760,509.48.

ISSUES: MPCs entitlement to zero-rating for VAT purposed for its sales and

services to tax-exempt NPC Refund or Tax Credit for its unutilized input VAT, 2nd quarter of

1998

HELD: Petition is Partly granted, ordering the CIR for the issuance of the tax credit certificate to MPC representing its unutilized input VAT payments directly attributable to its effectively zero-rated sales, 2nd quarter of P10,766,939.48 but denying the tax refund or credit to the extent of P135,993,570 (P146,760,509.48 - P10,766,939.48) representing its input VAT payments for service purchases from Mitsubishi Corporation of Japan for the construction of a portion of its Pagbilao, Quezon power station on the ground that it has prescribed.

On claim for refund:The claim for tax refund may be based on a statute granting tax exemption, which is to be construed strictissimi juris against the taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant must show that he clearly falls under the exempting statute.

On Prescription:The claim for tax refund/ credit of input tax covered by OR No. 0189, re: purchases by MPC from Mitsubishi from 1993 to 1996 was filed on December 20, 1999,clearly way beyond the two-year prescriptive period set in Sec. 112 of the NIRC, which provides:

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within

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two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: x x x

The above proviso clearly provides that unutilized input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not.

Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid.

The creditable input VAT due for the period covering the progress billing of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after September 30, 1996 or on September 30, 1998. Consequently, MPC's claim for refund or tax credit filed on December 10, 1999 had already prescribed.

MPC cannot avail itself of the provisions of Section 204(C) or 229 of the NIRC which, for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing of a claim therefore and in both instances apply only to erroneous payment or illegal collection of internal revenue taxes.

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.-- The Commissioner may -x x x x(c) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall

be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.x x x x

Sec. 229. Recovery of Tax Erroneously or Illegally Collected.-- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis ours.)

On entitlement to creditable input VAT:Section 105 of the NIRC provides that a creditable input VAT is an indirect tax which can be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation.

Its application has been drawn from the Tax Credit Method, of which an entity can credit against or subtract from the VAT charged on its sales or

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mpnanocpa-ue – college of lawtaxation law reviewoutputs the VAT paid on its purchases, inputs and imports. If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.

Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes.

On Zero-rated transactions:It refers to the export sale of goods and supply of services. The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

15 G.R. No. 166006 March 14, 2008PLANTERS PRODUCTS, INC. vs. FERTIPHIL CORPORATION

REYES, R.T., J.:

Planters Products, Inc. (PPI) and Fertiphil Corporation (Fertiphil) are private corporations incorporated under Philippine laws and both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.

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mpnanocpa-ue – college of lawtaxation law reviewOn June 3, 1985, then President Marcos issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Phils that the fertilizer pricing formula for a capital contribution component of not less than P10 per bag, until PPI becomes viable.

Pursuant to the LOI, Fertiphil paid P10 (P6,689,144) for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide Authority (FPA), and deposited collections to Far East Bank and Trust Company, the depositary bank of PPI (July 8, 1985 to January 24,1986).

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand so a complaint for collection and damages was filed before the RTC against FPA and PPI, questioning the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law because said law solely favored PPI, which used the proceeds to maintain its monopoly of the fertilizer industry.

In its Answer, FPA, thru the SolGen, countered that its issuance was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country.

RTC rendered judgment in favor of Fertiphil and ordered PPI to pay the sum paid by Fertiphil, and others. It held that the imposition of the P10 CRC as an exercise of the State’s inherent power of taxation, must be levied for public purpose. Taxes cannot be levied for the improvement of private property, or for the benefit, and promotion of private enterprises, except where the aid is incident to the public benefit. Thus, holding that the said LOI unconstitutional because it solely benefit a private entity.

Before the CA, it affirmed RTC’s ruling that its imposition was to ensure the continued supply and distribution of fertilizer in the country which is imbued with public interes. The government’s commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statute’s impartiality.

ISSUES:

Constitutionality of LOI 1465, taking into consideration the following:

Exercise of the power of taxation and police power for public purposes

Principle of Operative Facts HELD: Petition is denied, affirming the CAs decision.

On locus standi of Fertiphil: Fertiphil did not sustain direct injury or damage because the

imposition of the CRC fell to ultimate consumer or farmers, not on the seller of fertilizer.

The doctrine of locus standi or the right of appearance in a court of justice requires a litigant to have a material interest in the outcome of a case. In this case, Fertiphil paid P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund because as seller, it bore the ultimate burden of paying the levy, it faced the possibility of severe sanctions for failure to pay the levy.

The harm to its business consists not only in fewer clients because of the increased price, but also in adopting alternative corporate strategies to meet the demands of LOI 1465.

Constitutionality of the LOI: Contentions of Fertiphil-

It favors only one private domestic corporation, PPPI, and imposed at the expense and disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation and were then exerting all efforts and maximizing management and marketing skills to remain viable.

The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount to illegal exaction amounting to a denial of due process since the persons of entities which had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary it was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the detriment of other distributors and importers.

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Thus, being void, Fertiphil had no legal obligation to pay the levy and all levies duly paid pursuant to an unconstitutional law should be refunded under the civil code principle against unjust enrichment.

Contentions of PPI- LOI No. 1465 is a valid exercise either of the police power or the

power of taxation, i.e. implemented for the purpose of assuring the fertilizer supply and distribution in the country and for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI.

On police power and power of taxation-Police power and the power of taxation are inherent powers of the State. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose.

The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and lawful means tests are used to determine the validity of a law enacted under the police power.The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations, which is applied in the imposition of the levy. While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the levy is revenue generation.

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent. A plain reading of the LOI also supports the conclusion that the levy was for revenue generation and was imposed until adequate capital is raised to make PPI viable

One of the inherent limitations on the power of taxation is public purpose. This means that it cannot be used for purely private purposes or for the exclusive benefit of private persons because said power exists for the general welfare.

Public Purpose-The term public purpose is not defined but an elastic concept that can be hammered to fit modern standards. Jurisprudence states that public purpose

should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.

***Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose.

In this case, the levy imposed under LOI No. 1465 was not for a public purpose based on the following grounds:

Levy imposed to the benefit of PPI, a private company, as ultimate beneficiary of the taxes because LOI intends that the capital contribution shall be collected until adequate capital is raised to make PPI viable.

The imposition of the P10 levy was conditional and dependent upon PPI becoming financially viable, making the law for the benefit of LOI only. It notably does not fix a maximum amount when PPI is deemed financially viable, which makes Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite.

The levies paid under the LOI were directly remitted and deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI which proves that PPI benefited from the LOI.

The levy was used to pay the corporate debts of PPI as shown in the Letter of Understanding dated May 18, 1985 signed by then PM Virata. Said letter reveals that PPI was in deep financial problem because of its huge corporate debts with pending petitions for rehabilitation against PPI before the SEC.

For private purpose: It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a private

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mpnanocpa-ue – college of lawtaxation law reviewcorporation.

For police power but failed to comply with lawful subjects and means: Even if the LOI was enacted under the police power of the State, it would still be invalid for failing to comply with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.

Failed to promote public interest: It was enacted to give undue advantage to a private corporation.

Ruling of the CA:…..holding LOI 1465 unconstitutional….ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare. The government’s commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statute impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the country’s farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statute’s public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals.

Doctrine of Operative Fact:This doctrine means that an unconstitutional law has an effect before being declared unconstitutional. It is applied as a matter of equity and fair play.It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot always be erased by a new judicial declaration.

This doctrine is inapplicable in this case because it is a general rule that an

unconstitutional law is void – it produces no rights, imposes no duties and affords no protection; has no legal effect; is in legal contemplation, inoperative as if it has not been passed. Being void, Fertiphil is not required to pay the levy.

As such, all levies paid should be refunded in accordance with the principle against unjust enrichment enunciated in Article 7 NCC which provides that “Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary.”

When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern.

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.ISABELA CULTURAL CORPORATION, Respondent.

YNARES-SANTIAGO, J.:

FACTS: CIR assails the September 30, 2005 CA decision affirming the February 26, 2003 CTA decision, which cancelled and set aside the Assessment Notices for deficiency income tax and expanded withholding tax issued by the BIR against Isabela Cultural Corporation (ICC).

On February 23, 1990, ICC, a domestic corporation, received from the BIR, both for taxable year 1986, inclusive of surcharges and interest:

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(A) Assessment Notice for deficiency income tax of P333,196.86 which arose from the following:

1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co. for the year ending December 31, 1985;(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for 1984 and 1985. (c) Expense for security services of El Tigre Security & Investigation Agency for April and May 1986.

(2) The alleged understatement of ICC’s interest income on the three promissory notes due from Realty Investment, Inc.

(B) Assessment Notice for deficiency expanded withholding tax of P4,897.79, due to failure to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services.

On March 23, 1990, ICC sought a reconsideration of the subject assessments.

On February 9, 1995, a Final Notice of Assessment before seizure was received demanding payment of the amounts stated in the said notices.

Before the CTA, it was held premature because the Final Notice of Assessment cannot be considered as a final decision appealable it.

This was reversed by the CA holding that the BIR demand letter reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore be questioned before the CTA.

The case was remanded to the CTA which cancelled and set aside the assessment notices issued against ICC on the following grounds:

(a) claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the said

year when the bills demanding payment were sent to ICC. That, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time.

(b) ICC did not understate its interest income on the subject promissory notes. It was the BIR’s error when it overstated the interest income received from Realty Investment, Inc based on compounded interest when there was no stipulation to that effect or no delay in payment or breach of contract was done that would justify its application.

(c) ICC withheld 1% expanded withholding tax on its claimed deduction for security services as shown by the various payment orders and confirmation receipts it presented as evidence.

Petition for review with the CA affirmed the CTA decision

ISSUES: WON ICC correctly(a) sustained the deduction of the expenses for professional and

security services(b) recorded the interest income

Petitioner arguments are as follows:

(a) since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986.

(b) as to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment, the presumption that the assessment notices issued by the BIR are valid.

HELD: The petition is partially granted. The expense deduction of Isabela Cultural Corporation for professional and security services, is declared valid only insofar as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.

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mpnanocpa-ue – college of lawtaxation law reviewRequisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are:

(a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or

business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.

The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the NIRC which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed x x x".

In this case, ICC apply the accrual method of accounting. Under this method, Memorandum Order No. 1-2000, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year.

For a taxpayer using the accrual method, income or expense is recognized applying the ALL – EVENTS TEST. This test requires:

(1) fixing of a right to income or liability to pay (fixed) ; and(2) the availability of the reasonable accurate determination of such

income or liability (accurate)

The all-events test however does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.

The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with "reasonable accuracy."

Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. Since a deduction for income tax purposes partakes of

the nature of a tax exemption, then it must also be strictly construed as in tax exemptions.

(a) expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 & 1985 legal and retainer fees of the law firm Bengzon… and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year 1984.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm . It could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting and could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.

And since, it applies the accrual method of accounting, it bears the burden of establishing the accrual of an expense or income, which it failed to comply and merely relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services.

professional fees of SGV & Co. for auditing the financial statements of ICC for 1985 cannot be validly claimed as expense deductions in 1986 because ICC failed to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV. It failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986 so they cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR.

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expenses for security services, the records show that these expenses were incurred by ICC and could be properly claimed as deductions for the said year.

(b) insofar as the interest income from the promissory notes of Realty Investment, Inc., we sustain the findings of the CTA and CA that no such understatement exists and that only simple interest computation and not a compounded one should have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the application of compounded interest.

G.R. No. L-69259 January 26, 1988DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents. GUTIERREZ, JR., J.:

FACTS: Petitioners question the decision of the IAC which sustained the Hydro Pipes Phils. contention that the deed of exchange whereby Delfin & Pelagia Pacheco conveyed a parcel of land to Delpher Trades

25

mpnanocpa-ue – college of lawtaxation law reviewCorporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract.

Delfin and his sister, Pelagia Pacheco, co-owners of 27,169 m2 land located in the Municipality of Polo (now Valenzuela), Bulacan (now Metro Manila) leased the same on April 3, 1974 to Construction Components International Inc. with a condition that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions. August 3, 1974 - lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Pacheco.

Both the contract of lease and assignment of lease were annotated at the back of the title, as per stipulation of the parties.

January 3, 1976 - a deed of exchange was executed between lessors Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila for 2,500 shares of stock of the corporation with a total value of P1,500,000.00. Hydro Pipes Philippines, Inc. filed an amended complaint for reconveyance against lessors Pacheco on the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement. The trial court declared the valid existence of the plaintiffs preferential right to acquire the subject property (right of first refusal) and ordered the defendants and all persons deriving rights therefrom to convey the said property to plaintiff. This decision was affirmed on appeal by the IAC.

ISSUE: WON "Deed of Exchange" of the properties executed by the Pachecos and the Delpher constitute a contract of sale which, in effect, prejudiced the Hydro Pipes Phils. right of first refusal. Petitioners argued that Delpher Trades Corporation is a family corporation

of the Pacheco’s organized to perpetuate their control over the property through the corporation and to avoid taxes on the following:

(a) the 2 pieces of real estate, including one that has been leased to Hydro Pipes Philippines, were transferred to the corporation;

(b) the leased property was transferred to the corporation by virtue of a deed of exchange of property;

(c) to exchange for these properties, the Pacheco’s acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation; and

(d) at the time of incorporation, he knew all about the contract of lease of the lot to Hydro Pipes Philippines.

They refer to this scheme as "Estate Planning." Thus, there was actually no transfer of ownership of the subject parcel

of land since the Pachecos remained in control of the property.

Private respondents argue that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos so it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.

HELD: We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof

In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation which consequently make the Pachecos stockholders of the corporation by subscription.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

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Effects of the execution of a deed of exchange on properties for no par value shares of the Delpher:

(a) Continuous control of the property(b) tax exemption benefits, and (c) other inherent benefits in a corporation.

Insofar as taxation law is concerned, tax exemption benefits refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the provision which I quote:

"No gain or loss shall also be recognized if a person exchanges his property for stock in a corporation of which as a result of such exchange said person alone or together with others not exceeding four persons gains control of said corporation."

Doctrine of “Flexibility in connection with the ownership of the property in question:

There is flexibility in using no par value shares as the value is determined by the board of directors in increasing capitalization. The board can fix the value of the shares equivalent to the capital requirements of the corporation.

In this case, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50 years. On the other hand, if the property is held by the spouse the property will be tied up in succession proceedings and the consequential payments of estate and inheritance taxes when an owner dies. This is where the doctrine of flexibility takes place.

In effect, the continuity in relation to ownership by a particular person of certain properties in respect shall not be subjected to taxes (inheritance taxes) on succession as the corporation does not die.

The Estate Planning scheme resorted to by the Pachecos:

This mode is not prohibited, viz:"The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the Hydro Pipes has no basis for its claim of a light of first refusal under the lease contract.

G.R. No. L-26911 January 27, 1981ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. L-26924 January 27, 1981 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION and COURT OF TAX APPEALS, respondents.

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mpnanocpa-ue – college of lawtaxation law reviewDE CASTRO, J.:

FACTS: These are 2 petitions for review from the decision of the CTA on CTA tax case No. 1312 arose from the 1957 & 1958 deficiency income tax assessments made by the CIR where the Atlas Consolidated Mining and Development Corporation was assessed P546,295.16 for 1957 & P215,493.96 for 1958 deficiency income taxes.

Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. CIR opined the deficiency taxes on its assessment issued on August 20, 1962, on the following:

(a) For 1957, Atlas is not entitled to exemption from the income tax under Section 4 of RA 909 because the same covers only gold mines, the provision of which reads:

New mines, and old mines which resume operation, when certified to as such by the Secretary of Agriculture and Natural Resources upon the recommendation of the Director of Mines, shall be exempt from the payment of income tax during the first three (3) years of actual commercial production. Provided that, any such mine and/or mines making a complete return of its capital investment at any time within the said period, shall pay income tax from that year.

(b) For 1958 deficiency income tax covers the disallowance of items claimed by Atlas as deductible from gross income.

October 9, 1962 - Atlas protested the assessment asking for its reconsideration and cancellation, of which the CIR conducted a reinvestigation of the case.

October 25, 1962 - the Secretary of DOF ruled that the exemption provided in RA 909 embraces all new mines and old mines whether gold or other minerals. Accordingly, CIR recomputed the deficiency income tax liabilities, which on June 9, 1964, the CIR issued a revised assessment entirely eliminating the assessment of P546,295.16 for the year 1957 and the assessment for 1958 was reduced from P215,493.96 to P39,646.82 from which Atlas appealed to the CTA, assailing the disallowance of the following items claimed as deductible from its gross income for 1958:

Transfer agent's fee P59,477.42Stockholders relation service fee 25,523.14 U.S. stock listing expenses 8,326.70 Suit expenses 6,666.65 Provision for contingencies 60,000.00 Total P159,993.91

October 25, 1966 – CTA allowed the above disallowed items, except the items denominated by Atlas as stockholders relation service fee and suit expenses.

As the exemption of petitioner from the payment of corporate income tax under Section 4, Republic Act 909, was good only up to the Ist quarter of 1958 ending on March 31 of the same year, only three-fourth (3/4) of the net taxable income of petitioner is subject to income tax, computed as follows:

Total net income for 1958 1,968,898.27 Net income corresponding to taxable period April 1 to Dec. 31, 1958, ¾ or 9/12 of TNI 1,476,673.70 Add: Stockholders relation service fee (3/4 or 9/12 of 25,523.14) 19,142.35

Litigation expenses 6,666.65 Net income per decision110,242.70

Tax due thereon 412,695.00 Less: Amount already assessed 405,468.00 DEFICIENCY INCOME TAX DUE 7,227.00 Add: 1/2 % monthly interest from 6-20-59 to 6-20-62 (18%) 1,300.89 TOTAL AMOUNT DUE & COLLECTIBLE 8,526.22

Separate petition for review before the CA were filed by Atlas and CIR which sustained the ruling of the CA. The contention of Atlas is as follows:

G. R. No. L-26911—Atlas appealed CTA decision disallowing the deduction from gross income of the so-called stockholders relation service fee amounting to P25,523.14 on the ground that said amount pertains to 1958 annual public relations expenses incurred and paid to P.K Macker & Co., a reputable public relations consultant in New York

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City, U.S.A is a deductible expense from GI under Sec.30 (a)(1) NIRC, an ordinary and necessary business expense aimed at creating a favorable image and goodwill to gain or maintain their patronage.

The issue raised was WON the expenses paid for the services rendered by a public relations firm P.K MacKer & Co. labelled as stockholders relation service fee is an allowable deduction as business expense under Sec. 30 (a)(1) of NIRC.

CA sustained the CTA decision which states that : A taxpayer who claims a deduction must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. The law allowing expenses as deduction from GI is Sec. 30 (a)(1) of NIRC which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.

Statutory test of deductibility, three conditions are imposed:(1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or business.

In addition, the taxpayer who meet the business test must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

An expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's business, when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected.

That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain the public's and its stockholders' patronage, does not make it deductible as business expense but a capital expenditures.

ISSUE: WON the (1) attorneys fees/litigation expenses paid indefense of title to the Toledo Mining properties purchased from Mindanao Lode Mines Inc. civil case is an allowable deduction as business expense under Sec. 30 (a)(1) of NIRC; (2) CIR can raise the fact of payment for the first time on appeal

HELD: No in both issues.

CIR’s contentions:

The CIR contended that under Sec.. 30(a)(1) of NIRC, it is a requirement for an expense to be deductible from gross income that it must have been "paid or incurred during the year" for which it is claimed; that in the absence of convincing and satisfactory evidence of payment, the deduction from gross income for the year 1958 income tax return cannot be sustained; and that the best evidence to prove payment, if at all any has been made, would be the vouchers or receipts issued therefor which ATLAS failed to present.

He also contended that should be disallowed for not being ordinary and necessary and not incurred in trade or business, as required under Sec. 30(a)(1) of NIRC; that said fees were therefore incurred not for the production of income but for the acquisition petition of capital in view of the definition that an expense is deemed to be incurred in trade or business if it was incurred for the production of income, or in the expectation of producing income for the business.

In this case, Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in its 1958 income tax return, but explains the failure with the allegation that the CIR did not raise that question of fact in his pleadings, or even in the report of the investigating examiner and/or letters of demand and assessment notices of Atlas which gave rise to its appeal to the CTA.

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(1) The litigation expenses under consideration were incurred in defense of Atlas title to its mining properties. In line with the decision of the U.S. Tax Court in the case of Safety Tube Corp. vs. CIR, it is well settled that litigation expenses incurred in defense or protection of title are capital in nature and not deductible but shall constitute a part of the cost of the property, and are not deductible as expense.

(2) CIR cannot be allowed to adopt a theory distinct and different from that he has previously pursued. In the case at bar, the Court of Tax Appeal found that the fact of payment of the claimed deduction from gross income was never controverted by the CIR even during the initial stages of routinary administrative scrutiny conducted by BIR examiners. Thus, it was too late for the CIR to raise the issue of fact of payment for the first time in his memorandum in the CTA and in this instant appeal to the SC. Failure to assert a question within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it.

RANDOM NOTES:

01

Chamber of Real Estate and Builders’ Associations, Inc., vs.The Hon. Executive Secretary Alberto Romulo, et al - G.R. No. 160756 promulgated March 9, 2010 - Supreme Court (En Banc)

The imposition of the MCIT on domestic corporations, as well as the CWT on income from sales of real property classified as ordinary assets, is constitutional.

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Facts:Petitioner Chamber of Real Estate and Builders’ Associations, Inc.

(CREBA), an association of real estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on corporations.

Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income, beginning on the 4th taxable year immediately following the year in which it commenced its business operations, when such MCIT is greater than the normal corporate income tax. If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.

CREBA argued, among others, that the use of gross income as MCIT base amounts to a confiscation of capital because gross income, unlike net income, is not realized gain. CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as the Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection of CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations:

• Use gross selling price (GSP) or fair market value (FMV) as basis for determining the income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable income as provided for under the Tax Code;

• Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code provision which imposes income tax on net income at the end of the taxable period;

• Go against the due process clause because the government collects income tax even when the net income has not yet been determined; gain is never assured by mere receipt of the selling price; and

• Contravene the equal protection clause because the CWT is being charged upon real estate enterprises, but not on other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a real estate enterprise.

Issues:1. Is the imposition of MCIT constitutional?2. Is the imposition of CWT on income from sales of real properties

classified as ordinary assets constitutional?

Ruling:1. Yes. The imposition of the MCIT is constitutional. An income tax is

arbitrary and confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is imposed on gross income which is computed by deducting from gross sales 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. Various safeguards were incorporated into the law imposing MCIT.

Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in which the corporation commenced its operations.

Secondly, the law allows the carry-forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the 3 immediately succeeding years.

Thirdly, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.

2. Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property classified as ordinary assets remains as the entity’s net taxable income as provided in the Tax Code, i.e., gross income less allowable costs and deductions. The 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.

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The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and convenience. The knowledge of the withholding agent-buyer is limited to the particular transaction in which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to him. Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to cancel its possible future tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. The withholding agent-buyer’s act of collecting the tax at the time of the transaction, by withholding the tax due from the income payable, is the very essence of the withholding tax method of tax collection.

On the alleged violation of the equal protection clause, the taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

What distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts.

02

South African Airways vs. Commissioner of Internal Revenue - G.R. No. 180356, February 16, 2010

Gross Philippine billings; off line carrier . South African Airways, an off-line international carrier selling passage documents through an independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.

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mpnanocpa-ue – college of lawtaxation law reviewThe 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.

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% 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 rate of 32% of such income.

AN OFF-LINE AIR CARRIER HAVING A GENERAL SALES AGENT IN THEPHILIPPINES IS ENGAGED IN OR DOING BUSINESS IN THE PHILIPPINESSUCH THAT ITS INCOME FROM SALES OF PASSAGE DOCUMENTS HERE ISPHILIPPINE SOURCE INCOME SUBJECT TO ORDINARY INCOME TAX.

The Supreme Court ruled that the taxpayer is not subject to the 2½% Gross Philippine Billings (GPB) tax under Section 28(A)(3)(a) of the Tax Code. However, the Supreme Court ruled that the taxpayer is subject to the 32% income tax under Section 28(A)(1) of the Tax Code. The Supreme Court reiterated the rule in the case of British Overseas Airways which held that an off-line air carrier is doing business in the Philippines and that income from thesale of passage documents in the Philippines is taxable Philippine-source income. South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356 dated February16, 2010.

03

Manila International Airport Authority vs. City of Pasay, et al., G.R. No. 163072, April 2, 2009.

Real Property Tax. The NAIA Pasay properties of the Manila International Airport Authority is exempt from real property tax imposed by the City of Pasay. MIAA is not a government-owned or controlled corporation but a

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mpnanocpa-ue – college of lawtaxation law reviewgovernment instrumentality which is exempt from any kind of tax from the local governments. Indeed, the exercise of the taxing power of local government units is subject to the limitations enumerated in Section 133 of the Local Government Code. Under Section 133(o) of the Local Government Code, local government units have no power to tax instrumentalities of the national government like the MIAA. Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties. Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended for public use, and as such are exempt from real property tax under Section 234(a) of the Local Government Code. However, under the same provision, if MIAA leases its real property to a taxable person, the specific property leased becomes subject to real property tax. In this case, only those portions of the NAIA Pasay properties which are leased to taxable persons like private parties are subject to real property tax by the City of Pasay.

04

Smart Communications, Inc., vs. The City of Davao, represented by its Mayor Hon. Rodrigo Duterte and the Sangguniang Panlunsod of Davao City, G.R. No. 155491, July 21, 2009 .

Franchise tax. Jurisprudence suggests that aside from the national franchise tax, the franchisee is still liable to pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment thereof under its legislative franchise. The “in lieu of all taxes” clause in a legislative franchise should

categorically state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority.

“IN LIEU OF ALL TAXES” CLAUSE IN A LEGISLATIVE FRANCHISE, INTHE ABSENCE OF UNEQUIVOCAL LANGUAGE PROVIDING OTHERWISE, APPLIES ONLY TO NATIONAL INTERNAL REVENUE TAXES AND NOT TO LOCAL TAXES.

Taxpayer was assessed for local franchise tax by a city government. The taxpayer raised the defense that it is not subject to the local franchise tax because of the “in lieu of all taxes” clause found in its legislative franchise. The Supreme Court ruled that in the absence of unequivocal language, the “in lieu of all taxes” clause only applies to national internal revenue taxes and not to local taxes. The taxpayer sought to avail of the “most favored treatment clause” by citing that a taxpayer with a similar line of business and legislative franchise enjoys exemption from the local franchise tax. However, a careful study of the language of the legislative franchise of the other taxpayer revealed that their franchise specifically exempts the taxpayer from local taxes. Smart Communications Inc. v. City of Davao, G.R. 155491 dated September 16, 2008.

05

National Power Corporation vs. Province of Quezon and Municipalilty of Pagbilao, G.R. No. 171586, January 25, 2010

Real property tax; payment of tax prior to protest . The protest contemplated under Section 252 is required where there is a question as to the reasonableness or correctness of the amount assessed. Hence, if a taxpayer disputes the reasonableness of an increase in a real property tax assessment, he is required to

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mpnanocpa-ue – college of lawtaxation law review“first pay the tax” under protest. Otherwise, the city or municipal treasurer will not act on his protest.

A claim for tax exemption, whether full or partial, does not question the authority of local assessor to assess real property tax. National Power Corporation vs. Province of Quezon and Municipalilty of Pagbilao, G.R. No. 171586, January 25, 2010.

In National Power Corporation vs. Province of Quezon and Municipalilty of Pagbilao, G.R. No. 171586, January 25, 2010, the Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) for unpaid real property taxes. Napocor, which entered into a Build-Operate-Transfer (BOT) Agreement with Mirant, protested the assessment before the Local Board of Assessment Appeals (LBAA), claiming entitlement to the tax exemptions provided under Section 234 of the Local Government Code (LGC). The real property taxes assessed were not paid prior to the protest.

The Local Board of Assessment Appeals (LBAA) dismissed Napocor’s petition for exemption for its failure to comply with Section 252 of the LGC requiring payment of the assailed tax before any protest can be made.

The Central Board of Assessment Appeals (CBAA) ultimately dismissed Napocor’s appeal for failure to meet the requirements for tax exemption; however, the CBAA agreed with Napocor’s position that the protest contemplated in Section 252 (a) is applicable only when the taxpayer is questioning the reasonableness or excessiveness of an assessment. According to the CBAA, a payment prior to protest applies only if the taxpayer is subject to the tax but is disputing the correctness of the amount assessed. The CBAA ruled that the requirement of payment prior to protest does not apply where the legality of the assessment is put in issue on account of the taxpayer’s claim that it is exempt from tax.

The Court of Tax Appeals (CTA) en banc agreed with the CBAA’s discussion, relying mainly on the cases of Ty vs. Trampe and Olivarez vs. Marquez.

Real property tax; proper entity to file protest of assessment. Legal interest is defined as interest in property or a claim cognizable at law, equivalent to that of a legal owner who has legal title to the property. Given this

definition, Napocor is clearly not vested with the requisite interest to protest the tax assessment, as it is not an entity having the legal title over the machineries. It has absolutely no solid claim of ownership or even of use and possession of the machineries.

If Napocor truly believed that it was the owner of the subject machineries, it should have complied with Sections 202 and 206 of the LGC which obligates owners of real property to:

a. file a sworn statement declaring the true value of the real property, whether taxable or exempt; and

b. file sufficient documentary evidence supporting its claim for tax exemption.

While a real property owner’s failure to comply with Sections 202 and 206 does not necessarily negate its tax obligation nor invalidate its legitimate claim for tax exemption, Napocor’s omission to do so in this case can be construed as contradictory to its claim of ownership of the subject machineries. That it assumed liability for the taxes that may be imposed on the subject machineries similarly does not clothe it with legal title over the same. We do not believe that the phrase “person having legal interest in the property” in Section 226 of the LGC can include an entity that assumes another person’s tax liability by contract.

A review of the provisions of the LGC on real property taxation shows that the phrase has been repeatedly adopted and used to define an entity:

a. in whose name the real property shall be listed, valued, and assessed;

b. who may be summoned by the local assessor to gather information on which to base the market value of the real property;

c. who may protest the tax assessment before the LBAA and may appeal the latter’s decision to the CBAA;

d. who may be liable for the idle land tax, as well as who may be exempt from the same;

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mpnanocpa-ue – college of lawtaxation law reviewe. who shall be notified of any proposed ordinance imposing a special levy, as well as who may object the proposed ordinance;

f. who may pay the real property tax;

g. who is entitled to be notified of the warrant of levy and against whom it may be enforced;

h. who may stay the public auction upon payment of the delinquent tax, penalties and surcharge; and

i. who may redeem the property after it was sold at the public auction for delinquent taxes.

For the Court to consider an entity assuming another person’s tax liability by contract as a person having legal interest in the real property would extend to it the privileges and responsibilities enumerated above. The framers of the LGC certainly did not contemplate that the listing, valuation, and assessment of real property can be made in the name of such entity; nor did they intend to make the warrant of levy enforceable against it. Insofar as the provisions of the LGC are concerned, this entity is a party foreign to the operation of real property tax laws and could not be clothed with any legal interest over the property apart from its assumed liability for tax. The rights and obligations arising from the BOT Agreement between Napocor and Mirant were of no legal interest to the tax collector – the Province of Quezon – which is charged with the performance of independent duties under the LGC.

Some authorities consider a person whose pecuniary interests is or may be adversely affected by the tax assessment as one who has legal interest in the property (hence, possessed of the requisite standing to protest it), citing Cooley’s Law on Taxation. The reference to this foreign material, however, is misplaced. The tax laws of the United States deem it sufficient that a person’s pecuniary interests are affected by the tax assessment to consider him as a person aggrieved and who may thus avail of the judicial or administrative remedies against it. As opposed to our LGC, mere pecuniary interest is not sufficient; our law has required legal interest in the property taxed before any administrative or judicial remedy can be availed. The right to appeal a tax assessment is a purely statutory right; whether a person challenging an

assessment bears such a relation to the real property being assessed as to entitle him the right to appeal is determined by the applicable statute – in this case, our own LGC, not US federal or state tax laws. National Power Corporation vs. Province of Quezon and Municipalilty of Pagbilao, G.R. No. 171586, January 25, 2010

THE PARTY CONTRACTUALLY ASSUMING REAL PROPERTY TAX LIABILITY PURSUANT TO AN ENERGY CONVERSION AGREEMENT DOES NOT HAVE LEGAL INTEREST TO GIVE IT PERSONALITY TO PROTEST THE TAX IMPOSED BY LAW ON THE OTHER PARTY.

NPC contends that it should be regarded as the beneficial owner of the plant, since it will acquire ownership thereof at the end of 25 years. NPC also asserts that pursuant to the ECA, it has the right to control and supervise the construction and operation of the plant, and that the other party to the ECA has retained only naked title to it. The Court held that these contentions are not sufficient to vest the NPC the personality to protest the assessment. Legal interest should be an interest that is actual and material, direct and immediate, not simply contingent or expectant. In this case, NPC’s ownership of the plant will happen only after the lapse of the 25-year period. Prior to this event, the real interest of NPC is only in the continued operation of the plant for the generation of electricity. Moreover, the tax liability that would give NPC the personality to protest the assessment is the liability arising from the law that the local government unit can rightfully and successfully enforce, not the contractual liability that is enforceable between the parties to a contract. National Power Corporation v. Province of Quezon and Municipality of Pagbilao, G.R. No. 171586 dated July 15, 2009.

SUPREME COURT REITERATES THAT AN ENTITY THAT ASSUMES ANOTHER PERSON’S TAX LIABILITY BY CONTRACT HAS NO LEGAL INTEREST IN THE PROPERTY BEING SUBJECTED TO REAL PROPERTY TAX.

Our law has required legal interest in the property taxed before any administrative or judicial remedy can be availed. The right to appeal a tax assessment is a purely statutory right; whether a person challenging an assessment bears such a relation to the real property being assessed as to entitle him the right to appeal is determined by the applicable statute – in this case, our

36



mpnanocpa-ue – college of lawtaxation law reviewown Local Government Code of 1991 (“LGC”), not U.S. federal or state tax laws.

PAYMENT UNDER PROTEST IS REQUIRED BEFORE AN APPEAL TO THE LOCAL BOARD OF ASSESSMENT APPEALS (“LBAA”) CAN BE MADE.The LBAA dismissed Napocor’s petition for exemption for its failure to comply with Section 252 of the LGC requiring payment of the assailed tax before any protest can be made. In Ty v. Trampe, the Supreme Court held that the protest contemplated under Section 252 is required where there is a question as to the reasonableness or correctness of the amount assessed. Payment under protest is not required if the taxpayer is questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the tax. A claim for tax exemption, whether full or partial, does not question the authority of the local assessor to assess real property tax. In this case, petitioner was claiming tax exemption, and hence was simply questioning the correctness of the assessment. Petitioner should have first complied with Section 252, particularly the requirement of payment under protest.

06Fort Bonifacio Development Corp. vs. Commissioner of Internal

Revenue, et al./Fort Bonifacio Development Corp. vs. Commissioner of Internal Revenue et al., G.R. No. 158885/G.R. No. 170680, April 2, 2009

Value-added tax. There is nothing in Section 105 of the old Tax Code that prohibits the inclusion of real properties, together with the improvements

thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the transitional input tax credit is computed.

1. Section 111 (A) of the new NIRC providing for transitional input tax credits to taxpayers not previously covered under the VAT law is clear and unambiguous to cover goods and properties.

Section 100 (now 105) defines “good or properties” to include “real properties held primarily for sale to costumers or held for lease in the ordinary course of business.” The statutory definition leaves no room for doubt. Thus, having been defined, the term “goods” as used in Section 105 (now 111(A)) of the same Code could not have a different meaning. xxx As mandated by Article 7 of the Civil Code, an administrative rule or regulation, to be valid, must conform and not contravene the law on which it is based. It cannot modify, expand, or subtract from the law it is intended to implement. Any rule that is not consistent with the statute itself is null and void. While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails.

Section 4.105-1 of RR 7-95, which limits “goods” to improvements on the real property while excludes the real properties themselves is, therefore, struck down for being contradictory to the Tax Code. Fort Bonifacio Development Corp. v. Commissioner of Internal Revenue, G.R.158885 and 170680. October 2, 2009.

13Silkair (Singapore) PTE. Ltd. vs. Commissioner of Internal

Revenue, G.R. No. 184398, February 25, 2010.

Facts: SPL, a Singapore corporation, is an online international carrier which maintains a Philippine representative office and operates routes passing through Cebu and Davao. SPL filed with the BIR a claim for refund of the excise taxes

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mpnanocpa-ue – college of lawtaxation law reviewit allegedly paid on its purchases of jet fuel from P Corp. on the basis of Sec 135 of the 1997 NIRC. Held: The SC held that the proper party to question or seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. In this case, P Corp., being the manufacturer of the petroleum products, is the statutory taxpayer and, therefore, the proper party to file the claim for tax refund. The SC did not give merit to the argument of SPL that it is exempt from indirect taxes on the basis of the RP-Singapore Air Transport Agreement. The SC held that the exemption granted under Sec 135(B) of the 1997 NIRC and Article 4(2) of the Air Transport Agreement, without clear legislative intent, cannot be construed as including indirect taxes. Silkair Pte Ltd v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008

Excise tax; refund. The proper party to question, or claim a refund or tax credit of an indirect tax is the statutory taxpayer, which is Petron in this case, as it is the company on which the tax is imposed by law and which paid the same even if the burden thereof was shifted or passed on to another. It bears stressing that even if Petron shifted or passed on to petitioner Silkair, the burden of the tax, the additional amount which petitioner paid is not a tax but a part of the purchase price which it had to pay to obtain the goods.

Proper Party to Claim Excise Tax Refund

The proper party to seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. In case of a refund of excise taxes on petroleum products, it is the manufacturer or producer which is entitled to claim a refund. Even if the manufacturer orproducer passed the burden of the tax to the purchaser, the additional amount billed for jet fuel is not a tax but part of the price which the purchaser had to pay. [Silkair (Singapore) Pte. Ltd. vs. CIR, G.R. No. 173594, promulgated 6 February 2008]

STATUTORY TAXPAYER IS PROPER PARTY TO CLAIM FOR REFUND OF INDIRECT TAXES;INDIRECT TAX EXEMPTION MUST BE CLEARLY GRANTED; 15-DAY APPEAL PERIOD TO CTA EN BANC IS JURISDICTIONAL; SERVICE TO COUNSEL OF RECORD BINDS PETITIONER

Petitioner Silkair, a Singapore-based international air carrier, sought a refund of excise tax paid by Petron Corporation as manufacturer, which shifted the burden of the tax to purchaser Silkair. The CTA Division denied against the claim since it was not the taxpayer. On September 12, 2005, a new counsel entered appearance without the withdrawal of the original counsel. Its original counsel of record received on October 3, 2005 a copy of the September 22, 2005 Resolution of the CTA Division denying its motion for reconsideration of the decision. On October 13, 2005, the original counsel withdrew its appearance with conformity of petitioner and the new counsel requested for an official copy of the Resolution. On October 14, 2005, the new counsel received a copy of the Resolution and requested on October 28, 2005 an extension of time to file petition. The Court En Banc gave it until November 14, 2005. Upon request, another extension until November 24, 2005 was granted and on November 17, 2005, Silkair filed its petition. By Resolution of May 19, 2006, the CTA En Banc dismissed the petition for being filed out of time notwithstanding the grant of extension.

On petition for certiorari, the Supreme Court affirmed the dismissal, ruling that where no notice of withdrawal or substitution of counsel has been shown, notice to counsel of record is notice to the client citing Section 26, Rule 138 of the Rules of Court on the requirements for withdrawal of counsel.

Ruling on the merits, the high tribunal held: The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even he shifts the burdenthereof to another. Under Section 130(A)(2) of the NIRC, it is the manufacturer or producer who is subject to excise tax. Thus, Petron Corporation, not Silkair, is the statutory taxpayer entitled to claim a refund based on Section 135 of the NIRC, which exempts from excise tax petroleum products sold to exempt entities under international agreements and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the purchase price. There is no indirect tax exemption under the Air Transport Agreement in the absence of clear showing of legislative intent. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer. Silkair (Singapore) PTE, Ltd. vs. CIR, G.R. No. 173594, Feb. 6, 2008.

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mpnanocpa-ue – college of lawtaxation law reviewWho is the proper party to claim a refund for the payment of excise taxes? What is an excise tax? What is the remedy of a taxpayer who enjoys tax exemption with regard to the payment of excise taxes?

Silkair (Singapore Pte. Ltd. Purchased aviation jet fuel from Petron, to which the latter imposed a P3.67 per liter excise (specific) tax.

Claiming exemption from payment of excise taxes pursuant to Section 135 of the Tax Code and Article 4 of the Philippines Singapore Air Agreement, Silkair filed a formal claim for refund with the Commissionerof Internal Revenue (CIR). Silkair alleged that it was the one who actually paid the excise taxes due on the transactions while Petron merely remitted the payment to the BIR, thereby negating the tax exemptionexpressly granted to it. Nonetheless, the Supreme Court held that “the proper party to question, or seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.”3

Excise tax, “whether classified as specific or ad valorem tax, is basically an indirect tax imposed on the consumption of a specified list of goods or products. The tax is directly levied on the manufacturer upon removal of the table goods from the place of production but in reality, the tax is passed on to the end consumer as part of the selling price of goods sold.”4

In view thereof, while Petron actually passed on the burden of the tax to Silkair, the additional amount billed to the latter was essentially a part of the purchase price and not a tax in itself. Hence, the SC ruled that “even if the consumers or purchasers ultimately pay for the tax, they are not considered the taxpayers. The fact that Petron, on whom the excise tax is imposed, can shift the tax burden to its purchasers does not make the latter the taxpayers and the former the withholding agent.

17Ericsson Telecommunications, Inc. vs. City of Pasig, G.R.

No.176667, November 22, 2007.

LOCAL BUSINESS TAX ON CONTRACTORS SHOULD BE BASED ON GROSS RECEIPTS, ACTUAL OR CONSTRUCTIVE

Taxpayer is a corporation with principal office in Pasig City and engaged in the design, engineering, and marketing of telecommunications facilities/system. It was assessed deficiency business taxes for the years 1998- 2001 based on prior year’s gross revenues per its audited financial statements.

The Supreme Court sustained the taxpayer’s position and ruled that as a contractor, it correctly paid its taxes based on gross receipt, actual or constructive, as opposed to gross earnings/revenue, which includesuncollected earnings. It cited Section 4. 108-4, BIR Revenue Regulations No. 16-2005, which defined gross receipts.

“Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. In contrast, gross revenue covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received.

16Petron Corporation vs. Mayor Tobias M. Tiangco and the

Municipal Treasurer of the Municipality of Navotas, G.R. No. 158881, 16 April 2008)

Qualified prohibition to impose fees and charges on petroleum products The SC ruled that language of Section 133(h) of the Local Government Code (LGC) is

39

mpnanocpa-ue – college of lawtaxation law reviewclear that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all “taxes, fees and charges.” The first limitation comprehends a wider range of subjects of taxation: all articles already covered by excise taxation under the NIRC, such as alcohol products, tobacco products, mineral products, automobiles, and such nonessential goods as jewelry, goods made of precious metals, perfumes, and yachts and other vessels intended for pleasure or sports. In contrast, the latter reference to “taxes, fees and charges” pertains only to one class of articles of the many subjects of excise taxes, specifically, “petroleum products”. While local government units are authorized to burden all such other class of goods with “taxes, fees and charges,” excepting excise taxes, a specific prohibition is imposed barring the levying of any other type of taxes with respect to petroleum products.

A LOCAL GOVERNMENT UNIT HAS NO POWER UNDER THE LGC TO IMPOSE BUSINESS TAXES ON PERSONS/ENTITIES ENGAGED IN THE SALE OF PETROLEUM PRODUCTS

P Corp. was assessed deficiency business taxes on its sale of petroleum products from its depot located in Taguig. P protested the assessment on the ground that under the implementing rules of the LGC, the sale of petroleum products is exempt from business taxes. Held: The Supreme Court ruled in favor of P Corp. pointing out that “while Section 133(h) does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from extending the levy of any kind of ‘taxes, fees or charges on petroleum products.’”

11CIR vs. PERF Realty Corporation, G.R. No. 163345, 4 July 2008)

Failure to indicate option of tax refund or tax credit not fatal to a claim for refund Section 76 of the 1997 Tax Code offers two options: (1) filing for tax refund and (2) availing of tax credit. The two options are alternative and the choice of one precludes the other. However, failure to indicate a choice will not

bar a valid request for a refund, should this option be chosen by the taxpayer later on. The reason for requiring that a choice be made in the Final Adjustment Return upon its filing is to ease tax administration, particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference and hence shows simple negligence or plain oversight.

08CIR vs. Fortune Tobacco Corporation, G.R. Nos.167274-75, 21 July

2008)

Revenue Regulations (RR) No. 17-99 contrary to Section 145 of the 1997 Tax Code

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mpnanocpa-ue – college of lawtaxation law reviewBy adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, RR No. 17-99 [implementing Sections 141, 142, 143 and 145 (A) and (C) (1), (2), (3) and (4) of the 1997 Tax Code relative to the increase of the excise tax on distilled spirits, wines, fermented liquors and cigars and cigarettes packed by machine by 12% on January 1, 2000] effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12% — a situation not supported by the plain wording of Section 145 of the 1997 Tax Code.

15Planters Products, Inc. vs. Fertiphil Corporation, G.R. No. 166006,

March 14, 2008

TAX MUST BE FOR PUBLIC PURPOSE LOI 1464 issued on June 3, 1985 by President Ferdinand Marcos

provided for a capital recovery component (CRC) on the domestic sale of

fertilizers of not less than P10 per bag in favor of Planters Products, Inc. (PPI). Fertiphil Corporation sought a refund of the levy in a suit for collection and damages before the Makati Regional Trial Court (RTC), which granted the refund. The Court of Appeals (CA) affirmed the RTC decision. In sustaining the CA and RTC decisions, the Supreme Court ruled that Fertiphil has locus standi or right to appear in court since it suffered direct injury from the levy being required to pay it. It further held: The RTC has jurisdiction to consider the constitutionality of statutes, executive orders, presidential decrees and other issuances pursuant to Section 5, Article VIII of the 1987 Constitution. Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief.

The constitutionality of LOI 1465 is the very lis mota of the complaint for collection. The refund could not be granted without LOI 1465 being declared unconstitutional. The imposition of the levy was an exercise by the State of its taxation power. The primary purpose of the levy is revenue generation. “An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose.” The levy is not for a public purpose.

“First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. x x x Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming financially ‘viable.’ x x x Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by the FPA to Far East Bank and Trust Company, the depositary bank of PPI. x x x Fourth, the levy was used to pay the corporate debts of PPI.” The LOI is unconstitutional even if enacted under the police power as it did not promote public interest..

10Commissioner of Internal Revenue vs. Primetown Property Group,

Inc., G.R. No. 162155, August 28, 2007.

PRESCRIPTIVE PERIOD

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On April 14, 2000, the taxpayer filed its petition for review claiming refund based on its final adjusted return filed on April 14, 1998. Counting 365 days as a year pursuant to Article 13 of the Civil Code, the CTA found that the petition was filed beyond the two-year prescriptive period equivalent to 730 days for filing the claim under Section 229 of the NIRC, ruling that the petition was filed 731 days after the filing of the return. On appeal, the CA reversed the CTA and ruled that Article 13 of the Civil Code did not distinguish between a regular year and a leap year. The SC affirmed the CA’s reversal but ruled that the basis for the reversal is EO 292 of the Administrative Code of 1987, a more recent law, which provides that a year is composed of 12 calendar months. Using this, the petition was filed on the last day of the 24th calendar month from the day the taxpayer filed its final adjusted return.

SUPREME COURT HOLDS THAT THE TWO-YEAR PRESCRIPTIVE PERIOD CONSISTS OF 24 CALENDAR MONTHS PURSUANT TO SECTION 31, CHAPTER VIII, BOOK I OF E.O. 292, OR THE ADMINISTRATIVE CODE OF 1987.

Section 31 provides that a “year” shall be understood to be 12 calendar months. Both Article 13 of the Civil Code and Section 31 of the Administrative Code of 1987 deal with the same subject matter — the computation of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year is composed of 12 calendar months and the number of days is irrelevant. There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, the Supreme Court held that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal periods.

COMMISSIONER OF INTERNAL REVENUE vs. MIRANT PAGBILAO CORPORATION (Formerly SOUTHERN ENERGY QUEZON, INC.) (G.R. No. 172129, 12 September 2008)

What is the best evidence to substantiate the payment of input VAT? Is the non-payment of interest by reason of the late payment of input VAT fatal to a claim

42

mpnanocpa-ue – college of lawtaxation law reviewfor refund thereof? How is the prescriptive period in filing a claim for refund of unutilized input VAT reckoned?

Mirant Pagbilao Corporation (MPC) sells its generated power to the National Power Corporation (NPC). By reason of NPC’s tax exempt status, MPC filed an Application for Effective Zero Rating with the BIR’s Revenue District Office No. 60 in Lucena City. Getting no response from the RDO, MPC filed a request for ruling with the VAT Review Committee at the BIR National Office.

Subsequently, the CIR issued VAT Ruling No. 052-99, stating that “the supply of electricity by Hopewell Phil. To the NPC shall be subject to zero percent (0%) VAT. MPC then chose not to pay the VAT in the progress billings from Mitsubishi for the period covering April 1993 to September 1996. It was only in April 14, 1998 that MPC paid Mitsubishi the abovementioned VAT component of P135,993,570.

While awaiting the approval of its application with the RDO, MPC filed its quarterly VAT return for the second quarter of 1998 on August 25, 1998 where it reflected an input VAT of P148,003,047.62, which amount includes the abovementioned P135,993,570 supported by Official Receipt 0189. MPC subsequently filed an administrative claim for refund of unutilized input VAT, however, the CIR failed to act on the same. Hence, MPC filed a petition with the CTA.

The CTA granted MPC’s claim for input VAT refund or credit, but only for the amount of P10,766,939.48. On appeal, the CA modified the decision of the CTA and granted MPC’s claim for tax refund or credit in the total amount of P146,760,509.48. The CA likewise denied the CIR’s motion for reconsideration.

The main difference between the decisions of the CTA and CA involves the sufficiency of O.R. No. 0189 to substantiate the payment of input VAT. While the CA claimed that O.R. No. 0189 was the best evidence for thepayment of input VAT by MPC to Mitsubishi, on the other hand, the CTA claims otherwise and doubted the veracity and genuineness of O.R. No. 0189. Eventually, the SC held that O.R. No. 0189 undoubtedly proves payment by MPC of its creditable input VAT relative to its purchases from Mitsubishi.

The SC affirmed that O.R. No. 0198 in itself sufficiently proves payment of creditable input VAT involved pursuant to Section 110 (A)(1)(B) of the NIRC. The Court said that although the BIR is not precluded from requiring additional evidence to prove that input VAT had indeed been paid or, in fine, that the taxpayer is indeed entitled to a tax refund or credit for input

VAT,KxxxK..the law considers a duly executed VAT invoice or OR as sufficient evidence to support a claim for input tax credit.

The SC further said that any doubt as to what OR 0198 was issued for was put to rest by the report of the independent accountant that O.R. No. 0189 dated April 14, 1998 is for payment of the VAT on the progress billings from Mitsubishi Japan.

Furthermore, the SC ruled that MPC’s nonpayment of interest to Mitsubishi, in view of the former’s late payment of creditable input VAT, is not fatal to MPC’s claim for refund since such issue does not belie the fact of payment by MPC of the input VAT involved, as well as, the genuineness of OR 0189. Nonetheless, the Court affirmed that MPC has already lost its right to file the instant claim for refund of the unutilized input VAT since prescription has already set in. Section 112(A) of the NIRC declares that a

VAT registered person may file for the issuance of a tax credit certificate or refund of creditable input tax within two (2) years after the close of the taxable quarter when the sales were made. As pronounced by the Court, “prescriptive period commences from the close of the taxable quarter when the sales were made and not from the time the input VAT was paid nor from the time the official receipt was issued. Thus when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid.

Hence, while the creditable input VAT involved in the present case relates to the progress billing dated September 6, 1996, MPC filed the present claim for refund only on December 10, 1999, which is clearly beyond the period provided under the law.

Commissioner of Internal Revenue vs. Bank of the Philippine Islands, G.R. No. 134062, April 17, 2007.

ONLY NOTICE REQUIRED IN PRIOR LAW; FAILURE TO PROTEST WITHIN 30 DAYS IS FATAL

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mpnanocpa-ue – college of lawtaxation law reviewIn two notices dated October 28, 1988, the Commissioner of Internal Revenue validly assessed for 1986 deficiency percentage and documentary stamp taxes in the total amount of P129,488,656.63 by notifying the taxpayer of his findings. Section 228 of the 1997 NIRC requiring that the taxpayer should inform the taxpayer in writing of the law and facts on which the assessments for deficiency taxes were made is not applicable here. What applies is Section 270 (subsequently renumbered 229 prior to amendment as 228) of the old law prior to amendment by RA 8424, which merely required notice of findings. Due process was observed when a pre-assessment notice was issued and the taxpayer was given the opportunity to discuss the findings and even prepared worksheets in connection with the findings. The December 10, 1988 reply which stated “[a]s soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the assessment” does not qualify as a protest. Hence, the assessments became final and unappealable.

1997 TAX REFORM ACT CANNOT BE APPLIED RETROACTIVELY; WRITTEN CLAIM IS CONDITION PRECEDENT TO FILING A PETITION FOR REVIEW PRIOR THERETO

Under Section 230 of the old Tax Code, an actual written claim for refund is required. Amended income tax return filed on June 17, 1997 cannot be considered as a written claim. Section 204(c) of the 1997 NIRC (RA 8424, the 1997 Tax Reform Act), provides in pertinent part: “That a return filed showing an overpayment shall be considered as a written claim for credit or refund”, can only operate prospectively. The new Tax Code became effective only on January 1, 1998. Tax refunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpayer and liberally in favor of the government

Bank of the Philippine Islands (Formerly Far East Bank and Trust Company vs. CIR, G.R. No. 174942, March 7, 2008.

REQUEST FOR RE-INVESTIGATION NOT GRANTED DOES NOT TOLL PRESCRIPTIVE PERIOD; INVALID AND LAPSED WAIVER OF PRESCRIPTION

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Under Section 320 of the 1977 NIRC, the law then applicable, the period of prescription for assessment and collection is 3 years. The CIR had 3 years from the time he issued assessment notices to BPI on 7 April 1989 or until 6 April 1992 within which to collect the deficiency DST. However, it was only on 9 August 2002 that the CIR ordered BPI to pay the deficiency. For BPI’s protest letters dated 20 April and 8 May 1989 to toll the prescriptive period for collection, the request for reinvestigation should have been granted. There is nothing to show that such request was granted. Neither did the waiver of prescription effective until 31 December 1994 suspend the prescriptive period is invalid. The CIR himself contends that the waiver is void as it shows no date of acceptance in violation of RMO 20-90. At any rates, more than 8 years elapsed since expiry of the waiver before the BIR attempted to collect.

Prescriptive period for collection

The BIR has three years from the date of actual filing of the tax return to assess deficiency taxes or to commence proceedings for the collection of deficiency taxes. When it validly issues an assessment within the three year period, the BIR has another three years within which to collect the tax due by distraint, levy, or court proceeding. The three year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent to the taxpayer. Under Section 320 (now Section 223) of the Tax Code, in order to suspend the running of the prescriptive periods for assessment and collection, the request for reinvestigation must be granted first by the BIR.

Commissioner of Internal Revenue v. Bank of the Philippine Islands, G.R. No. 178490 dated July 7, 2009.

UNDER SEC. 76 OF THE NATIONAL INTERNAL REVENUE CODE (“NIRC”), ONCE THE CARRY-OVER OPTION IS TAKEN, NO APPLICATION FOR TAX REFUND OR TAX CREDIT CERTIFICATE

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mpnanocpa-ue – college of lawtaxation law reviewSHALL BE ALLOWED FOR THE CARRIED OVER EXCESS INCOME TAX CREDIT IN ANY SUBSEQUENT YEAR.

The phrase “for that taxable period” under Sec. 76 of the NIRC merely identifies the excess income tax, subject of the option, by referring to the taxable period when it was acquired by the taxpayer. In the present case, the excess income tax credit, which was opted to be carried over, was acquired during the taxable year 1998. The option to carry over the 1998 excess income tax credit is irrevocable; the taxpayer cannot later on opt to apply for a refund of the very same 1998 excess income tax credit. Thus, the failure of the taxpayer to indicate any option in its ITR for the year 2000 was already immaterial to its 1998 excess income tax credit.

Philex Mining vs. Commissioner of Internal Revenue (CIR), G.R. No. 148187 dated 16 April 2008)

Court rules against allowing bad debt deductions; circumstances show advance is not a true loan

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mpnanocpa-ue – college of lawtaxation law reviewThe Supreme Court (SC) ruled that advances are not loans which could be allowed as bad debt deductions if a) there was no unconditional obligation to return the advances; b) if such advances were made with neither security or collateral, or a specific deed evidencing the terms and conditions normally accompanying loans; c) the parties also did not provide a specific maturity date for the advances to become due and demandable, and the manner of payment was unclear; and d) if there is evidence of “partnership” between the parties as there would be a 50% sharing of the net profits as “compensation”.

The SC pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality. Furthermore, while a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership. In this case, the totality of the circumstances and the stipulations in the parties’ agreement indubitably lead to the conclusion that a partnership was formed between Co. P and Co. B.

FOR PURPOSES OF CLAIMING A BAD DEBT DEDUCTION, A TAXPAYER MUST PROVE THE EXISTENCE OF A SUBSISTING DEBT

P Corp. and B. Corp. entered into a “Power of Attorney Agreement” wherein P Corp. will manage and operate the mining claim owned by B Corp. Under the said Agreement, P Corp. as manager and operator of the mining claim was to receive fifty percent (50%) of the net profit to be earned from the operation of the mining claim. The said Agreement also provided that P Corp. was authorized to make advances of cash and property in the course of operating and managing the mining claim. Over the course of managing the mining claim, P Corp. made several advances of cash and properties. Because of continued losses, P Corp. withdrew as manager of the mining claim and operation of the mine eventually ceased. Eventually, two Agreements were entered into by P Corp. and B. Corp. in order to settle the advances made by P Corp. in the course of managing and operating the mining claim. B Corp. assigned certain properties to P Corp. to satisfy its indebtedness. Despite partial settlement, a substantial amount remained unpaid and this amount was subsequently written off by P Corp. as a bad debt and reported the same for income tax purposes. The BIR disallowed the bad debt deduction and assessed P Corp. for deficiency taxes. The matter was elevated to the CTA which upheld the assessment on the ground that there was no loan, and that the advances made by P Corp. were in

the nature of an investment in the mining claim. The Court of Appeals upheld the decision of the CTA, thus, the case was elevated to the Supreme Court (SC). Held: The SC affirmed the CTA decision and ruled that there was no valid and existing loan between P Corp. and B. Corp. The SC held P Corp. failed to prove that there was a valid and existing loan transaction between the two corporations. The SC agreed with the CTA that the relationship between the parties was actually that of a joint venture as evidenced by the stipulations on profit sharing and the contribution of funds. The SC held that in order to validly claim a bad debt deduction, a taxpayer must be able to establish the existence of a subsisting debt.

Here are selected February 2010 rulings of the Supreme Court of the Philippines on tax law:

Assessment; final decision. Records show that petitioner disputed the PAN but not the Formal Letter of Demand with Assessment Notices. Nevertheless, we

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mpnanocpa-ue – college of lawtaxation law reviewcannot blame petitioner for not filing a protest against the Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter indicate that it is the final decision of the respondent on the matter. We have time and again reminded the CIR to indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her right to appeal to the tax court accrues. Viewed in the light of the foregoing, respondent is now estopped from claiming that he did not intend the Formal Letter of Demand with Assessment Notices to be a final decision. Allied Banking Corporation vs. Commissioner of Internal Revenue, G.R. No. 175097, February 5, 2010.

Overseas communication tax; PAL. Under its franchise, Philippine Airlines is exempt from the overseas communications tax. Republic of the Philippines represented by the Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL), G.R. No. 179800, February 4, 2010.

VAT; invoice. The CTA en banc correctly denied petitioner Panasonic’s claim for refund of the VAT it paid as a zero-rated taxpayer on the ground that its sales invoices did not state on their faces that its sales were “zero-rated.” For the effective zero rating , the taxpayer has to be VAT-registered and must comply with invoicing requirements.

When petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on December 9, 1995 and took effect on January 1, 1996. It already required the printing of the word “zero-rated” on the invoices covering zero-rated sales. When R.A. 9337 amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code. This conversion from regulation to law did not diminish the binding force of such regulation with respect to acts committed prior to the enactment of that law. Panasonic Communication Imaging Corporation of the Philippines vs. Commissioner of Internal Revenue, G.R. No. 178090, February 8, 2010.

VAT; motion pictures. Gross receipts derived by respondents from admission tickets in showing motion pictures, films or movies are not subject to value-added tax under Section 108 of the National Internal Revenue Code of 1997.

Commissioner of Internal Revenue vs. SM Prime Holdings, Inc., et al., G.R. No. 183505. February 26, 2010.

VAT; refund of excess creditable VAT withheld. The CTA did not err in granting respondent Ironcon’s application for refund of its excess creditable VAT withheld.

Respondent Ironcon’s excess creditable VAT in this case consists of amounts withheld and remitted to the BIR by Ironcon’s clients. These clients were government agencies that applied the 6% withholding rate on their payments to Ironcon pursuant to Section 114 of the NIRC (prior to its amendment by R.A. 9337). Petitioner CIR’s main contention is that, since these amounts were withheld in accordance with what the law provides, they cannot be regarded as erroneously or illegally collected as contemplated in Sections 204(C) and 229 of the NIRC.

Petitioner CIR also points out that since the NIRC does not specifically grant taxpayers the option to refund excess creditable VAT withheld, it follows that such refund cannot be allowed. Excess creditable VAT withheld is much unlike excess income taxes withheld. In the latter case, Sections 76 and 58(D) of the NIRC specifically make the option to seek a refund available to the taxpayer. The CIR submits thus that the only option available to taxpayers in case of excess creditable VAT withheld is to apply the excess credits to succeeding quarters.

But the amounts involved in this case are creditable withholding taxes, not final taxes subject to withholding. As the CTA correctly points out, taxes withheld on certain payments under the creditable withholding tax system are but intended to approximate the tax due from the payee. The withheld taxes remitted to the BIR are treated as deposits or advances on the actual tax liability of the taxpayer, subject to adjustment at the proper time when the actual tax liability can be fully and finally determined. Commissioner of Internal Revenue vs. Ironco Builders and Development Corp., G.R. No. 180042, February 8, 2010.

Commercial Law

BOT; public bidding. In a situation where there is no other competitive bid submitted for the BOT project, that project would be awarded to the original

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mpnanocpa-ue – college of lawtaxation law reviewproponent thereof. However, when there are competitive bids submitted, the original proponent must be able to match the most advantageous or lowest bid; only when it is able to do so will the original proponent enjoy the preferential right to the award of the project over the other bidder. These are the general circumstances covered by Section 4-A of Republic Act No. 6957, as amended. In the instant case, AEDC may be the original proponent of the NAIA IPT III Project; however, the Pre-Qualification Bids and Awards Committee (PBAC) also found the People’s Air Cargo & Warehousing Co., Inc. Consortium (Paircargo), the predecessor of PIATCO, to be a qualified bidder for the project. Upon consideration of the bid of Paircargo/PIATCO, the PBAC found the same to be far more advantageous than the original offer of AEDC. It is already an established fact in Agan that AEDC failed to match the more advantageous proposal submitted by PIATCO by the time the 30-day working period expired on 28 November 1996; and since it did not exercise its right to match the most advantageous proposal within the prescribed period, it cannot assert its right to be awarded the project. Asia’s Emerging Dragon Corp. vs. DOTC, et al./Republic of the Philippines etc. et al. vs. Hon. CA, et al., G.R. No. 169914/G.R. No. 174166, April 7, 2009.

Dividends. Dividends are payable to the stockholders of record as of the date of the declaration of dividends or holders of record on a certain future date, as the case may be, unless the parties have agreed otherwise. A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties; hence, the transferor has the right to dividends as against the corporation without notice of transfer but it serves as trustee of the real owner of the dividends, subject to the contract between the transferor and transferee as to who is entitled to receive the dividends. Imelda O. Cojuangco, Prime Holdings, Inc., and the Estate of Ramon U. Cojuangco vs. Sandiganbayan, Republic of the Philippines and the Sheriff of Sandiganbayan, G.R. No. 183278, April 24, 2009.

Holdover. As a general rule, officers and directors of a corporation hold over after the expiration of their terms until such time as their successors are elected or appointed. Sec. 23 of the Corporation Code contains a provision to this effect. The holdover doctrine has, to be sure, a purpose which is at once legal as it is practical. It accords validity to what would otherwise be deemed as dubious corporate acts and gives continuity to a corporate enterprise in its relation to outsiders.

Authorities are almost unanimous that one who continues with the discharge of the functions of an office after the expiration of his or her legal term––no successor having, in the meantime, been appointed or chosen––is commonly regarded as a de factoofficer, even where no provision is made by law for his holding over and there is nothing to indicate the contrary. By fiction of law, the acts of such de facto officer are considered valid and effective. Dr. Hans Christian M. Señeres vs. Commission on Elections and Melquiades A. Robles, G.R. No. 178678, April 16, 2009.

Insurance Contract. It is settled that where the insurance contract provides for indemnity against liability to third persons, the liability of the insurer is direct and such third persons can directly sue the insurer. The direct liability of the insurer under indemnity contracts against third party liability does not mean, however, that the insurer can be held solidarily liable with the insured and/or the other parties found at fault, since they are being held liable under different obligations. The liability of the insured carrier or vehicle owner is based on tort, in accordance with the provisions of the Civil Code; while that of the insurer arises from contract, particularly, the insurance policy. The third-party liability of the insurer is only up to the extent of the insurance policy and that required by law; and it cannot be held solidarily liable for anything beyond that amount. Any award beyond the insurance coverage would already be the sole liability of the insured and/or the other parties at fault. The Heirs of George Y. Poe vs. Malayan Insurance Co. Inc., G.R. No. 156302, April 7, 2009 .

Intra-corporate controversy. A corporate officer’s dismissal or removal is always a corporate act and/or an intra-corporate controversy, over which the Securities and Exchange Commission [SEC] (now the Regional Trial Court) has original and exclusive jurisdiction. Atty. Virgilio R. Garcia vs. Eastern Telecommunications Philippines, Inc. et al./Eastern Telecommunications Philippines Inc. vs. Atty. Virgilio R. Garcia, G.R. No. 173115/G.R. No. 173163-64, April 16, 2009.

Non-stock corporations. A non-stock corporation may seize and dispose of the membership share of a fully-paid member on account of its unpaid debts to the corporation when it is authorized to do so under the corporate by-laws (even if not so provided in the Articles of Incorporation). Valley Golf & Country Club, Inc. vs. Rosa O. Vda. Caram, G.R. No. 158805, April 16, 2009.

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mpnanocpa-ue – college of lawtaxation law reviewLiability of corporate officers. Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. There was no showing of David willingly and knowingly voting for or assenting to patently unlawful acts of the corporation, or that David was guilty of gross negligence or bad faith. Armando David vs. National Federation of Labor Union, et al., G.R. No. 148263 and 148271-72, April 21, 2009.

Labor Law

Backwages. The Court agrees with the NLRC’s conclusion that petitioner is not entitled to backwages. He never bothered to redeem his driver’s license at the soonest possible time when there was no showing that he was unlawfully prevented by respondent from doing so. Thus, petitioner should not be paid for the time he was not working. The Court has held that where the failure of employees to work was not due to the employer’s fault, the burden of economic loss suffered by the employees should not be shifted to the employer. Each party must bear his own loss. It would be unfair to allow petitioner to recover something he has not earned and could not have earned, since he could not discharge his work as a driver without his driver’s license. Respondent should be exempted from the burden of paying backwages. Bernardino V. Navarro vs. P.V. Pajarillo Liner and NLRC, G.R. No. 164681, April 24, 2009.

Breach of trust. The documentary evidence of petitioner indubitably establishes that respondent committed payroll padding, sold canepoints without the knowledge and consent of management and misappropriated the proceeds thereof, and rented tractor to another farm and misappropriated the rental payments therefor. These acts constitute willful breach by the employee of the trust reposed in him by his employer – a ground for termination of employment. Bacolod-Talisay Realty and Development Corp., et al. vs. Romeo Dela Cruz, G.R. No. 179563, April 30, 2009.

CBA. Just like any other contract, a CBA is the law between the contracting parties and compliance therewith in good faith is required by law. HFS Phlippines, Inc., Ruben T. Del Rosario and IUM Ship Management vs. Ronaldo R. Pilar, G.R. No. 168716, April 16, 2009.

Due process. The Court of Appeals correctly held that petitioners did not comply with the proper procedure in dismissing respondent. In other words, petitioners failed to afford respondent due process by failing to comply with the twin notice requirement in dismissing him, viz: (1) a first notice to apprise him of his fault, and (2) a second notice to him that his employment is being terminated. The letter dated June 3, 1997 sent to respondent was a letter of suspension. It did not comply with the required first notice, the purpose of which is to apprise the employee of the cause for termination and to give him rasonable opportunity to explain his side. The confrontation before the barangay council did not constitute the first notice – to give the employee ample opportunity to be heard with the assistance of counsel, if he so desires. Hearings before thebarangay council do not afford the employee ample opportunity to be represented by counsel if he so desires because Section 415 of the Local Government Code mandates that “[i]n all katarungang pambarangay proceedings, the parties must appear in person without the assistance of counsel or his representatives, except for minors and incompetents who may be assisted by their next-of-kin who are not lawyers.” The requirement of giving respondent the first notice not having been complied with, discussions of whether the second notice was complied with is rendered unnecessary. Bacolod-Talisay Realty and Development Corp., et al. vs. Romeo Dela Cruz, G.R. No. 179563, April 30, 2009.

Due process; lack of jurisdiction. The proceedings before the Labor Arbiter deprived David of due process. MACLU and NAFLU filed their complaint against MAC on 12 August 1993. Arbiter Ortiguerra’s decision shows that MACLU, NAFLU, and MAC were the only parties summoned to a conference for a possible settlement. Because of MAC’s failure to appear, Arbiter Ortiguerra deemed the case submitted for resolution. David’s resignation from MAC took effect on 15 October 1993. NAFLU and MACLU moved to implead Carag and David for the first time only in their position paper dated 3 January 1994. David did not receive any summons and had no knowledge of the decision against him. The records of the present case fail to show any order from Arbiter Ortiguerra summoning David to attend the preliminary conference. Despite this lack of summons, in her Decision dated 17 June 1994, Arbiter Ortiguerra not only granted MACLU and NAFLU’s motion to implead Carag and David, she also held Carag and David solidarily liable with MAC. Armando David vs.. National Federation of Labor Union, et al, G.R. No. 148263 and 148271-72, April 21, 2009.

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mpnanocpa-ue – college of lawtaxation law reviewHearing. The guiding principles in connection with the hearing requirement in dismissal cases are:

(a) “ample opportunity to be heard” means any meaningful opportunity (verbal or written) given to the employee to answer the charges against him and submit evidence in support of his defense, whether in a hearing, conference or some other fair, just and reasonable way;

(b) a formal hearing or conference becomes mandatory only when requested by the employee in writing or substantial evidentiary disputes exist or a company rule or practice requires it, or when similar circumstances justify it;

(c) the “ample opportunity to be heard” standard in the Labor Code prevails over the “hearing or conference” requirement in the implementing rules and regulations. Felix B. Perez, et al. Vs. Philippine Telegraph and Telephone Company, G.R. No. 152048, April 7, 2009.

Illegal dismissal; abandonment . Petitioner insists that there cannot be any illegal dismissal because in the first place, there was no dismissal to speak of, as it was respondent who abandoned his work, after finding out that he was being investigated for theft. It is a basic principle that in the dismissal of employees, the burden of proof rests upon the employer to show that the dismissal is for a just cause and failure to do so would necessarily mean that the dismissal is not justified. Petitioner failed to discharge the burden of proof that complainant was guilty of abandonment. It did not adduce any proof to show that petitioner clearly and unequivocally intended to abandon his job. It has been repeatedly stressed that for abandonment to be a valid cause for dismissal there must be a concurrence of intention to abandon and some overt act from which it may be inferred that the employee had no more interest to continue working in his job. An employee who forthwith takes steps to protest his layoff cannot by any logic be said to have abandoned his work. Otherwise stated, one could not possibly abandon his work and shortly thereafter vigorously pursue his complaint for illegal dismissal. In the instant case, save for the allegation that respondent did not submit him to the investigation and the latter’s failure to return to work as instructed in the 8 February 1999 letter, petitioner was unable to present any evidence which tend to show respondent’s intent to abandon his work. Neither is the Court convinced that the filing of the illegal dismissal case was respondent’s way to avoid the charge of theft. On the contrary, the filing of the

complaint a few days after his alleged dismissal signified respondent’s desire to return to work, a factor which further militates against petitioner’s theory of abandonment. Harbor View Restaurant vs. Reynaldo Labro, G.R. No. 168273, April 30, 2009.

Illegal dismissal; burden of proof. Under the Labor Code, as amended, the requirements for the lawful dismissal of an employee are two-fold, the substantive and the procedural. Not only must the dismissal be for a valid or authorized cause, the rudimentary requirements of due process – notice and hearing – must, likewise, be observed before an employee may be dismissed. One does not suffice; without their concurrence, the termination would, in the eyes of the law, be illegal.

As the employer, petitioner has the burden of proving that the dismissal of petitioner was for a cause allowed under the law and that petitioner was afforded procedural due process. Petitioner failed to discharge this burden. Indeed, it failed to show any valid or authorized cause under the Labor Code which allowed it to terminate the services of individual respondents. Neither did petitioner show that individual respondents were given ample opportunity to contest the legality of their dismissal. No notice of such impending termination was ever given to them. Individual respondents were definitely denied due process. Having failed to establish compliance with the requirements on termination of employment under the Labor Code, the dismissal of individual respondents was tainted with illegality. Iligan Cement Corporation vs. Iliascor Employees and Workers Union-Southern Philippines Federation of Labor, et al., G.R. No. 158956, April 24, 2009.

Illegal dismissal; penalty. The worst that respondent committed was an inadvertent infraction. For that, the extreme penalty of dismissal imposed on him by petitioners was grossly disproportionate. Taking into account the managerial position he held and the prior warning issued to him for failing to communicate with his superiors, the penalty commensurate to the violation he committed should be suspension for three months. Gulf Air Jassim Hindri Abdullah, et al. vs. NLRC, et al., G.R. No. 159687, April 24, 2009.

Intra-union dispute. Pending the final resolution of the intra-union dispute, respondent’s officers remained duly authorized to conduct union affairs. De La

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mpnanocpa-ue – college of lawtaxation law reviewSalle University, et al. vs. De La Salle University Employees Association (DLSUEA-NAFTEU),G.R. No. 177283, April 7, 2009.

Labor only contracting. We are not convinced that Vedali is an independent contractor. Petitioner failed to present any service contract with Vedali in the proceedings with the Labor Arbiter. There is nothing on record that Vedali has a substantial capital or investment to actually perform the service under its own account and responsibility. Petitioner is a mere labor-only contractor because it only supplied workers to petitioner to work at its pier. In a labor-only contract, there are three parties involved: (1) the “labor-only” contractor; (2) the employee who is ostensibly under the employ of the “labor-only” contractor; and (3) the principal who is deemed the real employer. Under this scheme, the “labor-only” contractor is the agent of the principal. Iligan Cement Corporation vs. Iliascor Employees and Workers Union-Southern Philippines Federation of Labor, et al., G.R. No. 158956, April 24, 2009.

Liability of corporate officers. Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. There was no showing of David willingly and knowingly voting for or assenting to patently unlawful acts of the corporation, or that David was guilty of gross negligence or bad faith. Armando David vs. National Federation of Labor Union, et al, G.R. No. 148263 and 148271-72, April 21, 2009.

Loss of confidence. Loss of trust and confidence, as a valid ground for dismissal, must be based on willful breach of the trust reposed in the employee by his employer. Such breach is willful if it is done intentionally, knowingly, and purposely, without justifiable excuse, as distinguished from an act done carelessly, thoughtlessly, heedlessly or inadvertently. Elsewise stated, it must be based on substantial evidence and not on the employer’s whims or caprices or suspicions; otherwise, the employee would eternally remain at the mercy of the employer. A condemnation of dishonesty and disloyalty cannot arise from suspicion spawned by speculative inferences. Adam B. Garcia vs. NLRC (Second Division) Legazpi Oil Company, Inc. Romeo F. Mercado and Gus Zuluaga, G.R. No. 172854, April 16, 2009.

Loss of Confidence. Without undermining the importance of a shipping order or request, the respondents’ evidence is insufficient to clearly and convincingly establish the facts from which the loss of confidence resulted. Other than their bare allegations and the fact that such documents came into petitioners’ hands at some point, respondents should have provided evidence of petitioners’ functions, the extent of their duties, the procedure in the handling and approval of shipping requests and the fact that no personnel other than petitioners were involved. There was, therefore, a patent paucity of proof connecting petitioners to the alleged tampering of shipping documents. The alterations on the shipping documents could not reasonably be attributed to petitioners because it was never proven that petitioners alone had control of or access to these documents. Unless duly proved or sufficiently substantiated otherwise, impartial tribunals should not rely only on the statement of the employer that it has lost confidence in its employee. Felix B. Perez, et al. vs. Philippine Telegraph and Telephone Company,G.R. No. 152048, April 7, 2009.

Prescription. Articles 1139 to 1155 of the Civil Code provide the general law on prescription of actions. Under Article 1139, actions prescribe by the mere lapse of time prescribed by law. That law may either be the Civil Code or special laws as specifically mandated by Article 1148. In labor cases, the special law on prescription is Article 291 of the Labor Code. The Labor Code has no specific provision on when a monetary claim accrues. Thus, again the general law on prescription applies – Article 1150 of the Civil Code. Juanaria A. Rivera vs. United Laboratories, Inc., G.R. No. 155639, April 22, 2009.

Resignation. Resignation is defined as the voluntary act of an employee who finds himself in a situation where he believes that personal reasons cannot be sacrificed in favor of the exigency of the service and he has no other choice but to disassociate himself from his employment. Respondent’s resignation can be gleaned from the unambiguous terms of his letter to Captain Cristino. Respondent’s bare claim that he was forced to execute his resignation letter deserves no merit. Bare allegations of threat or force do not constitute substantial evidence to support a finding of forced resignation. That such claim was proferred a year later all the more renders his contention bereft of merit. Virgen Shipping Corporation, et al. vs. Jesus B. Barraquio, G.R. No. 178127, April 16, 2009.

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mpnanocpa-ue – college of lawtaxation law reviewResignation. Petitioner voluntarily resigned. Her employer cannot be held liable for constructive dismissal. Gloria Artiaga vs. Siliman University and Siliman University Medical Center, G.R. No. 178453, April 16, 2009.

Security of Tenure. Security of tenure in the career executive service, which presupposes a permanent appointment, takes place upon passing the CES examinations administered by the CES Board. It is that which entitles the examinee to conferment of CES eligibility and the inclusion of his name in the roster of CES eligibles. Under the rules and regulations promulgated by the CES Board, conferment of the CES eligibility is done by the CES Board through a formal board resolution after an evaluation has been done of the examinee’s performance in the four stages of the CES eligibility examinations. Upon conferment of CES eligibility and compliance with the other requirements prescribed by the Board, an incumbent of a CES position may qualify for appointment to a CES rank. Appointment to a CES rank is made by the President upon the Board’s recommendation. It is this process which completes the official’s membership in the CES and confers on him security of tenure in the CES. Petitioner does not seem to have gone through this definitive process.

At this juncture, what comes unmistakably clear is the fact that because petitioner lacked the proper CES eligibility and therefore had not held the subject office in a permanent capacity, there could not have been any violation of petitioner’s supposed right to security of tenure inasmuch as he had never been in possession of the said right at least during his tenure as Deputy Director for Hospital Support Services. Hence, no challenge may be offered against his separation from office even if it be for no cause and at a moment’s notice. Not even his own self-serving claim that he was competent to continue serving as Deputy Director may actually and legally give even the slightest semblance of authority to his thesis that he should remain in office. Be that as it may, it bears emphasis that, in any case, the mere fact that an employee is a CES eligible does not automatically operate to vest security of tenure on the appointee inasmuch as the security of tenure of employees in the career executive service, except first and second-level employees, pertains only to rank and not to the office or position to which they may be appointed. Jose Pepito M. Amores M.D. vs. Civil Service Commission, Board of Trustees of the Lung Center of the Philippines as represented by Hon. Manuel M. Dayrit and Fernando A. Melendres, M.D., G.R. No. 170093, April 29, 2009

SSS. The claim for funeral benefits under P.D. No. 626, as amended, which was filed after the lapse of 10 years by the therein petitioner who had earlier filed a claim for death benefits, had not prescribed. Soledad Muños Mesa vs. Social Security System, et al., G.R. No. 160467, April 7, 2009.

Transfer. Jurisprudence recognizes the exercise of management prerogative to transfer or assign employees from one office or area of operation to another, provided there is no demotion in rank or diminution of salary, benefits, and other privileges, and the action is not motivated by discrimination, made in bad faith, or effected as a form of punishment or demotion without sufficient cause. To determine the validity of the transfer of employees, the employer must show that the transfer is not unreasonable, inconvenient, or prejudicial to the employee; nor does it involve a demotion in rank or a diminution of his salaries, privileges and other benefits. Should the employer fail to overcome this burden of proof, the employee’s transfer shall be tantamount to constructive dismissal.

We have long stated that the objection to the transfer being grounded solely upon the personal inconvenience or hardship that will be caused to the employee by reason of the transfer is not a valid reason to disobey an order of transfer. Such being the case, petitioner cannot adamantly refuse to abide by the order of transfer without exposing herself to the risk of being dismissed. Hence, her dismissal was for just cause in accordance with Article 282(a) of the Labor Code. Aileen G. Herida vs. F4C Pawnshop and Jewelry Store/Marcelino Florete, Jr., G.R. No. 172601, April 16, 2009.

Unfair labor practice; burden of proof. Petitioner makes several allegations that UST committed ULP. The onus probandi falls on the shoulders of petitioner to establish or substantiate such claims by the requisite quantum of evidence. In labor cases as in other administrative proceedings, substantial evidence or such relevant evidence as a reasonable mind might accept as sufficient to support a conclusion is required. In the petition at bar, petitioner miserably failed to adduce substantial evidence as basis for the grant of relief. UST Faculty Union vs. University of Sto. Tomas, Rev. Fr. Rolando De la Rosa, Rev Fr. Rodelio Aligan, Domingo Legaspi, and Merecedes Hinayon, G.R. No. 180892, April 7, 2009.

Tax

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mpnanocpa-ue – college of lawtaxation law reviewExcise tax. Section 145 of the Tax Code, as amended by RA 9334: (1) does not violate the equal protection and unformity of taxation clauses; (2) does not violate the constitutional prohibition on unfair competition; and (3) does not vilate the constitutional prohibition on regresssive and inequitable taxation. British American Tobacco vs. Jose Isidro N. Camacho, et al. G.R. No. 163583, April 15, 2009.

Real Property Tax. Marcopper Mining’s siltation dam and decant system are not machineries but improvements subject to real property tax. The Provincial Assesor of Marinduque vs. Hon. Court of Appeals, et al., G.R. No. 170532, April 30, 2009.

Stamp tax. Pawnshop transactions evidenced by pawn tickets are subject to documentary stamp taxes. H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 171138, April 7, 2009.

Commercial Law

Insurance; insurable interest. Insurable interest is one of the most basic and essential requirements in an insurance contract. In general, an insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance. Section 10 of the Insurance Code indeed provides that every person has an insurable interest in his own life. Section 19 of the same code also states that an interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs. Violeta R. Lalican vs. The Insular Life Assurance Company Limited, as represented by the President Vicente R. Avilon, G.R. No. 183526, August 25, 2009 .

Insurance; reinstatement. To reinstate a policy means to restore the same to premium-paying status after it has been permitted to lapse. Both the Policy Contract and the Application for Reinstatement provide for specific conditions for the reinstatement of a lapsed policy. In the instant case, Eulogio’s death

rendered impossible full compliance with the conditions for reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his Application for Reinstatement and deposit the amount for payment of his overdue premiums and interests thereon with Malaluan; but Policy No. 9011992 could only be considered reinstated after the Application for Reinstatement had been processed and approved by Insular Life during Eulogio’s lifetime and good health.

Eulogio’s death, just hours after filing his Application for Reinstatement and depositing his payment for overdue premiums and interests with Malaluan, does not constitute a special circumstance that can persuade this Court to already consider Policy No. 9011992 reinstated. Said circumstance cannot override the clear and express provisions of the Policy Contract and Application for Reinstatement, and operate to remove the prerogative of Insular Life thereunder to approve or disapprove the Application for Reinstatement. Even though the Court commiserates with Violeta, as the tragic and fateful turn of events leaves her practically empty-handed, the Court cannot arbitrarily burden Insular Life with the payment of proceeds on a lapsed insurance policy. Justice and fairness must equally apply to all parties to a case. Courts are not permitted to make contracts for the parties. The function and duty of the courts consist simply in enforcing and carrying out the contracts actually made. Violeta R. Lalican vs. The Insular Life Assurance Company Limited, as represented by the President Vicente R. Avilon, G.R. No. 183526, August 25, 2009 .

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Here are selected August 2009 Philippine Supreme Court decisions on political law:

Constitutional law

Congress; legislative immunity. The immunity Senator Santiago claims is rooted primarily on the provision of Article VI, Section 11 of the Constitution.

As American jurisprudence puts it, this legislative privilege is founded upon long experience and arises as a means of perpetuating inviolate the functioning process of the legislative department. Without parliamentary immunity, parliament, or its equivalent, would degenerate into a polite and ineffective

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mpnanocpa-ue – college of lawtaxation law reviewdebating forum. Legislators are immune from deterrents to the uninhibited discharge of their legislative duties, not for their private indulgence, but for the public good. The privilege would be of little value if they could be subjected to the cost and inconvenience and distractions of a trial upon a conclusion of the pleader, or to the hazard of a judgment against them based upon a judge’s speculation as to the motives.

This Court is aware of the need and has in fact been in the forefront in upholding the institution of parliamentary immunity and promotion of free speech. Neither has the Court lost sight of the importance of the legislative and oversight functions of the Congress that enable this representative body to look diligently into every affair of government, investigate and denounce anomalies, and talk about how the country and its citizens are being served. Courts do not interfere with the legislature or its members in the manner they perform their functions in the legislative floor or in committee rooms. Any claim of an unworthy purpose or of the falsity and mala fides of the statement uttered by the member of the Congress does not destroy the privilege. The disciplinary authority of the assembly and the voters, not the courts, can properly discourage or correct such abuses committed in the name of parliamentary immunity.

For the above reasons, the plea of Senator Santiago for the dismissal of the complaint for disbarment or disciplinary action is well taken. Indeed, her privilege speech is not actionable criminally or in a disciplinary proceeding under the Rules of Court. It is felt, however, that this could not be the last word on the matter. Antero J. Pobre vs. Sen. Miriam Defensor-Santiago, A.C. No. 7399. August 25, 2009 .

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Here are selected July 2009 Philippine Supreme Court decisions on commercial, tax and labor laws:

Commercial Law

Board action. A corporate loan entered into by the President without board approval is binding on the corporation when the President is authorized under the by-laws to enter into loans on behalf of the

corporation. Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009 .

Tax Law

Minimum corporate income tax. Under its charter, Philippine Airlines is exempt from the minimum corporate income tax. Commissioner of Internal Revenue vs.. Philippine Airlines, Inc., G.R. No. 180066, July 7, 2009 .

Overseas communications tax. Section 13 of Presidential Decree No. 1590, granting respondent tax exemption, is clearly all-inclusive. The basic corporate income tax or franchise tax paid by respondent shall be “in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description imposed, levied, established, assessed or collected by any municipal, city, provincial, or national authority or government agency, now or in the future x x x,” except only real property tax. Even a meticulous examination of Presidential Decree No. 1590 will not reveal any provision therein limiting the tax exemption of respondent to final withholding tax on interest income or excluding from said exemption the overseas communications tax. Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL), G.R. No. 180043, July 14, 2009 .

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Categories: Commercial Law, Labor Law, Tax Law Tags: check-off, compensable illness, customs duties, franchise tax, illegal dismissal, illegal strike, jurisdiction, loss of confidence, minimum corporate income tax, probationary employment, project employee, real property tax, retirement, tax credit

Here are selected June 2009 decisions of the Philippine Supreme Court on commercial, tax and labor laws.

Commercial Law

Derivative suits. The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the

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mpnanocpa-ue – college of lawtaxation law reviewcorporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation. By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by the Supreme Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

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Here are selected March 2009 decisions on civil, commercial and labor laws:

Civil Law

Family home. A family home is generally exempt from execution, provided it was duly constituted as such. It is likewise a given that the family home must be constituted on property owned by the persons constituting it. As pointed out in Kelley, Jr. v. Planters Products, Inc.: ”[T]he family home must be part of the properties of the absolute community or the conjugal partnership, or of the exclusive properties of either spouse with the latter’s consent, or on the property of the unmarried head of the family.” In other words, the family home must be established on the properties of (a) the absolute community, or (b) the conjugal partnership, or (c) the exclusive property of either spouse with the consent of the other. It cannot be established on property held in co-ownership with third persons. However, it can be established partly on community property, or conjugal property and partly on the exclusive property of either spouse with the consent of the latter. If constituted by an unmarried head of a family, where there is no communal or conjugal property existing, it can be constituted only on his or her own property. Therein lies the fatal flaw in the postulate of petitioners. For all their arguments to the contrary, the stark and immutable fact is that the property on which their alleged family home stands is owned by

respondents and the question of ownership had been long laid to rest with the finality of the appellate court’s judgment in CA-G.R. CV No. 55207. Thus, petitioners’ continued stay on the subject land is only by mere tolerance of respondents. Simeon Cabang, et al. vs. Mr. & Mrs. Guillermo Basay, G.R. No. 180587, March 20, 2009.

National Internal Revenue Code

Documentary stamp tax; pledge. A pawn ticket is subject to documentary stamp tax. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 179085, January 21, 2010.

Interest; good faith reliance. With respect to petitioner’s argument against liability for surcharges and interest — that it was in good faith in not paying documentary stamp taxes, it having relied on the rulings of respondent CIR and the CTA that pawn tickets are not subject to documentary stamp taxes, the Court finds the same meritorious.

It is settled that good faith and honest belief that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law are sufficient justification to delete the imposition of surcharges and interest. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 179085, January 21, 2010.

Value added tax; pawnshops . Since the imposition of VAT on pawnshops, which are non-bank financial intermediaries, was deferred for the tax years 1996 to 2002, petitioner is not liable for VAT for the tax year 1999. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 179085, January 21, 2010.

VAP; coverage. It is well-settled that where the language of the law is clear and unequivocal, it must be given its literal application and applied without interpretation. The general rule of requiring adherence to the letter in construing statutes applies with particular strictness to tax laws and provisions of a taxing act are not to be extended by implication. A careful reading of the RMOs pertaining to the VAP shows that the recording of the information in the Official Registry Book of the BIR is a mandatory requirement before a

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mpnanocpa-ue – college of lawtaxation law reviewtaxpayer may be excluded from the coverage of the VAP. Commissioner of Internal Revenue vs. Julieta Ariete, G.R. No. 164152. January 21, 2010.

As a rule, the taxpayer must pay the real property tax assessed prior to protesting a real property tax assessment. Section 252 of the Local Government Code (LGC) provides:

Section 252. Payment Under Protest. -

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be annotated on the tax receipts the words “paid under protest”. The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt. . .

(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of this Code.

In Ty vs. Trampe, the Supreme Court ruled that the payment of the tax prior to protest is not necessary where the taxpayer questions the authority and power of the assessor to impose the assessment and of the treasurer to collect the tax. If the taxpayer claims that the property is exempt from real property tax, is the taxpayer required to pay the tax pursuant to Section 252 or is the taxpayer covered by Ty vs. Trampe?

Here are selected December 2009 rulings of the Supreme Court of the Philippines on tax law:


Tax refund; nature . It is settled that tax refunds are in the nature of tax exemptions. Laws granting exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Where the taxpayer claims a refund, the CTA as a court of record is required to conduct a formal trial (trial de novo) to prove every minute aspect of the claim. Kepco

Philippines Corporation vs. Commissioner of Internal Revenue, G.R. No. 179356, December 14, 2009 .

VAT; input VAT on capital goods . For petitioner’s purchases of domestic goods and services to be considered as “capital goods or properties,” three requisites must concur. First, the useful life of goods or properties must exceed one year; second, said goods or properties are treated as depreciable assets under Section 34 (f) and; third, the goods or properties must be used directly or indirectly in the production or sale of taxable goods and services.

From petitioner’s evidence, the account vouchers specifically indicate that the disallowed purchases were recorded under inventory accounts, instead of depreciable accounts. That petitioner failed to indicate under its fixed assets or depreciable assets account, goods and services allegedly purchased pursuant to the rehabilitation and maintenance of Malaya Power Plant Complex, militates against its claim for refund. As correctly found by the CTA, the goods or properties must be recorded and treated as depreciable assets under Section 34 (F) of the NIRC. Kepco Philippines Corporation vs. Commissioner of Internal Revenue, G.R. No. 179356, December 14, 2009 .

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Here are selected July 2009 Philippine Supreme Court decisions on commercial, tax and labor laws:

Commercial Law

Board action. A corporate loan entered into by the President without board approval is binding on the corporation when the President is authorized under the by-laws to enter into loans on behalf of the corporation. Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009 .

Minimum corporate income tax. Under its charter, Philippine Airlines is exempt from the minimum corporate income tax. Commissioner of Internal Revenue vs.. Philippine Airlines, Inc., G.R. No. 180066, July 7, 2009 .

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mpnanocpa-ue – college of lawtaxation law reviewOverseas communications tax. Section 13 of Presidential Decree No. 1590, granting respondent tax exemption, is clearly all-inclusive. The basic corporate income tax or franchise tax paid by respondent shall be “in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description imposed, levied, established, assessed or collected by any municipal, city, provincial, or national authority or government agency, now or in the future x x x,” except only real property tax. Even a meticulous examination of Presidential Decree No. 1590 will not reveal any provision therein limiting the tax exemption of respondent to final withholding tax on interest income or excluding from said exemption the overseas communications tax. Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL), G.R. No. 180043, July 14, 2009 .

Here are selected April 2009 decisions of the Supreme Court on commercial, labor and tax laws:

Commercial Law

BOT; public bidding. In a situation where there is no other competitive bid submitted for the BOT project, that project would be awarded to the original proponent thereof. However, when there are competitive bids submitted, the original proponent must be able to match the most advantageous or lowest bid; only when it is able to do so will the original proponent enjoy the preferential right to the award of the project over the other bidder. These are the general circumstances covered by Section 4-A of Republic Act No. 6957, as amended. In the instant case, AEDC may be the original proponent of the NAIA IPT III Project; however, the Pre-Qualification Bids and Awards Committee (PBAC) also found the People’s Air Cargo & Warehousing Co., Inc. Consortium (Paircargo), the predecessor of PIATCO, to be a qualified bidder for the project. Upon consideration of the bid of Paircargo/PIATCO, the PBAC found the same to be far more advantageous than the original offer of AEDC. It is already an established fact in Agan that AEDC failed to match the more advantageous proposal submitted by PIATCO by the time the 30-day working period expired on 28 November 1996; and since it did not exercise its right to match the most advantageous proposal within the prescribed period, it cannot assert its right to be awarded the project. Asia’s Emerging Dragon Corp. vs. DOTC, et al./Republic of the Philippines etc. et al. vs. Hon. CA, et al., G.R. No. 169914/G.R. No. 174166, April 7, 2009.

Dividends. Dividends are payable to the stockholders of record as of the date of the declaration of dividends or holders of record on a certain future date, as the case may be, unless the parties have agreed otherwise. A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties; hence, the transferor has the right to dividends as against the corporation without notice of transfer but it serves as trustee of the real owner of the dividends, subject to the contract between the transferor and transferee as to who is entitled to receive the dividends. Imelda O. Cojuangco, Prime Holdings, Inc., and the Estate of Ramon U. Cojuangco vs. Sandiganbayan, Republic of the Philippines and the Sheriff of Sandiganbayan, G.R. No. 183278, April 24, 2009.

Holdover. As a general rule, officers and directors of a corporation hold over after the expiration of their terms until such time as their successors are elected or appointed. Sec. 23 of the Corporation Code contains a provision to this effect. The holdover doctrine has, to be sure, a purpose which is at once legal as it is practical. It accords validity to what would otherwise be deemed as dubious corporate acts and gives continuity to a corporate enterprise in its relation to outsiders.

Authorities are almost unanimous that one who continues with the discharge of the functions of an office after the expiration of his or her legal term––no successor having, in the meantime, been appointed or chosen––is commonly regarded as a de factoofficer, even where no provision is made by law for his holding over and there is nothing to indicate the contrary. By fiction of law, the acts of such de facto officer are considered valid and effective. Dr. Hans Christian M. Señeres vs. Commission on Elections and Melquiades A. Robles, G.R. No. 178678, April 16, 2009.


Documentary stamp tax; pledge. A pawn ticket is subject to documentary stamp tax. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 179085, January 21, 2010.

Interest; good faith reliance. With respect to petitioner’s argument against liability for surcharges and interest — that it was in good faith in not paying documentary stamp taxes, it having relied on the rulings of respondent CIR and

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mpnanocpa-ue – college of lawtaxation law reviewthe CTA that pawn tickets are not subject to documentary stamp taxes, the Court finds the same meritorious.

It is settled that good faith and honest belief that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law are sufficient justification to delete the imposition of surcharges and interest. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 179085, January 21, 2010.

Value added tax; pawnshops . Since the imposition of VAT on pawnshops, which are non-bank financial intermediaries, was deferred for the tax years 1996 to 2002, petitioner is not liable for VAT for the tax year 1999. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 179085, January 21, 2010.

VAP; coverage. It is well-settled that where the language of the law is clear and unequivocal, it must be given its literal application and applied without interpretation. The general rule of requiring adherence to the letter in construing statutes applies with particular strictness to tax laws and provisions of a taxing act are not to be extended by implication. A careful reading of the RMOs pertaining to the VAP shows that the recording of the information in the Official Registry Book of the BIR is a mandatory requirement before a taxpayer may be excluded from the coverage of the VAP. Commissioner of Internal Revenue vs. Julieta Ariete, G.R. No. 164152. January 21, 2010.

Tax Procedure

Assessment; finality. Petitioner’s administrative protest was denied by Final Decision on Disputed Assessment dated August 2, 2005 issued by respondent and which petitioner received on August 4, 2005. Under the above-quoted Section 228 of the 1997 Tax Code, petitioner had 30 days to appeal respondent’s denial of its protest to the CTA.

Since petitioner received the denial of its administrative protest on August 4, 2005, it had until September 3, 2005 to file a petition for review before the CTA Division. It filed one, however, on October 20, 2005, hence, it was filed out of time. For a motion for reconsideration of the denial of the

administrative protest does not toll the 30-day period to appeal to the CTA. Fishwealth Canning Corporation vs. Commissioner of Internal Revenue, G.R. No. 179343, January 21, 2010.

Court of Tax Appeals; findings of fact. Generally, the findings of fact of the CTA, a court exercising expertise on the subject of tax, are regarded as final, binding, and conclusive upon this Court, especially if these are similar to the findings of the Court of Appeals which is normally the final arbiter of questions of fact. Commissioner of Internal Revenue vs. Julieta Ariete, G.R. No. 164152. January 21, 2010.

Income tax; mortgage. Under Revenue Memorandum Circular 58-2008, if the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax is due and must paid within ten (10) days following the end of the month in which the redemption period expires. The payment of the documentary stamp tax and the filing of the return thereof must be made within five (5) days from the end of the month when the redemption period expires.

Here, the executive judge approved the issuance of the certificate of sale to UCPB on March 1, 2002. Consequently, the three-month redemption period ended only on June 1, 2002. Only on this date then did the deadline for payment of creditable withholding tax and documentary stamp tax on the extrajudicial foreclosure sale become due. UCPB had, therefore, until July 10, 2002 to pay the creditable withholding tax and July 5, 2002 to pay the stamp tax. Since it paid both taxes on July 5, 2002, it is not liable for deficiencies. Commissioner of Internal Revenue vs. United Coconut Planters Bank, G.R. No. 179063, October 23, 2009 .

Stamp tax; certificates drawing interest. Chinabank’s special savings deposits (SSD), otherwise known as “Savings Plus Deposit, are “certificates of deposits drawing interest” subject to documentary stamp tax as provided for in Section 180 of the 1997 NIRC. China Banking Corporation vs. The Commissioner of Internal Revenue, G.R. No. 172359, October 2, 2009 .

Value added tax; presumptive input VAT. FBDC is entitled to transitional input tax credit under Section 105 of the NIRC, on its Global City land inventory. Under Revenue Regulations No. 6-97, the allowable transitional input tax credit is not limited to improvements on real properties. Fort Bonifacio Development

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http://sc.judiciary.gov.ph/jurisprudence/2009/october2009/172359.htm











mpnanocpa-ue – college of lawtaxation law reviewCorporation vs. Commissioner of Internal Revenue, et al./Fort Bonifacio Development Corporation vs. Commissioner of Internal Revenue, et al., G.R. No. 158885/G.R. No. 170680, October 2, 2009 .

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents. FELICIANO, J.:p

FACTS: For the taxable years 1974 & 1975 both ending on 30 June Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA") of P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the 35% withholding tax at source was deducted.

5 January 1977 - P&G-Phil filed with the CIR a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things,

Sec. 24 (b) (1) of NIRC as amended by PD 369, the applicable rate of withholding tax on the dividends remitted was only 15% and 35% of the dividends

13 July 1977 - P&G-Phil filed a petition for review with CTA, which on 31 January 1984 decision ordered CIR to refund or grant the tax credit the mentioned amount. This was however reversed by CTA 2nd Division holding as follows:

P&G-USA and not P&G-Phil ., was the proper party to claim the refund or tax credit here involved;

there is nothing in Sec. 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends; and

P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent company in the

P&G-USA may be subject to the preferential tax rate of 15% instead of 35%."

ISSUES: WON (1) P&G-Phil. has the capacity to claim for refund or tax credit (2) Dividends are taxable to 15% (3) CIR can raise this alleged incapacity for the first time

HELD/ ARGUMENTS:

(1) The NIRC provides rules for a claim for refund or tax credit filed with the CIR is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected, viz:

Sec. 306.Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: . . .

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner may: (3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D. No. 69)

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It thus becomes important to note that under Sec.53(c) of NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC.

The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer", both connote legal obligation or duty to pay a tax.

There is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. Although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

Hence, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Sec. 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

(2) Sec. 24(b)(1) of NIRC provides:(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this Section . . .

The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation.

In other words, in the instant case, the reduced 15% dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the preferred 15% dividend tax rate.Further, Philippine NIRC does not require that the US tax law deem the parent-corporation to have paid the 20 percentage points of dividend tax waived by the Philippines but only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the 20 percentage points waived by the Philippines.

Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

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Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall —

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

(c) Applicable Rules(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

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b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA.

"Deemed Paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA, of which. the US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits.

What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream.

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.x 35% — Regular Philippine corporate income tax rate———P35.00 — Paid to the BIR by P&G-Phil. as Philippine corporate income tax.P100.00-35.00———P65.00 — Available for remittance as dividends to P&G-USAP65.00 — Dividends remittable to P&G-USAx 35% — Regular Philippine dividend tax rate under Sec, 24(b)(1) NIRCP22.75 — Regular dividend taxP65.00 — Dividends remittable to P&G-USAx 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC———P9.75 — Reduced dividend taxP22.75 — Regular dividend tax under Section 24 (b) (1), NIRC-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC———P13.00 — Amount of dividend tax waived by Philippine government

under===== Section 24 (b) (1), NIRC.

The amount above is as follows:(a) P13.00 for every P100.00 of pre-tax net income earned by P&G-

Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

(b) the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA- 9.75 — Dividend tax withheld at the reduced (15%) rate———P55.25 — Dividends actually remitted to P&G-USA

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P35.00 — Philippine corporate income tax paid by P&G-Philto the BIRDividends actuallyremitted by P&G-Phil.to P&G-USA

P55.25x P35.00 P29.75 Amount of accumulated P65.00 profits earned byP&G-Phil. in excess of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

Section 30 (c) (3) and (8), NIRC, provides:(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .(c) Taxes. — . . . (3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government—e.g., for taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income,

war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term "accumulated profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period.

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

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As to the applicable tax rate:The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.

Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ."

There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

The position originally taken by the Second Division results in a severe practical problem of administrative circularity which in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that would require P&G Phil., or any

Philippine corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We should leave details relating to administrative implementation where they properly belong — with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form: (1) imperative to adopt measures responsive to the requirements of a developing economy foremost of which is the financing of economic development programs; (2) nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the rate of 35%; (3) in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loan.

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax

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mpnanocpa-ue – college of lawtaxation law reviewpayable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 — Dividends remittable to P&G-USA - 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.———P55.25 — Dividends actually remitted to P&G-USAP55.25x 46% — Maximum US corporate income tax rate———P25.415—US corporate tax payable by P&G-USAwithout tax creditsP25.415- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.at 15% (Section 901, US Tax Code) P15.66 — US corporate income tax payable after Section 901——— tax credit.P55.25- 15.66———P39.59 — Amount received by P&G-USA net of R.P. and U.S. taxes

without ===== "deemed paid" tax credit.P25.415- 29.75 — "Deemed paid" tax credit under Section 902 US——— Tax Code (please see page 18 above)- 0 - — US corporate income tax payable on dividends====== remitted by P&G-Phil. to P&G-USA after Section 902 tax credit.P55.25 — Amount received by P&G-USA net of RP and US====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after

US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should encourage additional investment or re-investment in the Philippines by P&G-USA.

It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. — Dividends

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] —.

This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

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