TAXATION

CASE DIGESTS
INHERENT LIMITATIONS
PLANTERS PRODUCTS, INC. vs. FERTIPHIL CORPORATION
Facts:
Planters Products, Inc. ("PPI") and Fertiphil Corporation ("Fertiphil") are domestic
corporations engaged in the importation and distribution of agricultural products. On the
strength of Letter of Instruction No. 1465 issued by then President Marcos on 1985, Fertiphil
and other domestic corporations engaged in the fertilizer business paid P10.00 for every bag of
fertilizer sold in the country to the Fertilizer and Pesticide Authority (FPA), the government
agency governing the fertilizer industry. FPA in turn remitted the amount to PPI for its
rehabilitation as mandated by LOI No. 1465.
The imposition of the levy by the FPA was voluntarily stopped after the 1986 EDSA
revolution. Fertiphil demanded from PPI the refund of P6,698,144.00 which it paid. PPI refused.
Hence, Fertiphil filed a collection and damage suit against FPA and PPI before the Makati RTC.
Fertiphil contended that LOI No. 1465 was void and unconstitutional as it favored PPI only.
FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a
valid exercise of the police power of the State in ensuring the stability of the fertilizer industry.
It also averred that Fertiphil did not sustain any damage from the LOI because the burden
imposed by the levy fell on the consumer, not the seller.
The RTC decided in favor of Fertiphil declaring LOI No. 1465 void and unconstitutional.
The CA affirmed the decision upon appeal.
Issues:
1. WON Fertiphil has locus standi.
2. WON RTCs can resolve constitutional issues.
3. WON LOI No. 1465 is unconstitutional.
4. WON the doctrine of operative is inapplicable.
5. WON Fertiphil can seek a refund.
Ruling:
1. Yes, Fertiphil has locus standi because it suffered direct injury. Even assuming
arguendo that there is no direct injury present, given that the issues raised by Fertiphil are of
paramount public importance, hence the liberal policy on locus standi must apply.
2. Yes, the Constitution vests the power of judicial review not only to the SC, but in all
RTCs.
3. Yes, because it was not for a public purpose. The levy was imposed to give undue
benefit to PPI.
4. Yes, the general rule is that an unconstitutional law is void; the doctrine of operative
fact is inapplicable. Moreover, the PPI did not raise the applicability of the doctrine of operative
fact with the RTC and the CA. It cannot belatedly raise the issue in order to extricate itself from
the effects of an unconstitutional law.
5. Yes, given that LOI No. 1465 is unconstitutional it produces no rights, imposes no
duties and affords no protection. It has no legal effect. Being void, Fertiphil is not required to
pay the levy. All levies paid should be refunded in accordance with the general civil code
principle against unjust enrichment.

THE PHILIPPINE GUARANTY CO., INC. vs. THE COMMISSIONER OF INTERNAL REVENUE
and THE COURT OF TAX APPEALS
Facts:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not doing business in
the Philippines. Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in
Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
A proportionate amount of taxes on insurance premiums not recovered from the
original assured were to be paid for by the foreign reinsurers. Conflicts and/or differences
between the parties under the reinsurance contracts were to be arbitrated in Manila. Philippine
Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers premiums which were excluded from its gross income when it filed its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co.,
Inc. withholding tax on the ceded reinsurance premiums.
Philippine Guaranty Co., Inc. protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not subject to
withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals which
affirmed the assessment made by the Commissioner of Internal Revenue.
Issues:
1. WON the premiums ceded in 1953 and 1954 to the foreign reinsurers are considered
income from sources within the Philippines.
2. WON rulings of the Commissioner of Internal Revenue requiring no withholding of the
tax due on the reinsurance premiums in question relieved Philippine Guaranty Co., Inc. of the
duty to pay the corresponding withholding tax thereon.
3. WON the withholding tax should be computed from the amount actually remitted to
the foreign reinsurers instead of from the total amount ceded.
Ruling:
1. Yes, Section 24 of the Tax Code subjects foreign corporations to tax on their income
from sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. Since The reinsurance contracts show that the
transactions took place in the Philippines. These insurance premiums, therefore, came from
sources within the Philippines and, hence, are subject to corporate income tax.
2. No, it would not exculpate from the liability to pay such withholding tax. The
Government is not estopped from collecting taxes by the mistakes or errors of its agents.
Although, it may be freed from the payment of surcharges or penalties imposed.
3. No, Sections 53 and 54 of the Tax Code allow no deduction from the income therein
enumerated in determining the amount to be withheld. Accordingly, in computing the
withholding tax due on the reinsurance premium in question, no deduction shall be recognized.

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC. vs.

MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL.

Facts:
Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the CFI of Leyte for that court to declare Section 2 of Republic Act
No. 2264, otherwise known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962,
of the municipality of Tanauan, Leyte, null and void.
Municipal Ordinance No. 23 levies and collects from soft drinks producers and
manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked.
While 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 on each gallon of
volume capacity. The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
municipal production tax.
The CFI dismissed the complaint, upheld the constitutionality of Section 2, Republic Act
No. 2264 and declared both ordinances as legal and constitutional. Pepsi-Cola Bottling
Company appealed to the CA which certified the case to the SC as it involves only pure
questions of law.
Issues:
1. WON RA 2264, Sec. 2 is an undue delegation of power, confiscatory and oppressive.
2. WON Ordinances Nos. 23 and 27 constitute double taxation and impose percentage
or specific taxes.
3. WON Ordinance No 27 imposes a percentage or a specific tax.
4. WON Ordinance No 27 is unjust and unfair.
Ruling:
1. No, legislative powers may be delegated to local governments in respect of matters of
local concern. Local governments are granted the autonomous authority to create their own
sources of revenue and to levy taxes under Sec. 5, Art. XI of the Constitution. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the State has
not deemed wise to tax for more general purposes.
2. No, Ordinance No. 27 was intended as a substitute for the prior Ordinance No. 23,
and operates as a repeal of the latter, even without words to that effect.
3. No, Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or
other taxes in any form based thereon. The tax is levied on the produce (whether sold or not)
and not on the sales. The volume capacity of the taxpayer's production of soft drinks is
considered solely for purposes of determining the tax rate on the products, but there is not set
ratio between the volume of sales and the amount of the tax. Nor can the tax levied be treated
as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits.
4. The tax of one (P0.01) on each gallon of volume capacity on all soft drinks, produced
or manufactured, or an equivalent of 1- centavos per case, cannot be considered unjust and
unfair. Municipal corporations are allowed much discretion in determining the rates of
imposable taxes. This is in line with the constitutional policy of according the widest possible
autonomy to local governments in matters of local taxation, an aspect that is given expression
in the Local Tax Code

COMMISSIONER OF INTERNAL REVENUE vs.

S.C. JOHNSON and SON, INC., & COURT OF APPEALS
Facts:
SC Johnson (Phil) entered into a license agreement with SC Johnson (US) wherein the
former 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. The said License
Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents,
Trade Marks and Technology Transfer.
SC Johnson (Phil) was obliged to pay SC Johnson (US) royalties based on a percentage of
net sales and subjected the same to 25% withholding tax on royalty payments which SC
Johnson (Phil) paid for the period covering July 1992 to May 1993.
SC Johnson (Phil) filed with the International Tax Affairs Division (ITAD) of the BIR a
claim for refund of overpaid withholding tax on royalties. Since the agreement was approved by
the Technology Transfer Board, the preferential tax rate of 10% should apply pursuant to the
most-favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax
Treaty.
The Commissioner did not act on said claim for refund. SC Johnson (Phil) then filed a
petition for review before the Court of Tax Appeals (CTA) which ordered the Commissioner of
Internal Revenue to issue a tax credit certificate in favor of SC Johnson (Phil). CA affirmed CTAs
ruling upon appeal.
Issue:
WON SC Johnson (US) is entitled to the tax rate of 10% on royalties as provided by the
RP-US tax treaty in relation to the RP-West Germany tax treaty.
Ruling:
No, since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, SC
Johnson (Phil) cannot be deemed entitled to the 10 percent rate granted under the latter treaty
for the reason that there is no payment of taxes on royalties under similar circumstances. There
is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is
paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed against the person or
entity claiming the exemption. The burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant of organic or statute law.