1.
Chamber of Real Estate and Builders’ the income tax on the sale of real estate classified as ordinary
Associations, Inc., v. The Hon. Executive
Secretary Alberto Romulo, et al
G.R. No. 160756. March 9, 2010
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
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?
Held: (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 three 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.
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.
2. COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. CEBU PORTLAND CEMENT
 COMPANY and COURT OF TAX APPEALS,
respondents.
G.R. No. L-29059 December 15, 1987
FACTS: By virtue of a decision of the CTA, as modified on
appeal by the Supreme Court, the CIR was ordered to refund to
Cebu Portland Cement Company the amount of P 359,408.98,
representing overpayments of ad valorem taxes on cement
produced and sold by it. When respondent moved for a writ of
execution, petitioner opposed on the ground that the private
respondent had an outstanding sales tax liability to which the
judgment debt had already been credited. In fact, it was
stressed, there was still a balance owing on the sales taxes in
the amount of P 4,789,279.85 plus 28% surcharge. The CTA
granted the CIR’s motion.
The CIR claims that the refund should be charged against the
tax deficiency of the private respondent on the sales of cement
under Section 186 of the Tax Code. His position is that cement
is a manufactured and not a mineral product and therefore not
exempt from sales taxes. The petitioner also denies that the
sales tax assessments have already prescribed because the
prescriptive period should be counted from the filing of the
sales tax returns, which had not yet been done by the private
respondent.
Meanwhile, the private respondent disclaims liability for the
sales taxes, on the ground that cement is not a manufactured
product but a mineral product. As such, it was exempted from
sales taxes. Also, the alleged sales tax deficiency could not as
yet be enforced against it because the tax assessment was not
yet final, the same being still under protest and still to be
definitely resolved on the merits. Besides, the assessment had
already prescribed, not having been made within the
reglementary five-year period from the filing of the tax returns.
ISSUE: Whether or not sales tax was properly imposed upon
private respondent.
HELD: Yes, because cement has always been considered a
manufactured product and not a mineral product. This matter
was extensively discussed and categorically resolved in
Commissioner of Internal Revenue v. Republic Cement
Corporation, decided on August 10, 1983, stating that cement
qua cement was never considered as a mineral product within
the meaning of Section 246 of the Tax Code, notwithstanding
that at least 80% of its components are minerals, for the
simple reason that cement is the product of a manufacturing
process and is no longer the mineral product contemplated in
the Tax Code (i.e.; minerals subjected to simple treatments)
for the purpose of imposing the ad valorem tax.
The argument that the assessment cannot as yet be enforced
because it is still being contested loses sight of the urgency of
the need to collect taxes as "the lifeblood of the government."
If the payment of taxes could be postponed by simply
questioning their validity, the machinery of the state would
grind to a halt and all government functions would be
paralyzed.
3. Municipality of Makati v. Court of Appeals
GR # 89898-9 10/01/90
Facts: An expropriation proceeding for a piece of land filed by
the Municipality of Makati against Admiral Financial and
Credit Corp resulted with the Municipality having to pay P
5,291,666.00 less initial payments by the municipality. After
that, private respondent filed a writ for execution for the
balance. Regional Trial Court granted the motion and directed
the bank to deliver the said balance. Subsequent motions for
reconsideration and appeal to the respondent Court of Appeals
by the municipality in order to stop the garnishment.
Issues: Whether or not the court can validly subject
government accounts/property to garnishment. Whether or
not the the court erred with the decision of assessing the
higher amount as to how much the municipality is willing to
pay.
Held: The court ruled that the Municipality of Makati's
accounts or property cannot be held for garnishment as
government's fund, held for public use, can not be held for
garnishment. However, the court still held the Municipality
liable for the assessed value of the land and improvements
because the private respondent should be entitled to just
compensation.
4. CIR –v– Algue, Inc., & CTA
G.R. No. L-28896 February 17, 1988
FACTS: Algue, Inc., a domestic corporation engaged in
engineering, construction and other allied activities. Philippine
Sugar Estate Development Company had earlier appointed
Algue as its agent, authorizing it to sell its land, factories and
oil manufacturing process. [There was a sale for which] Algue
received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees
were paid to the aforenamed individuals. The payees duly
reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon, and there
was no distribution of dividends was involved.
[Algue claimed the 75,000 to be deductible from their tax, to
which the CIR disallowed.]
ISSUE: Whether or not the Collector of Internal Revenue
correctly disallowed the P75,000.00 deduction claimed by
private respondent Algue as legitimate business expenses in its
income tax returns.
HELD: NO – CIR is not correct. The burden is on the
taxpayer to prove the validity of the claimed deduction. In the
present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved
that the payment of the fees was necessary and reasonable in
the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat
and should be, as it was, sufficiently recompensed.
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. On the other hand,
such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself.
It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common
good, may be achieved.
It is said that taxes are what we pay for civilization society.
Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to
must contribute his share in the running of the government.
The government for its part, is expected to respond in the form
of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all
the awesome power of the tax collector, he may still be stopped
in his tracks if the taxpayer can demonstrate, as it has here,
that the law has not been observed.
5. BPI Family Savings Bank v. CA, et al.
GR No. 122480; April 12, 2000
Facts: Petitioner BPI Family Savings Bank had an excess
withholding taxes for the year 1989 amounting to P112,491.90.
It indicated in its 1989 Income Tax Return that it would apply
the said amount as a tax credit for the succeeding taxable year,
1990. However because of business losses, petitioner informed
the Bureau of Internal Revenue (BIR) that it would claim the
amount as a tax refund, instead of applying it as a tax credit.
When no action from the BIR was forthcoming, petitioner filed
its claim with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund.
Since petitioner declared in its 1989 Income Tax Return that it
would apply the excess withholding tax as a tax credit for the
following year, the Tax Court held that petitioner was
presumed to have done so. The CTA and the CA ruled that
petitioner failed to overcome this presumption because it did
not present its 1990 Return, which would have shown that the
amount in dispute was not applied as a tax credit. Hence, the
CA concluded that petitioner was not entitled to a tax refund.
Issue: Whether or not petitioner is entitled to the refund of
P112,491.90, representing excess creditable withholding tax
paid for the taxable year 1989.
Held: It is undisputed that petitioner had excess withholding
taxes for the year 1989 and was thus entitled to a refund
amounting to P112,491. Pursuant to Section 69 of the 1986 Tax
Code which states that a corporation entitled to a refund may
opt either (1) to obtain such refund or (2) to credit said amount
for the succeeding taxable year.
Petitioner presented evidence to prove its claim that it did not
apply the amount as a tax credit.
A copy of the Final Adjustment Return for 1990 was attached
to petitioner's Motion for Reconsideration filed before the
CTA. A final adjustment return shows whether a corporation
incurred a loss or gained a profit during the taxable year. In
this case, that Return clearly showed that petitioner incurred
P52,480,173 as net loss in 1990. Clearly, it could not have
applied the amount in dispute as a tax credit.
The BIR did not controvert the veracity of the said return. It
did not even file an opposition to petitioner's Motion and the
1990 Final Adjustment Return attached thereto.
Petitioner also calls the attention of this Court, as it had done
before the CTA, to a Decision rendered by the Tax Court in
CTA Case No. 4897, involving its claim for refund for the year
1990. In that case, the Tax Court held that "petitioner suffered
a net loss for the taxable year 1990 . . . ." Respondent, however,
urges this Court not to take judicial notice of the said case.
Respondents' reasoning underscores the weakness of their
case. For if they had really believed that petitioner is not
entitled to a tax refund, they could have easily proved that it
did not suffer any loss in 1990. Indeed, it is noteworthy that
respondents opted not to assail the fact appearing therein —
that petitioner suffered a net loss in 1990 — in the same way
that it refused to controvert the same fact established by
petitioner's other documentary exhibits
Technicalities and legalisms, however exalted, should not be
misused by the government to keep money not belonging to it
and thereby enrich itself at the expense of its law-abiding
citizens. If the State expects its taxpayers to observe fairness
and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments of such
taxes. Indeed, the State must lead by its own example of honor,
dignity and uprightness.
6. COMMISSIONER OF INTERNAL REVENUE
vs.TOKYO SHIPPING CO. LTD., represented by
SORIAMONT STEAMSHIP AGENCIES INC., and
COURT OF TAX APPEALS
244 SCRA 342; May 26, 1995
Facts: Tokyo Shipping a foreign corporation represented in
the Philippines by Soriamont Steamship Agencies and owns
and operates M/V Gardenia. NASUTRA 2 chartered M/V
Gardenia to load 16,500 metric tons of raw sugar in the
Philippines. Soriamont Agency, 4 paid the required income and
common carrier's taxes P59,523.75 and P47,619.00,
respectively (Total P107,142.75). Upon arriving, however, at
Guimaras Port of Iloilo, the vessel found no sugar for loading.
NASUTRA and Soriamont mutually agreed to have the vessel
sail for Japan without any cargo. Claiming the pre-payment of
income and common carrier's taxes as erroneous since no
receipt was realized from the charter agreement, Tokyo
instituted a claim for tax credit or refund of the sum
P107,142.75 from CIR. Petitioner failed to act promptly on the
claim , hence Tokyo filed a petition for review 6 before Court of
Tax Appeals. CTA decided for Tokyo and denied MR of CIR.
Issue: WON Tokyo Shipping Co. Ltd., is entitled to a refund or
tax credit – whether it was able to prove that it derived no
receipts from its charter agreement, and hence is entitled to a
refund of the taxes it pre-paid to the government.
Ruling: Yes. Pursuant to Section 24 (b) (2) of the National
Internal Revenue Code which at that time, a resident foreign
corporation engaged in the transport of cargo is liable for taxes
depending on the amount of income it derives from sources
within the Philippines. Thus, before such a tax liability can be
enforced the taxpayer must be shown to have earned income
sourced from the Philippines.
Indeed, a claim for refund is in the nature of a claim for
exemption 8 and should be construed in strictissimi
juris against the taxpayer. And Tokyo has the burden of proof
to establish the factual basis of its claim for tax refund.
But sufficient evidence has already been adduced by Tokyo
proving that it derived no receipt from its charter agreement
with NASUTRA - M/V "Gardenia" arrived in Iloilo on January
10, 1981 but found no raw sugar to load and returned to Japan
without any cargo laden on board.
7. COMMISSIONER OF INTERNAL REVENUE V.
MISTUBISHI METAL CORPORATION (181
SCRA 214)
Facts: Atlas Consolidated Mining andDevelopment
Corporation, a domestic corporation, entered into a Loan and
Sales Contract with Mitsubishi Metal Corporation, a Japanese
corporation licensed to engage in business in the Philippines. To
be able to extend the loan to Atlas, Mitsubishi entered into
another loan agreement with Export-Import Bank (Eximbank),
a financing institution owned, controlled, and financed by the
Japanese government. After making interest payments to
Mitsubishi, with the corresponding 15% tax thereon remitted to
the Government of the Philippines, Altas claimed for tax credit
with the Commissioner of Internal Revenue based on Section
29(b)(7) (A) of the National Internal Revenue Code, stating that
since Eximbank, and not Mitsubishi, is where the money for the
loan originated from Eximbank, then it should be exempt from
paying taxes on its loan thereon.
Issue: WON the interest income from the loans extended to
Atlas by Mitsubishi is excludible from gross income taxation.
NO. Mitsubishi secured the loan from Eximbank in its own
independent capacity as a private entity and not as a conduit of
Eximbank. Therefore, what the subject of the 15% withholding
tax is not the interest income paid by Mitsubishi to Eximbank,
but the interest income earned by Mitsubishi from the loan to
Atlas. Thus, it does not come within the ambit of Section 29(b)
(7)(A), and it is not exempt from the payment of taxes.
Notes: Findings of fact of the Court of Tax Appeals are entitled
to the highest respect and can only be disturbed on appeal if
they are not supported by substantial evidence or if there is a
showing of gross error or abuse on the part of the tax court.
Laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception.
8. Phil Bank of Communications vs. CIR, et. al.
302 SCRA 241 January 28, 1999
Facts: Petitioner, Philippine Bank of Communications
(PBCom), a commercial banking corporation duly organized
under Philippine laws, filed its quarterly income tax returns
for the first and second quarters of 1985, reported profits, and
paid the total income tax of P5,016,954.00. The taxes due were
settled by applying PBCom's tax credit memos.
Subsequently, however, PBCom suffered losses so that when it
filed its Annual Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise reported a net loss
of P14,129,602.00, and thus declared no tax payable for the
year.
But during these two years, PBCom earned rental income from
leased properties. The lessees withheld and remitted to the
BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
Subsequently, Petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the
first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund
of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of
Internal Revenue, petitioner instituted a Petition for Review
on November 18, 1988 before the Court of Tax Appeals (CTA).
The CTA rendered a decision which, as stated on the outset,
denied the request of petitioner for a tax refund or credit in the
sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law.
The petitioner's claim for refund in 1986 amounting to
P234,077.69 was likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment in
the succeeding year.
ISSUE: Whether the Court of Appeals erred in denying the
plea for tax refund or tax credits on the ground of prescription
HELD: No. Basic is the principle that "taxes are the lifeblood
of the nation." The primary purpose is to generate funds for
the State to finance the needs of the citizenry and to advance
the common weal. 13 Due process of law under the
Constitution does not require judicial proceedings in tax cases.
This must necessarily be so because it is upon taxation that the
government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes
adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible.
From the same perspective, claims for refund or tax credit
should be exercised within the time fixed by law because the
BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by
incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977
(now Sec. 229, NIRC of 1997) provides for the prescriptive
period for filing a court proceeding for the recovery of tax
erroneously or illegally collected.
The rule states that the taxpayer may file a claim for refund or
credit with the Commissioner of Internal Revenue, within two
(2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided,
should be computed from the time of filing the Adjustment
Return and final payment of the tax for the year.
9. Sison v. Ancheta
GR No. L-59431; 25 July 1984
F A C T S: Batas Pambansa 135 was enacted. Sison, as
taxpayer, alleged that its provision (Section 1) unduly
discriminated against him by the imposition of higher rates
upon his income as a professional, that it amounts to class
legislation, and that it transgresses against the equal
protection and due process clauses of the Constitution as well
as the rule requiring uniformity in taxation.
I S S U E: Whether or not BP 135 violates the due process
and equal protection clauses, and the rule on uniformity in
taxation.
H E L D: There is a need for proof of such persuasive
character as would lead to a conclusion that there was a
violation of the due process and equal protection clauses.
Absent such showing, the presumption of validity must prevail.
Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at
the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation.
Where the differentiation conforms to the practical dictates of
justice and equity, similar to the standards of equal protection,
it is not discriminatory within the meaning of the clause and is
therefore uniform. Taxpayers may be classified into different
categories, such as recipients of compensation income as
against professionals. Recipients of compensation income are
not entitled to make deductions for income tax purposes as
there is no practically overhead expense, while professionals
and businessmen have no uniform costs or expenses necessary
to produce their income. There is ample justification to adopt
the gross system of income taxation to compensation income,
while continuing the system of net income taxation as regards
professional and business income.
10. Reyes vs. Almanzor
196 SCRA 322; April 26, 1991
FACTS: Petitioners J.B.L. Reyes, Edmundo and Milagros
Reyes are owners of parcels of land situated in Tondo and Sta.
Cruz Districts, City of Manila, which are leased and entirely
occupied as dwelling sites by tenants. Said tenants were paying
monthly rentals not exceeding three hundred pesos (P300.00)
in July, 1971.
On July 14, 1971, the National Legislature enacted Republic
Act No. 6359 prohibiting for one year from its effectivity, an
increase in monthly rentals of dwelling units or of lands on
which another's dwelling is located, where such rentals do not
exceed three hundred pesos (P300.00) a month but allowing
an increase in rent by not more than 10% thereafter.
On October 12, 1972, Presidential Decree No. 20 amended R.A.
No. 6359 by making absolute the prohibition to increase
monthly rentals below P300.00 and by indefinitely suspending
the aforementioned provision of the Civil Code, excepting
leases with a definite period. Consequently, the Reyeses were
precluded from raising the rentals and from ejecting the
tenants thereof.
The City Assessor of Manila assessed the value of the Reyeses
property on the schedule of market values duly reviewed by the
Secretary of Finance. The revision entailed an increase to the
tax rates and the petitioners averred that the reassessment
imposed upon them greatly exceeded the annual income
derived from their properties.
ISSUE: WON income approach is the method to be used in
the tax assessment and not the comparable sales approach.
HELD: The income approach and not the comparable sales
approach must be used.
“By no strength of the imagination can the market value of
properties covered by P.D. No. 20 be equated with the market
value of properties not so covered. The former has naturally a
much lesser market value in view of the rental restrictions.
In the case at bar, not even the factors determinant of the
assessed value of subject properties under the "comparable
sales approach" were presented by the public respondents,
namely: (1) that the sale must represent a bonafide arm's
length transaction between a willing seller and a willing buyer
and (2) the property must be comparable property. Nothing
can justify or support their view as it is of judicial notice that
for properties covered by P.D. 20 especially during the time in
question, there were hardly any willing buyers. As a general
rule, there were no takers so that there can be no reasonable
basis for the conclusion that these properties were comparable
with other residential properties not burdened by P.D. 20.”
11. PAL v. Sec of Finance
GR No. 115852; 30 October 1995
F A C T S: The Value-Added Tax [VAT] is levied on the sale,
barter or exchange of goods and properties as well as on the
sale or exchange of services. It is equivalent to 10% of the gross
selling price or gross value in money of goods or properties
sold, bartered or exchanged or of the gross receipts from the
sale or exchange of services. Republic Act No. 7716 seeks to
widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue
Code.
These are various suits for certiorari and prohibition
challenging the constitutionality of RA 7716:
In the case at bar, PAL attacks the formal validity of Republic
Act No. 7716. PAL contends that it violates Art. VI, Section
26[1] which provides that "Every bill passed by Congress shall
embrace only one subject which shall be expressed in the title
thereof." It is contended that neither H. No. 11197 nor S. No.
1630 provided for removal of exemption of PAL transactions
from the payment of the VAT and that this was made only in
the Conference Committee bill which became Republic Act No.
7716 without reflecting this fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE-ADDED
TAX [VAT] SYSTEM, WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES.
Furthermore, section 103 of RA 7716 states the following:
Section 103. Exempt Transactions.- The following shall be
exempt from the value-added tax:
[q] Transactions which are exempt under special laws, except
those granted under Presidential Decree Nos. 66, 529, 972,
1491, 1590.
The effect of the amendment is to remove the exemption
granted to PAL, as far as the VAT is concerned.
Philippine Airlines [PAL] claims that its franchise under P.D.
No. 1590 which makes it liable for a franchise tax of only 2% of
gross revenues "in lieu of all the 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," cannot be amended by Rep. Act No. 7716 as to make it
[PAL] liable for a 10% value-added tax on revenues, because
Sec. 24 of P.D. No. 1590 provides that PAL's franchise can only
be amended, modified or repealed by a special law specifically
for that purpose.
I S S U E: Whether or not this amendment of Section 103 of
the NIRC is fairly embraced in the title of Republic Act No.
7716, although no mention is made therein of P. D. No. 1590
H E L D: The court ruled in in the affirmative. The title states
that the purpose of the statute is to expand the VAT system,
and one way of doing this is to widen its base by withdrawing
some of the exemptions granted before. To insist that P. D. No.
1590 be mentioned in the title of the law, in addition to Section
103 of the NIRC, in which it is specifically referred to, would be
to insist that the title of a bill should be a complete index of its
content.
The constitutional requirement that every bill passed by
Congress shall embrace only one subject which shall be
expressed in its title is intended to prevent surprise upon the
members of Congress and to inform the people of pending
legislation so that, if they wish to, they can be heard regarding
it. If, in the case at bar, petitioner did not know before that its
exemption had been withdrawn, it is not because of any defect
in the title but perhaps for the same reason other statutes,
although published, pass unnoticed until some event somehow
calls attention to their existence.
Republic Act No. 7716 expressly amends PAL's franchise [P. D.
No. 1590] by specifically excepting from the grant of
exemptions from the VAT PAL's exemption under P. D. No.
1590. This is within the power of Congress to do under Art.
XII, Section 11 of the Constitution, which provides that the
grant of a franchise for the operation of a public utility is
subject to amendment, alteration or repeal by Congress when
the common good so requires.
12. ARTURO M. TOLENTINO, petitioner, vs. THE
SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL REVENUE,
respondents. G.R. No. 115455 August 25, 1994
FACTS: Herein various petitioners seek to declare RA 7166 as
unconstitutional as it seeks to widen the tax base of the
existing VAT system and enhance its administration by
amending the National Internal Revenue Code. The value-
added tax (VAT) is levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of
services. It is equivalent to 10% of the gross selling price or
gross value in money of goods or properties sold, bartered or
exchanged or of the gross receipts from the sale or exchange of
services.
CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt
without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall
"evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the
application of the tax to existing contracts of the sale of real
property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to
be paid because of the 10% VAT. The additional amount, it is
pointed out, is something that the buyer did not anticipate at
the time he entered into the contract.
It is next pointed out that while Section 4 of R.A. No. 7716
exempts such transactions as the sale of agricultural products,
food items, petroleum, and medical and veterinary services, it
grants no exemption on the sale of real property which is
equally essential. The sale of real property for socialized and
low-cost housing is exempted from the tax, but CREBA claims
that real estate transactions of "the less poor," i.e., the middle
class, who are equally homeless, should likewise be exempted.
Finally, it is contended, for the reasons already noted, that
R.A. No. 7716 also violates Art. VI, Section 28(1) which
provides that "The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of
taxation."
ISSUE: Whether or not RA 7166 violates the principle of
progressive system of taxation.
HELD: No, there is no justification for passing upon the
claims that the law also violates the rule that taxation must be
progressive and that it denies petitioners' right to due process
and that equal protection of the laws. The reason for this
different treatment has been cogently stated by an eminent
authority on constitutional law thus: "When freedom of the
mind is imperiled by law, it is freedom that commands a
momentum of respect; when property is imperiled it is the
lawmakers' judgment that commands respect. This dual
standard may not precisely reverse the presumption of
constitutionality in civil liberties cases, but obviously it does
set up a hierarchy of values within the due process clause."
Petitioners contend that as a result of the uniform 10% VAT,
the tax on consumption goods of those who are in the higher-
income bracket, which before were taxed at a rate higher than
10%, has been reduced, while basic commodities, which before
were taxed at rates ranging from 3% to 5%, are now taxed at a
higher rate.
Just as vigorously as it is asserted that the law is regressive, the
opposite claim is pressed by respondents that in fact it
distributes the tax burden to as many goods and services as
possible particularly to those which are within the reach of
higher-income groups, even as the law exempts basic goods
and services. It is thus equitable. The goods and properties
subject to the VAT are those used or consumed by higher-
income groups. These include real properties held primarily
for sale to customers or held for lease in the ordinary course of
business, the right or privilege to use industrial, commercial or
scientific equipment, hotels, restaurants and similar places,
tourist buses, and the like. On the other hand, small business
establishments, with annual gross sales of less than P500,000,
are exempted. This, according to respondents, removes from
the coverage of the law some 30,000 business establishments.
On the other hand, an occasional paper of the Center for
Research and Communication cities a NEDA study that the
VAT has minimal impact on inflation and income distribution
and that while additional expenditure for the lowest income
class is only P301 or 1.49% a year, that for a family earning
P500,000 a year or more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion
regarding these arguments, any discussion whether the VAT is
regressive in the sense that it will hit the "poor" and middle-
income group in society harder than it will the "rich," is largely
an academic exercise. On the other hand, the CUP's contention
that Congress' withdrawal of exemption of producers
cooperatives, marketing cooperatives, and service
cooperatives, while maintaining that granted to electric
cooperatives, not only goes against the constitutional policy to
promote cooperatives as instruments of social justice (Art. XII,
§ 15) but also denies such cooperatives the equal protection of
the law is actually a policy argument. The legislature is not
required to adhere to a policy of "all or none" in choosing the
subject of taxation. 44
Nor is the contention of the Chamber of Real Estate and
Builders Association (CREBA), petitioner in G.R. 115754, that
the VAT will reduce the mark up of its members by as much as
85% to 90% any more concrete. It is a mere allegation. On the
other hand, the claim of the Philippine Press Institute,
petitioner in G.R. No. 115544, that the VAT will drive some of
its members out of circulation because their profits from
advertisements will not be enough to pay for their tax liability,
while purporting to be based on the financial statements of the
newspapers in question, still falls short of the establishment of
facts by evidence so necessary for adjudicating the question
whether the tax is oppressive and confiscatory.
Indeed, regressivity is not a negative standard for courts to
enforce. What Congress is required by the Constitution to do is
to "evolve a progressive system of taxation." This is a directive
to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and
the reduction of social, economic and political inequalities
(Art. XIII, § 1), or for the promotion of the right to "quality
education" (Art. XIV, § 1). These provisions are put in the
Constitution as moral incentives to legislation, not as judicially
enforceable rights.
13. ABAKADA v. Ermita (Delegation to the
President)
469 SCRA 1: September 1, 2005
Facts: RA 9337: VAT Reform Act enacted on May 24, 2005.
Sec. 4 (sales of goods and properties), Sec. 5 (importation of
goods) and Sec. 6 (services and lease of property) of RA 9337,
in collective, granted the Secretary of Finance the authority to
ascertain: (a) whether by 12/31/05, the VAT collection as a
percentage of the 2004 GDP exceeds 2.8% or (b)the national
government deficit as a percentage of the 2004 GDP exceeds
1.5%. If either condition is met, the Sec of Finance must inform
the President who, in turn, must impose the 12% VAT rate
(from 10%) effective January 1, 2006.
ABAKADA maintained that Congress abandoned its exclusive
authority to fix taxes and that RA 9337 contained a uniform
proviso authorizing the President upon recommendation by
the DOF Secretary to rasie VAT to 12%.
Sen Pimentel maintained that RA 9337 constituted undue
delegation of legislative powers and a violation of due process
since the law was ambiguous and arbitrary. Same with Rep.
Escudero.
Pilipinas Shell dealers argued that the VAT reform was
arbitrary, oppressive and confiscatory.
Respondents countered that the law was complete, that it left
no discretion to the President, and that it merely charged the
President with carrying out the rate increase once any of the
two conditions arise.
Issue: WON there was undue delegation.
Held: No delegation but mere implementation of the law.
Constitution allows as under exempted delegation the
delegation of tariffs, customs duties, and other tolls, levies on
goods imported and exported. VAT is tax levied on sales of
goods and services which could not fall under this exemption.
Hence, its delegation if unqualified is unconstitutional.
Legislative power is authority to make a complete law. Thus, to
be valid, a law must be complete in itself, setting forth therein
the policy and it must fix a standard, limits of which are
sufficiently determinate and determinable.
No undue delegation when congress describes what job must
be done who must do it and the scope of the authority given.
(Edu v Ericta)
Sec of Finance was merely tasked to ascertain the existence of
facts. All else was laid out. Mainly ministerial for the Secretary
to ascertain the facts and for the president to carry out the
implementation for the VAT. They were agents of the
legislative dept
14. CIR and Commissioner of Customs vs. Botelho
Shipping Corp. & General Shipping Co., Inc.
G.R. Nos. L-21633-34 June 29, 1967
FACTS: Reparations Commission of the Philippines sold to
Botelho the vessel "M/S Maria Rosello" for the amount of
P6,798,888.88. The former likewise sold to General Shipping
the vessel "M/S General Lim" at the price of P6,951,666.66.
Upon arrival at the port of Manila, the Bureau of Customs
placed the same under custody and refused to give due course
[to applications for registration], unless the aforementioned
sums of P483,433 and P494,824 be paid as compensating tax.
The buyers subsequently filed with the CTA their respective
petitions for review. Pending the case, Republic Act No. 3079
amended Republic Act No. 1789 — the Original Reparations
Act, under which the aforementioned contracts with the
Buyers had been executed — by exempting buyers of
reparations goods acquired from the Commission, from
liability for the compensating tax.
Invoking [section 20 of the RA 3079], the Buyers applied, for
the renovation of their utilizations contracts with the
Commission, which granted the application, and, then, filed
with the Tax Court, their supplemental petitions for review.
The CTA ruled in favor of the buyers.
[On appeal, the CIR and COC maintain that such proviso
should not be applied retroactively], upon the ground that a
tax exemption must be clear and explicit; that there is no
express provision for the retroactivity of the exemption,
established by Republic Act No. 3079, from the compensating
tax; that the favorable provisions, which are referred to in
section 20 thereof, cannot include the exemption from
compensating tax; and, that Congress could not have intended
any retroactive exemption, considering that the result thereof
would be prejudicial to the Government.
ISSUE: Whether or not the tax exemption can be applied
retroactively
HELD: YES. The inherent weakness of the last ground
becomes manifest when we consider that, if true, there could
be no tax exemption of any kind whatsoever, even if Congress
should wish to create one, because every such exemption
implies a waiver of the right to collect what otherwise would be
due to the Government, and, in this sense, is prejudicial
thereto. It may not be amiss to add that no tax exemption —
like any other legal exemption or exception — is given without
any reason therefor. In much the same way as other statutory
commands, its avowed purpose is some public benefit or
interest, which the law-making body considers sufficient to
offset the monetary loss entitled in the grant of the exemption.
Indeed, section 20 of Republic Act No. 3079 exacts a valuable
consideration for the retroactivity of its favorable provisions,
namely, the voluntary assumption, by the end-user who
bought reparations goods prior to June 17, 1961 of "all the new
obligations provided for in" said Act.
Furthermore, Section 14 of the Law on Reparations, as
amended, exempts from the compensating tax, not particular
persons, but persons belonging to a particular class. Indeed,
appellants do not assail the constitutionality of said section 14,
insofar as it grants exemptions to end-users who, after the
approval of Republic Act No. 3079, on June 17, 1961,
purchased reparations goods procured by the Commission.
From the viewpoint of Constitutional Law, especially the equal
protection clause, there is no difference between the grant of
exemption to said end-users, and the extension of the grant to
those whose contracts of purchase and sale mere made before
said date, under Republic Act No. 1789.
15. Tan v. Del Rosario
G.R. No. 109289. October 3, 1994
Facts: Petitioners assail RA 7496, also commonly known as
the Simplified Net Income Taxation Scheme ("SNIT"),
amending certain provisions of the National Internal Revenue
Code, as violative of the constitutional requirement that
taxation shall be "shall be uniform and equitable." The law
would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on
corporations and partnerships.
Petitioner gives a fairly extensive discussion on the merits of
the law, illustrating, in the process, what he believes to be an
imbalance between the tax liabilities of those covered by the
amendatory law and those who are not.
Issue: Whether or not RA 7496 is violative of the
constitutional requirement that taxation shall be uniform and
equitable.
Held: Petition denied. Uniformity of taxation means that (1)
the standards that are used therefore are substantial and not
arbitrary, (2) the categorization is germane to achieve
legislative purpose, (3) the law applies, all things being equal,
to both present and future conditions and (4) the classification
applies equally well to all those belonging to the same class.
With the legislature primarily lies the discretion to determine
the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. This court cannot freely
delve into those matters which, by constitutional fiat, rightly
rest on legislative judgment. Of course, where a tax measure
becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it
down, for, despite all its plenitude, the power to tax cannot
override constitutional proscriptions. This stage, however, has
not been demonstrated to have been reached within any
appreciable distance in this controversy before us.
16. MACEDA vs. MACARAIG, JR
223 SCRA 217 June 8, 1993
Topic: Classification of Taxes According
to Burden or Incidence (Direct or
Indirect)
Facts: This matter of indirect tax exemption of the private
respondent National Power Corporation (NPC) is brought to
this Court a second time. Unfazed by the Decision We
promulgated on May 31, 1991 petitioner Ernesto Maceda asks
this Court to reconsider said Decision.
A Chronological review of the relevant NPC laws, specially with
respect to its tax exemption provisions.
1. On November 3, 1936, Commonwealth Act No. 120:
creating the National Power Corporation. The main
source of funds for the NPC was the flotation of bonds
in the capital markets 4 and these bonds...“issued under
the authority of this Act shall be exempt from the
payment of all taxes by the Commonwealth of the
Philippines…”
2. On June 24, 1938, C.A. No. 344, the provision on tax
exemption in relation to the issuance of the NPC bonds
was neither amended nor deleted.
3. On September 30, 1939, C.A. No. 495, the provision on
tax exemption in relation to the issuance of the NPC
bonds was neither amended nor deleted.
4. On June 4, 1949, Republic Act No. 357, any such loan
or loans shall be exempt from taxes, duties, fees,
imposts, charges, contributions and restrictions of the
Republic of the Philippines
5. On the same date, R.A. No. 358, to facilitate payment of
its indebtedness, the National Power Corporation shall
be exempt from all taxes.
6. On July 10, 1952, R.A. No. 813 amended R.A. No. 357.
The tax provision as stated in R.A. No. 357, was not
amended.
7. On June 2, 1954, R.A. No. 987 was enacted specifically
to withdraw NPC's tax exemption for real estate taxes.
8. On September 8, 1955, R.A. No. 1397, the tax
exemption provision related to the payment of this
total indebtedness was not amended nor deleted.
9. On June 13, 1958, R.A. No. 2055, the tax provision
related to the repayment of loans was not amended nor
deleted.
10. On June 18, 1960, R.A. No 2641 converted the NPC
from a public corporation into a stock corporation. No
tax exemption was incorporated in said Act.
11. On June 17, 1961, R.A. No. 3043. No tax provision was
incorporated in said Act.
12. On June 17, 1967, R.A. No 4897. No tax provision was
incorporated in said Act.
13. On September 10, 1971, R.A. No. 6395 was enacted
revising the charter of the NPC. The bonds issued shall
be exempt from the payment of all taxes. As to the
foreign loans the NPC was authorized to contract, shall
also be exempt from all taxes,
14. On January 22, 1974, P.D. No. 380…shall also
be exempt from all direct and indirect taxes,
15. On February 26, 1970, P.D. No. 395, no tax exemption
provision was amended, deleted or added.
16. On July 31, 1975, P.D. No. 758 was issued directing that Petitioner contends that P.D. No. 938 repealed the indirect tax
P200,000,000.00 would be appropriated annually to exemption of NPC.
cover the unpaid subscription of the Government in the
NPC authorized capital stock, which amount would be Issue: WON NPC is exempted to pay Indirect Income Tax
taken from taxes accruing to the General Funds of the
Government, proceeds from loans, issuance of bonds, Held: Yes. Classifications or kinds of Taxes: According to
treasury bills or notes to be issued Persons who pay or who bear the burden:
17. On May 27, 1976 P.D. No. 938, declared exempt from a. Direct Tax — that where the person supposed to pay
the payment of all forms of taxes… the tax really pays
18. On January 30, 1976, P.D. No. 882 was issued it. WITHOUT transferring the burden
withdrawing the tax exemption of NPC with regard to to someone else.
imports Examples: Individual income tax,
19. On July 30, 1977, P.D. 1177, All units of government, corporate income tax,
including government-owned or controlled transfer taxes (estate tax,
corporations, shall pay income taxes, customs duties donor's tax), residence tax,
and other taxes and fees are imposed under revenues immigration tax
laws: provided, that organizations otherwise exempted b. Indirect Tax — that where the tax is imposed upon
by law from the payment of such taxes/duties may ask goods BEFORE reaching the consumer
for a subsidy from the General Fund who ultimately pays for it, not as a tax,
20. On July 11, 1984, P.D. No. 1931, all exemptions from but as a part of the purchase price.
the payment of duties, taxes, fees, imposts and other Examples: the internal revenue indirect
charges heretofore granted in favor of government- taxes (specific tax,
owned or controlled corporations including their percentage taxes, (VAT) and
subsidiaries, are hereby withdrawn. the tariff and customs
21. On December 17, 1986, E.O. No. 93 was issued with a indirect taxes (import duties,
view to correct presidential restoration or grant of tax special import tax and other
exemption to other government and private entities dues)
without benefit of review by the Fiscal Incentives
Review Board, “WHEREAS, in addition to those tax A chronological review of the NPC laws will show that it has
and duty exemption privileges were restored by the been the lawmaker's intention that the NPC was to be
Fiscal Incentives Review Board (FIRB), a number of completely tax exempt from all forms of taxes — direct and
affected entities, government and private, had their tax indirect.
and duty exemption privileges restored”
P.D. No. 380 added phrase "directly or indirectly,"

P.D. No. 938 amended into “exempt from the payment of ALL
FORMS OF taxes”
President Marcos must have considered all the NPC statutes
from C.A. No. 120 up to P.D. No. 938.
One common theme in all these laws is that the NPC must be
enable to pay its indebtedness 56 which, as of P.D. No. 938, was
P12 Billion in total domestic indebtedness, at any one time,
and U$4 Billion in total foreign loans at any one time. The
NPC must be and has to be exempt from all forms of taxes if
this goal is to be achieved.
The tax exemption stood as is — with the express mention of
"direct and indirect" tax exemptions. Lawmakers wanted the
NPC to be exempt from ALL FORMS of taxes — direct and
indirect.
Therefore, that NPC had been granted tax exemption
privileges for both direct and indirect taxes under P.D. No.
938.
The Court rules and declares that the oil companies which
supply bunker fuel oil to NPC have to pay the taxes imposed
upon said bunker fuel oil sold to NPC. By the very nature of
indirect taxation, the economic burden of such taxation is
expected to be passed on through the channels of commerce to
the user or consumer of the goods sold. Because, however, the
NPC has been exempted from both direct and indirect
taxation, the NPC must be held exempted from absorbing the
economic burden of indirect taxation
17. ESSO STANDARD EASTERN, INC vs.
COMMISSIONER OF INTERNAL REVENUE
G.R. Nos. L-28508-9, July 7, 1989
FACTS: In CTA Case No. 1251, Esso Standard Eastern Inc.
(Esso) deducted from its gross income for 1959, as part of
itso r d i n a r y a n d n e c e s s a r y b u s i n e s s e x p e n s e s , t h e
amount it had spent for drilling and exploration
o f i t s p e t r o l e u m concessions. This claim was disallowed by
the Commissioner of Internal Revenue (CIR) on the ground
that the expensesshould be capitalized and might be written
off as a loss only when a "dry hole" should result. Esso then
filed an amendedreturn where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells.Also claimed as ordinary and
necessary expenses in the same return was the amount
of P340,822.04, representingmargin fees it had paid to the
Central Bank on its profit remittances to its New York head
office.On August 5, 1964, the CIR granted a tax credit of
P221,033.00 only, disallowing the claimed deduction for
themargin fees paid on the ground that the margin fees paid to
the Central Bank could not be considered taxes or allowed
asdeductible business expenses.Esso appealed to the Court of
Tax Appeals (CTA) for the refund of the margin fees it had
earlier paid contendingthat the margin fees were
deductible from gross income either as a tax or as an
ordinary and necessary businessexpense. However, Esso’s
appeal was denied.
ISSUE: (1) Whether or not the margin fees are taxes.(2)
Whether or not the margin fees are necessary and ordinary
business expenses.
RULING: (1) No. A tax is levied to provide revenue for
government operations, while the proceeds of the margin fee
areapplied to strengthen our country's international reserves.
The margin fee was imposed by the State in the exercise of
itspolice power and not the power of taxation.(2) No.
Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful inthe development of
the taxpayer's business. It is 'ordinary' when it connotes a
payment which is normal in relation to thebusiness of the
taxpayer and the surrounding circumstances. Since the
margin fees in question were incurred for theremittance
of funds to Esso's Head Office in New York, which is a separate
and distinct income taxpayer from the branchin the
Philippines, for its disposal abroad, it can never be said
therefore that the margin fees were appropriate and helpfulin
the development of Esso's business in the Philippines
exclusively or were incurred for purposes proper to the
conductof the affairs of Esso's branch in the Philippines
exclusively or for the purpose of realizing a profit or of
minimizing a loss inthe Philippines exclusively.
18. PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION
vs. THE MUNICIPALITY OF JAGNA, PROVINCE
OF BOHOL
G.R. No. L-24265 December 28, 1979
TOPIC: Nature and amount of license
FACTS: Plaintiff-appellant is a domestic corporation with
principal offices in Manila. lt is a consolidated corporation of
Procter & Gamble Trading Company and Philippine
Manufacturing Company, which later became Procter &
Gamble Trading Company, Philippines. It is engaged in the
manufacture of soap, edible oil, margarine and other similar
products, and for this purpose maintains a "bodega" in
defendant Municipality where it stores copra purchased in the
municipality and therefrom ships the same for its
manufacturing and other operations.
On December 13, 1957, the Municipal Council of Jagna enacted
Municipal Ordinance No. 4, Series of 1957 or An Ordinance
imposing storage fees of all exportable copra deposited in the
bodega within the jurisdlcti0n of the municipality of jagna
bohol. For a period of six years, from 1958 to 1963, plaintiff
paid defendant Municipality, allegedly under protest, storage
fees in the total sum of P42,265.13.
On March 3, 1964, plaintiff filed this suit in the Court of First
Instance of Manila, Branch VI, wherein it prayed that 1)
Ordinance No. 4 be declared inapplicable to it, or in the alter.
native, that it be pronounced ultra-vires and void for being
beyond the power of the Municipality to enact; and 2) that
defendant Municipality be ordered to refund to it the amount
of P42,265.13 which it had paid under protest; and costs.
The trial Court upheld its jurisdiction as well as defendant
Municipality's power to enact the Ordinance in question under
section 2238 of the Revised Administrative Code, otherwise
known as the general welfare clause.
ISSUES: Whether defendant Municipality was authorized to
impose and collect the storage fee provided for in the
challenged Ordinance under the laws then prevailing.
Whether the imposition of P0.10 per 100 kilos of copra stored
in a bodega within the municipality ofJagnas' territory is
beyond the cost of regulation and surveillance

HELD: The validity of the Ordinance must be upheld
pursuant to the broad authority conferred upon municipalities
by Commonwealth Act No. 472, which was the prevailing law
when the Ordinance was enacted.
A municipality is authorized to impose three kinds of licenses:
(1) a license for regulation of useful occupation or enterprises;
(2) license for restriction or regulation of non-useful
occupations or enterprises; and (3) license for revenue. 4 It is
thus unnecessary, as plaintiff would have us do, to determine
whether the subject storage fee is a tax for revenue purposes or
a license fee to reimburse defendant Municipality for service of
supervision because defendant Municipality is authorized not
only to impose a license fee but also to tax for revenue
purposes.
The storage fee imposed under the question Ordinance is
actually a municipal license tax or fee on persons, firms and
corporations, like plaintiff, exercising the privilege of storing
copra in a bodega within the Municipality's territorial
jurisdiction. For the term "license tax" has not acquired a fixed
meaning. It is often used indiseriminately to designate
impositions exacted for the exercise of various privileges. In
many instances, it refers to revenue-raising exactions on
privileges or activities.
(2) Municipal corporations are allowed wide discretion in
determining the rates of imposable license fees even in cases of
purely police power measures. In the absence of proof as to
municipal conditions and the nature of the business being
taxed as well as other factors relevant to the issue of
arbitrariness or unreasonableness of the questioned rates,
Courts will go slow in writing off an Ordinance. In the case at
bar, appellant has not sufficiently shown that the rate imposed
by the questioned Ordinance is oppressive, excessive and
prohibitive.
19. Golden Ribbon Lumber Co., Inc. v. City of
Butuan
GR No. L-18534 24 December 1964
F A C T S: Golden Ribbon Lumber Co., Inc., a duly organized
domestic corporation, operated a lumber mill and lumber yard
in Butuan City. Pursuant to Ordinance No. 5, as amended by
Ordinance Nos. 9, 10, 47, and 49 of the said city, it paid the
taxes provided therein. Claiming that said ordinance, as
amended, was void, it later brought the present action to have
it so declared; to recover the amount paid, and to have
appellants permanently enjoined from enforcing said
ordinance as amended.
I S S U E: Whether or not Ordinance No. 5 falls within the
Charter of the City of Butuan.
H E L D: No. The tax imposed is and was really intended to be
on lumber sold and not a tax on, or, license fee for the privilege
of operating a lumber mill and/or a lumber yard. It violates RA
2264 as municipal corporations are prohibited from imposing
charges of taxes of such nature.
Appellants’ claim that the questioned tax is one on business or
a privilege tax for the operation of a lumber mill or a lumber
yard is without merit. The character or nature of a tax is
determined by its operation, practical results and incidents.
Neither the original ordinance in question nor the amendatory
ones provide that payment thereof is a condition precedent to
the enjoyment of such privilege or that its non-payment would
result in the cancellation of any previous license granted.
Lastly, the rule is well-settled that municipal corporations are
clothed with no power of taxation; that its charter or a statute
must clearly show an intent to confer that power or the
municipal corporation cannot assume and exercise it, and that
any such power granted must be construed strictly, any doubt
or ambiguity arising out from the terms of the grant to be
resolved against the municipality.
20. VICTORIAS MILLING CO. V PPA
153 SCRA 317; August 27, 1987
FACTS: This is a petition for review on certiorari of the
July 27, 1984 Decision of the Office of the Presidential
Assistant For Legal Affairs dismissing the appeal from the
adverse ruling of the Philippine Ports Authority on the sole
ground that the same was filed beyond the reglementary
period.
On April 28, 1981, the Iloilo Port Manager of respondent
Philippine Ports Authority (PPA for short) wrote petitioner
Victorias Milling Co., requiring it to have its tugboats and
barges undergo harbor formalities and pay entrance/clearance
fees as well as berthing fees effective May 1, 1981. PPA,
likewise, requiring petitioner to secure a permit for cargo
handling operations at its Da-an Banua wharf and remit 10%
of its gross income for said operations as the government's
share.
Victorias Milling Co. maintained that it is except from paying
PPA any fee or charge because: 1. The wharf and its facilities
are built and installed on it’s own land; 2. Repairs and
maintenance are solely paid by it; 3. Maintenance and
dredging of the channel are done by the Company personnel;
4. At not time has the government paid any centavo for such
activities.
ISSUE: WON the Victorias Milling Co. claim of exception for
PPA fees is meritorious.
HELD: No, the petitioners claim that there is no basis for the
PPA to assess and impose the dues and charge is devoid of
merit.
As correctly stated by the Solicitor General, the fees and
charges PPA collects are not for the use of the wharf that
petitioner owns but for the privilege of navigating in public
waters, of entering and leaving public harbours and berthing
on public streams or waters.
As to the requirement to remit 10% of the handling charges,
Section 6B-(ix) of the Presidential Decree No. 857 authorized
the PPA "To levy dues, rates, or charges for the use of the
premises, works, appliances, facilities, or for services provided
by or belonging to the Authority, or any organization
concerned with port operations." This 10% government share
of earnings of arrastre and stevedoring operators is in the
nature of contractual compensation to which a person desiring
to operate arrastre service must agree as a condition to the
grant of the permit to operate.
21. CIR v. CA, CTA, AdMU
GR No.115349; 18 April 1997
F A C T S: Private respondent, Ateneo de Manila University,
is a non-stock, non-profit educational institution with auxiliary
units and branches all over the country. The Institute of
Philippine Culture (IPC) is an auxiliary unit with no legal
personality separate and distinct from private respondent. The
IPC is a Philippine unit engaged in social science studies of
Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international
organizations, private foundations and government agencies.
On 8 July 1983, private respondent received from CIR a
demand letter dated 3 June 1983, assessing private respondent
the sum of P174,043.97 for alleged deficiency contractor’s tax,
and an assessment dated 27 June 1983 in the sum of
P1,141,837 for alleged deficiency income tax, both for the fiscal
year ended 31 March 1978. Denying said tax liabilities, private
respondent sent petitioner a letter-protest and subsequently
filed with the latter a memorandum contesting the validity of
the assessments.
After some time petitioner issued a final decision dated 3
August 1988 reducing the assessment for deficiency
contractor’s tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.
The lower courts ruled in favor of respondent. Hence this
petition.
Petitioner Commissioner of Internal Revenue contends that
Private Respondent Ateneo de Manila University "falls within
the definition" of an independent contractor and "is not one of
those mentioned as excepted"; hence, it is properly a subject of
the three percent contractor's tax levied by the foregoing
provision of law. Petitioner states that the "term 'independent
contractor' is not specifically defined so as to delimit the scope
thereof, so much so that any person who . . . renders physical
and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's tax."
I S S U E: Whether or not private respondent falls under the
purview of independent contractor pursuant to Section 205 of
the Tax Code and is subject to a 3% contractors tax.
H E LD: The petition is unmeritorious.
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under Section 12 of
the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or use
of the physical or mental faculties of such contractors or their
employees.
Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying
the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its exemption
therefrom.
Interpretation of Tax Laws. The doctrine in the
interpretation of tax laws is that “(a) statute will not be
construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. . . . (A) tax cannot be imposed without
clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by
implication.” In case of doubt, such statutes are to be
construed most strongly against the government and in favor
of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes
expressly and clearly import.
Ateneo’s Institute of Philippine Culture never sold its services
for a fee to anyone or was ever engaged in a business apart
from and independently of the academic purposes of the
university. Funds received by the Ateneo de Manila University
are technically not a fee. They may however fall as gifts or
donations which are “tax-exempt” as shown by private
respondent’s compliance with the requirement of Section 123
of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution.
Transaction of IPC not a contract of sale nor a
contract for a piece of work. The transactions of Ateneo’s
Institute of Philippine Culture cannot be deemed either as a
contract of sale or a contract for a piece of work. By the
contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain
in money or its equivalent. In the case of a contract for a piece
of work, “the contractor binds himself to execute a piece of
work for the employer, in consideration of a certain price or
compensation. . . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing
produced to the employer and transfer dominion over the
thing. . . .” In the case at bench, it is clear from the evidence on
record that there was no sale either of objects or services
because, as adverted to earlier, there was no transfer of
ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine
Culture.
22. COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. THE HON. COURT OF APPEALS,
R.O.H. AUTO PRODUCTS PHILIPPINES, INC.
and THE HON. COURT OF TAX APPEALS,
respondents. G.R. No. 108358 January 20, 1995
Facts: On 22 August 1986, Executive Order No. 41 was
promulgated declaring a one-time tax amnesty on unpaid
income taxes, later amended to include estate and donor's
taxes and taxes on business, for the taxable years 1981 to 1985.
Respondent R.O.H. Auto Products Philippines, Inc., availing of
the amnesty, filed in October 1986 and November 1986, its Tax
Amnesty Return and Supplemental Tax Amnesty Return No.
and paid the corresponding amnesty taxes due.
Prior to this availment, petitioner Commissioner of Internal
Revenue, in a communication received by private respondent
on August 13, 1986, assessed the latter deficiency income and
business taxes for its fiscal years 1981 and 1982 in an aggregate
amount of P1,410,157.71. Meanwhile, respondent averred that
since it had been able to avail itself of the tax amnesty, the
deficiency tax notice should forthwith be cancelled and
withdrawn. This was denied by the CIR Revenue
Memorandum Order No. 4-87, implementing Executive Order
No. 41, had construed the amnesty coverage to include only
assessments issued by the Bureau of Internal Revenue after
the promulgation of the executive order on August 22 1986
and not to assessments theretofore made.
On appeal, The Court of Tax appeal upheld for the respondent,
which was further upheld by the Court of Appeals.
ISSUE: Whether or not the the deficiency assessments were
extinguished by reason of respondent’s availment of the tax
amnesty.
HELD: Yes, as the scope of the amnesty covers the unpaid
income taxes for the years 1981 to 1985. If, as the
Commissioner argues, Executive Order No. 41 had not been
intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to August 22, 1986, the law could have
simply so provided in its exclusionary clauses. It did not. The
conclusion is unavoidable, and it is that the executive order
has been designed to be in the nature of a general grant of tax
amnesty subject only to the cases specifically excepted by it.
Further, the law provides that, upon full compliance with the
conditions of the tax amnesty and the rules and regulations
issued pursuant to this Executive order, the taxpayer shall be
relieved of any income tax liability on any untaxed income
from January 1, 1981 to December 31, 1985, including
increments thereto and penalties on account of the non-
payment of the said tax. Civil, criminal or administrative
liability arising from the non-payment of the said tax, which
are actionable under the National Internal Revenue Code, as
amended, are likewise deemed extinguished.
23.HYDRO RESOURCES V. COURT OF TAX
APPEALS ET AL.
GR 80276; December 21, 1990
FACTS Hydro Resources Contractors Corporation entered
into a contract of sale with the National Irrigation Authority
(NIA) for the construction of Magat River Multipurpose
Project in Isabella in August 1978. The contract provided that
Hydro will import parts, construction equipment and tools and
taxes and duties to be paid by NIA. Tools and equipment
arrived during 1978 and 1979. NIA reneged on the contract.
Therefore causing the transfer its sale to Hydro in seperate
dates in December 6, 1982 and March 24, 1983. Executive
Order 860 took effect during December 21, 1982 provided for
3% ad valorem tax on importations and it specifically provided
that it should have no retroactive effect. During the contract of
sale execution, Hydro was assessed and paid the said 3% ad
valorem tax worth P 281,591 under protest. The Hydro when
filing for refund with Customs Commissioner who indorsed
the approval of the refund but was denied by the Secretary of
Finance and motion was denied by the Court of Tax Appeals.
ISSUE Whether or not should the Executive Order 860
should have a retroactive effect.
HELD The Court of Tax Appeals erred in applying a
retroactive effect for the Executive Order therefore should not
have been subject to the additional 3% ad valorem tax. In
general tax laws are not retroactive in nature. Not only that
Executive Order 860 specifically provides that it is not
retroactive in nature, but also when the conditional contract of
sale was executed, its had a suspensive condition contemplated
in the Civil Code (Article 1187) where it returned ownership to
the seller Hydro because NIA was not able to comply with its
part of the contract, it was deemed executed as if during the
constitution of the obligation which was in 1978 and not in
1982.
24.Central Azucarera Don Pedro –v– CIR and CTA
G.R. Nos. L-23236 and L-23254 May 31,
1967
FACTS: Central Azucarera Don Pedro, a domestic corporation
with office at Nasugbu, Batangas, had been filing its income
tax returns on the "fiscal year" basis ending August 31, of every
year.
[It had been assessed deficiency tax plus interest. It paid the
deficiency tax but protested on the imposition of the interest],
claiming that the imposition of ½% monthly interest on its
deficiency tax for the fiscal year 1954 to 1958, Pursuant to
Section 51 (d) of the Revenue Code, as amended by Republic
Act No. 2343, is illegal, because the imposition of interest on
efficiency income tax earned prior to the effectivity of the
amendatory law (Rep. Act 2343) [on 1959] will be tantamount
to giving it (Rep. Act No. 2343) retroactive application. [It
further contends that] the application of the amended
provision (now Sec. 51-d of the Tax Code) to the cases at bar
would run counter to the constitutional restriction against the
enactment of ex post facto laws.
ISSUE: Whether or not the imposition of the interest, is
unconstitutional
HELD: NO – [the interest was correctly imposed]. It is to be
noted that the collection of interest in these cases is not penal
in nature, thus —
the imposition of . . . interest is but a just
compensation to the state for the delay in
paying the tax, and for the concomitant use by
the taxpayer of funds that rightfully should be
in the government's hands (U.S. vs. Goldstein,
189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp.
330; U.S. vs. Joffray, 97 Fed. [2d] 488). The
fact that the interest charged is made
proportionate to the period of delay constitutes
the best evidence that such interest is not penal
but compensatory. (Castro vs. Collector of
Internal Revenue, G.R. No. L-12174, Resolution
on Motion for Reconsideration, December 28,
1962)
and we had already held that —
The doctrine of unconstitutionality raised by
appellant is based on the prohibition against ex
post facto laws. But this prohibition applies
only to criminal or penal matters, and not to
laws which concern civil matters or
proceedings generally, or which affect or
regulate civil or private rights (Ex parte
Garland, 18 Law Ed., 366; 16 C.J.S., 889-891).
(Republic vs. Oasan Vda. de Fernandez, 99
Phil. 934, 937).
Finally, section 13 of the amendatory Republic Act No. 2343
refers only to the basic tax rates, which are made applicable to
income received in 1959 onward, but does not affect the
interest due on deficiencies, which are left to be governed by
section 51 (d).

25.Pepsi-Cola Bottling Company of the
Philippines, Inc. v. Municipality of Tanauan
G.R. No. L-31156; February 27, 1976
Facts: In February 1963, plaintiff commenced a complaint
seeking to declare Section 2 of R.A. 2264 (Local Autonomy
Act) unconstitutional as an undue delegation of taxing power
and to declare Ordinance Nos. 23 and 27 issued by the
Municipality of Tanauan, Leyte as null and void.
Municipal Ordinance No. 23 levies and collects from soft
drinks producers and manufacturers one-sixteenth (1/16) of a
centavo for every bottle of soft drink corked. On the other
hand, Municipal Ordinance No. 27 levies and collects on soft
drinks produced or manufactured within the territorial
jurisdiction of the municipality a tax of one centavo (P0.01) on
each gallon of volume capacity. The tax imposed in both
Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.”
Issues: (1) Is Section 2 of R.A. 2264 an undue delegation of
the power of taxation? (2) Do Ordinance Nos. 23 and 24
constitute double taxation and impose percentage or specific
taxes?
Held: (1) NO. The power of taxation is purely legislative and
cannot be delegated to the executive or judicial department of
the government without infringing upon the theory of
separation of powers. But as an exception, the theory does not
apply to municipal corporations. Legislative powers may be
delegated to local governments in respect of matters of local
concern. (2) NO. The Municipality of Tanauan discovered that
manufacturers could increase the volume contents of each
bottle and still pay the same tax rate since tax is imposed on
every bottle corked. To combat this scheme, Municipal
Ordinance No. 27 was enacted. As such, it was a repeal of
Municipal Ordinance No. 23. In the stipulation of facts, the
parties admitted that the Municipal Treasurer was enforcing
Municipal Ordinance No. 27 only. Hence, there was no case of
double taxation.
26. COMMISSIONER OF INTERNAL REVENUE vs.
S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS
309 SCRA 87 ; June 25, 1999
Topic: Double Taxation
Facts: SC. JOHNSON AND SON, INC., a domestic
corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson and
Son, United States of America (USA), a non-resident foreign
corporation was granted the right to use the trademark,
patents and technology owned by the latter including the right
to manufacture, package and distribute the products. License
Agreement was duly registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks and Technology
Transfer under Certificate of Registration No. 8064. SC.
JOHNSON AND SON, INC was obliged to pay SC Johnson and
Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty
payments which [respondent] paid from July 1992 to May
1993. Respondent filed with the International Tax Affairs
Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that Since the agreement
was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply hence royalties paid
by the [respondent] to SC Johnson and Son, USA is only
subject to 10% withholding tax pursuant to the most-favored
nation clause of the RP-US Tax Treaty.
The Commissioner did not act on said claim for refund.
Respondent filed a petition for review before the CTA to claim
a refund of the overpaid withholding tax on royalty payments.
CTA decided for Respondent and ordered CIR to issue a tax
credit certificate in the amount of P963,266.00 representing
overpaid withholding tax on royalty payments, beginning July,
1992 to May, 1993. CIR filed a petition for review with CA. CA
upheld CTA.
CIR contends that under RP-US Tax Treaty, which is known as
the "most favored nation" clause, the lowest rate of the
Philippine tax at 10% may be imposed on royalties derived by a
resident of the United States from sources within the
Philippines only if the circumstances of the resident of the
United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no "matching
credit" provision as that provided in RP-West Germany Tax
Treaty, the tax on royalties under the RP-US Tax Treaty is not
paid under similar circumstances as those obtaining in the RP-
West Germany Tax Treaty. Also petitioner argues that since
S.C. Johnson's invocation of the "most favored nation" clause
is in the nature of a claim for exemption from the application
of the regular tax rate of 25% for royalties, the provisions of
the treaty must be construed strictly against it.
Respondent countered that the "most favored nation" clause
under the RP-US Tax Treaty refers to royalties paid under
similar circumstances as those royalties subject to tax in other
treaties; that the phrase "paid under similar circumstances"
does not refer to payment of the tax but to the subject matter
of the tax, that is, royalties, because the "most favored nation"
clause is intended to allow the taxpayer in one state to avail of
more liberal provisions contained in another tax treaty
wherein the country of residence of such taxpayer is also a
party thereto, subject to the basic condition that the subject
matter of taxation in that other tax treaty is the same as that in
the original tax treaty under which the taxpayer is liable; thus,
the RP-US Tax Treaty speaks of "royalties of the same kind
paid under similar circumstances".
Issue: WON SC Johnson can refund.
Ruling: NO. The tax rates on royalties and the circumstances
of payment thereof are the same for all the recipients of such
royalties and there is no disparity based on nationality in the
circumstances of such payment. 6 On the other hand, a cursory
reading of the various tax treaties will show that there is no
similarity in the provisions on relief from or avoidance of
double taxation 7 as this is a matter of negotiation between the
contracting parties. This dissimilarity is true particularly in the
treaties between the Philippines and the United States and
between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral
treaties which the Philippines has entered into for the
avoidance of double taxation. 9 The purpose of these
international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different
jurisdictions. 10 More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical
periods. 11 The apparent rationale for doing away with double
taxation is of encourage the free flow of goods and services and
the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies.
Double taxation usually takes place when a person is resident
of a contracting state and derives income from, or owns capital
in, the other contracting state and both states impose tax on
that income or capital. In order to eliminate double taxation, a
tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of
income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of
source is limited.
Double taxation usually takes place when a person is resident
of a contracting state and derives income from, or owns capital
in, the other contracting state and both states impose tax on
that income or capital. In order to eliminate double taxation, a
tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of
income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of
source is limited. On the other hand, in the credit method,
although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in
the former is credited against the tax levied in the latter. The
basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax. 15
The phrase "royalties paid under similar circumstances" in the
most favored nation clause of the US-RP Tax Treaty
necessarily contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because
the royalties are paid for the right to use property or rights, i.e.
trademarks, patents and technology, located within the
Philippines. 17 The United States is the state of residence since
the taxpayer, S. C. Johnson and Son, U. S. A., is based there.
Under the RP-US Tax Treaty, the state of residence and the
state of source are both permitted to tax the royalties, with a
restraint on the tax that may be collected by the state of
source.
the concessional tax rate of 10 percent provided for in the RP-
Germany Tax Treaty should apply only if the taxes imposed
upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances.
This would mean that private respondent must prove that the
RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed to
their German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not
contain similar provisions on tax crediting.
If the rates of tax are lowered by the state of source, in this
case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant some
form of tax relief, whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been
collected by the Philippine government will simply be collected
by another state, defeating the object of the tax treaty since the
tax burden imposed upon the investor would remain
unrelieved. If the state of residence does not grant some form
of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a
favorable tax regime, should it impose a lower tax rate on the
royalty earnings of the investor, and it would be better to
impose the regular rate rather than lose much-needed
revenues to another country.
The entitlement of the 10% rate by U.S. firms despite the
absence of a matching credit (20% for royalties) would
derogate from the design behind the most grant equality of
international treatment since the tax burden laid upon the
income of the investor is not the same in the two countries.
The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment
precisely to underscore the need for equality of treatment.
Respondent cannot be deemed entitled to the 10 percent rate
granted under the RP-West Germany Tax Treaty for the reason
that there is no payment of taxes on royalties under similar
circumstances in RP-US treaty.
27. CIR v Rufino
GR Nos> L-33665-68; February 27, 1987
Facts: This is a petition for review on certiorari of the CTA
decision which absolved petitioners from liability for capital
gains tax on stocks received by them from Eastern Theatrical,
Inc. The Rufinos were majority stockholders of Eastern
Theatrical Co., Inc (hereinafter Old ETC) which had a
corporate term of 25 years, which terminated on January 25,
1959, president of which was Ernesto Rufino. On December 8,
1958, the Eastern Theatrical Co, Inc. (hereinafter New ETC,
with a corporate term of 50 years) was organized, and the
Rufinos were also the majority stockholders of the corporation,
with Vicente Rufino as the General-Manager. Both ETCs were
engaged in the same business.
Old ETC held a stockholder’s meeting to merge with the New
ETC on December 17, 1958 to continue its business after the
end of Old ETC’s corporate term. The merger was authorized
by a board resolution. It was expressly declared that the
merger was necessary to continue operating the Capitol and
Lyric Theaters in Manila even after the expiration of corporate
existence, to preserve both its booking contracts and to uphold
its collective bargaining agreements. Through the two Rufinos
(Ernesto and Vicente), a Deed of Assignment was executed,
which conveyed and transferred all the business, property,
assets and good will of the Old ETC to the New ETC in
exchange for shares of stock of the latter to be issued to
the shareholders at the rate of one stock for each stock
held in the Old ETC. The Deed was to retroact from January 1,
1959. New ETC’s Board approved the merger and the Deed of
Assignment on January 12, 1959 and all changes duly
registered with the SEC.
The BIR, after examination, declared that the merger was not
undertaken for a bona fide business purpose but only to avoid
liability for the capital gains tax on the exchange of the old for
the new shares of stock. He then imposed deficiency
assessments against the private respondents, the Rufinos. The
Rufinos requested for a reconsideration, which was denied.
Therefore, they elevated their matter to the CTA, who reversed
the judgment of the CIR, saying that they found that there was
“no taxable gain derived from the exchange of old stocks
simply for new stocks for the New Corporation” because it was
pursuant to a valid plan of reorganization. The CIR raised it to
the SC on petition for review on certiorari.
Issue: WON there was a valid merger and that there was no
taxable gain derived therefrom.
Held: YES, the CTA was correct in ruling that there WAS a
merger and that no taxable gain was derived. CTA decision is
AFFIRMED.
Rationale:
• Validity of transfer. In support of its argument that the
Rufinos were trying to avoid the payment of capital
gains tax, the CIR said that the New ETC did not
actually issue stocks in exchange for the properties of
the Old ETC. The increase in capitalization only
happened in March 1959, or 37 days after the Old ETC
expired. Prior to registration, the New ETC could not
have validly performed the transfer. The SC ruled that
the retroactivity of the Deed of Assignment cured the
defect and there was no impediment.
• Bona Fide Business Purpose. The criterion of
the law is that the purpose of the merger must be for a
bona fide business purpose and not for the purpose of
escaping taxes. The case of Helvering v. Gregory stated
that a mere “operation having no business or corporate
purpose—a mere devise which put on the form of a
corporate reorganization as a disguise for concealing its
real character and the sole object and accomplishment
of which was the consummation of a preconceived
plan, not to reorganize a business but to transfer a
parcel of corporate shares.” When the corporation
created is nothing more than a contrivance, there is no
legitimate business purpose. The Court states that
there is no such furtive intention in this case. In fact,
the New ETC continues to operate the Capitol and Lyric
movie theaters even up to 27 years after the merger.
There is as yet no dissolution, so the Rufinos haven’t
gained any benefit yet from the merger, which makes
them no more liable than the time the merger took
place.
The government’s remedy: The merger merely deferred
the payment for taxes until the future, which the government
may assert later on when gains are realized and benefits are
distributed among the stockholders as a result of the merger.
The taxes are not forfeited but merely postponed and may be
imposed at the proper time later on.
28. DELPHER TRADES CORPORATIONvs. IAC
G.R. No. L-69259 January 26, 1988
Facts: Delfin Pacheco and sister Pelagia were the owners of a
parcel of land in Polo (now Valenzuela). On April 3, 1974, they
leased to Construction Components International Inc. the
property and providing for a right of first refusal should it
decide to buy the said property.
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 Delfin and Pelagia. In 1976, a deed of exchange was
executed between lessors Delfin and Pelagia Pacheco and
defendant Delpher Trades Corporation whereby the Pachecos
conveyed to the latter the leased property together with
another parcel of land also located in Malinta Estate,
Valenzuela for 2,500 shares of stock of defendant corporation
with a total value of P1.5M.
On the ground that it was not given the first option to buy the
leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of the lot.
Issue: WON the Deed of Exchange of the properties executed
by the Pachecos and the Delpher Trades Corporation on the
other was meant to be a contract of sale which, in effect,
prejudiced the Hydro Phil's right of first refusal over the leased
property included in the "deed of exchange,"
Held: No, 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.
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 private respondent
has no basis for its claim of a light of first refusal
29. CIR v. Toda, Jr.
GR No. 147188; 14 September 2004
F A C T S: On 2 March 1989, CIC authorized Benigno P. Toda,
Jr., President and owner of 99.991% of its outstanding capital
stock, to sell the Cibeles Building. On 30 August 1989, Toda
purportedly sold the property for P100 million to Rafael A.
Altonaga, who, in turn, sold the same property on the same
day to Royal Match Inc. (RMI) for P200 million. Three and a
half years later Toda died. On 29 March 1994, the BIR sent an
assessment notice and demand letter to the CIC for deficiency
income tax for the year 1989. On 27 January 1995, the Estate
of Benigno P. Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza Bautista,
received a Notice of Assessment from the CIR for deficiency
income tax for the year 1989. The Estate thereafter filed a
letter of protest. The Commissioner dismissed the protest. On
15 February 1996, the Estate filed a petition for review with the
CTA. In its decision the CTA held that the Commissioner failed
to prove that CIC committed fraud to deprive the government
of the taxes due it. It ruled that even assuming that a pre-
conceived scheme was adopted by CIC, the same constituted
mere tax avoidance, and not tax evasion. Hence, the CTA
declared that the Estate is not liable for deficiency of income
tax. The Commissioner filed a petition for review with the
Court of Appeals. The Court of Appeals affirmed the decision
of the CTA, hence, this recourse.
I S S U E: Whether or not this is a case of tax evasion or tax
avoidance.

H E L D: Tax evasion connotes the integration of three

factors: (1) the end to be achieved, i.e. the payment of less than
that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being “evil,”
in “bad faith,” “willfull,” or “deliberate and not accidental”; and
(3) a course of action or failure of action which is unlawful. All
these factors are present in the instant case. The scheme
resorted to by CIC in making it appear that there were two
sales of the subject properties, i.e. from CIC to Altonaga, and
then from Altonaga to RMI cannot be considered a legitimate
tax planning. Such scheme is tainted with fraud. Altonaga’s
sole purpose of acquiring and transferring title of the subject
properties on the same day was to create a tax shelter. The sale
to him was merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless, the execution of
the two sales was calculated to mislead the BIR with the end in
view of reducing the consequent income tax liability.
 30. CIR v. ESSO (Set-off)
172 SCRA 369; April 18, 1989
Facts: ESSO overpaid its 1959 income tax by P221, 033.00. It was
accordingly granted a tax credit. However, ESSO’s payment of its
income tax for 1960 was found to be short byP367,994. So the
Commissioner demanded payment of the deficiency, with interest.
ESSO paid under protest, including the interest as reckoned by the
Commissioner. ESSO’s contention: The interest was more than that
properly
due. It should not have been required to pay interest on the total
amount of the deficiency tax, P367,994.00, but only on the
amount of P146,961.00—representing the difference between said
deficiency and ESSOs earlier overpayment. ESSO thus asked for a
refund.
CIR’s contention: It denied the claim for refund. Income taxes are
determined and paid on an annual basis, such determination and
payment are separate and independent transactions; and a tax credit
could not be considered until it has been finally approved and the
taxpayer notified. Since in this case, the tax credit was approved only
on August 5, 1964, it could not be availed of in reduction of ESSOs
earlier tax deficiency for 1960; as of that year there was no tax credit
to speak of. In support of this, the Commissioner invokes the Section
51 of the Tax Code: (d) Interest on deficiency. — Interest upon the
amount determined as deficiency shall be assessed at the same time as
the deficiency and shall be paid upon notice and demand from the
Commissioner of Internal Revenue; and shall be collected as a part of
the tax. ESSO appealed to the Court of Tax Appeals, which in turn
ordered payment to ESSO of its "refund-claim. Hence, this appeal by
the Commissioner.
ISSUE: Was it proper to apply ESSO’s tax credit in reducing the total
deficiency subject to interest?
HELD: Yes, regardless of CIR’s assertions, the fact is
that as early as July 15, 1960, the Government already
had in its hands the sum representing excess payment.
Having been paid and received by mistake, that sum
unquestionably belonged to ESSO, and the
Government had the obligation to return it to ESSO.
The obligation to return money mistakenly paid arises
from the moment that payment is made, and not from
the time that the payee admits the obligation to
reimburse. The obligation of the payee to reimburse
results from the mistake, not from the payee's
confession of the mistake or recognition of the
obligation to reimburse. In other words, since the
amount of P221,033.00 belonging to ESSO was already
in the hands of the Government as of July, 1960, it was
neither legally nor logically possible for ESSO
thereafter to be considered a debtor of the
Government; and whatever other obligation ESSO
might subsequently incur in favor of the Government
would have to be reduced by that sum, in respect of
which no interest could be charged.
Nothing is better settled than that courts are not to give
words a meaning which would lead to absurd or
unreasonable consequences.” "Statutes should receive a
sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or
absurd conclusion."
31. Domingo v. Garlitos
GR No. L-18993 29 June 1963
F A C T S: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme
Court declared as final and executory the order of the Court of First
Instance of Leyte for the payment of estate and inheritance taxes,
charges and penalties amounting to P40,058.55 by the Estate of the
late Walter Scott Price. The petition for execution filed by the fiscal,
however, was denied by the lower court. The Court held that the
execution is unjustified as the Government itself is indebted to the
Estate for 262,200; and ordered the amount of inheritance taxes be
deducted from the Government’s indebtedness to the Estate.
I S S U E: Whether a tax and a debt may be compensated.
H E L D: The court having jurisdiction of the Estate had found that
the claim of the Estate against the Government has been recognized
and an amount of P262,200 has already been appropriated by a
corresponding law (RA 2700). Under the circumstances, both the
claim of the Government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue and
demandable as well as fully liquidated. Compensation, therefore, takes
place by operation of law, in accordance with Article 1279 and 1290 of
the Civil Code, and both debts are extinguished to the concurrent
amount. In other words, the estate and inheritance taxes are set off, by
virtue of the government’s indebtedness to the estate.
32. COMMISSIONER OF INTERNAL REVENUE V.
ISABELA CULTURAL CORP.
(515 SCRA 556); February 12, 2007
Topic: The all-events test; when deductions from income taxes
may be claimed
Facts: When the Bureau of Internal Revenue disallowed Isabela
Cultural Corporation¶s claimed deductions for the years 1984-1986 in
their 1986 taxes for expense deductions, to wit:
(1) Expenses for auditing services for the year ending 31December
1985;
(2) Expenses for legal services for the years 1984 and 1985; and
(3) Expense for security services for the months of April
and May 1986.
As such, the former charged the latter for deficiency
income taxes. Isabela Cultural Corporation contests the
assessment.
Issue No. 1. For a taxpayer using the accrual method,
when do the facts present themselves in such a manner
that the taxpayer must recognize income or expense?
Ruling: The accrual of income and expense is
permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to
pay; and (2) the availability of the reasonable accurate
determination of such income or liability. The test does
not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its
basis is unchangeable; the test is satisfied where a
computation may be unknown, but is not as much as
unknowable, within the taxable year.
Issue No. 2. WON the deductions were properly
claimed by Isabela Cultural Corporation.
Ruling: The deductions for expenses for professional
fees consisting of expenses for legal and auditing
services are NOT allowable. However, the deductions for
expenses for security services were properly claimed by
34
Isabela Cultural Corporation. For the legal and auditing services,
Isabela Cultural Corporation could have reasonably known the fees of
those firms that it hired, thus satisfying the ³all-events test.´ As such,
per Revenue Audit Memorandum Order No. 1-2000, they cannot
validly be deducted from its gross income for the said year and were
therefore properly disallowed by the BIR. As for the security services,
because they were incurred in 1986, they could be properly claimed as
deductions for the said year.

Notes The requisites for the deductibility of ordinary and necessary

trade, business, or professional expenses, like expenses paid for legal
and auditing services, are:

a. The expense must be ordinary and necessary;

b. It must have been paid or incurred during the taxable year;
c. It must have been paid or incurred in carrying on the trade or
business of the taxpayer; and
d. It must be supported by receipts, records, or other pertinent papers.

Revenue Audit Memorandum Order No. 1-2000, provides that under

the accrual method of accounting, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year.
Thus, a taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so
cannot deduct the same for the next year.

The propriety of an accrual must be judged by the facts that a taxpayer

knew, or could reasonably be expected to have known, at the closing of
its books for the taxable year. 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.

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