SECOND DIVISION
for review in C.T.A. Case No. 2511 on July 31, 1973, while his Answer
G.R. No. 48532 August 31, 1992
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O.
MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME
A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L.
DIMAYUGA, JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR.,
MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO,
EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public
respondent Court of Tax Appeals, promulgated September 26,
19771 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income
taxes which they claim to have been erroneously or illegally paid or
collected.
As summarized by the Solicitor General, the facts of the cases are as
follows:
Petitioners are Filipino citizens and employees of Procter and
Gamble, Philippine Manufacturing Corporation, with offices at
Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is
a subsidiary of Procter & Gamble, a foreign corporation based in
Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners
were assigned, for certain periods, to other subsidiaries of Procter &
Gamble, outside of the Philippines, during which petitioners were
paid U.S. dollars as compensation for services in their foreign
assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos.
2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A.
Case No. 2511 filed their income tax returns for the year 1970, they
computed the tax due by applying the dollar-to-peso conversion on
the basis of the floating rate ordained under B.I.R. Ruling No. 70-027
dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90
to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of
P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above
conversion rate in converting their dollar income for 1971 to
Philippine peso. However, on February 8, 1973 and October 8, 1973,
petitioners in said cases filed with the office of the respondent
Commissioner, amended income tax returns for the above-
mentioned years, this time using the par value of the peso as
prescribed in Section 48 of Republic Act No. 265 in relation to
Section 6 of Commonwealth Act No. 265 in relation to Section 6 of
Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of
computing and paying the corresponding income tax due from
them. The aforesaid computation as shown in the amended income
tax returns resulted in the alleged overpayments, refund and/or tax
credit. Accordingly, claims for refund of said over-payments were
filed with respondent Commissioner. Without awaiting the
resolution of the Commissioner of the Internal Revenue on their
claims, petitioners filed their petitioner for review in the above-
mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition
in C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases
involve common question of law and facts, that respondent Court of
Tax Appeals heard the cases jointly. In its decision dated September
26, 1977, the respondent Court of Tax Appeals held that the proper
conversion rate for the purpose of reporting and paying the
Philippine income tax on the dollar earnings of petitioners are the
rates prescribed under Revenue Memorandum Circulars Nos. 7-71
and 41-71. Accordingly, the claim for refund and/or tax credit of
petitioners in the above-entitled cases was denied and the petitions
for review dismissed, with costs against petitioners. Hence, this
petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred
in holding:
1. That petitioners' dollar earnings are receipts derived from
foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar
earnings for tax purposes in the prevailing free market rate of
exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert
petitioners' dollar earnings for tax purposes into Philippine pesos is
"unrealistic" and, therefore, the prevailing free market rate should
be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand,
refutes petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two
cases are Philippine income tax for the calendar years 1970 (CTA
Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should
be governed by the provisions of the National Internal Revenue
Code and its implementing rules and regulations, and not by the
provisions of Central Bank Circular No. 42 dated May 21, 1953, as
contended by petitioners.
Section 21 of the National Internal Revenue Code, before its
amendment by Presidential Decrees Nos. 69 and 323 which took
effect on January 1, 1973 and January 1, 1974, respectively, imposed
a tax upon the taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether residing here
or abroad.
Petitioners are citizens of the Philippines temporarily residing
abroad by virtue of their employment. Thus, in their tax returns for
the period involved herein, they gave their legal residence/address
as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes
"A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos.
2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar
earnings should be converted into Philippine pesos in computing the
income tax due therefrom, in accordance with the provisions of
Revenue Memorandum Circular No. 7-71 dated February 11, 1971
for 1970 income and Revenue Memorandum Circular No. 41-71
dated December 21, 1971 for 1971 income, which reiterated BIR
Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of
conversion (Revenue Circulars Nos. 7-71 and 41-71) should be
applied in order to determine the true and correct value in
Philippine pesos of the income of petitioners. 3
After a careful examination of the records, the laws involved and the
jurisprudence on the matter, We are inclined to agree with
respondents Court of Tax Appeals and Commissioner of Internal
Revenue and thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these
cases income may be defined as an amount of money coming to a
person or corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. 4 Income can also be
though of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are
not receipts derived from foreign exchange transactions. For a
foreign exchange transaction is simply that a transaction in
foreign exchange, foreign exchange being "the conversion of an
amount of money or currency of one country into an equivalent
amount of money or currency of another." 6 When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they were
earning in their assigned nation's currency and were ALSO spending
in said currency. There was no conversion, therefore, from one
currency to another.
Public respondent Court of Tax Appeals did err when it concluded
that the dollar incomes of petitioner fell under Section 2(f)(g) and
(m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine
the peso equivalent of the foreign earnings of petitioners for income
tax purposes. Petitioners claim that since the dollar earnings do not
fall within the classification of foreign exchange transactions, there
occurred no actual inward remittances, and, therefore, they are not
included in the coverage of Central Bank Circular No. 289 which
provides for the specific instances when the par value of the peso
shall not be the conversion rate used. They conclude that their
earnings should be converted for income tax purposes using the par
value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of
receipts for export products, receipts of sale of foreign exchange or
foreign borrowings and investments but not income tax. He also
claims that he had to use the prevailing free market rate of
exchange in these cases because of the need to ascertain the true
and correct amount of income in Philippine peso of dollar earners
for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the
subject matters involved therein are export products, invisibles,
receipts of foreign exchange, foreign exchange payments, new
foreign borrowing and
investments nothing by way of income tax payments. Thus,
petitioners are in error by concluding that since C.B. Circular No. 289
does not apply to them, the par value of the peso should be the
guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the
foreign subsidiaries of Procter & Gamble. It was a definite amount of
money which came to them within a specified period of time of two
yeas as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to
August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby
imposed upon the taxable net income received during each taxable
year from all sources by every individual, whether a citizen of the
Philippines residing therein or abroad or an alien residing in the
Philippines, determined in accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the
National Internal Revenue Code, Section 338 thereof empowers the
Secretary of Finance to "promulgate all needful rules and
regulations" to effectively enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71
10 and 41-71 11 were issued to prescribed a uniform rate of
exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively.
Said revenue circulars were a valid exercise of the authority given to
the Secretary of Finance by the Legislature which enacted the
Internal Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary of Finance
himself. 12
Petitioners argue that since there were no remittances and
acceptances of their salaries and wages in US dollars into the
Philippines, they are exempt from the coverage of such circulars.
Petitioners forget that they are citizens of the Philippines, and their
income, within or without, and in these cases wholly without, are
subject to income tax. Sec. 21, NIRC, as amended, does not brook
any exemption.
Since petitioners have already paid their 1970 and 1971 income
taxes under the uniform rate of exchange prescribed under the
aforestated Revenue Memorandum Circulars, there is no reason for
respondent Commissioner to refund any taxes to petitioner as said
Revenue Memorandum Circulars, being of long standing and not
contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that
"taxes are the lifeblood of the government" and one of the duties of
a Filipino citizen is to pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The
dismissal by the respondent Court of Tax Appeals of petitioners'
claims for tax refunds for the income tax period for 1970 and 1971 is
AFFIRMED. Costs against petitioners.
SO ORDERED.
EN BANC
G.R. No. L-12287 August 7, 1918
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-
appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue, defendants-
appellees.
Gregorio Araneta for appellants.
Assistant Attorney Round for appellees.
MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law, a law of
American origin, with reference to the Civil Code, a law of Spanish
origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to
January 1, 1914. The marriage was contracted under the provisions
of law concerning conjugal partnerships (sociedad de gananciales).
On February 25, 1915, Vicente Madrigal filed sworn declaration on
the prescribed form with the Collector of Internal Revenue, showing,
as his total net income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was
in fact the income of the conjugal partnership existing between
himself and his wife Susana Paterno, and that in computing and
assessing the additional income tax provided by the Act of Congress
of October 3, 1913, the income declared by Vicente Madrigal should
be divided into two equal parts, one-half to be considered the
income of Vicente Madrigal and the other half of Susana Paterno.
The general question had in the meantime been submitted to the
Attorney-General of the Philippine Islands who in an opinion dated
March 17, 1915, held with the petitioner Madrigal. The revenue
officers being still unsatisfied, the correspondence together with this
opinion was forwarded to Washington for a decision by the United
States Treasury Department. The United States Commissioner of
Internal Revenue reversed the opinion of the Attorney-General, and
thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had
been decided adversely by the Collector of Internal Revenue, action
was begun by Vicente Madrigal and his wife Susana Paterno in the
Court of First Instance of the city of Manila against Collector of
Internal Revenue and the Deputy Collector of Internal Revenue for
the recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally collected by the defendants from the
plaintiff, Vicente Madrigal, under the provisions of the Act of
Congress known as the Income Tax Law. The burden of the
complaint was that if the income tax for the year 1914 had been
correctly and lawfully computed there would have been due payable
by each of the plaintiffs the sum of P2,921.09, which taken together
amounts of a total of P5,842.18 instead of P9,668.21, erroneously
and unlawfully collected from the plaintiff Vicente Madrigal, with
the result that plaintiff Madrigal has paid as income tax for the year
1914, P3,786.08, in excess of the sum lawfully due and payable.
The answer of the defendants, together with an analysis of the tax
declaration, the pleadings, and the stipulation, sets forth the basis of
defendants' stand in the following way: The income of Vicente
Madrigal and his wife Susana Paterno of the year 1914 was made up
of three items: (1) P362,407.67, the profits made by Vicente
Madrigal in his coal and shipping business; (2) P4,086.50, the profits
made by Susana Paterno in her embroidery business; (3) P16,687.80,
the profits made by Vicente Madrigal in a pawnshop company. The
sum of these three items is P383,181.97, the gross income of
Vicente Madrigal and Susana Paterno for the year 1914. General
deductions were claimed and allowed in the sum of P86,879.24. The
resulting net income was P296,302.73. For the purpose of assessing
the normal tax of one per cent on the net income there were
allowed as specific deductions the following: (1) P16,687.80, the tax
upon which was to be paid at source, and (2) P8,000, the specific
exemption granted to Vicente Madrigal and Susana Paterno,
husband and wife. The remainder, P271,614.93 was the sum upon
which the normal tax of one per cent was assessed. The normal tax
thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned
the additional tax provided for in the Income Tax Law. The trial court
in an exhausted decision found in favor of defendants, without
costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with
the additional income tax, is that is should be divided into two equal
parts, because of the conjugal partnership existing between them.
The learned argument of counsel is mostly based upon the
provisions of the Civil Code establishing the sociedad de gananciales.
The counter contentions of appellees are that the taxes imposed by
the Income Tax Law are as the name implies taxes upon income tax
and not upon capital and property; that the fact that Madrigal was a
married man, and his marriage contracted under the provisions
governing the conjugal partnership, has no bearing on income
considered as income, and that the distinction must be drawn
between the ordinary form of commercial partnership and the
conjugal partnership of spouses resulting from the relation of
marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five
answers have been given the course of history. The final stage has
been the selection of income as the norm of taxation. (See Seligman,
"The Income Tax," Introduction.) The Income Tax Law of the United
States, extended to the Philippine Islands, is the result of an effect
on the part of the legislators to put into statutory form this canon of
taxation and of social reform. The aim has been to mitigate the evils
arising from inequalities of wealth by a progressive scheme of
taxation, which places the burden on those best able to pay. To
carry out this idea, public considerations have demanded an
exemption roughly equivalent to the minimum of subsistence. With
these exceptions, the income tax is supposed to reach the earnings
of the entire non-governmental property of the country. Such is the
background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The
essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of
time is called capital. A flow of services rendered by that capital by
the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the
fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be
defined as "profits or gains." (London County Council vs. Attorney-
General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49
Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax,
second edition [1915], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S.,
549; and Towne vs. Eisner, decided by the United States Supreme
Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to
returns by the husband and wife not living apart, contains the
following:
The husband, as the head and legal representative of the household
and general custodian of its income, should make and render the
return of the aggregate income of himself and wife, and for the
purpose of levying the income tax it is assumed that he can ascertain
the total amount of said income. If a wife has a separate estate
managed by herself as her own separate property, and receives an
income of more than $3,000, she may make return of her own
income, and if the husband has other net income, making the
aggregate of both incomes more than $4,000, the wife's return
should be attached to the return of her husband, or his income
should be included in her return, in order that a deduction of $4,000
may be made from the aggregate of both incomes. The tax in such
case, however, will be imposed only upon so much of the aggregate
income of both shall exceed $4,000. If either husband or wife
separately has an income equal to or in excess of $3,000, a return of
annual net income is required under the law, and such return must
include the income of both, and in such case the return must be
made even though the combined income of both be less than
$4,000. If the aggregate net income of both exceeds $4,000, an
annual return of their combined incomes must be made in the
manner stated, although neither one separately has an income of
$3,000 per annum. They are jointly and separately liable for such
return and for the payment of the tax. The single or married status
of the person claiming the specific exemption shall be determined as
one of the time of claiming such exemption which return is made,
otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in
force in the Philippine Islands, we turn for a moment to consider the
provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court in speaking of the conjugal
partnership, decided that "prior to the liquidation the interest of the
wife and in case of her death, of her heirs, is an interest inchoate, a
mere expectancy, which constitutes neither a legal nor an equitable
estate, and does not ripen into title until there appears that there
are assets in the community as a result of the liquidation and
settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871;
Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in
the property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income
after such income has become capital. Susana Paterno has no
absolute right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno cannot make
a separate return in order to receive the benefit of the exemption
which would arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely
distinct from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of the
additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The
husband and wife are only entitled to the exemption of P8,000
specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing
with the conjugal partnership and having no application to the
Income Tax Law. The aims and purposes of the Income Tax Law must
be given effect.
The point we are discussing has heretofore been considered by the
Attorney-General of the Philippine Islands and the United States
Treasury Department. The decision of the latter overruling the
opinion of the Attorney-General is as follows:
TREASURY DEPARTMENT, Washington.
Income Tax.
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915,
transmitting copy of correspondence "from the Philippine
authorities relative to the method of submission of income tax
returns by marred person."
You advise that "The Governor-General, in forwarding the papers to
the Bureau, advises that the Insular Auditor has been authorized to
suspend action on the warrants in question until an authoritative
decision on the points raised can be secured from the Treasury
Department."
From the correspondence it appears that Gregorio Araneta, married
and living with his wife, had an income of an amount sufficient to
require the imposition of the net income was properly computed
and then both income and deductions and the specific exemption
were divided in half and two returns made, one return for each half
in the names respectively of the husband and wife, so that under the
returns as filed there would be an escape from the additional tax;
that Araneta claims the returns are correct on the ground under the
Philippine law his wife is entitled to half of his earnings; that Araneta
has dominion over the income and under the Philippine law, the
right to determine its use and disposition; that in this case the wife
has no "separate estate" within the contemplation of the Act of
October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the foregoing
explanation, tax was assessed against the entire net income against
Gregorio Araneta; that the tax was paid and an application for
refund made, and that the application for refund was rejected,
whereupon the matter was submitted to the Attorney-General of
the Islands who holds that the returns were correctly rendered, and
that the refund should be allowed; and thereupon the question at
issue is submitted through the Governor-General of the Islands and
Bureau of Insular Affairs for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the
Philippine Islands, to be administered as in the United States but by
the appropriate internal-revenue officers of the Philippine
Government. You are therefore advised that upon the facts as
stated, this office holds that for the Federal Income Tax (Act of
October 3, 1913), the entire net income in this case was taxable to
Gregorio Araneta, both for the normal and additional tax, and that
the application for refund was properly rejected.
The separate estate of a married woman within the contemplation
of the Income Tax Law is that which belongs to her solely and
separate and apart from her husband, and over which her husband
has no right in equity. It may consist of lands or chattels.
The statute and the regulations promulgated in accordance
therewith provide that each person of lawful age (not excused from
so doing) having a net income of $3,000 or over for the taxable year
shall make a return showing the facts; that from the net income so
shown there shall be deducted $3,000 where the person making the
return is a single person, or married and not living with consort, and
$1,000 additional where the person making the return is married
and living with consort; but that where the husband and wife both
make returns (they living together), the amount of deduction from
the aggregate of their several incomes shall not exceed $4,000.
The only occasion for a wife making a return is where she has
income from a sole and separate estate in excess of $3,000, but
together they have an income in excess of $4,000, in which the
latter event either the husband or wife may make the return but not
both. In all instances the income of husband and wife whether from
separate estates or not, is taken as a whole for the purpose of the
normal tax. Where the wife has income from a separate estate
makes return made by her husband, while the incomes are added
together for the purpose of the normal tax they are taken separately
for the purpose of the additional tax. In this case, however, the wife
has no separate income within the contemplation of the Income Tax
Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a
few basic ideas. The Income Tax Law was drafted by the Congress of
the United States and has been by the Congress extended to the
Philippine Islands. Being thus a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the
official who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law,
whose meaning is doubtful, by the department charged with its
execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338;
In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands
vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva
Segovia [1915], 32 Phil., 634.) We conclude that the judgment
should be as it is hereby affirmed with costs against appellants. So
ordered.
EN BANC
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal
Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of
Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau
of Internal Revenue; MANUEL ALBA, Minister of Budget,
FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief
or prohibition proceeding 1 on the validity of Section I of Batas
Pambansa Blg. 135 depends upon a showing of its constitutional
infirmity. The assailed provision further amends Section 21 of the
National Internal Revenue Code of 1977, which provides for rates of
tax on citizens or residents on (a) taxable compensation income, (b)
taxable net income, (c) royalties, prizes, and other winnings, (d)
interest from bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in the
net profits of taxable partnership, (f) adjusted gross income. 2
Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be
unduly discriminated against by the imposition of higher rates of tax
upon his income arising from the exercise of his profession vis-a-vis
those which are imposed upon fixed income or salaried individual
taxpayers. 4 He characterizes the above sction as arbitrary
amounting to class legislation, oppressive and capricious in
character 5 For petitioner, therefore, there is a transgression of both
the equal protection and due process clauses 6 of the Constitution
as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents
to file an answer within 10 days from notice. Such an answer, after
two extensions were granted the Office of the Solicitor General, was
filed on May 28, 1982. 8 The facts as alleged were admitted but not
the allegations which to their mind are "mere arguments, opinions
or conclusions on the part of the petitioner, the truth [for them]
being those stated [in their] Special and Affirmative Defenses." 9 The
answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise
of the State's power to tax. The authorities and cases cited while
correctly quoted or paraghraph do not support petitioner's stand."
10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must
be dismissed.
1. It is manifest that the field of state activity has assumed a
much wider scope, The reason was so clearly set forth by retired
Chief Justice Makalintal thus: "The areas which used to be left to
private enterprise and initiative and which the government was
called upon to enter optionally, and only 'because it was better
equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-
defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet
the increasing social challenges of the times." 11 Hence the need for
more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the
source of the bulk of public funds. To praphrase a recent decision,
taxes being the lifeblood of the government, their prompt and
certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice
Malcolm, "is an attribute of sovereignty. It is the strongest of all the
powers of of government." 13 It is, of course, to be admitted that for
all its plenitude 'the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits . Adversely
affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to
invalidate in appropriate cases a revenue measure. if it were
otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14
In a separate opinion in Graves v. New York, 15 Justice Frankfurter,
after referring to it as an 1, unfortunate remark characterized it as "a
flourish of rhetoric [attributable to] the intellectual fashion of the
times following] a free use of absolutes." 16 This is merely to
emphasize that it is riot and there cannot be such a constitutional
mandate. Justice Frankfurter could rightfully conclude: "The web of
unreality spun from Marshall's famous dictum was brushed away by
one stroke of Mr. Justice Holmess pen: 'The power to tax is not the
power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as
the fundamental law overrides any legislative or executive, act that
runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision as
petitioner here alleges fails to abide by its command, then this
Court must so declare and adjudge it null. The injury thus is centered
on the question of whether the imposition of a higher tax rate on
taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He
alleges arbitrariness. A mere allegation, as here. does not suffice.
There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as
void or its face, he has not made out a case. This is merely to adhere
to the authoritative doctrine that were the due process and equal
protection clauses are invoked, considering that they arc not fixed
rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be
invoked where a taxing statute is so arbitrary that it finds no support
in the Constitution. An obvious example is where it can be shown to
amount to the confiscation of property. That would be a clear abuse
of power. It then becomes the duty of this Court to say that such an
arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose,
or, in case of a retroactive statute is so harsh and unreasonable, it is
subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid
the charge that there is a denial of this constitutional mandate
whether the assailed act is in the exercise of the lice power or the
power of eminent domain is to demonstrated that the governmental
act assailed, far from being inspired by the attainment of the
common weal was prompted by the spirit of hostility, or at the very
least, discrimination that finds no support in reason. It suffices then
that the laws operate equally and uniformly on all persons under
similar circumstances or that all persons must be treated in the
same manner, the conditions not being different, both in the
privileges conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under
circumtances which if not Identical are analogous. If law be looked
upon in terms of burden or charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on
some in the group equally binding on the rest." 20 That same
formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of
approximating the Ideal of the laws benefits being available to all
and the affairs of men being governed by that serene and impartial
uniformity, which is of the very essence of the Idea of law. There is,
however, wisdom, as well as realism in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause
aims is not a disembodied equality. The Fourteenth Amendment
enjoins 'the equal protection of the laws,' and laws are not abstract
propositions. They do not relate to abstract units A, B and C, but are
expressions of policy arising out of specific difficulties, address to
the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same." 21
Hence the constant reiteration of the view that classification if
rational in character is allowable. As a matter of fact, in a leading
case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes,
went so far as to hold "at any rate, it is inherent in the power to tax
that a state be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of
one particular class for taxation, or exemption infringe no
constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of
uniformity. According to the Constitution: "The rule of taxation shag
be uniform and equitable." 24 This requirement is met according to
Justice Laurel in Philippine Trust Company v. Yatco,25 decided in
1940, when the tax "operates with the same force and effect in
every place where the subject may be found. " 26 He likewise
added: "The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable." 27 The problem
of classification did not present itself in that case. It did not arise
until nine years later, when the Supreme Court held: "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, ... . 28 As clarified by Justice
Tuason, where "the differentiation" complained of "conforms to the
practical dictates of justice and equity" it "is not discriminatory
within the meaning of this clause and is therefore uniform." 29
There is quite a similarity then to the standard of equal protection
for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation."30
8. Further on this point. Apparently, what misled petitioner is
his failure to take into consideration the distinction between a tax
rate and a tax base. There is no legal objection to a broader tax base
or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate. Taxpayers may be
classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real
differences. In the case of the gross income taxation embodied in
Batas Pambansa Blg. 135, the, discernible basis of classification is
the susceptibility of the income to the application of generalized
rules removing all deductible items for all taxpayers within the class
and fixing a set of reduced tax rates to be applied to all of them.
Taxpayers who are recipients of compensation income are set apart
as a class. As there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for income tax
purposes because they are in the same situation more or less. On
the other hand, in the case of professionals in the practice of their
calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just
then to disregard the disparities by giving all of them zero deduction Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the 20% int. p.a. fr. 7-15-85 to
Batasang Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
taxation as regards professional and business income.
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40
9. Nothing can be clearer, therefore, than that the petition is
without merit, considering the (1) lack of factual foundation to show II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and FY ended March 31, 1985
uniformity in taxation and (3) the reasonableness of the distinction
between compensation and taxable net income of professionals and Undeclared net income from
businessman certainly not a suspect classification,
Philphos and NDC construction projects . . . . . P 483,634,905.57
WHEREFORE, the petition is dismissed. Costs against petitioner.
Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
[G.R. No. 137377. December 18, 2001]
Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI
CORPORATION, respondent. Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00
DECISION
PUNO, J.: Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50

In this petition for review, the Commissioner of Internal Revenue 20% int. p.a. fr. 4-26-85
assails the decision dated January 15, 1999 of the Court of Appeals
in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66
1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court
ordered the Commissioner of Internal Revenue to desist from TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16
collecting the 1985 deficiency income, branch profit remittance and
contractors taxes from Marubeni Corporation after finding the latter III. DEFICIENCY CONTRACTORS TAX
to have properly availed of the tax amnesty under Executive Orders
Nos. 41 and 64, as amended. FY ended March 31, 1985

Respondent Marubeni Corporation is a foreign corporation
organized and existing under the laws of Japan. It is engaged in
general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the
Philippines and maintains a branch office in Manila.
Undeclared gross receipts/ gross income from
Philphos and NDC construction projects . . . . P 967,269,811.14
Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00

Sometime in November 1985, petitioner Commissioner of Internal Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00
Revenue issued a letter of authority to examine the books of
accounts of the Manila branch office of respondent corporation for 25% surcharge for late payment . . . . . . . . . 9,672,698.00
the fiscal year ending March 1985. In the course of the examination,
petitioner found respondent to have undeclared income from two Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00
(2) contracts in the Philippines, both of which were completed in
1984. One of the contracts was with the National Development Add: 20% int. p.a. fr. 4-21-85 to
Company (NDC) in connection with the construction and installation
of a wharf/port complex at the Leyte Industrial Development Estate to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
in the municipality of Isabel, province of Leyte. The other contract
was with the Philippine Phosphate Fertilizer Corporation (Philphos) TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46
for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate. IV. DEFICIENCY COMMERCIAL BROKERS TAX

On March 1, 1986, petitioners revenue examiners recommended an FY ended March 31, 1985
assessment for deficiency income, branch profit remittance,
contractors and commercial brokers taxes. Respondent questioned Undeclared share from commission income
this assessment in a letter dated June 5, 1986.
(denominated as subsidy from Home
On August 27, 1986, respondent corporation received a letter dated
August 15, 1986 from petitioner assessing respondent several Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
deficiency taxes. The assessed deficiency internal revenue taxes,
inclusive of surcharge and interest, were as follows: Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00

I. DEFICIENCY INCOME TAX Add: 50% surcharge for non-declaration. . . . . . . 814,284.50

FY ended March 31, 1985 25% surcharge for late payment . . . . . . . . . 407,142.25

Undeclared gross income (Philphos and Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75

and NDC construction projects). . . . . . . . . . . . P 967,269,811.14 Add: 20% int. p.a. fr. 4-21-85

Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57 to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98

Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57 TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68

Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00 The 50% surcharge was imposed for your clients failure to report for
tax purposes the aforesaid taxable revenues while the 25%
surcharge was imposed because of your clients failure to pay on
time the above deficiency percentage taxes.
x x x x x x x x x. [1]
Petitioner found that the NDC and Philphos contracts were made on
a turn-key basis and that the gross income from the two projects
amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and
installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further
stated that the same was petitioners final decision and that if
respondent disagreed with it, respondent may file an appeal with
the Court of Tax Appeals within thirty (30) days from receipt of the
assessment.
On September 26, 1986, respondent filed two (2) petitions for
review with the Court of Tax Appeals. The first petition, CTA Case
No. 4109, questioned the deficiency income, branch profit
remittance and contractors tax assessments in petitioners
assessment letter. The second, CTA Case No. 4110, questioned the
deficiency commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring
a one-time amnesty covering unpaid income taxes for the years
1981 to 1985 was issued. Under this E.O., a taxpayer who wished to
avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of
December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and
(c) file a return and pay a tax equivalent to ten per cent (10%) of the
increase in net worth from December 31, 1980 to December 31,
1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax
amnesty return dated October 30, 1986 and attached thereto its
sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of
P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from
October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was
expanded by Executive Order (E.O.) No. 64. In addition to the
income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64[3] included estate and donors taxes under Title III
and the tax on business under Chapter II, Title V of the National
Internal Revenue Code, also covering the years 1981 to 1985. E.O.
No. 64 further provided that the immunities and privileges under
E.O. No. 41 were extended to the foregoing tax liabilities, and the
period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed
their amnesty return under E.O. No. 41, as amended, could avail
themselves of the benefits, immunities and privileges under the new
E.O. by filing an amended return and paying an additional 5% on the
increase in net worth to cover business, estate and donors tax
liabilities.
The period of amnesty under E.O. No. 64 was extended to January
31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax
amnesty return under the benefit of E.O. No. 64 and paid a further
amount of P1,445,637.00 to the BIR equivalent to five percent (5%)
of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the
Court of Tax Appeals rendered a decision in CTA Case No. 4109. The
tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency
taxes subject of said case as deemed cancelled and withdrawn. The
Court of Tax Appeals disposed of as follows:
WHEREFORE, the respondent Commissioner of Internal Revenue is
hereby ORDERED to DESIST from collecting the 1985 deficiency taxes
it had assessed against petitioner and the same are deemed
considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive
Order No. 41, as amended.[4]
Petitioner challenged the decision of the tax court by filing CA-G.R.
SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition
and affirmed the decision of the Court of Tax Appeals. Hence, this
recourse.
Before us, petitioner raises the following issues:
(1) Whether or not the Court of Appeals erred in affirming the
Decision of the Court of Tax Appeals which ruled that herein
respondents deficiency tax liabilities were extinguished upon
respondents availment of tax amnesty under Executive Orders Nos.
41 and 64.
(2) Whether or not respondent is liable to pay the income, branch
profit remittance, and contractors taxes assessed by petitioner.[5]
The main controversy in this case lies in the interpretation of the
exception to the amnesty coverage of E.O. Nos. 41 and 64. There are
three (3) types of taxes involved herein income tax, branch profit
remittance tax and contractors tax. These taxes are covered by the
amnesties granted by E.O. Nos. 41 and 64. Petitioner claims,
however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4
(b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of
the amnesty granted thereunder, viz:
Sec. 4. Exceptions.The following taxpayers may not avail themselves
of the amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2
and 14;
b) Those with income tax cases already filed in Court as of the
effectivity hereof;
c) Those with criminal cases involving violations of the income tax
law already filed in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National
Internal Revenue Code, as amended, insofar as the said liabilities are
concerned;
e) Those with tax cases pending investigation by the Bureau of
Internal Revenue as of the effectivity hereof as a result of
information furnished under Section 316 of the National Internal
Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully
acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal
Exactions and Transactions) and Chapter Four (Malversation of
Public Funds and Property) of the Revised Penal Code, as amended.
Petitioner argues that at the time respondent filed for income tax
amnesty on October 30, 1986, CTA Case No. 4109 had already been
filed and was pending before the Court of Tax Appeals. Respondent
therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is
very clear and unambiguous. It excepts from income tax amnesty
those taxpayers with income tax cases already filed in court as of the
effectivity hereof. The point of reference is the date of effectivity of
E.O. No. 41. The filing of income tax cases in court must have been
made before and as of the date of effectivity of E.O. No. 41. Thus,
for a taxpayer not to be disqualified under Section 4 (b) there must
have been no income tax cases filed in court against him when E.O.
No. 41 took effect. This is regardless of when the taxpayer filed for
income tax amnesty, provided of course he files it on or before the
deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit remittance
and contractors tax assessments was filed by respondent with the
Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not
yet been filed in court. Respondent corporation did not fall under
the said exception in Section 4 (b), hence, respondent was not
disqualified from availing of the amnesty for income tax under E.O.
No. 41.
The same ruling also applies to the deficiency branch profit
remittance tax assessment. A branch profit remittance tax is defined
and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the
National Internal Revenue Code.[6] In the tax code, this tax falls
under Title II on Income Tax. It is a tax on income. Respondent
therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax
assessment.
The difficulty herein is with respect to the contractors tax
assessment and respondents availment of the amnesty under E.O.
No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by
including estate and donors taxes and tax on business. Estate and
donors taxes fall under Title III of the Tax Code while business taxes
fall under Chapter II, Title V of the same. The contractors tax is
provided in Section 205, Chapter II, Title V of the Tax Code; it is
defined and imposed under the title on business taxes, and is
therefore a tax on business.[7]
When E.O. No. 64 took effect on November 17, 1986, it did not
provide for exceptions to the coverage of the amnesty for business,
estate and donors taxes. Instead, Section 8 of E.O. No. 64 provided
that:
Section 8. The provisions of Executive Orders Nos. 41 and 54 which
are not contrary to or inconsistent with this amendatory Executive
Order shall remain in full force and effect.
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41
not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has income tax cases already filed
in court as of the effectivity hereof. As to what Executive Order the
exception refers to, respondent argues that because of the words
income and hereof, they refer to Executive Order No. 41.[8]
In view of the amendment introduced by E.O. No. 64, Section 4 (b)
cannot be construed to refer to E.O. No. 41 and its date of
effectivity. The general rule is that an amendatory act operates
prospectively.[9] While an amendment is generally construed as
becoming a part of the original act as if it had always been contained
therein,[10] it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right
or obligations of contract are thereby impaired.[11]
There is nothing in E.O. No. 64 that provides that it should retroact
to the date of effectivity of E.O. No. 41, the original issuance.
Neither is it necessarily implied from E.O. No. 64 that it or any of its
provisions should apply retroactively. Executive Order No. 64 is a
substantive amendment of E.O. No. 41. It does not merely change
provisions in E.O. No. 41. It supplements the original act by adding
other taxes not covered in the first.[12] It has been held that where
a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect
so as to subject to tax past transactions not subject to tax under the
original act.[13] In an amendatory act, every case of doubt must be
resolved against its retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
amnesty is a general pardon or intentional overlooking by the State
of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.[15] It partakes of an
absolute forgiveness or waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate.[16] A tax amnesty, much like a tax
exemption, is never favored nor presumed in law.[17] If granted, the
terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the
taxing authority.[18] For the right of taxation is inherent in
government. The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims an exemption
(or an amnesty) from the common burden must justify his claim by
the clearest grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the state.[19]
In the instant case, the vagueness in Section 4 (b) brought about by
E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term income tax cases should be read as to refer to
estate and donors taxes and taxes on business while the word
hereof, to E.O. No. 64. Since Executive Order No. 64 took effect on
November 17, 1986, consequently, insofar as the taxes in E.O. No.
64 are concerned, the date of effectivity referred to in Section 4 (b)
of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When
E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109
was already filed and pending in court. By the time respondent filed
its supplementary tax amnesty return on December 15, 1986,
respondent already fell under the exception in Section 4 (b) of E.O.
Nos. 41 and 64 and was disqualified from availing of the business tax
amnesty granted therein.
It is respondents other argument that assuming it did not validly
avail of the amnesty under the two Executive Orders, it is still not
liable for the deficiency contractors tax because the income from
the projects came from the Offshore Portion of the contracts. The
two contracts were divided into two parts, i.e., the Onshore Portion
and the Offshore Portion. All materials and equipment in the
contract under the Offshore Portion were manufactured and
completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.
Before going into respondents arguments, it is necessary to discuss
the background of the two contracts, examine their pertinent
provisions and implementation.
The NDC and Philphos are two government corporations. In 1980,
the NDC, as the corporate investment arm of the Philippine
Government, established the Philphos to engage in the large-scale
manufacture of phosphatic fertilizer for the local and foreign
markets.[20] The Philphos plant complex which was envisioned to
be the largest phosphatic fertilizer operation in Asia, and among the
largest in the world, covered an area of 180 hectares within the 435-
hectare Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct
and install a modern, reliable, efficient and integrated wharf/port
complex at the Leyte Industrial Development Estate. The wharf/ port
complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was
to be specifically adapted to the site for the handling of phosphate
rock, bagged or bulk fertilizer products, liquid materials and other
products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar),[21] and other industrial plants within
the Estate. The bidding was participated in by Marubeni Head Office
in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and
respondent entered into an agreement entitled Turn-Key Contract
for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corporation.[22] The
Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems,
fuel oil depot, utilities systems, storage and service buildings, offsite
facilities, harbor service vessels, navigational aid system, fire-fighting
system, area lighting, mobile equipment, spare parts and other
related facilities.[23] The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the
transfer of technology and know-how,[24] and:
x x x the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of
testing and commissioning of the Wharf-Port Complex as set forth in
Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the
Wharf/Port Complex through the Owner, with the design and
construction of other facilities around the site. The scope of works
shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial
port practice, for the timely and successful implementation of the
object of this Contract, whether or not expressly referred to in the
abovementioned Annex I.[25]
The contract price for the wharf/ port complex was
Y12,790,389,000.00 and P44,327,940.00. In the contract, the price in
Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Pesos
Portion. The Japanese Yen Portions I and II were financed in two (2)
ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by suppliers credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund
under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote
economic development.[26] The OECF extended to the Philippine
Government a loan of Y7,560,000,000.00 for the Leyte Industrial
Estate Port Development Project and authorized the NDC to
implement the same.[27] The other type of financing is an indirect
type where the supplier, i.e., Marubeni, obtained a loan from the
Export-Import Bank of Japan to advance payment to its sub-
contractors.[28]
Under the financing schemes, the Japanese Yen Portions I and II and
the Philippine Pesos Portion were further broken down and
subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the
corresponding materials, equipment and services were contained in
a list attached as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened
for public bidding a project to construct and install two ammonia
storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on
May 2, 1982, Philphos and respondent corporation entered into an
agreement entitled Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation.[30] The object of the contract was to
establish and place in operating condition a modern, reliable,
efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia[31]and
for the delivery of ammonia to an integrated fertilizer plant adjacent
to the storage complex and to vessels at the dock.[32] The storage
complex was to consist of ammonia storage tanks, refrigeration
system, ship unloading system, transfer pumps, ammonia heating
system, fire-fighting system, area lighting, spare parts, and other
related facilities.[33] The scope of the works required for the
completion of the ammonia storage complex covered the supply,
including grants of licenses and transfer of technology and know-
how,[34] and:
x x x the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of
testing and commissioning of the Ammonia Storage Complex as set
forth in Annex I of this Contract, as well as the coordination of tie-ins
at boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and
construction of other facilities at and around the Site. The scope of
works shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial
practice, for the timely and successful implementation of the object
of this Contract, whether or not expressly referred to in the
abovementioned Annex I.[35]
The contract price for the project was Y3,255,751,000.00 and
P17,406,000.00. Like the NDC contract, the price was divided into
three portions. The price in Japanese currency was broken down
into the Japanese Yen Portion I and Japanese Yen Portion II while the
price in Philippine currency was classified as the Philippine Pesos
Portion. Both Japanese Yen Portions I and II were financed by
suppliers credit from the Export-Import Bank of Japan. The price
stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the
project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to
the latter as Annex III.[36]
The division of the price into Japanese Yen Portions I and II and the
Philippine Pesos Portion under the two contracts corresponds to the
two parts into which the contracts were classifiedthe Foreign
Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign
Offshore Portion.[37] Japanese Yen Portion II and the Philippine
Pesos Portion correspond to the Philippine Onshore Portion.[38]
Under the Philippine Onshore Portion, respondent does not deny its
liability for the contractors tax on the income from the two projects.
In fact respondent claims, which petitioner has not denied, that the
income it derived from the Onshore Portion of the two projects had
been declared for tax purposes and the taxes thereon already paid
to the Philippine government.[39] It is with regard to the gross
receipts from the Foreign Offshore Portion of the two contracts that
the liabilities involved in the assessments subject of this case arose.
Petitioner argues that since the two agreements are turn-key,[40]
they call for the supply of both materials and services to the client,
they are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided and
services rendered were all done and completed within the territorial
jurisdiction of the Philippines.[41] Accordingly, respondents entire
receipts from the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total gross
receipts covering both labor and materials should be subjected to
contractors tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code
(NIRC) as follows:
Sec. 205. Contractors, proprietors or operators of dockyards, and
others.A contractors tax of four percent of the gross receipts is
hereby imposed on proprietors or operators of the following
business establishments and/or persons engaged in the business of
selling or rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors,
as defined in Republic Act No. 4566;
xxxxxxxxx
(q) Other independent contractors. The term independent
contractors includes persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax
under 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.
It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income
from the Philippines and which act as supervisory, communications
and coordinating centers for their affiliates, subsidiaries or branches
in the Asia-Pacific Region.
x x x x x x x x x.[43]
Under the afore-quoted provision, an independent contractor is a
person 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. The word
contractor refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting
himself to control as to the petty details.[44]
A contractors tax is a tax imposed upon the privilege of engaging in
business.[45] It is generally in the nature of an excise tax on the
exercise of a privilege of selling services or labor rather than a sale
on products;[46] and is directly collectible from the person
exercising the privilege.[47] Being an excise tax, it can be levied by
the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority.[48] Like
property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.[49]
In the case at bar, it is undisputed that respondent was an
independent contractor under the terms of the two subject
contracts. Respondent, however, argues that the work therein were
not all performed in the Philippines because some of them were
completed in Japan in accordance with the provisions of the
contracts.
An examination of Annex III to the two contracts reveals that the
materials and equipment to be made and the works and services to
be performed by respondent are indeed classified into two. The first
part, entitled Breakdown of Japanese Yen Portion I provides:
Japanese Yen Portion I of the Contract Price has been subdivided
according to discrete portions of materials and equipment which will
be shipped to Leyte as units and lots. This subdivision of price is to
be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese
Yen Portion I is as follows:
x x x x x x x x x. [50]
The subdivision of Japanese Yen Portion I covers materials and
equipment while Japanese Yen Portion II and the Philippine Pesos
Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words,
the supplies for the project are listed under Portion I while labor and
other supplies are listed under Portion II and the Philippine Pesos
Portion. Mr. Takeshi Hojo, then General Manager of the Industrial
Plant Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of the two
projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan.[51]
The machines and equipment were designed, engineered and
fabricated by Japanese firms sub-contracted by Marubeni from the
list of sub-contractors in the technical appendices to each
contract.[52] Marubeni sub-contracted a majority of the equipment
and supplies to Kawasaki Steel Corporation which did the design,
fabrication, engineering and manufacture thereof;[53] Yashima &
Co. Ltd. which manufactured the mobile equipment; Bridgestone
which provided the rubber fenders of the mobile equipment;[54]
and B.S. Japan for the supply of radio equipment.[55] The
engineering and design works made by Kawasaki Steel Corporation
included the lay-out of the plant facility and calculation of the design
in accordance with the specifications given by respondent.[56] All
sub-contractors and manufacturers are Japanese corporations and
are based in Japan and all engineering and design works were
performed in that country.[57]
The materials and equipment under Portion I of the NDC Port
Project is primarily composed of two (2) sets of ship unloader and
loader; several boats and mobile equipment.[58] The ship unloader
unloads bags or bulk products from the ship to the port while the
ship loader loads products from the port to the ship. The unloader
and loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the
specifications of the project. After manufacture, they were rolled on
to a barge and transported to Isabel, Leyte.[59] Upon reaching
Isabel, the unloader and loader were rolled off the barge and pulled
to the pier to the spot where they were installed.[60] Their
installation simply consisted of bolting them onto the pier.[61]
Like the ship unloader and loader, the three tugboats and a line boat
were completely manufactured in Japan. The boats sailed to Isabel
on their own power. The mobile equipment, consisting of three to
four sets of tractors, cranes and dozers, trailers and forklifts, were
also manufactured and completed in Japan. They were loaded on to
a shipping vessel and unloaded at the Isabel Port. These pieces of
equipment were all on wheels and self-propelled. Once unloaded at
the port, they were ready to be driven and perform what they were
designed to do.[62]
In addition to the foregoing, there are other items listed in Japanese
Yen Portion I in Annex III to the NDC contract. These other items
consist of supplies and materials for five (5) berths, two (2) roads, a
causeway, a warehouse, a transit shed, an administration building
and a security building. Most of the materials consist of steel sheets,
steel pipes, channels and beams and other steel structures,
navigational and communication as well as electrical equipment.
[63]
In connection with the Philphos contract, the major pieces of
equipment supplied by respondent were the ammonia storage tanks
and refrigeration units.[64] The steel plates for the tank were
manufactured and cut in Japan according to drawings and
specifications and then shipped to Isabel. Once there, respondents
employees put the steel plates together to form the storage tank. As
to the refrigeration units, they were completed and assembled in
Japan and thereafter shipped to Isabel. The units were simply
installed there.[65] Annex III to the Philphos contract lists down
under the Japanese Yen Portion I the materials for the ammonia
storage tank, incidental equipment, piping facilities, electrical and
instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were
inspected and tested in Japan prior to shipment in accordance with
the terms of the contracts.[66] The inspection was made by
representatives of respondent corporation, of NDC and Philphos.
NDC, in fact, contracted the services of a private consultancy firm to
verify the correctness of the tests on the machines and
equipment[67]while Philphos sent a representative to Japan to
inspect the storage equipment.[68]
The sub-contractors of the materials and equipment under Japanese
Yen Portion I were all paid by respondent in Japan. In his deposition
upon oral examination, Kenjiro Yamakawa, formerly the Assistant
General Manager and Manager of the Steel Plant Marketing
Department, Engineering & Construction Division, Kawasaki Steel
Corporation, testified that the equipment and supplies for the two
projects provided by Kawasaki under Japanese Yen Portion I were
paid by Marubeni in Japan. Receipts for such payments were duly
issued by Kawasaki in Japanese and English.[69] Yashima & Co. Ltd.
and B.S. Japan were likewise paid by Marubeni in Japan.[70]
Between Marubeni and the two Philippine corporations, payments
for all materials and equipment under Japanese Yen Portion I were
made to Marubeni by NDC and Philphos also in Japan. The NDC,
through the Philippine National Bank, established letters of credit in
favor of respondent through the Bank of Tokyo. The letters of credit
were financed by letters of commitment issued by the OECF with the
Bank of Tokyo. The Bank of Tokyo, upon respondents submission of
pertinent documents, released the amount in the letters of credit in
favor of respondent and credited the amount therein to
respondents account within the same bank.[71]
Clearly, the service of design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and
control of testing and commissioning, coordination[72]of the two
projects involved two taxing jurisdictions. These acts occurred in two
countries Japan and the Philippines. While the construction and
installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC
project and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished products
when shipped to the Philippines. The other construction supplies
listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not
finished products when shipped to the Philippines. They, however,
were likewise fabricated and manufactured by the sub-contractors
in Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal
Revenue v. Engineering Equipment & Supply Co[73]is not in point. In
that case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment
designed, supplied and installed centralized air-conditioning systems
for clients who contracted its services. Engineering, however, did
not manufacture all the materials for the air-conditioning system. It
imported some items for the system it designed and installed.[74]
The issues in that case dealt with services performed within the local
taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other
issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP
No. 42518 is affirmed.
SO ORDERED.
EN BANC
June 30, 1987
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on
the ground that it is erroneous. We have carefully studied it and find
it is not; on the contrary, it is supported by law and doctrine. So
finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo
with several Japanese shipbuilding companies for the construction
of twelve ocean-going vessels. 1 The purchase price was to come
from the proceeds of bonds issued by the Central Bank. 2 Initial
payments were made in cash and through irrevocable letters of
credit. 3 Fourteen promissory notes were signed for the balance by
the NDC and, as required by the shipbuilders, guaranteed by the
Republic of the Philippines. 4 Pursuant thereto, the remaining
payments and the interests thereon were remitted in due time by
the NDC to Tokyo. The vessels were eventually completed and
delivered to the NDC in Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase price.
No tax was withheld. The Commissioner then held the NDC liable on
such tax in the total sum of P5,115,234.74. Negotiations followed
but failed. The BIR thereupon served on the NDC a warrant of
distraint and levy to enforce collection of the claimed amount. 6 The
NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the
tax deficiency in the sum of P900.00, representing the compromise
penalty. 7 The NDC then came to this Court in a petition for
certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted
to them under Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. (a) Gross
income from sources within the Philippines. The following items
of gross income shall be treated as gross income from sources within
the Philippines:
(1) Interest. Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not
subject to tax under the above provision because all the related
activities the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to
the NDC were done in Tokyo. 8 The law, however, does not speak
of activity but of "source," which in this case is the NDC. This is a
domestic and resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the
Government's right to levy and collect income tax on interest
received by foreign corporations not engaged in trade or business
within the Philippines is not planted upon the condition that 'the
activity or labor and the sale from which the (interest) income
flowed had its situs' in the Philippines. The law specifies: 'Interest
derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate
or otherwise.' Nothing there speaks of the 'act or activity' of non-
resident corporations in the Philippines, or place where the contract
is signed. The residence of the obligor who pays the interest rather
than the physical location of the securities, bonds or notes or the
place of payment, is the determining factor of the source of interest
income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128,
citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA
480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co.,
Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the
obligor is a resident of the Philippines the interest payment paid by
him can have no other source than within the Philippines. The
interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development Company,
a corporation duly organized and existing under the laws of the
Republic of the Philippines, with address and principal office at Calle
Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in fourteen (14) promissory
notes for each vessel, the balance of the contract price of the twelve
(12) ocean-going vessels purchased and acquired by it from the
Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-
13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.)
And pursuant to the terms and conditions of these promisory notes,
which are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the
years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52
and $1,541.031.00, respectively, as interest on the unpaid balance
of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15,
Partial Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The
residence of the obligor which paid the interest under consideration,
petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and
as a corporation duly organized and existing under the laws of the
Philippines, it is a domestic corporation, resident of the Philippines.
(Sec. 84(c), National Internal Revenue Code.) The interest paid by
petitioner, which is admittedly a resident of the Philippines, is on the
promissory notes issued by it. Clearly, therefore, the interest
remitted to the Japanese shipbuilders in Japan in 1960, 1961 and
1962 on the unpaid balance of the purchase price of the vessels
acquired by petitioner is interest derived from sources within the
Philippines subject to income tax under the then Section 24(b)(1) of
the National Internal Revenue Code. 9
There is no basis for saying that the interest payments were
obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities exempt
from taxation under Section 29(b)[4] of the Tax Code, reading as
follows:
SEC. 29. Gross Income. xxxx xxx xxx xxx
(b) Exclusion from gross income. The following items shall
not be included in gross income and shall be exempt from taxation
under this Title:
xxx xxx xxx
(4) Interest on Government Securities. Interest upon the
obligations of the Government of the Republic of the Philippines or
any political subdivision thereof, but in the case of such obligations
issued after approval of this Code, only to the extent provided in the
act authorizing the issue thereof. (As amended by Section 6, R.A. No.
82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of
securities is R.A. No. 1407, which in fact is silent on this matter. C.A.
No. 182 as amended by C.A. No. 311 does carry such authorization
but, like R.A. No. 1407, does not exempt from taxes the interests on
such securities.
It is also incorrect to suggest that the Republic of the Philippines
could not collect taxes on the interest remitted because of the
undertaking signed by the Secretary of Finance in each of the
promissory notes that:
Upon authority of the President of the Republic of the Philippines,
the undersigned, for value received, hereby absolutely and
unconditionally guarantee (sic), on behalf of the Republic of the
Philippines, the due and punctual payment of both principal and
interest of the above note.10
There is nothing in the above undertaking exempting the interests
from taxes. Petitioner has not established a clear waiver therein of
the right to tax interests. Tax exemptions cannot be merely implied
but must be categorically and unmistakably expressed. 11 Any doubt
concerning this question must be resolved in favor of the taxing
power. 12
Nowhere in the said undertaking do we find any inhibition against
the collection of the disputed taxes. In fact, such undertaking was
made by the government in consonance with and certainly not
against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. All persons, corporations
and general co-partnership (companies colectivas), in whatever
capacity acting, including lessees or mortgagors of real or personal
capacity, executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the
Government of the Philippines having control, receipt, custody;
disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments,
or other fixed or determinable annual or categorical gains, profits
and income of any nonresident alien individual, not engaged in trade
or business within the Philippines and not having any office or place
of business therein, shall (except in the cases provided for in
subsection (a) of this section) deduct and withhold from such annual
or periodical gains, profits and income a tax to twenty (now 30%)
per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. In the case
of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having
any office or place of business therein, there shall be deducted and
withheld at the source in the same manner and upon the same
items as is provided in section fifty-three a tax equal to thirty (now
35%) per centum thereof, and such tax shall be returned and paid in
the same manner and subject to the same conditions as provided in
that section:....
Manifestly, the said undertaking of the Republic of the Philippines
merely guaranteed the obligations of the NDC but without
diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of
the Republic of the Philippines, the petitioner closes its eyes to the
nature of this entity as a corporation. As such, it is governed in its
proprietary activities not only by its charter but also by the
Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed.
The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the
Republic of the Philippines that was subject to the tax the NDC did
not withhold.
In effect, therefore, the imposition of the deficiency taxes on the
NDC is a penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is imposed by Section 53(c) of
the Tax Code, thus:
Section 53(c). Return and Payment. Every person required
to deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of each
year, and, on or before the time fixed by law for the payment of the
tax, shall pay the amount withheld to the officer of the Government
of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims
and demands of any person for the amount of any payments made
in accordance with the provisions of this section. (As amended by
Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue
and the Court of Tax Appeals, 13 the Court quoted with approval the
following regulation of the BIR on the responsibilities of withholding
agents:
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not subject
to withholding, the withholding agent may thereupon remit the
amount of a tax withheld. (2nd par., Sec. 200, Income Tax
Regulations).
"Strict observance of said steps is required of a withholding agent
before he could be released from liability," so said Justice Jose P.
Bengson, who wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be
construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the
withholding agent of the government an so should be held liable for
its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any
pronouncement as to costs. It is so ordered.