REPUBLIC ACT NO.
10165 June 11, 2012 meet the individual needs of the particular child and the capacity of the child to
AN ACT TO STRENGTHEN AND PROPAGATE FOSTER CARE AND TO PROVIDE FUNDS
THEREFOR
Section 3. Definition of Terms. – For purposes of this Act, the following terms are defined:
(a) Agency refers to any child-caring or child-placing institution licensed and
accredited by the Department of Social Welfare and Development (DSWD) to
implement the foster care program.
(b) Child refers to a person below eighteen (18) years of age, or one who is over
eighteen (18) but is unable to fully take care of or protect oneself from abuse,
neglect, cruelty, exploitation or discrimination because of a physical or mental
disability or condition.
(c) Child Case Study Report refers to a written report prepared by a social
worker containing all the necessary information about a child.
(d) Child with Special Needs refers to a child with developmental or physical
disability.
(e) Family refers to the parents or brothers and sisters, whether of the full or
half-blood, of the child.
(f) Foster Care refers to the provision of planned temporary substitute parental
care to a child by a foster parent.
(g) Foster Child refers to a child placed under foster care.
(h) Foster Family Care License refers to the document issued by the DSWD
authorizing the foster parent to provide foster care.
(i) Foster Parent refers to a person, duly licensed by the DSWD, to provide
foster care.
(j) Foster Placement Authority (FPA) refers to the document issued by the
DSWD authorizing the placement of a particular child with the foster parent.
(k) Home Study Report refers to a written report prepared by a social worker
containing the necessary information on a prospective parent or family
member.
(l) Matching refers to the judicious pairing of a child with foster parent and
family members based on the capacity and commitment of the foster parent to
benefit from the placement.
(m) Parent refers to the biological or adoptive parent or legal guardian of a
child.
(n) Placement refers to the physical transfer of the child with the foster parent.
(o) Relatives refer to the relatives of a child, other than family members, within
the fourth degree of consanguinity or affinity.
(p) Social Worker refers to the registered and licensed social worker of the
DSWD, local government unit (LGU) or agency.
ARTICLE II
ELIGIBILITY
Section 4. Who May Be Placed Under Foster Care. – The following may be placed in foster
care:
(a) A child who is abandoned, surrendered, neglected, dependent or orphaned;
(b) A child who is a victim of sexual, physical, or any other form of abuse or
exploitation;
(c) A child with special needs;
(d) A child whose family members are temporarily or permanently unable or
unwilling to provide the child with adequate care;
(e) A child awaiting adoptive placement and who would have to be prepared
for family life;
(f) A child who needs long-term care and close family ties but who cannot be
placed for domestic adoption;
(g) A child whose adoption has been disrupted;
(h) A child who is under socially difficult circumstances such as, but not limited
to, a street child, a child in armed conflict or a victim of child labor or
trafficking;
(i) A child who committed a minor offense but is released on recognizance, or
who is in custody supervision or whose case is dismissed; and
 (j) A child who is in need of special protection as assessed by a social worker,
an agency or the DSWD.
Provided, That in the case of (b), (c), (f), (h), (i), and (j), the child must have no family
willing and capable of caring and providing for him.
Section 5. Who May Be a Foster Parent. – An applicant who meets all of the following
qualifications may be a foster parent:
(a) Must be of legal age;
(b) Must be at least sixteen (16) years older than the child unless the foster
parent is a relative;
(c) Must have a genuine interest, capacity and commitment in parenting and is
able to provide a familial atmosphere for the child;
(d) Must have a healthy and harmonious relationship with each family member
living with him or her;
(e) Must be of good moral character;
(f) Must be physically and mentally capable and emotionally mature;
(g) Must have sufficient resources to be able to provide for the family’s needs;
(h) Must be willing to further hone or be trained on knowledge, attitudes and
skills in caring for a child; and
(i) Must not already have the maximum number of children under his foster
care at the time of application or award, as may be provided in the
implementing rules and regulations (IRR) of this Act.
Provided, That in determining who is the best suited foster parent, the relatives of the
child shall be given priority, so long as they meet the above qualifications: Provided,
further, That an alien possessing the above qualifications and who has resided in the
Philippines for at least twelve (12) continuous months and maintains such residence
until the termination of placement by the DSWD or expiration of the foster family license,
may qualify as a foster parent
Section 22. Assistance and Incentives to Foster Parent. –
(a) Support Care Services. – The DSWD, the social service units of LGUs and
agencies shall provide support care services to include, but not limited to,
counseling, visits, training on child care and development, respite care, skills
training and livelihood assistance.
(b) Additional Exemption for Dependents. – For purposes of claiming the
Twenty-five thousand pesos (PhP 25,000.00) additional exemption for foster
parents for each dependent not exceeding four (4) as provided for by Republic
Act No. 9504, the definition of the term "dependent" under Section 35(B) of the
National Internal Revenue Code (NIRC) of 1997 shall be amended to include
"foster child": Provided, That all other conditions provided for under the
aforesaid section of the NIRC of 1997 must be complied with: Provided, further.
That this additional exemption shall be allowed only if the period of foster care
is at least a continuous period of one (1) taxable year.
For purposes of this section, only one (1) foster parent can treat the foster child as a
dependent for a particular taxable year. As such, no other parent or foster parent can
claim the said child as a dependent for that period.
Section 23. Incentives to Agencies. – Agencies shall be entitled to the following tax
incentives:
(a) Exemption from Income Tax. – Agencies shall be exempt from income tax on
the income derived by it as such organization pursuant to Section 30 of the
NIRC of 1997, as implemented by Revenue Regulation (RR) No. 13-98; and
(b) Qualification as a Donee Institution. – Agencies can also apply for
qualification as a donee institution.
Section 24. Incentives to Donors. – Donors of an agency shall be entitled to the following:
(a) Allowable Deductions. – Donors shall be granted allowable deductions from
its gross income to the extent of the amount donated to agencies in accordance
with Section 34(H) of the NIRC of 1997; and
(b) Exemption from Donor’s Tax. – Donors shall be exempted from donor’s tax
under Section 101 of the NIRC of 1997: Provided, That not more than thirty
percent (30%) of the amount of donations shall be spent for administrative
expenses.
Republic Act No. 9504 June 17, 2008 "(1) x x x:
Amending RA 8424
"x x x; and
AN ACT AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424,
AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE OF "(c) On the taxable income defined in Section 31 of this code, other than income
1997 subject to tax under Subsections (B), (C) and (D) of this Section, derived for
"Not over P10,000 ........ 5%
Be it enacted by the Senate and
House of Representatives of the
Philippines in Congress "Over P10,000 but not over P30,000 ........ P500+10% of the excess over P10,000
assembled::
"Over P30,000 but not over P70,000 ........ P2,500+15% of the excess over P30,000
SECTION 1. Section 22 of
Republic Act No. 8424, as "Over P70,000 but not over P140,000 ........ P8,500+20% of the excess over P70,000
amended, otherwise known as
the National Internal Revenue "Over P140,000 but not over P250,000 ........ P22,500+25% of the excess over P140,000
Code of 1997, is hereby further
amended by adding the "Over P250,000 but not over P500,000 ........ P50,000+30% of the excess over P250,000
following definition after
Subsection (FF) to read as "Over P5000,000 ........ P125,000+32% of the excess over P500,000
follows:
each taxable year from all sources within the Philippines by an individual alien
"SEC. 22. Definitions. - when used in this Title: who is a resident of the Philippines.

"(A) x x x.
"x x x
"(FF) x x x.
"(GG) the term 'statutory minimum wage' earner shall refer to rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE)
"(HH) the term 'minimum wage earner' shall refer to a worker in the private
sector paid the statutory minimum wage, or to an employee in the public sector
with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned."
SEC. 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 3. Section 34(L) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby amended to read as follows:
"SEC. 24. Income Tax Rates. -
"(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of
the Philippines. -
"(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed
in accordance with and at the rates established in the following schedule:
"For married individuals, the husband and wife, subject to the provision of
Section 51 (D) hereof, shall compute separately their individual income tax
based on their respective total taxable income: Provided, that if any income
cannot be definitely attributed to or identified as income exclusively earned or
realized by either of the spouses, the same shall be divided equally between the
spouses for the purpose of determining their respective taxable income.
"Provided, That minimum wage earners as defined in Section 22 (HH) of this
Code shall be exempt from the payment of income tax on their taxable
income: Provided, further, That the holiday pay, overtime pay, night shift
differential pay and hazard pay received by such minimum wage earners shall
likewise be exempt from income tax.
"x x x."
"SEC. 34. Deductions from Gross Income. - Except for taxpayers earning
compensation income arising from personal services rendered under an
employer-employee relationship where no deductions shall be allowed under
 this Section other than under Subsection (M)hereof, in computing taxable
income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B), (C);
and 28(A)(1), there shall be allowed the following deductions from the gross
income:
"(A) Expenses. -
"x x x.
"(L) Optional Standard Deduction. - In lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than
a nonresident alien, may elect a standard deduction in an amount not exceeding
forty percent (40%) of his gross sales or gross receipts, as the case may be. In
the case of a corporation subject to tax under section 27(A) and 28(A)(1), it
may elect a standard deduction in an amount not exceeding forty percent
(40%) of it gross income as defined in Section 32 of this Code. Unless the
taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the deductions
allowed in the preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is made: Provided,
That an individual who is entitled to and claimed for the optional standard shall
not be required to submit with his tax return such financial statements
otherwise required under this Code: Provided, further, That except when the
Commissioner otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said corporation shall keep
such records pertaining to his gross income as defined in Section 32 of this
Code during the taxable year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
"(M) x x x."
"x x x."
SEC. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby amended to read as follows:
"SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
"(A) In General. - For purposes of determining the tax provided in Section 24(A)
of this title, there shall be allowed a basic personal exemption amounting to
Fifty thousand pesos (P50,000) for each individual taxpayer.
"In the case of married individual where only one of the spouses is deriving
gross income, only such spouse shall be allowed the personal exemption.
"(B) Additional Exemption for Dependents. - There shall be allowed an additional
exemption of Twenty-five thousand pesos (25,000) for each dependent not
exceeding four (4).
"The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.
"In the case of legally separated spouses, additional exemptions may be claimed
only by the spouse who has custody of the child or children:
Provided, That the total amount of additional exemptions that may be claimed
by both shall not exceed the maximum additional exemptions herein allowed.
"For purposes of this Subsection, a "dependent" means a legitimate, illegitimate
or legally adopted child chiefly dependent upon and living with the taxpayer if
such dependent is not more than twenty-one (21) years of age, unmarried and
not gainfully employed or if such dependent, regardless of age, is incapable of
self-support because of mental or physical defect.
"x x x."
SEC. 5. Section 51 (A)(2) of Republic Act No, 8424, as amended, otherwise known as the
National Internal revenue Code of 1997, is hereby further amended to read as follows:
"SEC. 51. Individual Return. -
"(A) Requirements. -
"(1) Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
"(a) x x x;
"x x x.
"(2) The following individuals shall not be required to file an income tax return:
"(a) x x x;
"(b) An individual with respect to pure compensation income, as defined in
Section 32(A)(1), derived from such sources within the Philippines, the income
tax on which has been correctly withheld under the provisions of Section 79 of
this Code: Provided, That an individual deriving compensation concurrently
from two or more employers at any time during the taxable year shall file an
income tax return;
 "(c) x x x; and

"(d) A minimum wage earner as defined in Section 22(HH) of this Code or an

individual who is exempt from income tax pursuant to the provisions of this
Code and other laws, general or special.

"x x x."

SEC 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

"Section 79. Income Tax Collected at Source. -

"(A) Requirement of Withholding. - Except in the case of a minimum wage

earner as defined in Section 22(HH) of this code, every employer making
payment of wages shall deduct and withhold upon such wages a tax determined
in accordance with the rules and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the Commissioner:

"x x x."

SEC. 7. Separability Clause. - If any provision of this Act is declared invalid or

unconstitutional, other provisions hereof which are not affected thereby shall continue
to be in full force and effect.

SEC. 8. Repealing Clause. - Any law, presidential decree or issuance, executive order,
letter of instruction, administrative order, rule or regulation contrary to or inconsistent
with any provision of this Act as hereby amended or modified accordingly.

SEC. 9. Effectivity Clause. - This Act shall take fifteen (15) days following its publication
in the official Gazette or in at least two (2) newspaper of general circulation.

Approved,

Personal Equity and Retirement Account (PERA) Act of 2008
(RA 9505)
AN ACT ESTABLISHING A PROVIDENT PERSONAL SAVINGS PLAN, KNOWN AS THE
PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)
SECTION 1. Title. -- This Act shall be known as the "Personal Equity and Retirement
Account (PERA) Act of 2008".
SEC. 2. Declaration of Policy. -- It is declared the policy of the State to promote capital
market development and savings mobilization by establishing a legal and regulatory
framework of retirement plans for persons, comprised of voluntary personal savings and
investments. The State recognizes the potential contribution of PERA to long-term fiscal
sustainability through the, provision of long-term financing and reduction of social
pension benefits.
SEC. 3. Definition of Terms. -- Unless the context requires otherwise, the following
terms shall have the following significance as used in this Act:
a. "Administrator" is an entity accredited by the Bureau of Internal Revenue (BIR), after
pre-qualification by the concerned Regulatory Authority. The Administrator shall be
responsible for overseeing the PERA, whose core functions shall include, but not limited
to: reporting on contributions made to the account, computing the values of investments,
educating the Contributor, enforcing PERA contributions and withdrawal limits,
collecting appropriate taxes and penalties for the government, securing BIR Income Tax
Credit Certificates for the Contributor, consolidating reports on all investments, income,
expenses and withdrawals on the account and ensuring that PERA contributions are
invested in accordance with the prudential guidelines set by the Regulatory Authorities.
b. "Contributor" is any person with the capacity to contract and possesses a tax
identification number. The Contributor establishes and makes contributions to a PERA.
c. "Custodian" is a separate and distinct entity unrelated to the Administrator, accredited
by the Bangko Sentral ng Pilipinas, providing services in connection with the
custodianship of funds and securities comprising the PERA investments. The Custodian
shall be responsible for receiving all funds in connection with the PERA, maintaining
custody of all original securities, evidence of deposits or other evidence of investment.
The Custodian shall operate independently from the Administrator. The Custodian is
required to report to the Contributor and the concerned Regulatory Authority at regular
intervals all financial transactions and all documents in its custody under a PERA.
d. "Early withdrawal" shall pertain to any withdrawal prior to the period of distribution
as set forth under Section 12 hereof.
e. "Investment Manager" is a. regulated person or entity authorized by a Contributor to
make investment decisions for his PERA. As such, it shall assume fiduciary duty and
responsibility for PERA investments. An Investment Manager shall act with utmost
fidelity by observing policies directed towards confidentiality, scrupulous care, safety
and prudent management of PERA funds.
f. "Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement
account established by and for the .exclusive use and benefit of the Contributor for the
purpose of being invested solely in PERA investment products in the Philippines. The
Contributor shall retain the ownership, whether legal or beneficial, of funds placed
therein, including all earnings of such funds.
g. "PERA Investment Product" refers to a unit investment bust fund, mutual fund, entity
contract, insurance pension products, pre-need pension plan, shares of stock and other
securities listed and traded in a local exchange, exchange-traded bonds or any other
investment product or outlet which the concerned Regulatory Authority may allow for
PERA purposes: Provided, however, That to qualify as a PERA investment product under
this Act, the product must be non-speculative, readily marketable, and with a track
record of regular income payments to investors.
The concerned Regulatory Authority must first approve the product before being
granted tax-exempt privileges by the BIR.
h. "Regulatory Authority" refers to the Bangko Sentral ng Pilipinas (BSP) as regards
banks, other supervised financial institutions and trust entities, the Securities and
Exchange Commission (SEC) for investment companies, investment houses,
stockbrokerages and pre-need plan companies, and the Office of the Insurance
Commission (OIC) for insurance companies.
i. "Overseas Filipino" refers to (1) an individual citizen of the Philippines who is working
or deriving income from abroad, including one who retained or reacquired his Philippine
citizenship under Republic Act No. 9225, otherwise known as the "Citizenship Retention
and Reacquisition Act of 2003"; or (2) the legitimate spouse, whether or not said spouse
is of Filipino ancestry, and the children of the Filipino citizen mentioned in item (1)
hereof.
SEC. 4. Establishment of a PERA. -- A Contributor may create and maintain a maximum
of five (5) PERA, at any one time: Provided, That the Contributor shall designate and
maintain only one (1) Administrator for all his PERA.
The Contributor shall make all investment decisions pertaining to his PERA. However, he
has the option of appointing an Investment Manager, either in writing or in electronic
form, to make investment decisions on his behalf without prior consultation.
SEC. 5. Maximum Annual PERA Contributions. -- A Contributor may make an
aggregate maximum contribution of One hundred thousand pesos (P100,000.00) or its
equivalent in any convertible foreign currency at the prevailing rate at the time of the
actual contribution, to his/her PERA per year: Provided, That if the Contributor is
married, each of the spouses shall be entitled to make a maximum contribution of One
hundred thousand pesos (P100,000.00) or its equivalent in any convertible foreign
currency per year to his/her respective PERA Provided, further, That if the Contributor is
an overseas Filipino, he shall be allowed to make maximum contributions double the
allowable maximum amount.
A Contributor has the option to contribute more than the maximum amount prescribed
herein: Provided, That the excess shall no longer be entitled to a tax credit of five percent
(5%).
The Secretary of Finance may adjust the maximum contribution from time to time, taking
into consideration the present value of the said maximum contribution using the
Consumer Price Index as published by the National Statistics Office, fiscal position of the
government and other pertinent factors.
SEC. 6. Employer's Contribution. -- A private employer may contribute to its
employee's PERA to the extent of the amount allowable to the Contributor: Provided,
however, That the employer complies with the mandatory Social Security System (SSS)
contribution and retirement pay under the Labor Code of the Philippines. Such
contribution shall be allowed as a deduction from the employer's gross income. The
Contributor, however, retains the prerogative to make investment decisions pertaining
to his PERA.
SEC. 7. Separate Asset. -- The PERA shall be kept separate from the other assets of an
Administrator/Custodian and shall not be part of the general assets of the
Administrator/Custodian for purposes of insolvency.
SEC. 8. Tax Treatment of Contributions. -- The Contributor shall be given an income
tax credit equivalent to five percent (5%) of the total PERA contribution: Provided,
however, That in no instance can there be any refund of the said tax credit arising from
the PERA contributions. If the Contributor is an overseas Filipino, he shall be entitled to
claim tax credit from any tax payable to the national government under the National
Internal Revenue Code of 1997, as amended.
SEC. 9. Tax Treatment of Investment Income. -- All income earned from the
investments and reinvestments of the maximum amount allowed herein is tax exempt.
SEC. 10. Tax Treatment of Distributions. -- All distributions in accordance with Section
12 hereof are tax exempt.
SEC. 11. Termination. -- Any premature termination shall be treated as an early
withdrawal under Section 13 hereof: Provided, That the penalties thereunder shall not
apply if the entire proceeds therefrom are immediately transferred to another PERA
investment and/or another Administrator.
SEC. 12. Distributions Upon Retirement/Death. -- Distributions may be made upon
reaching the age of fifty-five (55) years: Provided, That the Contributor has made
contributions to the PERA for at least five (5) years. The distribution shall be made in
either lump sum or pension for a definite period or lifetime pension, the choice of which
shall be at the option of the Contributor. The Contributor, however, has the option to
continue the PERA. Complete distribution shall be made upon the death of the
Contributor, irrespective of the age of the Contributor at the time of his death.
SEC. 13. Penalty on Early Withdrawal. -- Any early withdrawal shall be subject to a
penalty, the amount of which would be determined by the Secretary of Finance and
payable to the government: Provided, That the amount of the penalty shall in no case be
less than the tax incentives enjoyed by the Contributor.
No early withdrawal penalty shall be imposed on any withdrawal of any funds for the
following purposes:
For payment of accident or illness-related hospitalization in excess of thirty (30) days;
and
For payment to a Contributor who has been subsequently rendered permanently totally
disabled as defined under the Employees Compensation Law, Social Security Law and
Government Service Insurance System Law.
SEC. 14. Non-Assignability. -- No portion of the assets of a PERA may be assigned,
alienated, pledged, encumbered, attached, garnished, seized or levied upon. PERA assets
shall not be considered assets of the Contributor for purposes of insolvency and estate
taxes.
SEC. 15. Rules and Regulations. -- Consistent with the policy of promoting
transparency in PERA investment and thereby affording protection to the Contributor,
the Department of Finance, the Bureau of Internal Revenue and the concerned
Regulatory Authorities, with the Bangko Sentral ng Pilipinas as lead agency, shall
coordinate to establish uniform rules and regulations pertaining to the following subject
matters:
a. Qualification and disqualification standards for Administrators, Custodians and
Investment Managers, including directors and officers thereof;
b. Qualified and/or eligible PERA investment products;
c. Valuation standards for PERA investments;
d. Disclosure requirements on the terms and conditions of the PERA investments; contributions to, or investments from, the PERA or

e. Minimum requirements imposed on the Administrators as regards inculcating
financial literacy in investors;
f. Ascertainment of client suitability for PERA products;
g. Fees to be charged by the Administrator, Custodian or Investment Manager shall
always be reasonable and approved by the concerned Regulatory Authority;
f. Violate any provision of this Act or rules and regulations issued pursuant to this Act.
Notwithstanding the foregoing, any willful violation by the accredited Administrator,
Custodian or Investment Manager of any of the provisions of this Act, or its
implementing rules and regulations, or other tern and conditions of the authority to act
as Administrator, Custodian or Investment Manager may be subject to the administrative
sanctions provided for in applicable laws.

h. Record-keeping, reporting and audit requirement of Administrators and Custodians The above penalties shall be without prejudice to whatever civil and criminal liability
pertaining to records for all contributions, earnings and total account balances; and provided for under applicable laws for the same act or omission.

i. Other pertinent matters to be determined by the Regulatory Authorities. SEC. 18. Abuse of the Tax Exemption and Privileges. -- Any person, natural or
juridical, who unduly avails of the tax exemption privileges herein granted, possibly by
co-mingling PERA accounts in an investment with other investments, when such person
SEC. 16. Administration of Tax Incentives. -- The BIR shall issue the implementing
is not entitled hereto, shall be subject to the penalties provided in Section 17 hereof. In
rules and regulations regarding all aspects of tax administration relating to PERA. The
addition, the offender shall refund to the government double the amount of the tax
BIR shall coordinate the qualification standards of the Administrator with the Regulatory
exemptions and privileges enjoyed under this Act, plus interest of twelve percent (12%)
Authorities.
per year from the date of enjoyment of the tax exemptions and privileges to the date of
actual payment.
SEC. 17. Penalty. -- A fine of not less than Fifty thousand pesos (P50,000.00) nor more
than Two hundred thousand pesos (P200,000.00) or imprisonment of not less than six
SEC. 19. Separability Clause. -- If any provision or part hereof is held invalid or
(6) years and one (1) day to not more than twelve (12) years or both such fine and
unconstitutional, the remainder of the law or the provision not otherwise affected shall
imprisonment, at the discretion of the court, shall be imposed upon any person,
remain valid and subsisting.
association, partnership or corporation, its officer, employee or agent, who, acting alone
or in connivance with others, shall:
SEC. 20. Repealing Clause. -- All laws, decrees, orders, rules and regulations or parts
thereof inconsistent with this Act are hereby amended or modified accordingly.
a. Act as Administrator, Custodian or Investment Manager without being properly
qualified or without being granted prior accreditation by the concerned Regulatory
Authority; SEC. 21. Effectivity. -- This Act shall take effect fifteen (15) days following its publication
in a newspaper of general circulation: Provided, That the tax incentives granted
hereunder shall take effect on January 1, 2009.
b . Invest the contribution without written or electronically authenticated authority from
the Contributor, or invest the contribution in contravention of the instructions of the
Contributor;

c. Knowingly and willfully make any statement in any application, report, or document
required to be filed under this Act, which statement is false or misleading with respect to
any material fact:

d. Misappropriate or convert, to the prejudice of the Contributor, contributions to and

investments or income from the PERA;

e. By gross negligence, cause any loss, conversion, or misappropriation of the

G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the
joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated
26 January 1983, which set aside petitioner's assessment of deficiency income taxes
against respondent British Overseas Airways Corporation (BOAC) for the fiscal years
1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under
the laws of the United Kingdom It is engaged in the international airline business and is a
member-signatory of the Interline Air Transport Association (IATA). As such it operates
air transportation service and sells transportation tickets over the routes of the other
airline members. During the periods covered by the disputed assessments, it is admitted
that BOAC had no landing rights for traffic purposes in the Philippines, and was not
granted a Certificate of public convenience and necessity to operate in the Philippines by
the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and
partly in 1962, when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales
agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways
— which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed
BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes covering the
years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in
the issuance of a new assessment, dated 16 January 1970 for the years 1959 to 1967 in
the amount of P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which
claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had
already filed a petition for review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of corporation returns)
penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set
aside. In a letter, dated 16 February 1972, however, the CIR not only denied the BOAC
request for refund in the First Case but also re-issued in the Second Case the deficiency
income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as
compromise penalty under Section 74 of the Tax Code. BOAC's request for
reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file
the Second Case before the Tax Court praying that it be absolved of liability for deficiency
income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the
CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place
where services are rendered determines the source. Thus, in the dispositive portion of its
Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79,
and to cancel the deficiency income tax assessments against BOAC in the amount of
P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly,
taxable.
2. Whether or not during the fiscal years in question BOAC s a resident
foreign corporation doing business in the Philippines or has an office
or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a
resident foreign corporation but a non-resident foreign corporation,
then it is liable to Philippine income tax at the rate of thirty-five per
 cent (35%) of its gross income received from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign
corporation not engaged in trade or business within the Philippines
and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no
specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of commercial
gain or for the purpose and object of the business organization. 2 "In order that a foreign
corporation may be regarded as doing business within a State, there must be continuity
of conduct and intention to establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general
sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged
in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips —
each trip in the series corresponding to a different airline company; (3) receiving the fare
from the whole trip; and (4) consequently allocating to the various airline companies on
the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." 4 Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. — ...
(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized, authorized, or
existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of
tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from
salaries, wages or compensation for personal service of whatever kind
and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property, whether real
or personal, growing out of the ownership or use of or interest in such
property; also from interests, rents, dividends, securities, or
the transactions of any business carried on for gain or profile, or gains,
profits, and income derived from any source whatever (Sec. 29[3];
Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words 'income from any source whatever' disclose a legislative policy
to include all income not expressly exempted within the class of taxable income under
our laws." Income means "cash received or its equivalent"; it is the amount of money
coming to a person within a specific time ...; it means something distinct from principal
or capital. For, while capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69
to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the
income. 8 For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In BOAC's case,
the sale of tickets in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in Philippine
currency. The site of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the
obligation of the purchaser of the ticket to pay the fare and the corresponding obligation
of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid contract, binding upon
the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4)
rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not
mention income from the sale of tickets for international transportation. However, that
does not render it less an income from sources within the Philippines. Section 37, by its
language, does not intend the enumeration to be exclusive. It merely directs that the
types of income listed therein be treated as income from sources within the Philippines.
A cursory reading of the section will show that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation
is income for services, with the result that the place where the services are rendered
determines the source; and since BOAC's service of transportation is performed outside
the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in
the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued
within the Philippines. business a And even if the BOAC tickets sold covered the
"transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact
that income from the sale of tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the
fiscal years covered by the questioned deficiency income tax assessments in these cases,
or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69,
promulgated on 24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2-½
per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory
definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from
uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo or
mail originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income
from Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If it
had been intended as an excise or percentage tax it would have been place under Title V
of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by
this Court of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on
February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in that
case was to the effect that the mere sale of tickets, unaccompanied by the physical act of
carriage of transportation, does not render the taxpayer therein subject to the common
carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an
excise tax, being a tax on the activity of transporting, conveying or removing passengers
and cargo from one place to another. It purports to tax the business of transportation. 14
Being an excise tax, the same can be levied by the State only when the acts, privileges or
businesses are done or performed within the jurisdiction of the Philippines. The subject
matter of the case under consideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever form derived from any
source." Since the two cases treat of a different subject matter, the decision in one cannot
be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is hereby
ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years
1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for
a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim
for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency
income taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and
therefore setting aside the appealed joint decision of respondent Court of Tax Appeals. I
just wish to point out that the conflict between the majority opinion penned by Mr.
Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by
its general sales agent in the Philippines gas become moot after November 24, 1972.
Booth opinions state that by amendment through P.D. No.69, promulgated on November
24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income tax on
foreign corporations, international carriers such as respondent BOAC, have since then
been taxed at a reduced rate of 2-½% on their gross Philippine billings. There is,
therefore, no longer ant source of substantial conflict between the two opinions as to the
present 2-½% tax on their gross Philippine billings charged against such international
carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice
A.A. Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the
Court of Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct
and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas
Airways Corporation (BOAC), a foreign airline company which does not maintain any
flight operations to and from the Philippines, is liable for Philippine income taxation in
respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a
resident foreign corporation doing business in the Philippines or
[had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not
determinative of the lialibity of the BOAC to Philippine income taxation in respect of the
income here involved. The liability of BOAC to Philippine income taxation in respect of
such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in
the Philippines or having an office or place of business in the Philippines is subject to
Philippine income taxation only in respect of income derived from sources within the
Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as
amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August
1969, read as follows:
(2) Resident corporations. — A foreign corporation engaged in trade
or business with in the Philippines (expect foreign life insurance
companies) shall be taxable as provided in subsection (a) of this
section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. — (a) Tax on domestic corporations. — ...
and a like tax shall be livied, collected, and paid annually upon
the total net income received in the preceeding taxable year from all
sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign
country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when
it amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. — A corporation, organized, authorized
or existing under the laws of any foreign counrty, except foreign life
insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable
year from all sources within the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-
resident foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825
approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. — (1) Non-resident corporations. —
There shall be levied, collected and paid for each taxable year, in lieu
of the tax imposed by the preceding paragraph upon the amount
received by every foreign corporation not engaged in trade or business
within the Philippines, from all sources within the Philippines, as
interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or
determinative annual or periodical gains, profits and income a tax
equal to thirty per centum of such amount: provided, however, that
premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and
therefore a resident foreign corporation, or not doing business in the Philippines and
therefore a non-resident foreign corporation, it is liable to income tax only to the extent
that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part
of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the
receipt of Philippine source income creates no presumption that the recipient foreign
corporation is a resident of the Philippines. The critical issue, for present purposes, is
therefore whether of not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of payment but
rather to the "property, activity or service which produced the income." In Howden and
Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the issue of the applicable
source rule relating to reinsurance premiums paid by a local insurance company to a
foreign reinsurance company in respect of risks located in the Philippines. The Court
said:
The source of an income is the property, activity or services that
produced the income. The reinsurance premiums remitted to appellants
by virtue of the reinsurance contract, accordingly, had for their source
the undertaking to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines. — [T]he
reinsurance, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in
the Philippines. —4
The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In
the Howden case, that underlying prestation was theindemnification of the local insurance
company. Such indemnification could take place only in the Philippines where the risks
were located and where payment from the foreign reinsurance (in case the casualty
insured against occurs) would be received in Philippine pesos under the reinsurance
premiums paid by the local insurance companies constituted Philippine source income of
the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the
United States income tax system. The phrase "sources within the United States" was first
introduced into the U.S. tax system in 1916, and was subsequently embodied in the 1939
U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466, as
amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer
to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets.
While the three elements of this attempt at definition need not be
accepted as all-inclusive, they serve as useful guides in any inquiry
into whether a particular item is from "source within the United
States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from
labor (services) the place where the labor is done should be decisive; if
it is done in this counrty, the income should be from "source within
the United States." If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country,
the income should be from "source within the United States". If the
income is from the sale of capital assets, the place where the sale is
made should be likewise decisive. Much confusion will be avoided by
regarding the term "source" in this fundamental light. It is not a place;
it is an activity or property. As such, it has a situs or location; and if that
situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations. The intention
of Congress in the 1916 and subsequent statutes was to discard the
1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the "source", or situs of
the activities or property which produce the income . . . . Thus, if income
is to taxed, the recipient thereof must be resident within the
jurisdiction, or the property or activities out of which the income issue
or is derived must be situated within the jurisdiction so that the source
of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of
life and propertyand that the income rightly to be levied upon to defray
the burdens of the United States Government is that income which is
created by activities and property protected by this Government or
obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant
case. There are two possibly relevant source of income rules that must be confronted; (a)
the source rule applicable in respect of contracts of service; and (b) the source rule
applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may
be simply stated as follows: the income is sourced in the place where the service
contracted for is rendered. Section 37 (a) (3) of our Tax Code reads as follows:
Section 37. Income for 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:
xxx xxx xxx
(3) Services. — Compensation for labor or personal
services performed in the Philippines;... (Emphasis
supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources
without the Philippines in the following manner:
(c) Gross income from sources without the Philippines. — The following
items of gross income shall be treated as income from sources without
the Philippines:
(3) Compensation for labor or personal services performed without
the Philippines; ... (Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in
respect of services rendered by individual natural persons; they also apply to services
rendered by or through the medium of a juridical person. 6 Further, a contract of carriage
or of transportation is assimilated in our Tax Code and Revenue Regulations to a contract
for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the
Philippines. — Items of gross income, expenses, losses and deductions,
other than those specified in subsections (a) and (c) of this section
shall be allocated or apportioned to sources within or without the
Philippines, under the rules and regulations prescribed by the
Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and
partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived
from the 1939 U.S. Tax Code which "was based upon a recognition that transportation
was a service and that the source of the income derived therefrom was to be treated as
being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible,
implication that income derived from transportation or other services rendered entirely
outside the Philippines must be treated as derived entirely from sources without the
Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of
Revenue Regulations No. 2 (implementing Section 37 of the Tax Code) provides in part as
follows:
Section 155. Compensation for labor or personnel services. — Gross
income from sources within the Philippines includes compensation
for labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services
was made, or of the place of payment — (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code)
deals with a particular species of foreign transportation companies — i.e.,
foreign steamship companies deriving income from sources partly within and partly
without the Philippines:
Section 163 Foreign steamship companies. — The return of foreign
steamship companies whose vessels touch parts of the
Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income
thus ascertained, the ratio existing between it and the gross income
from all ports, both within and without the Philippines of all vessels,
whether touching of the Philippines or not, should be determined as
the basis upon which allowable deductions may be computed, — .
(Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue
Regulations No. 2 (again implementing Section 37 of the Tax Code) with provides as
follows:
Section 164. Telegraph and cable services. — A foreign corporation
carrying on the business of transmission of telegraph or cable
messages between points in the Philippines and points outside the
Philippines derives income partly form source within and partly from
sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue
Regulations No. 2 that steamship and telegraph and cable services rendered between
points both outside the Philippines give rise to income wholly from sources outside the
Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon
the one hand, and to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property
by the producer or manufacturer of such personal property will be regarded as
sourced entirely within or entirely without the Philippines or as sourced partly within and
partly without the Philippines, depending upon two factors: (a) the place where the sale
of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or
manufactured and sold outside the Philippines, the income derived therefrom will be
regarded as sourced entirely outside the Philippines, although the personal property had
been produced outside the Philippines, or if the sale of the property takes place outside
the Philippines and the personal was produced in the Philippines, then, the income
derived from the sale will be deemed partly as income sourced without the Philippines.
In other words, the income (and the related expenses, losses and deductions) will be
allocated between sources within and sources without the Philippines. Thus, Section 37
(e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the
Philippines. ... Gains, profits and income from (1) transportation or
other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in
whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as derived partly from
 sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property — i. e.,
trading — is, under the Tax Code, regarded as sourced wholly in the place where the
personal property is sold. Section 37 (e) of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the
Philippines ... Gains, profits and income derived from the purchase of
personal property within and its sale without the Philippines or from the
purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the
country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the
purchase and sale of personal property shall be treated as derived
entirely from the country in which sold. The word "sold" includes
"exchange." The "country" in which "sold" ordinarily means the place
where the property is marketed. This Section does not apply to
income from the sale personal property produced (in whole or in
part) by the taxpayer within and sold without the Philippines or
produced (in whole or in part) by the taxpayer without and sold
within the Philippines. (See Section 162 of these regulations).
(Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions
entered into by BOAC in the Philippines. Those transactions may be characterized either
as sales of personal property (i. e., "sales of airline tickets") or as entering into a lease of
services or a contract of service or carriage. The applicable "source of income" rules differ
depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of
entering into contracts of service, i.e., carriage of passengers or cargo between points
located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not
appear to be correct as a matter of tax law. The airline ticket in and of itself has no
monetary value, even as scrap paper. The value of the ticket lies wholly in the right
acquired by the "purchaser" — the passenger — to demand a prestation from BOAC,
which prestation consists of the carriage of the "purchaser" or passenger from the one
point to another outside the Philippines. The ticket is really the evidence of the contract of
carriage entered into between BOAC and the passenger. The money paid by the
passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of shoes
of a refrigerator or an automobile; it is really the compensation paid for the undertaking
of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as
purchases and sales of personal property, appear entirely inappropriate from other
viewpoint. Consider first purchases and sales: is BOAC properly regarded as engaged in
trading — in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider
next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as
"selling" "a product" — its service. However, for the technical purposes of the law on
income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of
services must preclude the application here of "source rules" applying generally to sales,
and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately
characterized as derived from a "service", rather than from an "activity" (a broader term
than service and including the activity of selling) or from the here involved
is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the
Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November 1972
and by Presidential Decree No. 1355, promulgated on 21 April 1978, in the following
manner:
(2) Resident corporations. — A corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the
preceeding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a
tax of two and one-half per cent on their gross Philippine
billings. "Gross Philippines of passage documents sold therein,
whether for passenger, excess baggege or mail, provide the cargo or
mail originates from the Philippines. The gross revenue realized from
the said cargo or mail shall include the gross freight charge up to final
destination. Gross revenues from chartered flights originating from
the Philippines shall likewise form part of "gross Philippine billings"
regardless of the place of sale or payment of the passage documents.
For purposes of determining the taxability to revenues from chartered
flights, the term "originating from the Philippines" shall include flight
of passsengers who stay in the Philippines for more than forty-eight
(48) hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the world to any other
point in the world, are not charged any Philippine income tax on their Philippine billings
(i.e., billings in respect of passenger or cargo originating from the Philippines). Under
this new approach, international carriers who service port or points in the Philippines
are treated in exactly the same way as international carriers not serving any port or
point in the Philippines. Thus, the source of income rule applicable, as above discussed,
to transportation or other services rendered partly within and partly without the
Philippines, or wholly without the Philippines, has been set aside. in place of Philippine
income taxation, the Tax Code now imposes this 2½ per cent tax computed on the basis
of billings in respect of passengers and cargo originating from the Philippines regardless
of where embarkation and debarkation would be taking place. This 2-½ per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income.
Thereby, the Government has done away with the difficulties attending the allocation of
income and related expenses, losses and deductions. Because taxes are the very lifeblood
of government, the resulting potential "loss" or "gain" in the amount of taxes collectible
by the state is sometimes, with varying degrees of consciousness, considered in choosing
from among competing possible characterizations under or interpretation of tax statutes.
It is hence perhaps useful to point out that the determination of the appropriate
characterization here — that of contracts of air carriage rather than sales of airline
tickets — entails no down-the-road loss of income tax revenues to the Government. In
lieu thereof, the Government takes in revenues generated by the 2-½ per cent tax on the
gross Philippine billings or receipts of international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

UNITED AIRLINES, INC., G.R. No. 178788 Petitioner used to be an online international carrier of passenger and cargo, i.e., it used to
Petitioner, operate passenger and cargo flights originating in the Philippines. Upon cessation of its
Present:
passenger flights in and out of the Philippines beginning February 21, 1998, petitioner

appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent general
- versus -
sales agent acting as such for several international airline companies.[2] Petitioner
CARPIO MORALES, J.,
continued operating cargo flights from the Philippines until January 31, 2001.[3]
Chairperson,
COMMISSIONER OF INTERNAL
REVENUE, BRION, On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax
Respondent. refund, pursuant to Section 28(A)(3)(a)[4] of the National Internal Revenue Code of
BERSAMIN,
1997 (NIRC) in relation to Article 4(7)[5] of the Convention between the Government of

VILLARAMA, JR., and the Republic of the Philippines and the Government of the United States of America with

respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total
SERENO, JJ.
amount of P15,916,680.69 pertaining to income taxes paid on gross passenger and cargo
Promulgated:
revenues for the taxable years 1999 to 2001, which included the amount
September 29, 2010 of P5,028,813.23 allegedly representing income taxes paid in 1999 on passenger revenue
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
from tickets sold in the Philippines, the uplifts of which did not originate in the
DECISION
Philippines. Citing the change in definition of Gross Philippine Billings (GPB) in the NIRC,

VILLARAMA, JR., J.: petitioner argued that since it no longer operated passenger flights originating from the

Philippines beginning February 21, 1998, its passenger revenue for 1999, 2000 and 2001

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil cannot be considered as income from sources within the Philippines, and hence should

Procedure, as amended, of the Decision[1] dated July 5, 2007 of the Court of Tax not be subject to Philippine income tax under Article 9[6] of the RP-US Tax Treaty.[7]

Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying petitioners claim for tax

refund of P5.03 million. As no resolution on its claim for refund had yet been made by the respondent and in

view of the two (2)-year prescriptive period (from the time of filing the Final Adjustment

The undisputed facts are as follows: Return for the taxable year 1999) which was about to expire on April 15, 2002,

petitioner filed on said date a petition for review with the Court of Tax Appeals (CTA). [8]

Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the

laws of the State of Delaware, U.S.A., engaged in the international airline business. Petitioner asserted that under the new definition of GPB under the 1997 NIRC and

Article 4(7) of the RP-US Tax Treaty, Philippine tax authorities have jurisdiction to tax

only the gross revenue derived by US air and shipping carriers from outgoing traffic in
the Philippines. Since the Bureau of Internal Revenue (BIR) erroneously imposed and Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First

collected income tax in 1999 based on petitioners gross passenger revenue, as beginning Division.

1998 petitioner no longer flew passenger flights to and from the Philippines, petitioner is

entitled to a refund of such erroneously collected income tax in the amount Hence, this petition anchored on the following grounds:

of P5,028,813.23.[9] I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE

PETITIONERS CLAIM FOR REFUND OF ERRONEOUSLY PAID
INCOME TAX ON GROSS PHILIPPINE BILLINGS [GPB] BASED ON
In its Decision[10] dated May 18, 2006, the CTAs First Division[11] ruled that no excess or ITS FINDING THAT PETITIONERS UNDERPAYMENT OF [P31.43
MILLION] GPB TAX ON CARGO REVENUES IS A LOT HIGHER
erroneously paid tax may be refunded to petitioner because the income tax on GPB under THAN THE GPB TAX OF [P5.03 MILLION] ON PASSENGER
Section 28(A)(3)(a) of the NIRC applies as well to gross revenue from carriage of cargoes REVENUES, WHICH IS THE SUBJECT OF THE INSTANT CLAIM
FOR REFUND. THE DENIAL OF PETITIONERS CLAIM ON SUCH
originating from the Philippines. It agreed that petitioner cannot be taxed on its 1999 GROUND CLEARLY AMOUNTS TO AN OFF-SETTING OF TAX
LIABILITIES, CONTRARY TO WELL-SETTLED JURISPRUDENCE.
passenger revenue from flights originating outside the Philippines. However, in reporting a

cargo revenue of P740.33 million in 1999, it was found that petitioner deducted two (2) II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONERS
RIGHT TO DUE PROCESS.
items from its gross cargo revenue of P2.84 billion: P141.79 million as commission
III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY
and P1.98 billion as other incentives of its agent. These deductions were erroneous because DENYING PETITIONERS CLAIM FOR REFUND OF
the gross revenue referred to in Section 28(A)(3)(a) of the NIRC was total revenue before ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE
BILLINGS BASED ON ITS FINDING THAT PETITIONER
any deduction of commission and incentives. Petitioners gross cargo revenue in 1999, UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT
OF [P31.43 MILLION] FOR THE TAXABLE YEAR 1999.
being P2.84 billion, the GPB tax thereon was P42.54 million and not P11.1 million, the
amount petitioner paid for the reported net cargo revenue of P740.33 million. The CTA IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO
MAKE ANY ASSESSMENTS FOR DEFICIENCY TAXES. THE
First Division further noted that petitioner even underpaid its taxes on cargo revenue AUTHORITY TO MAKE ASSESSMENTS FOR DEFICIENCY
NATIONAL INTERNAL REVENUE TAXES IS VESTED BY THE
by P31.43 million, which amount was much higher than the P5.03 million it asked to be 1997 NIRC UPON RESPONDENT.
refunded.
V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY
INCOME TAX FOR THE TAXABLE YEAR 1999 IS ALREADY
BARRED BY PRESCRIPTION.[13]
A motion for reconsideration was filed by petitioner but the First Division denied the

same. It held that petitioners claim for tax refund was not offset with its tax liability; that
The main issue to be resolved is whether the petitioner is entitled to a refund of the
petitioners tax deficiency was due to erroneous deductions from its gross cargo revenue;
amount of P5,028,813.23 it paid as income tax on its passenger revenues in 1999.
that it did not make an assessment against petitioner; and that it merely determined if
petitioner was entitled to a refund based on the undisputed facts and whether petitioner
Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line
had paid the correct amount of tax.[12]
passenger revenues cannot be denied based on the finding of the CTA that petitioner

allegedly underpaid the GPB tax on cargo revenues by P31,431,171.09, which

underpayment is allegedly higher than the GPB tax of P5,028,813.23 on passenger Lastly, petitioner argues that any assessment against it for deficiency income tax for

revenues, the amount of the instant claim. The denial of petitioners claim for refund on taxable year 1999 is barred by prescription. Petitioner claims that the prescriptive

such ground is tantamount to an offsetting of petitioners claim for refund of erroneously period within which an assessment for deficiency income tax may be made has

paid GPB against its alleged tax liability. Petitioner thus cites the well-entrenched rule in prescribed on April 17, 2003, three (3) years after it filed its 1999 tax return.[18]

taxation cases that internal revenue taxes cannot be the subject of set-off or

compensation.[14] Respondent Commissioner maintains that the CTA acted within its jurisdiction in

denying petitioners claim for tax refund. It points out that the objective of the CTAs

According to petitioner, the offsetting of the liabilities is very clear in the instant determination of whether petitioner correctly paid its GPB tax for the taxable year 1999

case because the amount of petitioners claim for refund of erroneously paid GPB tax was to ascertain the latters entitlement to the claimed refund and not for the purpose of

of P5,028,813.23 for the taxable year 1999 is being offset against petitioners alleged imposing any deficiency tax. Hence, petitioners arguments regarding the propriety of the

deficiency GPB tax liability on cargo revenues for the same year, which was not even the CTAs determination of its deficiency tax on its GPB for gross cargo revenues for 1999 are

subject of an investigation nor any valid assessment issued by respondent against the clearly misplaced.[19]

petitioner. Under Section 228[15] of the NIRC, the taxpayer shall be informed in writing of

the law and the facts on which the assessment is made; otherwise, the assessment shall The petition has no merit.

be void. This administrative process of issuing an assessment is part of procedural due

process enshrined in the 1987 Constitution. Records do not show that petitioner has As correctly pointed out by petitioner, inasmuch as it ceased operating

been assessed by the BIR for any deficiency GBP tax for 1999, nor was there any finding passenger flights to or from the Philippines in 1998, it is not taxable under Section
or investigation being conducted by respondent of any liability of petitioner for GPB tax 28(A)(3)(a) of the NIRC for gross passenger revenues. This much was also found by the

for the said taxable period. Clearly, petitioners right to due process was violated.[16] CTA. In South African Airways v. Commissioner of Internal Revenue,[20] we ruled that the

correct interpretation of the said provisions is that, if an international air carrier

Petitioner further argues that the CTA acted in excess of its jurisdiction because the maintains flights to and from the Philippines, it shall be taxed at the rate of 2% of its GPB,

exclusive appellate jurisdiction of the CTA covers only decisions or inactions of the while international air carriers that do not have flights to and from the Philippines but

respondent in cases involving disputed assessments. The CTA has effectively assessed nonetheless earn income from other activities in the country will be taxed at the rate of

petitioner with a P31.43 million tax deficiency when it concluded that petitioner 32% of such income.

underpaid its GPB tax on cargo revenue. Since respondent did not issue an assessment

for any deficiency tax, the alleged deficiency tax on its cargo revenue in 1999 cannot be Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable
considered a disputed assessment that may be passed upon by the CTA. Petitioner year 1999 at the time when petitioner was still operating cargo flights originating from

stresses that the authority to issue an assessment for deficiency internal revenue taxes is the Philippines although it had ceased passenger flight operations. The CTA found that

vested by law on respondent, not with the CTA.[17] petitioner had underpaid its GPB tax for 1999 because petitioner had made deductions

from its gross cargo revenues in the income tax return it filed for the taxable year 1999,

the amount of underpayment even greater than the refund sought for erroneously paid
GPB tax on passenger revenues for the same taxable period. Hence, the CTA ruled
petitioner is not entitled to a tax refund.
Petitioners arguments regarding the propriety of such determination by the CTA are
misplaced.
Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner
made erroneous deductions on its gross cargo revenue; that because of the erroneous
deductions, petitioner reported a lower cargo revenue and paid a lower income tax
thereon; and that petitioner's underpayment of the income tax on cargo revenue is even
higher than the income tax it paid on passenger revenue subject of the claim for refund,
such that the refund cannot be granted.
Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or
Fraudulent Returns. - When an assessment is made in case of any
list, statement or return, which in the opinion of the Commissioner
was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be
recovered by any suit, unless it is proved that the said list, statement
or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply
to statements or returns made or to be made in good faith regarding
annual depreciation of oil or gas wells and mines.
In the afore-cited case of South African Airways, this Court rejected similar arguments on
the denial of claim for tax refund, as follows:
Precisely, petitioner questions the offsetting of its
payment of the tax under Sec. 28(A)(3)(a) with their liability
under Sec. 28(A)(1), considering that there has not yet been any
assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of legal
compensation, which cannot be applied under the circumstances
present in this case.
Article 1279 of the Civil Code contains the elements of legal
compensation, to wit:
Art. 1279. In order that compensation may be proper,
it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if
the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention
or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of
Internal Revenue, thus:
In several instances prior to the instant case, we
have already made the pronouncement that taxes cannot be
subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors
of each other. There is a material distinction between a tax
and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to deviate from
the aforementioned distinction.
Prescinding from this premise, in Francia v.
Intermediate Appellate Court, we categorically held that
taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can
be no off-setting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to
or greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.
The ruling in Francia has been applied to the
subsequent case of Caltex Philippines, Inc. v. Commission on
Audit, which reiterated that:
 . . . a taxpayer may not offset taxes due
from the claims that he may have against the
government. Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and debtors of
each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be
set-off.
Verily, petitioners argument is correct that the offsetting of
its tax refund with its alleged tax deficiency is unavailing under Art.
1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,
however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of
Tax Appeals erred in denying petitioners supplemental
motion for reconsideration alleging bringing to said courts
attention the existence of the deficiency income and
business tax assessment against Citytrust. The fact of such
deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank
to claim for a tax refund for the same year. To award such
refund despite the existence of that deficiency assessment is
an absurdity and a polarity in conceptual effects. Herein
private respondent cannot be entitled to refund and at the
same time be liable for a tax deficiency assessment for the
same year.
The grant of a refund is founded on the
assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to
and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself
and without unquestionable evidence, cannot be the
basis for the grant of the refund.
Section 82, Chapter IX of the National Internal
Revenue Code of 1977, which was the applicable law when
the claim of Citytrust was filed, provides that (w)hen an
assessment is made in case of any list, statement, or return,
which in the opinion of the Commissioner of Internal
Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under
such assessment shall be recovered by any suits unless it is
proved that the said list, statement, or return was not false
nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to
statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.
Moreover, to grant the refund without
determination of the proper assessment and the tax due
would inevitably result in multiplicity of proceedings or
suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a
proceeding for the recovery of erroneously refunded taxes
which recourse must be filed within the prescriptive period
of ten years after discovery of the falsity, fraud or omission
in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and
expenses on the part of the Government, impose a burden on
and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and
unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved
jointly with its claim for tax refund, to determine once
and for all in a single proceeding the true and correct
amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has
heretofore conceded, it would be only just and fair that the
taxpayer and the Government alike be given equal
opportunities to avail of remedies under the law to defeat
each others claim and to determine all matters of dispute
between them in one single case. It is important to note that
in determining whether or not petitioner is entitled to the
refund of the amount paid, it would [be] necessary to
determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of
the correct liability of the taxpayer and, certainly, a
determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or
necessarily involved therein. (Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72,
Chapter XI of the 1997 NIRC. The above pronouncements are,
therefore, still applicable today.
Here, petitioners similar tax refund claim assumes that
the tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under Sec.
28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the
 correctness of the return filed by petitioner is now put in doubt.
As such, we cannot grant the prayer for a refund.[21] (Additional With costs against the petitioner.
emphasis supplied.)

SO ORDERED.

In the case at bar, the CTA explained that it merely determined whether petitioner is

entitled to a refund based on the facts. On the assumption that petitioner filed a correct

return, it had the right to file a claim for refund of GPB tax on passenger revenues it paid

in 1999 when it was not operating passenger flights to and from the

Philippines. However, upon examination by the CTA, petitioners return was found

erroneous as it understated its gross cargo revenue for the same taxable year due to

deductions of two (2) items consisting of commission and other incentives of its

agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is not

entitled to a refund of its GPB tax on its passenger revenue, the amount of the former being

even much higher (P31.43 million) than the tax refund sought (P5.2 million). The CTA

therefore correctly denied the claim for tax refund after determining the proper

assessment and the tax due. Obviously, the matter of prescription raised by petitioner is a

non-issue. The prescriptive periods under Sections 203[22] and 222[23] of the NIRC find

no application in this case.

We must emphasize that tax refunds, like tax exemptions, are construed strictly against

the taxpayer and liberally in favor of the taxing authority.[24] In any event, petitioner has

not discharged its burden of proof in establishing the factual basis for its claim for a

refund and we find no reason to disturb the ruling of the CTA. It has been a long-standing

policy and practice of the Court to respect the conclusions of quasi-judicial agencies such

as the CTA, a highly specialized body specifically created for the purpose of reviewing tax

cases.[25]

WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated

July 5, 2007 of the Court of Tax Appeals En Banc in C.T.A. EB No. 227.