Professional Documents
Culture Documents
the latter’s mining claim, known as the Sto. Nino mine, located in
Atok and Tublay, Benguet Province. The parties’ agreement was
1. PHILEX MINING VS. COMMISSIONER OF INTERNAL denominated as “Power of Attorney”.
REVENUE • The agreement provides, among others, the following stipulations:
G.R. No. 148187, April 16, 2008
- The Principal, Baguio Gold, shall advance an amount of Php
Case: 11M to the Manager, Philex, and it is to be called as the
Philex and Baguio Gold entered into an agreement for the operation "Manager's Account".
of the Sto Nino Mine and denominated as "Power of Attorney". It was - Whenever necessary for the management of the project, the
stipulated, among others, that Philex shall advance to Baguio an Manager shall advance additional funds and property to the
amount of Php 11m and additional funds and property as maybe
said project. The cash and property shall not thereafter be
necessary, such advance cannot be unilaterally withdrawn until the
termination of the agreement, and Philex share shall be 50% of the withdrawn from the Sto. Nino PROJECT until termination of
profits from the Sto. Nino Project. The project incurred losses which this Agency.
eventually lead to the dissolution of the agreement. Philex assessed - The Compensation of the Manager shall be fifty per cent
that Baguio Gold has a remaining obligation of Php 114, 996, 768 (50%) of the net profit of the Sto. Nino project before income
representing the amount it advanced to the agreement and acting as
tax.
a guarantor for Baguio Gold. Philex deducted the said amount from
its taxable income claiming them as Bad Debts. The BIR disallowed - The Principal has current pecuniary obligation in favor of the
the deduction and assessed petitioner a deficiency income tax. The Managers and, in the future, may incur other obligations in
CTA affirmed the BIR and stated that the advances does not favor of the Managers. This Power of Attorney has been
constitute a loan but rather investments to a joint venture, in addition, executed as security for the payment and satisfaction of all
as to the claims for the amounts wherein Philex acted as a guarantor
to Baguio Gold, such amounts where not yet demandable. The CA such obligations of the Principal in favor of the Managers and
affirmed the decision of the CTA. as a means to fulfill the same. Therefore, this Agency shall
be irrevocable while any obligation of the Principal in favor of
The SC affirmed the decisions of the lower courts stating that the the Managers is outstanding, inclusive of the Managers'
"Power of Attorney" was in fact a joint venture agreement. There was account. After all obligations of the Principal in favor of the
no agreement that the amount so advanced shall be unilaterally be
returned so as to constitute them as loans. Furthermore, there is the Managers have been paid and satisfied in full, this Agency
agreement that Philex shall be entitled to a 50% share of the profits shall be revocable by the Principal upon 36-month notice to
of the project which strongly indicates that what was entered into the Managers.
was a partnership agreement. The SC also affirmed that amounts • In the course of managing and operating the project, Philex Mining
advanced by philex as guarantor are not yet due and demandable. made advances of cash and property in accordance with the
agreement. However, the mine suffered continuing losses over the
Facts:
• On April 16, 1971, petitioner Philex Mining Corporation (Philex years which resulted to petitioner’s withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine
Mining), entered into an agreement with Baguio Gold Mining
operations on February 20, 1982.
• On September 27, 1982, the parties executed a “Compromise with ascertained to be worthless since Baguio Gold remained existing
Dation in Payment” wherein Baguio Gold admitted an and had not filed a petition for bankruptcy; and that the deduction
indebtedness to petitioner in the amount of P179,394,000.00 and did not consist of a valid and subsisting debt considering that,
agreed to pay the same in three segments by first assigning under the management contract, petitioner was to be paid fifty
Baguio Gold’s tangible assets to petitioner, transferring to the latter percent (50%) of the project’s net profit.
• Petitioner appealed to the CTA, however the latter denied the
Baguio Gold’s equitable title in its Philodrill assets and finally
settling the remaining liability through properties that Baguio Gold former's petition and held that the power of attorney was in fact an
may acquire in the future. agreement to form a partnership. That the amount thus advanced
• On December 31, 1982, the parties executed an “Amendment to are in the nature of an investment, and that Baguio Gold cannot be
Compromise with Dation in Payment”where the parties determined considered in default since the debt was not yet demandable.
• The CA affirmed the ruling of the CTA, hence the instant petition.
that Baguio Gold’s indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio Gold to
other creditors that petitioner had assumed as guarantor. Issues:
• Baguio Gold undertook to pay petitioner in two segments by first • Whether or not Philex is entitled to a Bad Debt deduction
assigning its tangible assets for P127 ,838,051.00 and then arising from its claims from Baguio Gold.
transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold Held:
had a remaining outstanding indebtedness to petitioner in the • No.
amount of P114,996,768.00. • An examination of the “Power of Attorney” reveals that a
• Subsequently, petitioner wrote off in its 1982 books of partnership or joint venture was indeed intended by the parties.
account the remaining outstanding indebtedness of Baguio Under a contract of partnership, two or more persons bind
Gold by charging P112,136,000.00 to allowances and reserves themselves to contribute money, property, or industry to a common
that were set up in 1981 and P2,860,768.00 to the 1982 fund, with the intention of dividing the profits among themselves.
operations. While a corporation, like petitioner, cannot generally enter into a
• In its 1982 annual income tax return, petitioner deducted from contract of partnership unless authorized by law or its charter, it
has been held that it may enter into a joint venture which is akin to
its gross income the amount of P112 ,136,000.00 as “loss on a particular partnership.
settlement of receivables from Baguio Gold against reserves • Perusal of the agreement denominated as the “Power of Attorney”
and allowances.” However, the Bureau of Internal Revenue indicates that the parties had intended to create a partnership and
(BIR) disallowed the amount as deduction for bad debt and establish a common fund for the purpose. They also had a joint
assessed petitioner a deficiency income tax of P62,811,161.39. interest in the profits of the business as shown by a 50-50 sharing
• Petitioner protested before the BIR arguing that the deduction must in the income of the mine.
be allowed since all requisites for a bad debt deduction were • In this case, the totality of the circumstances and the stipulations in
satisfied, to wit: (a) there was a valid and existing debt; (b) the debt the parties’ agreement indubitably lead to the conclusion that a
was ascertained to be worthless; and (c) it was charged off within partnership was formed between petitioner and Baguio Gold.
the taxable year when it was determined to be worthless. • The strongest indication that petitioner was a partner in the Sto
• On October 28, 1994, the BIR denied petitioner ’s protest for lack of Niño mine is the fact that it would receive 50% of the net profits as
legal and factual basis. It held that the alleged debt was not “compensation” under paragraph of the agreement. The entirety
of the parties’ contractual stipulations simply leads to no other Appeals which disallowed petitioner’s claim for deduction as bad
conclusion than that petitioner’s “compensation” is actually its debts of several accounts in the total sum of P395,324.27, and
share in the income of the joint venture. imposing a 25% surcharge and 20% annual delinquency interest
• All told, the lower courts did not err in treating petitioner ’s advances on the alleged deficiency income tax liability of petitioner.
Petitioner Philippine Refining Company (PRC) was assessed by
as investments in a partnership known as the Sto. Nino mine. The
respondent Commissioner of Internal Revenue (CIR) to pay a
advances were not “debts” of Baguio Gold to petitioner inasmuch
deficiency tax for the year 1985 in the amount of P1,892,584.00,
as the latter was under no unconditional obligation to return the computed as follows:
same to the former under the “Power of Attorney”.
• As for the amounts that petitioner paid as guarantor to Baguio Deficiency Income Tax
Gold’s creditors, we find no reason to depart from the tax court’s Net Income per investigation P197,502,568.00
factual finding that Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the same. Verily, Add: Disallowances
petitioner pre-paid Baguio Gold’s outstanding loans to its bank Bad Debts P 713,070.93
creditors and this conclusion is supported by the evidence on
record. Interest Expense P P 3,379,616.00
2,666,545.49
Final Verdict: WHEREFORE, The instant petition is denied and
the order of the CA is hereby affirmed. Net Taxable Income P 200,882,184.00
Tax Due Thereon P 70,298,764.00
2. PHIL. REFINING COMP. VS CA
Less: Tax Paid P 69,115,899.00
REYES NOTES:
Deficiency Income Tax P 1,182,865.00
Q34.6. Is the declaration by the taxpayer that a
debt is worthless sufficient for it to claim a bad Add: 20% Interest (60% P 709,719.00
max.)
debt deduction?
No. In PHILIPPINE REFINING COMPANY VS. COURT OF APPEALS Total Amount Due and P 1,892,584.00
[MAY 8, 1996], at issue was PRC’s (now Unilever) claimed of bad Collectible
debt deduction. On appeal, the CTA disallowed the same as there CIR contend that:
was no iota of documentary evidence to prove the worthlessness of o Mere testimony of the Financial Accountant of the
the debts sought to be deducted. The Supreme Court stated that Petitioner explaining the worthlessness of said debts is
before a debt can be considered worthless, the taxpayer must also seen by this Court as nothing more than a self-serving
show that it is indeed uncollectible even in the future. PRC here exercise which lacks probative value.
failed to prove the worthlessness of the amounts receivable. o There was no iota of documentary evidence (e.g.,
collection letters sent, report from investigating fieldmen,
FACTS: letter of referral to their legal department, police
This is an appeal by certiorari from the decision of respondent report/affidavit that the owners were bankrupt due to fire
Court of Appeals affirming the decision of the Court of Tax that engulfed their stores or that the owner has been
murdered, etc.), to give support to the testimony of an Major Point 1: Conditions before debts could be considered as
employee of the Petitioner. Mere allegations cannot ”worthless.”
prove the worthlessness of such debts in 1985. For debts to be considered as “worthless,” and thereby qualify as
o Hence, the claim for deduction of these thirteen (13) “bad debts” making them deductible, the taxpayer should show
debts should be rejected. that:
CTA modified the findings of the Commissioner by reducing the o (1) there is a valid and subsisting debt;
deficiency income tax assessment to P237,381.26, with o (2) the debt must be actually ascertained to be worthless
surcharge and interest incident to delinquency. In said decision, and uncollectible during the taxable year;
the Tax Court reversed and set aside the Commissioner’s o (3) the debt must be charged off during the taxable year;
disallowance of the interest expense of P2,666,545.19 but and
maintained the disallowance of the supposed bad debts of o (4) the debt must arise from the business or trade of the
thirteen (13) debtors in the total sum of P395,324.27. taxpayer.
UNILEVER’s contention: o Additionally, before a debt can be considered worthless,
o Nobody is in a better position to determine when an the taxpayer must also show that it is indeed
obligation becomes a bad debt than the creditor itself, uncollectible even in the future.
and its judgment should not be substituted by that of SC In this case –
as it is UNILEVER which has the facilities in ascertaining o UNILEVER evidently failed to prove the worthless of the
the collectability or uncollectibility of these debts, are amounts receivable.
presumptuous and uncalled for. o Under Sec. 248 there imposes a 25% surcharge penalty.
o The CTA is a highly specialized body specialized body o Under Sec. 249 - (c) Delinquency Interest.—In case of
specifically created for the purpose of reviewing tax failure to pay:
cases. Through its expertise, it is undeniably competent (1)The amount of the tax due on any return
to determine the issue of W/N the debt is deductible required to be filed, or
through the evidence presented before it. (2)The amount of the tax due for which no return
is required, or
ISSUE: (3)A deficiency tax, or any surcharge or interest
1. Is UNILIVER liable to pay the assessed deficiency resulting from thereon, on the due date appearing in the notice
the bad debts? and demand of the Commissioner, there shall be
2. Is UNILIVER also liable to pay tax surcharge? assessed and collected, on the unpaid amount,
interest at the rate prescribed in paragraph (a)
HELD & RATIO: hereof until the amount is fully paid, which
YES (to both). The findings of the CTA will not ordinarily be reviewed interest shall form part of the tax.
absent a showing of gross error or abuse on its part. The findings of Major Point 2: The fact that a taxpayer appealed the assessment to
fact of the CTA are binding on this Court and in the absence of strong the CTA and that the same was modified does not relieve it of the
reasons for this Court to delve into facts, only questions of law are penalties incident to delinquency.
open for determination. Were it not, therefore, due to the desire of
The deficiency tax assessment in this case, which was the
this Court to satisfy petitioner’s calls for clarification and to use this
subject of the demand letter of respondent Commissioner dated
case as a vehicle for exemplification, this appeal could very well
April 11, 1989, should have been paid within thirty (30) days from
have been summarily dismissed.
receipt thereof. By reason of petitioner’s default thereon, the
delinquency penalties of 25% surcharge and interest of 20% or insolvent was still operating at the end of the taxable year, the
accrued from April 11, 1989. The fact that petitioner appealed the debt is not considered worthless and therefore not deductible.
assessment to the CTA and that the same was modified does not
relieve petitioner of the penalties incident to delinquency. The CASE:
reduced amount of P237,381.25 is but a part of the original Fernandez Hermanos is a domestic corporation engaged in
assessment of P1,892,584.00. investment, CIR assessed deficiency of income taxes for years 1950-
Tax laws imposing penalties for delinquencies, so we have 54, arising from discrepancies in income tax returns as petitioner
long held, are intended to hasten tax payments by punishing write-off deductions, which CIR disallowed. SC ruled that for there to
evasions or neglect of duty in respect thereof. If penalties bad debt, there must be an existing debt, but even assuming there
could be condoned for flimsy reasons, the law imposing was, if the debtor corporation losses money or insolvent but still in
penalties for delinquencies would be rendered nugatory, operation, they cannot be considered as worthless thereof not
and the maintenance of the Government and its multifarious deductible.
activities will be adversely affected.
We have likewise explained that it is mandatory to collect penalty
and interest at the stated rate in case of delinquency. The FACTS:
intention of the law is to discourage delay in the payment of Fernandez Hermanos is a domestic corporation engaged in the
taxes due the Government and, in this sense, the penalty and business as an investment company. CIR assessed deficiency of
interest are not penal but compensatory for the concomitant use income taxes for years 1950-54, arising from discrepancies in
of the funds by the taxpayer beyond the date when he is the income tax returns. Basically, CIR disallowed some of the
supposed to have paid them to the Government. Unquestionably, petitioner’s declared deductible losses.
petitioner chose to turn a deaf ear to these injunctions.
The Court of Tax Appeals modifying the CIR assessments –
allowing some, disallowing others. Both appealed.
FINAL VERDICT: The petition at bar is DENIED and the judgment of
respondent Court of Appeals is hereby AFFIRMED, with treble costs
ISSUES: Whether or not there was proper deduction?
against petitioner.
HELD & RATIO:
3. HERMANOS V. CIR
Matti Lumber Co – YES, FH declared as worthless its stock in
Matti Lumber, CTA allowed after finding that at the time
REYES NOTES:
declaration of loss was made, Matti Lumber had ceased in
operation and was insolvent. CIR argued that its equipment still
Q34.7. ABC, an investment company made advances to XYZ under
has value. CTA said that if these will realize gain in the future,
an agreement that a portion of its net profits would go to ABC. XYZ
then FH should make a proper declaration in the year that it
suffered substantial losses but continued to operate. ABC made a
receives profits for them. SC affirmed.
partial write-off of the losses and deducted the amount in its return.
Is the deduction proper? Palawan Manganese Mines – NO, the controlling stockholders of
NO. SC held that the deduction was improper. The court opined that FH are also that of Palawan Manganese. The latter requested
assuming that in this case there was a valid subsisting debt and that from former the financial help for its mining operations, to which
the debtor was incapable of paying the debt, the debt is still not the former agreed through a MOA, stated therein that FH would
deductible worthless debt because the debtor was still in operation. It grant accommodation advances and Palawan would
has been held that if the debtor corporation, although losing money compensate FH of 15% of profits. But Palawan continued to
suffer losses meanwhile FH continued to grant advances but in FINAL VERDICT: SC modifies CTA’s decision on Balamban Coal
reduced amount. FH then started writing off its books as Mines, crediting the loss which was disallowed, but affirms the
worthless the advances given for 1945-49 even if Palawan was decision to the others.
still in operation. CTA disallowed and said that their
understanding was that Palawan would compensate them with
15% of profits. In short, if there were no profits, there’s no Notes/ Source: This digest focuses primarily on the Bad Debt
obligation to pay. So FH cannot claim as loss an amount (the doctrine
advances) Palawan was not required to pay back.
Are these Bad Debts? NO. There can be no bad debt if there RR 5-99 (March 10, 1999)
was no valid and existing debt. But even assuming there was,
FH made the deductions at a time when Palawan was still in
operation. It has been held that if the debtor corporation, Depreciation
although losing money or insolvent, was still operation at the end
of the taxable year, the debt is not considered worthless and 4. BASILAN ESTATES, INC. v. CIR
therefore not deductible. Furthermore, neither under Sec 30(d) Deduction; Depreciation
(2) of our Tax code providing for deduction by corporations of
losses actually sustained and charged off during the taxable year REYES NOTES/ CASE: (p.33,Q.35.3)
nor under Sec 30(e)(1) thereof providing for deduction of bad
debts actually ascertained to be worthless and chared off within Can an asset be depreciated beyond is acquisition cost? — NO.
the taxable year, can there be a partial writing off of a loss or bad Basilan Estates claimed deductions for the depreciation of its assets
debt, as was sought to be done here by the taxpayer. For such up to 1949 on the basis of their acquisition cost. In 1950, however, it
losses or bad debts must be ascertained to be so and written off changed the depreciable value of the assets by increasing it to
during the taxable year, are therefore deductible in full or not at conform with the increase in cost of their replacement. Accordingly, in
all, in the absence of express provision in the Tax Code 1950-53, the company deducted from gross income the value of the
authorizing partial deductions. depreciation based on this reappraised value. The SC held that such
Balamban Coal Mines – FH made deductions while operations value cannot be deducted from gross income as it was beyond
were ongoing because according to it, it made no sales of coal the acquisition cost. Depreciation as a deduction is allowed so that
during those years because the coal could not be transported for the owner of the assets can set aside some money to buy a
lack of road. CTA disallowed because some definite event must replacement or, in other words, to gradually recover the acquisition
fix the time when the loss is sustained and here it was only the costs. The reason is that deductions from gross income are
event of actual abandonment of the mines, which came later. privileges, not matter of right. More importantly, the recovery, free of
Hacienda Dalupiri and Samal – CIR disallowed the deduction income tax, of an amount more than the invested capital in an asset
because they found that the farms were operated for pleasure will run counter to the purpose of a depreciation allowance. For then,
and not business and thus not entitled to claim deductions. But the taxpayer can not only recover the acquisition cost, but also make
CTA disallowed because it was convinced they operated for some profit. Recovery in due time through depreciation of investment
business. Losses were determined by inventories sanctioned by made is the philosophy behind depreciation allowance; the idea of
Sec 100 RR2 to which method the CTA was satisfied. profit on the investment made has never been the underlying reason
for the allowance of a deduction fro depreciation.
FACTS: • The law permits the taxpayer to recover gradually his capital
• Basilan Estates, Inc (Basilan) is a Philippine corporation engaged investment in wasting assets free from income tax
in the coconut industry with principal offices at Basilan City, • Section 30 (f) (1): “ In general. — A reasonable allowance for
• Paid its income tax returns for 1953 deterioration of property arising out of its use or employment in the
• 1959 - CIR assessed Basilan a deficiency income tax for the same business or trade, or out of its not being used: Provided, That when
year pursuant to Sec.25 o the Tax Code the allowance authorized under this subsection shall equal the
• P3,912 for 1953 and P86,876.85 as 25% surtax on capital invested by the taxpayer . . . no further allowance shall be
made. . . .” allows a deduction from gross income for depreciation
unreasonably accumulated profits
but limits the recovery to the capital invested in the asset being
• Basilan filed with the CTA a petition for review of the assessment depreciated.
alleging prescription of the period for assessment and collection; • >>> The income tax law does not authorize the depreciation of
error in disallowing claimed depreciations an asset beyond its acquisition cost. Hence, a deduction over
• CTA Decision: affirmed the deficiency in toto, there was no and above such cost cannot be claimed and allowed. The reason
prescription is that deductions from gross income are privileges, not matters of
• Basilan claimed deductions for the depreciation of its assets up to right. They are not created by implication but upon clear
1949 on the basis of the acquisition cost expression in the law.
• 1950: it changed the depreciable value of said assets by increasing • Moreover, the recovery, free of income tax, of an amount more
it to conform with the increase in cost for their replacement than the invested capital in an asset will transgress the underlying
• 1950-53: it deducted from gross income the value of depreciation purpose of a depreciation allowance. For then what the taxpayer
computed on the reappraised value would recover will be, not only the acquisition cost, but also some
profit. Recovery in due time thru depreciation of investment made
ISSUES: Whether or not the disallowance of items claimed as is the philosophy behind depreciation allowance; the idea of profit
deductible was proper on the investment made has never been the underlying reason for
the allowance of a deduction for depreciation.
HELD & RATIO: YES • Claim for depreciation beyond P36 ,842.04 or in the amount of
• Depreciation is the gradual diminution in the useful value of P10,500.49 has no justification in the law.
tangible property resulting from wear and tear and normal
obsolescense. FINAL VERDICT: CIR and CTA decisions sustained
• Depreciation commences with the acquisition of the property and
5. LIMPAN INVESTMENT CO. V. CIR & CTA
its owner is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is entitled to REYES NOTES/ CASE:
see that from earnings the value of the property invested is kept
unimpaired, so that at the end of any given term of years, the In this case PET Limpan Investment Corp a corp engaged in
original investment remains as it was in the beginning. It is not only the leasing of private property in the cities of Manila and Pasay had
the right of a company to make such a provision, but it is its duty to been assessed to have underreported its incomet ax for the years of
its bond and stockholders, and, in the case of a public service 1956 to 1957. Therefore, it was required by the CIR to pay the
corporation, at least, its plain duty to the public amounts due for those years. The matter was taken to the CTA
where the PETs claimed that 1. The depreciation scheme it used claimed that these amoutns were not earned as they had
should not have been overturned and 2. The rentals that they had ceded their interest in the buildings to PET corp.
been collecteinf ro those periods were in fact not collected during ISSUES:
those years. It was found by both the CTA and the SC that 1. The 1. W/N the deprecation scheme was proper?
depreciation scheme was not justified as it must find its basis in fact, 2. W/N the lease that was technically not collected in those
and 2. That the rentals were in fact available to the PET corp and years be assessed as having been earned in those
should be deemed to have been collected in the years where they years?
were available for collection. HELD & RATIO:
1. No, It was alleged: “With regard to the depreciation which
FACTS: respondent disallowed and deducted from the returns filed
This appeal is taken by PET Limpan Investment Corp. by petitioner, the same witness tried to establish that some of
against the CTA for ruling in favor of the CIR. The CTA its buildings are old and out of style; hence, they are entitled
ordered the PET in this case to pay the sums of P7,338.00 to higher rates of depreciation than those adopted by
and P30,502.50 which represented deficiency income tax, 50 respondent in his assessment. “ The SC decided not to
percent surcharge and 1 percent interest from the date of disturb this finding as no evidence had been presented to
June 1959. overturn it outside of the aforementioned bare statement.
PET is a domestic corp. engaged in the business of leasing
real properties. It’s principal stock holders are the spouses 2. Yes, On the other hand, Plaridel M. Mingoa, one of the BIR
Isabelo P. Lim and Purificacion Ceñiza de Lim. The examiners who personally conducted the investigation of the
properties being leased are located in Manila and in Pasay 1956 and 1957 income tax returns of petitioner corporation,
City. testified for the respondent that he personally interviewed the
In the years 1956 and 1957 respectively it was found that the tenants of petitioner and found that these tenants had been
PET corp underdeclared its income by P20,199.00 and regularly paying their rentals to the collectors of either
P81,690.00 respectively. Also, they had claimed excessive petitioner or its president, Isabelo P. Lim, but these payments
depreciation of the buildings that they owned P4,260.00 and were not declared in the corresponding returns; and that in
P16,336.00. applying rates of depreciation to petitioner's buildings, he
They were subsequently assessed at a deficiency of adopted Bulletin "F" of the U.S. Federal Internal Revenue
P30,502.50. Service. With respect to the balance, which petitioner denied
To make the long story short the PETs in this case were having unreported in the disputed tax returns, the excuse
merely saying, simply, that the rent collected wasn’t actually that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim
collected as planned so the amount was not yet really retained ownership of the lands and only later transferred or
earned. disposed of the ownership of the buildings existing thereon
They also alleged that striking down of the scheme for to petitioner corporation, so as to justify the alleged verbal
depreciating their buildings was unfair and oppressive. agreement whereby they would turn over to petitioner
corporation six percent (6%) of the value of its properties to
Sole witness for petitioner corporation in the Tax Court was
be applied to the rentals of the land and in exchange for
its Secretary-Treasurer, Vicente G. Solis, who admitted that it
whatever rentals they may collect from the tenants who
had omitted to report the sum of P12,100.00 as rental
refused to recognize the new owner or vendee of the
income in its 1956 tax return and also the sum of P29,350.00
buildings, is not only unusual but uncorroborated by the
as rental income in its 1957 tax return. However the spouses
alleged transferors, or by any document or unbiased
evidence. Hence, the first assigned error is without merit. The issue is WON the CTA erred with respect to the rate of mine
depletion. The Supreme Court ruled in favour of the petitioner saying
that the Tax Code provides that in computing net income there shall
be allowed as deduction in the case of mines, a reasonable
FINAL VERDICT: Petition is denied. The CTA decision is affirmed. allowance for depletion thereof not to exceed the market value in the
mind of the product thereof which has been mined and sold during
the year for which the return is made. Art. 3, Sec. 16 of the Const: All
Notes/ Source: persons shall have the right to a speedy disposition of their cases
before all judicial, quasi-judicial, or administrative bodies
The withdrawal in 1958 of the deposits in court pertaining to the 1957
rental income is no sufficient justification for the non-declaration of (for the correct formula that must be used regarding the rate of
said income in 1957, since the deposit was resorted to due to the depletion, please see below.)
refusal of petitioner to accept the same, and was not the fault of its
tenants; hence, petitioner is deemed to have constructively received FACTS:
such rentals in 1957. The payment by the sub-tenant in 1957 should • Consolidated Mines (The Company), a domestic corporation
have been reported as rental income in said year, since it is income engaged in mining, had filed its income tax returns for 1951,
just the same regardless of its source. 1952, 1953 and 1956. In 1957 examiners of the BIR
investigated the income tax returns filed by the Company
RR 12-2012 (October 12, 2012) because its auditor, Felipe Ollada, claimed the refund of the
sum ofP107,472.00 representing alleged overpayments of
income taxes for the year 1951.
Depletion • After the investigation the examiners reported that (A) for the
years 1951 to 1954 (1) the Company had not accrued as an
6. CONSOLIDATED MINES V COURT OF TAX APPEALS AND expense the share in the company profits of Benguet
COMMISSIONER OF INTERNAL REVENUE Consolidated Mines as operator of the Company's mines,
although for income tax purposes the Company had
REYES NOTES/ CASE: reported income and expenses on the accrual basis; (2)
depletion and depreciation expenses had been overcharged;
Consolidated Mine had filed its income tax returns for 1951, 1952, and (3) the claims for audit and legal fees and
1953 and 1956. In 1957 examiners of the BIR investigated the miscellaneous expenses for 1953 and1954 had not been
income tax returns filed by the Company because its auditor, Felipe properly substantiated; and that (B) for the year 1956 (1) the
Ollada, claimed the refund representing alleged overpayments of Company had overstated its claim for depletion; and (2)
income taxes for the year 1951. The investigators reported that the certain claims for miscellaneous expenses were not duly
company had underpaid its tax obligations. CIR then sent the supported by evidence.
company letter of demand requiring the payment of deficiency • In view of said reports the Commissioner of Internal
income taxes. The company appealed to the CTA, which likewise Revenue sent the Company a letter of demand requiring it to
rendered an unfavourable decision. The company questions the rate pay certain deficiency income taxes for the years 1951 to
or mine depletion adopted by the CTA and the disallowance of 1954, inclusive,and for the year 1956. Deficiency income tax
depreciation charges and certain miscellaneous.
assessment notices for said years were also sent to the ---------------------- = Rate of Depletion Per Unit Estimated ore
Company. Deposit of Product Mined and sold
• The Company requested a reconsideration of the The Commissioner and the Company do not agree as to the
assessment, but the Commissioner refused to reconsider, figures corresponding to either factor that affects the rate of
hence the Company appealed to the Court of depletion per unit. The figures according to the
Tax Appeals.On May 6, 1961 the Tax Court rendered Commissioner are:
judgment ordering the Company to pay the amounts P2,646,878.44 (mine cost) P0.59189 (rate of
ofP107,846.56, P134,033.01 and P71,392.82 as deficiency ------------------------- = depletion per ton)
income taxes for the years 1953, 1954and 1956, 4,471,892 tons (estimated ore deposit)
respectively. while the Company insists they are:
• However, on August 7, 1961, upon motion of the Company, P4,238,974.57 (mine cost) P1.0197 (rate of
the Tax Court reconsidered its decision and further reduced ------------------------- - = depletion per ton)
the deficiency income tax liabilities of the Company to 4,156,888 tons (estimated
P79,812.93,P51,528.24 and P71,382.82 for the years 1953,
1954 and 1956, respectively. ore deposit)
1. Both the company and the commissioner appealed to this
court. the company questions the rate or mine depletion They agree, however, that the "cost of the mine property"
adopted by the CTA and the disallowance of depreciation consists of (1) mine cost; and (2) expenses of development
charges and certain miscellaneous. before production
•
As an income tax concept, depletion is wholly a creation of
ISSUES:
the statute — "solely a matter of legislative grace." Hence,
1. Whether or not the Court of Tax Appeals erred with
the taxpayer has the burden of justifying the allowance of
respect to the rate of mine depletion.
any deduction claimed. As in connection with all other tax
controversies, the burden of proof to show that a
disallowance of depletion by the Commissioner is incorrect
HELD & RATIO: or that an allowance made is inadequate is upon the
1. YES, The Tax Code provides that in computing net income taxpayer, and this is true with respect to the value of the
there shall be allowed as deduction in the case of mines, a property constituting the basis of the deduction. This burden-
reasonable allowance for depletion thereof not to exceed the of-proof rule has been frequently applied and a value
market value in the mind of the product thereof which has claimed has been disallowed for lack of evidence.
been mined and sold during the year for which the return is
made. Art. 3, Sec. 16 of the Const: All persons shall have The Company's balance sheet for December 31, 1947 lists
the right to a speedy disposition of their cases before all the "mine cost" of P2,500,000 as "development cost" and the
judicial, quasi-judicial, or administrative bodies. amount of P1,738,974.37 as "suspense account (mining
• The formula for computing the rate of depletion is: properties subject to war losses)." The Company claims that
its accountant, Mr. Calpo, made these errors, because he
Cost of Mine Property was then new at the job. Granting that was what had
happened, it does not affect the fact that the, evidence on Conservation International is an international organization
hand is insufficient to prove the cost of development alleged with a home office and board members based overseas..
by the Company.
Nor can w the statements of Eligio S. Garcia be relied to,
who was the Company's treasurer and assistant secretary at ISSUES:
the time he testified on August 14, 1959. He admitted that he 3. Whether or not international organizations with home
did not know how the figure P4,238,974.57 was arrived at, offices based abroad are qualified to be granted done
explaining: "I only know that it is the figure appearing on the institution status?
balance sheet as of December 31, 1946 as certified by the
Company's auditors; and this we made as the basis of the HELD & RATIO:
valuation of the depletable value of the mines 3. NO, the requirements of the Tax Code of 1997 and Rev.
Regs. No 13-98 require that non-stock, non-profit corporation
or organizations must be created or organized under
Practicality therefore suggest that there is a better need to Philippine Laws and that an NGO must be a non-profit
rely on the Commissioner's assertion that the "development domestic corporation. A foreign corporation, like
cost" was P131,878.44, broken down as follows: Conservation International, whether resident or non-resident,
assessment, P34,092.12; development, P61,484.63; cannot be accredited as a done institution.
exploration, P13,966.62; and diamond drilling, P22,335.07. Section 34 (H) (1) of the Tax Code of 1997
specifically mentions “accredited domestic
The question as to which figure should properly correspond corporation or associations” and “non-government
organizations”. On the other hand, subparagraph (2)
to "mine cost" is one of fact. The findings of fact of the Tax
of the same Section of the Tax Code defines a “non-
Court, where reasonably supported by evidence, are
government organization” to mean a non profit-
conclusive upon the Supreme Court.
domestic corporation.
In implementing Sec. 34(H), Rev. Regs. No. 13-98
FINAL VERDICT: Petition GRANTED. The decision of CTA is states Sec 1 (a) “Non-stock, non-profit corporation or
modified. organization” – shall refer to a corporation or
association/organization referred to under Section
30 (E) and (G) of the Tax Code created or
Charitable and other contributions organized under Philippine laws exclusively for
one or more purposes.
RA 9500 (Sec. 25 only)
RA 9521, Sec. 3
Research and Development
7. BIR Ruling No. 19-01
8. 3M PHILIPPINE INC. v. COMMISSIONER OF INTERNAL
(VERY SHORT) REVENUE
Capital Gains Tax When unable to pay, the mortgage was extrajudicially
Sec. 22 (z) and 39 (B), Tax Code foreclosed and the property was sold to the bank as the
highest bidder in a public auction.
12. SUPREME TRANSLINER, INC. vs. BPI FAMILY SAVINGS
BANK Before the expiration of the one-year redemption period, the
petitioner wrote the bank of its intent to redeem the property.
REYES NOTES/ CASE:
Note: No Pierre Reyes notes. The bank quoted an amount of P15,704,249.12 redemption
price. Below is the statement of account:
CASE:
Balance of Principal P 9,551,827.64
Supreme Transliner obtained a loan from BPI Family Savings Bank, Add: Interest Due 1,417,761.24
which was secured by a REM over the lot owned by Spouses
Late Payment Charges 155,546.25
Alvarez. When the debt was due and demandable, the petitioner was
not able to pay. Foreclosure of the mortgage took place with the MRI 0.00
defendant bank as the highest bidder in the public auction. Before Fire Insurance 0.00
the one-year redemption period expired, the petitioner redeemed the Foreclosure Expenses 155,817.23
property but later on filed a case claiming that the charges were Sub-total P 11,280,952.36
excessive. The petitioner claimed that the redemption price included
Less: Unapplied Payment 908,241.01
attorney’s fees, liquidated damages and capital gains tax. The
Supreme Court ruled that as stipulated in the contract, the petitioner Total Amount Due As 10,372,711.35
shall bear the burden of paying the attorney’s fees and liquidated Of 08/07/96 (Auction Date)
damages. However, with respect to the capital gains tax, the Add: Attorney’s Fees (15%) 1,555,906.70
defendant bank shall return the amount corresponding to the amount Liquidated Damages (15%) 1,555,906.70
paid by the petitioner. In a foreclosure sale, no one shall bear the
burden of paying the capital gains tax because there is no actual
Interest on P
10,372,711.35
from 08/07/96 to 04/07/97 1,207,772.58 However, on appeal, the CA ruled in favor of the petitioner
that the attorney’s fees and liquidated damages were already
(243 days) at 17.25% p.a. included in the bid price.
The trial court held that petitoner is bound by the terms of the NO. The capital gains tax shall not be included in the
mortgage loan documents which clearly provided for the redemption price. In the redemption of a foreclosed
payment of the following interest, charges and expenses: mortgage, nobody shall pay for the capital gains tax.
18% p.a. on the loan, 3% post-default penalty, 15%
liquidated damages, 15% attorney’s fees and collection and In foreclosure sale, there is no actual transfer of the
legal costs. mortgaged real property until after the expiration of the one-
year redemption period as provided in Act No. 3135 and title property executed in the course of annulment proceedings. In both
thereto is consolidated in the name of the mortgagee in case BIR Rulings, the CIR held that the transfer of the title of the subject
of non-redemption. In the interim, the mortgagor is given the properties are not subject to CGT, as such transfers are equivalent to
option whether or not to redeem the real property. The conveyance but without monetary consideration, made in
issuance of the Certificate of Sale does not by itself transfer accordance with the Court’s Decision granting parties agreement for
ownership. the distribution of communal property.
CASE:
FINAL VERDICT: Petition is PARTLY GRANTED. BPI Family Avila and his ex-wife executed a MOA for the dissolution of
Savings Bank, Inc. is hereby ordered to RETURN the amounts their property relations. Among their agreements is the transfer of the
representing capital gains and documentary stamp taxes as reflected title of their house and lot to him by virtue of a Court’s Decision
in the Statement of Account To Redeem as of April 7, 1997, to declaring his marriage with his (ex) wife null and void.
petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita W/N the transfer of the title of the subject property to Avila is
Alvarez, and to retain only the sum provided in RR No. 4-99 as subject to CGT.
documentary stamps tax due on the foreclosure sale.. NO, it is not subject to CGT. Such transfer is equivalent to
a conveyance but without monetary consideration, made in
accordance with the Court's Decision granting parties’
agreement for the distribution of communal property.
SEC. 4. Privileges for the Senior Citizens. – The senior citizens No Reyes Notes. This is a long digest.
shall be entitled to the following:
PET wanted Section 4 of RA 7432 and regulations issued by the
(a) the grant of twenty percent (20%) discount from all DSWD and the DOF be declared unconstitutional. It provides that
establishments relative to the utilization of services in hotels allow business establishments to claim the 20% discount given to
and similar lodging establishments, restaurants and recreation senior citizens as a tax deduction. PET were assailing that private
centers, and purchase of medicines in all establishments for the property shall not be taken for public use without just compensation.
exclusive use or enjoyment of senior citizens, x x x; The issue is w/n the Sec. 4 of RA 7432 and the IRR are
unconstitutional. The Court held that these are constitutional. It is an
xxxx exercise of police power of the State, has already been settled
in Carlos Superdrug Corporation. The discount is treated as a
The establishment may claim the discounts granted under (a), deduction, a tax-deductible expense that is subtracted from the
(f), (g) and (h) as tax deduction based on the net cost of the gross income and results in a lower taxable income. The law is a
goods sold or services rendered: Provided, That the cost of the legitimate exercise of police power.
discount shall be allowed as deduction from gross income for
the same taxable year that the discount is granted. Provided, PETITION IS DISMISSED
further, That the total amount of the claimed tax deduction net
of value added tax if applicable, shall be included in their gross
sales receipts for tax purposes and shall be subject to proper FACTS:
documentation and to the provisions of the National Internal
Revenue Code, as amended. (Emphasis supplied.)
Petitioners assail the constitutionality of Section 4 of
Republic Act (RA) No. 7432, 3 as amended by RA 9257,4 and
Conformably, starting taxable year 2004, the 20% sales discount
the implementing rules and regulations issued by the DSWD
granted by establishments to qualified senior citizens is to be
and DOF insofar as these allow business establishments to
treated as tax deduction, no longer as tax credit.14
claim the 20% discount given to senior citizens as a tax
deduction.
DSWD likewise issued its own Rules and Regulations
Implementing RA 9257
o PET filed the present recourse, praying that Section 1. WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND
4 of RA 7432, as amended by RA 9257, and the X X X ITS IMPLEMENTING RULES AND REGULATIONS,
implementing rules and regulations issued by the INSOFAR AS THEY PROVIDE THAT THE TWENTY
DSWD and the DOF be declared unconstitutional PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY
insofar as these allow business establishments to BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE
claim the 20% discount given to senior citizens as a ESTABLISHMENTS, ARE INVALID AND
tax deduction; that the DSWD and the DOF be UNCONSTITUTIONAL
prohibited from enforcing the same; and that the tax
credit treatment of the 20% discount under the HELD & RATIO:
former Section 4 (a) of RA 7432 be reinstated.
PET: o The validity of the 20% senior citizen discount and tax
o engaged in the business of providing funeral and deduction scheme under RA 9257, as an exercise of
burial services police power of the State, has already been settled in
o not questioning the 20% discount granted to senior Carlos Superdrug Corporation.
citizens but are only assailing the constitutionality of
the tax deduction scheme prescribed under RA 9257 o Carlos Superdrug Corporation case
and the implementing rules and regulations issued o Compelling drugstore owners and establishments to
by the DSWD and the DOF grant the discount will result in a loss of profit and
o tax deduction scheme contravenes Article III, capital because 1) drugstores impose a mark-up of
Section 9 of the Constitution, which provides that: only 5% to 10% on branded medicines; and 2) the
"[p]rivate property shall not be taken for public use law failed to provide a scheme whereby drugstores
without just compensation. will be justly compensated for the discount.
o cite Central Luzon Drug Corporation, 12 where it was o The discount is treated as a deduction, a tax-
ruled that the 20% discount privilege constitutes deductible expense that is subtracted from the
taking of private property for public use which gross income and results in a lower taxable income.
requires the payment of just compensation Stated otherwise, it is an amount that is allowed by
RES: law to reduce the income prior to the application of
o constitutionality of RA 9257 and its implementing the tax rate to compute the amount of tax which is
rules and regulations, respondents contend that due.
petitioners failed to overturn its presumption of o being a tax deduction, the discount does not reduce
constitutionality. taxes owed on a peso for peso basis but merely
o Carlos Superdrug Corporation v. Department of offers a fractional reduction in taxes owed.
Social Welfare and Development,14 where it was o A tax deduction does not offer full reimbursement of
acknowledged that the tax deduction scheme does the senior citizen discount. As such, it would not
not meet the definition of just compensation. (PET meet the definition of just compensation.
also seeks the reversal of this decision) o Having said that, this raises the question of whether
the State, in promoting the health and welfare of a
ISSUES: special group of citizens, can impose upon private
establishments the burden of partly subsidizing a compensate for its impact on overall profits or
government program. The Court believes so. income/gross sales. The general public, or those not
o The Senior Citizens Act was enacted primarily to belonging to the senior citizen class, are, thus, made
maximize the contribution of senior citizens to to effectively shoulder the subsidy for senior citizens.
nation-building, and to grant benefits and privileges This, in petitioners’ view, is unfair.
to them for their improvement and well-being as the o Congress must be given sufficient leeway in
State considers them an integral part of our society formulating welfare legislations given the enormous
o the law provides that business establishments challenges that the government faces relative to,
extending the twenty percent discount to senior among others, resource adequacy and
citizens may claim the discount as a tax deduction. administrative capability in implementing social
The law is a legitimate exercise of police power. reform measures which aim to protect and uphold
o For purposes of reimbursement, the law states that the interests of those most vulnerable in our society.
the cost of the discount shall be deducted from o In fine, without the requisite showing of a clear and
gross income, the amount of income derived from unequivocal breach of the Constitution, the validity of
all sources before deducting allowable expenses, the assailed law must be sustained.
which will result in net income. o First, the assailed law, by imposing the senior citizen
o We, thus, found that the 20% discount as well as the discount, does not take any of the properties used
tax deduction scheme is a valid exercise of the by a business establishment like, say, the land on
police power of the State. which a manufacturing plant is constructed or the
o No compelling reason has been proffered to overturn, equipment being used to produce goods or services.
modify or abandon the ruling in Carlos Superdrug o Second, rather than taking specific properties of a business
Corporation. establishment, the senior citizen discount law merely
o However, it is a settled rule that the acquisition of regulates the prices of the goods or services being sold to
title or total destruction of the property is not senior citizens by mandating a 20% discount.
essential for "taking" under the power of eminent o Third, because the law impacts the prices of the goods or
domain to be present services of a particular establishment relative to its sales to
o although the private property owner is not divested senior citizens, its profits or income/gross sales are affected.
of ownership or possession, payment of just o Fourth, when the law imposes the 20% discount in favor of
compensation is warranted because of the burden senior citizens, it does not prevent the business
placed on the property for the use or benefit of the establishment from revising its pricing strategy.
public. o Court is not the proper forum to debate the economic
o theories or realities that impelled Congress to shift from the
o The 20% senior citizen discount is an exercise of police tax credit to the tax deduction scheme.
power. o The shift from the tax credit to tax deduction scheme is a
o The 20% senior citizen discount has not been shown policy determination by Congress and the Court will respect
to be unreasonable, oppressive or confiscatory. it for as long as there is no showing, as here, that the subject
o we note that petitioners hypothesize, consistent with regulation has transgressed constitutional limitations.
our previous ratiocinations, that the discount will o we cannot assume that the 20% discount results in a
force establishments to raise their prices in order to permanent reduction in profits or income/gross sales, much
less that business establishments are forced to operate at a cinema houses, concert halls, circuses, carnivals and other similar
loss under the assailed law. places of culture, leisure and amusement, which discount shall be
deducted by the said establishments from their gross income for
FINAL VERDICT: WHEREFORE PETITION IS DISMISSED income tax purposes and from their gross sales for value-added tax
or other percentage tax purposes. x x x x Sec. 4.
Notes/ Source: RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE
SECTION 4. Privileges for the Senior Citizens. – The senior citizens ESTABLISHMENTS. – Private establishments, i.e., transport
shall be entitled to the following: services, hotels and similar lodging establishments, restaurants,
a) the grant of twenty percent (20%) discount from all establishments recreation centers, drugstores, theaters, cinema houses, concert
relative to utilization of transportation services, hotels and similar halls, circuses, carnivals and other similar places of culture[,] leisure
lodging establishment[s], restaurants and recreation centers and and amusement, giving 20% discounts to qualified senior citizens are
purchase of medicine anywhere in the country: Provided, That required to keep separate and accurate record[s] of sales made to
private establishments may claim the cost as tax credit; senior citizens, which shall include the name, identification number,
b) a minimum of twenty percent (20%) discount on admission fees gross sales/receipts, discounts, dates of transactions and invoice
charged by theaters, cinema houses and concert halls, circuses, number for every transaction. The amount of 20% discount shall be
carnivals and other similar places of culture, leisure, and deducted from the gross income for income tax purposes and from
amusement; gross sales of the business enterprise concerned for purposes of the
c) exemption from the payment of individual income taxes: Provided, VAT and other percentage taxes.
That their annual taxable income does not exceed the property level
as determined by the National Economic and Development Authority
(NEDA) for that year;
d) exemption from training fees for socioeconomic programs RR 1-2009 (Dec. 9, 2008)
undertaken by the OSCA as part of its work; RR 7-2010 (July 20, 2010)
e) free medical and dental services in government establishment[s] RR 1-2011 (Feb. 24, 2011)
anywhere in the country, subject to guidelines to be issued by the RMC 031-2013 (April 12, 2013)
Department of Health, the Government Service Insurance System
and the Social Security System;
f) to the extent practicable and feasible, the continuance of the same Personal and additional exemptions/
benefits and privileges given by the Government Service Insurance
System (GSIS), Social Security System (SSS) and PAG-IBIG, as the
PERA
case may be, as are enjoyed by those in actual service. Sec. 35 (A), (B), (C), and (D), Tax Code
Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax 17. CARMELINO PANSACOLA v. COMMISSIONER OF INTERNAL
Credit – refers to the amount representing the 20% discount granted REVENUE
to a qualified senior citizen by all establishments relative to their Personal and additional exemptions
utilization of transportation services, hotels and similar lodging
establishments, restaurants, drugstores, recreation centers, theaters, CASE:
Petitioner Pansacola filed his income tax return for the The petitioner posits that
taxable year 1997, and paid the tax due thereon in April 1998. He o the personal and additional exemptions are of a fixed
sought refund of an alleged overpayment on the ground that Sec. 35 character based on Section 35 of the NIRC, and as ruled
of the NIRC had increased the additional and personal exemptions. by Umali v. Estanislao, these exemptions are fixed
The issue is whether or not the exemptions under Sec. 35, which amounts to which an individual taxpayer is entitled;
took effect on January 1, 1998, could be availed of for the taxable o the availability of these exemptions does not depend on
year 1997. the taxpayer’s profession, trade or business for a
The Court held against the petitioner. Deductions for income particular taxable period;
tax purposes partake the nature of tax exemptions, hence, must be o CTA erred in ruling that the increased exemptions were
strictly construed against the taxpayer. For the purpose of meant to be applied beginning taxable year 1998.
determining the tax due from a taxpayer, what is considered is his
status and qualified dependents at the close of the taxable year, and ISSUE: Could the exemptions under Sec. 35 of the NIRC, which took
not at the time the return is filed and tax due is paid. effect on January 1, 1998, be availed of for the taxable year 1997?
In this case, the NIRC made no reference that the personal
and additional exemptions shall apply on income accrued before HELD & RATIO: No, the exemptions under Sec. 35 have no
January 1, 1998. Therefore, petitioner cannot claim such refund. retroactive application, hence, cannot be availed of by petitioner.
[Reyes Notes on the rationale behind the personal and • Personal and additional exemptions under Sec. 35 of the NIRC
additional exemptions] Exemptions are fixed at arbitrary amounts are fixed amounts to which certain individual taxpayers are
intended to substitute for the disallowance of personal or living entitled. They are the theoretical personal, living and family
expenses as deductible items from the taxable income of certain expenses of an individual allowed to be deducted from the gross
individual taxpayers. The amounts represent roughly the equivalent net income of an individual taxpayer. They are predetermined by
of the taxpayer’s minimum subsistence and those of his dependents. the lawmakers as provided under the NIRC.
o Rationale behind personal and additional
exemptions [Reyes Notes]: Exemptions are fixed at
FACTS: arbitrary amounts intended to substitute for the
Petitioner Carmelino Pansacola filed his income tax return for the disallowance of personal or living expenses as deductible
taxable year 1997, and paid the tax due thereon in April 1998. items from the taxable income of certain individual
He claimed that there was an overpayment of P5,950.00 in his taxpayers. The amounts represent roughly the equivalent
income tax return (based on an increased personal and of the taxpayer’s minimum subsistence and those of his
additional exemptions found in the NIRC), so he asked for a dependents.
refund which was denied by the BIR. CTA also denied his claim. • Deductions for income tax purposes partake the nature of tax
CTA decided that exemptions, hence, must be strictly construed against the
o the increased exemptions claimed by petitioner were not taxpayer, and cannot be allowed unless granted in the most
yet available for the taxable year 1997, because all categorical and explicit language.
provisions of the NIRC took effect on January 1, 1998 o For the purpose of determining the tax due from an
only. Petitioner’s exemptions were determined as of individual taxpayer, what is considered is his status and
December 31, 1997; qualified dependents at the close of the taxable year
o the fixed character of personal and additional and not at the time the return is filed and the tax due
exemptions does not necessarily mean that these were thereon is paid.
time bound.
o Consequently, the corresponding allowable None
deductions, if any, had already been determined as of the
end of the calendar year. CASE:
o The NIRC made no reference that the personal China Banking Corporation (CBC) paid a total of P93,119,433.50 as
and additional exemptions shall apply on income gross receipts tax for the four quarters of 1996. CBC included the
earned before January 1, 1998. 20% final withholding tax on its passive interest income.
o Petitioner’s additional exemptions had not yet
accrued as of December 31, 1997, the last day of his In 1996, CTA rendered a Decision entitled Asian Bank Corporation
taxable year. Petitioner’s taxable income covers his v. Commissioner of Internal Revenue, (ASIAN BANK v. CIR) that
income for the calendar year 1997. the 20% final withholding tax on a bank’s passive interest income
o Furthermore, tax laws have prospective application, should NOT form part of its taxable gross receipts. On the strength of
unless it is expressly provided to apply retroactively. the aforementioned decision, CBC filed a claim for refund of the
alleged overpaid GRT for the four (4) quarters of 1996 in the
FINAL VERDICT: Petition is denied. aggregate amount of P6,646,829.67.
CTA: rendered a Decision agreeing with petitioner that the 20% final
RR 17-2011 (Oct. 27, 2011) withholding tax on interest income does not form part of its taxable
gross receipts. However, the CTA dismissed petitioner’s claim for for
its failure to prove that the 20% final withholding tax forms part of its
7. Partnerships 1996 taxable gross receipts. (Insufficiency of Evidence)
Sec. 26 & 73 (D), Tax Code
ISSUE: Whether or not the 20% final withholding tax on a bank’s
RMC 89-2012 (Dec. 27, 2012) passive interest income should be excluded from its taxable gross
RR 2-2010 (Feb. 18, 2010) receipts.
ISSUES:
• Notably, this Court, in the same case, held that under definition of the term, must be taken to include
RR Nos. 12-80 and 17-84, the Bureau of Internal the whole total gross receipts without any
Revenue (BIR) has consistently ruled that the term deductions, x x x. (Supreme Court of
gross receipts do not admit of any deduction. It Pennsylvania in Commonwealth of Pennsylvania
emphasized that interest earned by banks, even if v. Koppers Company, Inc)
subject to the final tax and excluded from taxable • 2006: Commissioner of Internal Revenue v. Bank of
gross income, forms part of its gross receipt for GRT the Philippine Islands (2006) - ruled that "the legislative
purposes. The interest earned refers to the gross intent to apply the term in its ordinary meaning may also
interest without deduction, since the regulations do not be surmised from a historical perspective of the levy on
provide for any deduction. gross receipts. From the time the gross receipts tax on
• 2003: Commissioner of Internal Revenue v. banks was first imposed in 1946 under R.A. No. 39 and
Solidbank Corporation (2003) - held that "gross throughout its successive reenactments, the legislature
receipts" refer to the total, as opposed to the net, income. has not established a definition of the term ‘gross receipts.’
These are, therefore, the total receipts before any Absent a statutory definition of the term, the BIR had
deduction for the expenses of management. consistently applied it in its ordinary meaning, i.e., without
• 2005: Commissioner of Internal Revenue v. Bank of deduction. On the presumption that the legislature is
familiar with the contemporaneous interpretation of a
Commerce (2005) - adhered to the ruling that the term
statute given by the administrative agency tasked to
"gross receipts" must be understood in its plain and
enforce the statute, subsequent legislative reenactments of
ordinary meaning. In this case, we ruled that gross receipts
the subject levy sans a definition of the term ‘gross
should be interpreted as the whole amount received as
receipts’ reflect that the BIR’s application of the term
interest, without deductions; otherwise, if deductions were
carries out the legislative purpose.
to be made from gross receipts, it would be considered as
"net receipts." • In sum, all the aforementioned cases are one in
• As commonly understood, the term "gross receipts" saying that "gross receipts" comprise "the entire
means the entire receipts without any deduction. receipts without any deduction." Clearly, then, the
Deducting any amount from the gross receipts 20% final withholding tax should form part of
changes the result, and the meaning, to net receipts. petitioner’s total gross receipts for purposes of
Any deduction from gross receipts is inconsistent with computing the GRT.
a law that mandates a tax on gross receipts, unless • Also worth noting is the fact that petitioner’s reliance on
the law itself makes an exception. Section 4 (e) of RR 12-80 is misplaced as the same was
• Highly refined and technical tax concepts have been already superseded by a more recent issuance, RR No.
developed by the accountant and legal technician 17-84.
primarily because of the impact of federal income tax • Revenue Regulations No. 12-80, issued on
legislation. However, this in no way should affect or November 7, 1980, had been superseded by
control the normal usage of words in the construction Revenue Regulations No. 17-84 issued on
of our statutes; x x x Under the ordinary basic October 12, 1984. Section 4 (e) of Revenue
methods of handling accounts, the term gross Regulations No. 12-80 provides that only items of
receipts, in the absence of any statutory
income actually received shall be included in the tax (a) The interest earned on Philippine Currency bank deposits and
base for computing the GRT. yield from deposit substitutes subjected to the withholding taxes in
• On the other hand, Section 7 (c) of Revenue accordance with these regulations need not be included in the gross
Regulations No. 17-84 includes all interest income in computing the depositor’s investor’s income tax liability. x
income in computing the GRT. (Commissioner xx
of Internal Revenue v. Citytrust Investment
Phils. Inc. 2006) (b) Only interest paid or accrued on bank deposits, or yield from
• Significantly, the Court even categorically stated in the deposit substitutes declared for purposes of imposing the withholding
aforementioned case that there is an implied repeal of taxes in accordance with these regulations shall be allowed as
interest expense deductible for purposes of computing taxable net
Section 4 (e). It held that there exists a disparity
income of the payor.
between Section 4 (e) of RR No. 12-80, which
imposes the GRT only on all items of income actually
(c) If the recipient of the above-mentioned items of income are
received (as opposed to their mere accrual) and
financial institutions, the same shall be included as part of the tax
Section 7 (c) of RR No. 17-84, which includes all base upon which the gross receipt tax is imposed.
interest income (whether actual or accrued) in
computing the GRT. Plainly, RR No. 17-84, which
Revenue Regulations No. 17-84 categorically states that if the
requires interest income, whether actually received or
merely accrued, to form part of the bank’s taxable recipient of the above-mentioned items of income are
gross receipts, should prevail. financial institutions, the same shall be included as part of
the tax base upon which the gross receipts tax is imposed. x
• All told, petitioner failed to point to any specific
x x.
provision of law allowing the deduction, exemption or
exclusion from its taxable gross receipts, of the
amount withheld as final tax. Besides, the exclusion Capital Gains Tax
sought by petitioner of the 20% final tax on its passive RR 4-99 (March 9, 1999)
RR 06-2008 (April 22, 2008)
income from the taxpayer’s tax base constitutes a tax
exemption, which is highly disfavored. A governing
principle in taxation states that tax exemptions are to (2) Resident Foreign Corporations
be construed in strictissimi juris against the taxpayer Sec. 28 (A), Tax Code as amended by RA 9294
and liberally in favor of the taxing authority and should
be granted only by clear and unmistakable terms. In general
FINAL VERDICT: Petition is denied. CA decision is AFFIRMED. International Carrier
RA No. 10378 (March 7, 2013)
Notes/ Source:
18. AIR NEW ZEALAND v. CIR
Section 7. Nature and Treatment of Interest on Deposits and CTA Case, January 30, 2008
Yield on Deposit Substitutes. –
REYES NOTES:
Air New Zealand is a resident foreign corporation. The absence of
ABC Airlines is an off-line international carrier selling passage flight operations to and from the Philippines is not determinative of
documents through an independent sales agent in the the source of income for purposes of ascertaining income tax liability.
Philippines. Is ABC engaged in trade or business in the It is sufficient that the income is derived from activity within the
Philippines and, as such, subject to the corporate income tax on Philippine territory. Air New Zealand is however NOT subject to
resident foreign corporations? income tax at 32% under the NIRC but at 1 ½ % under RP-New
Zealand Tax Treaty.
In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and FACTS:
intention to establish a continuous business, such as the Air New Zealand, petitioner herein, is a foreign corporation
appointment of a local agent, and not one of a temporary character. organized and existing under the laws of New Zealand with
Here, ABC maintained a general sales agent and it was engaged in principal office at New Zealand.
selling or issuing tickets, which is considered the main lifeblood of an As an off-line international air carrier having no landing rights
airline. in the Philippines, Air New Zealand does not maintain flight
operations to and from the Philippines. It is also not
The absence of flight operations to and from the Philippines is not registered with the SEC as a corporation and therefore not
determinative of the source of income for purposes of ascertaining licensed to do business in the Philippines.
income tax liability. It is sufficient that the income is derived from Air New Zealand, though, has a general sales agent in the
activity within the Philippine territory. For the source of income to be Philippines, Aerotel Limited Corporation, which sells passage
considered as coming from the Philippines, it is sufficient that the documents for compensation or commission covering off-line flights
income is derived from activity within the Philippines. In ABC’s case, of Air New Zealand.
the sale of tickets in the Philippines is the activity that produces the (Note: Off-line international air carrier here means that it does
income. The tickets exchanged hands here in the country and the not maintain any flight to and from the Philippines but it sells
payments for fares were also made with Philippine currency. The site air tickets through a general sales agent in the Philippines
of the source of payments is the Philippines. between two points outside the Philippines.)
Air New Zealand, through Aerotel, filed its Quarterly Income
CASE: Tax Returns on the Gross Philippine Billings for the 1 st and
2nd quarters of taxable year 2002 and paid the total amount
Air New Zealand is a foreign corporation existing and organized due of P257,698.
under the laws of New Zealand. Air New Zealand does not maintain
Now, Air New Zealand claims refund with the CIR in the
flight operations from and to the Philippines. However, it has a
amount abovementioned arguing that it is not a resident
general sales agent in the Philippines, Aerotel, which sells air tickets
foreign corporation and therefore NOT subject to:
covering off-line flights of Air New Zealand. In other words, Air New
a. 32% regular income tax on taxable income under
Zealand, through Aerotel, sells air tickets in the Philippines with
Section 28(a)(1) of the NIRC
flights between two points outside the Philippines. Now, Air New
b. 1 ½ % tax pursuant to the RP-New Zealand Tax Treaty
Zealand claims refund in the amount of P257,698 as tax returns on
Air New Zealand further argues that the sale of passage
the Gross Philippine Billings it paid arguing that it is not a resident
documents (air tickets) is not Philippine-source income;
foreign corporation hence not subject to income tax.
hence, not subject to income tax.
ISSUE: Whether or not Air New Zealand, as an offline
international carrier selling passage documents through an CASE:
independent sales agent in the Philippines, is engaged in trade BOAC is a 100% British Government-owned corporation
or business in the Philippines subject to corporate income tax existing under the laws of UK. It operates air transportation service
on resident foreign corporations, either at 32% under the NIRC and sells transportation tickets over the routes of the other airline
or at 1 ½ % RP-New Zealand Tax Treaty? members. CIR assessed BOAC for deficiency income taxes covering
the years 1959 to 1963 and for 1968 to 1971. BOAC paid under
HELD & RATIO: protest. This deficiency stems from its unpaid alleged taxes for being
1. YES. Air New Zealand is engaged in trade or business in a resident foreign corporation and from having revenues from sales
the Philippines subject to corporate income tax on of tickets which are allegedly from Philippine sources. The Court
resident corporations. However, it is NOT subject to ruled that BOAC is a foreign resident corporation. Even if BOAC just
income tax at 32% under the NIRC BUT at 1 ½ % under had agents in the Philippines for its selling tickets, its regular sale of
RP-New Zealand Tax Treaty. tickets, its main activity, is the very lifeblood of the airline business,
the generation of sales being the paramount objective. There should
Air New Zealand is a resident foreign corporation engaged in be no doubt then that BOAC was "engaged in" business in the
trade or business in the Philippines and must be subject to Philippines through a local agent during the period covered by the
income tax. assessments. A resident foreign corporation is one engaged in trade
The absence of flight operations to and from the Philippines or business in the Philippines as the Tax Code provides. The
is not determinative of the source of income for purposes of definition does not have a specific criterion, only that there must be
ascertaining income tax liability. continuity of conduct and intention to establish a continuous
It is sufficient that the income is derived from activity business, such as the appointment of a local agent, and not one of a
within the Philippine territory. Therefore, petitioner is a temporary character. Therefore, the revenues from sales of tickets
resident foreign corporation doing business in the are from Philippine sources so these are taxable under our income
Philippines. laws. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity
The definition of gross income in the Tax Code is broad and
within the Philippines. In BOAC's case, the sale of tickets in the
comprehensive to include proceeds from sales of transport
Philippines is the activity that produces the income. The tickets
documents. The words “income from any source whatever”
exchanged hands here and payments for fares were also made here
disclose a legislative policy to include all income not
in Philippine currency. The site of the source of payments is the
expressly exempted within the class of taxable income under
Philippines. The flow of wealth proceeded from, and occurred within,
our laws. (This case cited CIR v. British Overseas Airways
Philippine territory, enjoying the protection accorded by the Philippine
Corporation which stated the same ruling herein.)
government. In consideration of such protection, the flow of wealth
should share the burden of supporting the government.
FINAL VERDICT: Since petitioner already paid its income tax
liabilities for taxable year 2002 at the rate of 1 ½ % of gross income,
the payment is correct and therefore no refundable amount is due.
Petition is DENIED. FACTS:
BOAC is a 100% British Government-owned corporation
19. COMMISSIONER OF INTERNAL REVENUE v. BRITISH existing under the laws of UK, engaged in the international
OVERSEAS AIRWAYS CORPORATION and COURT OF TAX airline business and is a member-signatory of the Interline
APPEALS Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over penalties for violation of Section 46
the routes of the other airline members. (requiring the filing of corporation returns)
During the periods covered by the disputed assessments, it penalized under Section 74, NIRC.
is admitted that BOAC had no landing rights for traffic November 25, 1971: BOAC requested that
purposes in the Philippines, and was not granted a the assessment be countermanded and set
Certificate of public convenience and necessity to operate in aside.
the Philippines by the Civil Aeronautics Board (CAB), except February 16, 1972: In a letter, CIR not only
for a nine-month period, partly in 1961 and partly in 1962, denied the BOAC request for refund in the
when it was granted a temporary landing permit by the CAB. First Case but also re-issued in the Second
Consequently, it did not carry passengers and/or cargo to or Case the deficiency income tax assessment
from the Philippines, although during the period covered by for P534,132.08 for the years 1969 to 1970-
the assessments, it maintained a general sales agent in 71 plus P1,000.00 as compromise penalty
the Philippines — Wamer Barnes and Company, Ltd., under Section 74 of the Tax Code.
and later Qantas Airways — which was responsible for o This case was subsequently tried jointly with the
selling BOAC tickets covering passengers and cargoes. First Case. It went to CTA praying it be absolved of
There are two cases in this petition: liability.
o First Case January 26, 1983: CTA rendered a decision reversing CIR. It
May 7, 1968: CIR assessed BOAC held that the proceeds of sales of BOAC passage tickets in
P2,498,358.56 for deficiency income taxes the Philippines by Warner Barnes and Company, Ltd., and
covering the years 1959 to 1963. This was later by Qantas Airways, during the period in question, do not
protested by BOAC. constitute BOAC income from Philippine sources "since no
January 16, 1970: Subsequent investigation service of carriage of passengers or freight was performed
resulted in the issuance of a new by BOAC within the Philippines" and, therefore, said income
assessment, for the years 1959 to 1967 in is not subject to Philippine income tax. Income from
the amount of P858,307.79. BOAC paid this transportation is income from services so that the place
new assessment under protest. where services are rendered determines the source. Thus,
October 7, 1970: BOAC filed a claim for CTA ordered CIR to credit BOAC with the taxes it paid.
refund of the amount of P858,307.79, which Hence, this petition for review on certiorari of CTA’s decision.
claim was denied by the CIR. But before
said denial, BOAC had already filed a ISSUES:
petition for review with the Tax Court on 27 1. Whether or not during the fiscal years in question BOAC
January 1972, assailing the assessment and is a resident foreign corporation doing business in the
praying for the refund of the amount paid. Philippines or has an office or place of business in the
o Second Case Philippines.
November 17, 1971: BOAC was assessed 2. Whether or not the revenue derived by BOAC from sales
deficiency income taxes, interests, and of tickers in the Philippines for air transportation, while
penalty for the fiscal years 1968-1969 to having no landing rights here, constitute income of
1970-1971 in the aggregate amount of BOAC from Philippine sources, and accordingly taxable.
P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise HELD & RATIO:
5. YES, BOAC is a resident foreign corporation. very lifeblood of the airline business, the generation
a. Sec. 20, 1977 Tax Code: (h) the term resident of sales being the paramount objective. There
foreign corporation engaged in trade or business should be no doubt then that BOAC was "engaged
within the Philippines or having an office or place of in" business in the Philippines through a local agent
business therein. during the period covered by the assessments.
b. There is no specific criterion as to what constitutes 6. YES, BOAC’s revenue from sales of tickets in the Philippines
"doing" or "engaging in" or "transacting" business. constitutes income from Philippine sources so these are
Each case must be judged in the light of its peculiar taxable under our income tax laws.
environmental circumstances. The term implies a a. "Gross income" includes gains, profits, and income
continuity of commercial dealings and arrangements, derived from salaries, wages or compensation for
and contemplates, to that extent, the performance of personal service of whatever kind and in whatever
acts or works or the exercise of some of the form paid, or from profession, vocations, trades,
functions normally incident to, and in progressive business, commerce, sales, or dealings in property,
prosecution of commercial gain or for the purpose whether real or personal, growing out of the
and object of the business organization. "In order ownership or use of or interest in such property; also
that a foreign corporation may be regarded as doing from interests, rents, dividends, securities, or the
business within a State, there must be continuity of transactions of any business carried on for gain or
conduct and intention to establish a continuous profile, or gains, profits, and income derived from
business, such as the appointment of a local agent, any source whatever (Sec. 29[3], Tax Code;
and not one of a temporary character. Emphasis supplied)
c. BOAC, during the periods covered by the subject - b. The definition is broad and comprehensive to include
assessments, maintained a general sales agent in proceeds from sales of transport documents.
the Philippines, That general sales agent, from 1959 c. The source of an income is the property, activity or
to 1971, was engaged in: service that produced the income. For the source of
i. (1) selling and issuing tickets income to be considered as coming from the
ii. (2) breaking down the whole trip into series Philippines, it is sufficient that the income is derived
of trips — each trip in the series from activity within the Philippines.
corresponding to a different airline company d. In BOAC's case, the sale of tickets in the Philippines
iii. (3) receiving the fare from the whole trip and is the activity that produces the income. The tickets
iv. (4) consequently allocating to the various exchanged hands here and payments for fares were
airline companies on the basis of their also made here in Philippine currency. The site of
participation in the services rendered the source of payments is the Philippines. The flow
through the mode of interline settlement as of wealth proceeded from, and occurred within,
prescribed by Article VI of the Resolution Philippine territory, enjoying the protection accorded
No. 850 of the IATA Agreement. by the Philippine government. In consideration of
d. Those activities were in exercise of the functions such protection, the flow of wealth should share the
which are normally incident to, and are in burden of supporting the government.
progressive pursuit of, the purpose and object of its e. A transportation ticket is not a mere piece of paper.
organization as an international air carrier. In fact, When issued by a common carrier, it constitutes the
the regular sale of tickets, its main activity, is the contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the in the Philippines. Upon cessation of its passenger flights in and out
ticket to pay the fare and the corresponding of the Philippines beginning February 21, 1998, petitioner appointed
obligation of the carrier to transport the passenger a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent
upon the terms and conditions set forth thereon. general sales agent acting as such for several international airline
f. Section 37 of the Tax Code which enumerates items companies. Petitioner continued operating cargo flights from
of gross income from sources within the Philippines, the Philippines until January 31, 2001.
by its language, does not intend the enumeration to Petitioner filed a claim for refund of taxes allegedly
be exclusive. It merely directs that the types of erroneously assessed in 1999-2001 for P5,028,813.23 allegedly
income listed therein be treated as income from representing income taxes paid in 1999 on passenger revenue from
sources within the Philippines. tickets sold in the Philippines, the uplifts of which did not originate in
g. Sec. 24(b), Tax Code: Provided, however, That the Philippines (because by then, Petitioners were no longer
international carriers shall pay a tax of 2-½ per cent operating passenger flights to and from the Philippines, which is why
on their cross Philippine billings. they claim that they are no longer subject to the 2.5% Gross
h. PD 1355 (April 21, 1978): "Gross Philippine billings" Philippine Billings/ GPB for passenger flights; see definition in the
includes gross revenue realized from uplifts NOTES).
anywhere in the world by any international carrier CIR and CTA pointed out that petitioner was still liable for
doing business in the Philippines of passage P31.43 million deficiency income tax from its cargo revenues, as it
documents sold therein, whether for passenger, was found that in reporting a cargo revenue of P740.33 million in
excess baggage or mail provided the cargo or mail 1999, it was found that petitioner deducted two (2) items from its
originates from the Philippines. gross cargo revenue of P2.84 billion: 1) P141.79 million as
i. The foregoing provision ensures that international commission and 2) P1.98 billion as other incentives of its agent. Thus
airlines are taxed on their income from Philippine its claim for refund must be rejected.
sources. The 2-½ % tax on gross Philippine billings Petitioner claims this as contrary to the well entrenched rule
is an income tax. If it had been intended as an that taxes may not be set-off as the tax payer and government are not
excise or percentage tax it would have been place mutual debtors and creditors.
under Title V of the Tax Code covering Taxes on
Business. Two issues arise:
1.Whether or not Petitioner is subject to GPB during
FINAL VERDICT: CTA’s decision is set aside. BOAC is ordered to 1999-2001 for passenger flight revenues?=NO The SC ruled that
pay P534,132.08 as deficiency income tax for the fiscal years 1968- Inasmuch as petitioner ceased operating passenger flights to or from
69 to 1970-71 with some interests. The BOAC claim for refund in the the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of
amount of P858,307.79 is hereby denied. the NIRC for gross passenger revenues.
The denial of petitioner’s claim for refund on such ground is Inasmuch as petitioner ceased operating passenger flights to
tantamount to an offsetting of petitioner’s claim for refund of or from the Philippines in 1998, it is not taxable under
erroneously paid GPB against its alleged tax liability. Section 28(A)(3)(a) of the NIRC for gross passenger
Petitioner thus cites the well-entrenched rule in taxation revenues.
cases that internal revenue taxes cannot be the subject of o This much was also found by the CTA. In South
set-off or compensation.
African Airways v. Commissioner of Internal
Revenue, we ruled that the correct interpretation of
According to petitioner, the offsetting of the liabilities is very
the said provisions is that, if an international air
clear in the instant case because the amount of petitioner’s
carrier maintains flights to and from the Philippines,
claim for refund of erroneously paid GPB tax of
it shall be taxed at the rate of 2½% of its GPB, while
P5,028,813.23 for the taxable year 1999 is being offset
international air carriers that do not have flights to
against petitioner’s alleged deficiency GPB tax liability on
and from the Philippines but nonetheless earn
cargo revenues for the same year, which was not even the
income from other activities in the country will be
subject of an investigation nor any valid assessment issued
taxed at the rate of 32% of such income.
Petitioners claim for refund may be offset with its tax o The grant of a refund is founded on the
deficiency: assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The
Here, the subject of claim for tax refund is the tax paid on deficiency assessment, although not yet final,
passenger revenue for taxable year 1999 at the time when created a doubt as to and constitutes a challenge
petitioner was still operating cargo flights originating from against the truth and accuracy of the facts stated in
the Philippines although it had ceased passenger flight said return which, by itself and without
operations. unquestionable evidence, cannot be the basis for the
o The CTA found that petitioner had underpaid its GPB grant of the refund.
tax for 1999 because petitioner had made
deductions from its gross cargo revenues in the o Thus, to avoid multiplicity of suits and
income tax return it filed for the taxable year 1999, unnecessary difficulties or expenses, it is both
the amount of underpayment even greater than the logically necessary and legally appropriate that the
refund sought for erroneously paid GPB tax on issue of the deficiency tax assessment against
passenger revenues for the same taxable period. Citytrust be resolved jointly with its claim for tax
Hence, the CTA ruled petitioner is not entitled to a refund, to determine once and for all in a single
tax refund. proceeding the true and correct amount of tax due or
refundable.
Under Section 72 of the NIRC, the CTA can make a valid
finding that petitioner made erroneous deductions on its gross In the case at bar, the CTA explained that it merely
cargo revenue; that because of the erroneous deductions, determined whether petitioner is entitled to a refund based
petitioner reported a lower cargo revenue and paid a lower on the facts. On the assumption that petitioner filed a correct
income tax thereon; and that petitioner's underpayment of the return, it had the right to file a claim for refund of GPB tax on
income tax on cargo revenue is even higher than the income passenger revenues it paid in 1999 when it was not
tax it paid on passenger revenue subject of the claim for operating passenger flights to and from the Philippines.
refund, such that the refund cannot be granted. o However, upon examination by the CTA, petitioner’s
o SEC. 72. Suit to Recover Tax Based on False or Fraudulent return was found erroneous as it understated its
Returns. - When an assessment is made in case of any list, gross cargo revenue for the same taxable year due
statement or return, which in the opinion of the Commissioner
was false or fraudulent or contained any understatement or
to deductions of two (2) items consisting of
undervaluation, no tax collected under such assessment shall be commission and other incentives of its agent.
recovered by any suit, unless it is proved that the said list, o Having underpaid the GPB tax due on its cargo
statement or return was not false nor fraudulent and did not revenues for 1999, petitioner is not entitled to a
contain any understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be made in refund of its GPB tax on its passenger revenue,
good faith regarding annual depreciation of oil or gas wells and the amount of the former being even much higher
mines. (P31.43 million) than the tax refund sought (P5.2
million). The CTA therefore correctly denied the claim
Commissioner of Internal Revenue v. Court of Tax Appeals, for tax refund after determining the proper
however, granted the offsetting of a tax refund with a tax assessment and the tax due.
deficiency in this wise:
FINAL VERDICT:
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.
Branch Profit Remittance Tax
With costs against the petitioner.
21. BANK OF AMERICA NT & SA VS. COURT OF APPEALS
Profits of Branch of Foreign Companies are taxable 15% of what is
actually remitted abroad
NOTES: RECIT READY:
Gross Philippine Billings- gross revenue whether for passenger,
cargo, or mail originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or freight Bank of America, a foreign corp, has a branch in Phils and remitted
documents (NIRC Annotated, Vol. 2, Sacdalan-Casasola, 2013 ed., some of its profits to the head office. However, it paid 15% of its
Rex Book Store, p. 151) profits, which basis of 15% includes those that were yet to be
remitted abroad. BA claims that it should only pay 15% of what was
Kinds of Carriers- actually remitted abroad. Court ruled that refund must be given to BA
1. Off-line= international air carrier having no flight and that the 15% tax should be based on income actually remitted
operations to and from Ph abroad. (Please read the NOTES below for the rationale, as it is
2. On-line= international air carrier having flight operations to included in PM Reyes and Atty. Montero might ask about this)
and from Ph
FACTS:
Taxes imposed-
o International air carrier having flights originating from any Petitioner (Bank of America) is a foreign corporation duly
port or point in Ph, irrespective of the place where passage licensed to engage in business in the Philippines with
documents are sold or issued=GPB Tax of 2.5% Philippine branch office at BA Lepanto Bldg., Paseo de
o Off-line carrier having a branch or sales agent in the Ph Roxas, Makati, Metro Manila (I used to work here!)
which sells passage documents for compensation or On July 20, 1982 it paid 15% branch profit remittance tax in
commission to cover off-line flights of its principal or head the amount of P7,538,460.72 on profit from its regular
office, or for other airlines covering flights originating from banking unit operations and P445,790.25 on profit from its
Philippine ports or off-line flights, is NOT considered foreign currency deposit unit operations or a total of
engaged in business as an international air carrier in the Ph P7,984,250.97. The tax was based on net profits after
and is NOT subject to the GPB nor to 3% common carrier’s income tax without deducting the amount corresponding to
tax. Without prejudice to classification under a different the 15% tax.
category under the NIRC. Petitioner filed a claim for refund with the Bureau of Internal
Revenue of that portion of the payment which corresponds to
RR 15-2002 – Sections 1to 5 only the 15% branch profit remittance tax, on the ground that
the tax should have been computed on the basis of
OBUs/ FCDUs profits actually remitted abroad, which is P45,244,088.85,
and not on the amount before profit remittance tax, which
is P53,228,339.82.
RR 14-2012 (Nov. 7, 2012)
Subsequently, without awaiting respondent's decision,
petitioner filed a petition for review on June 14, 1984 with (15%)" — without more. Nowhere is there said of "base
this Honorable Court for the recovery of the amount. on the total amount actually applied for by the branch
Bank of America Contention: 15% of branch profit with the Central Bank of the Philippines as profit to be
remittance tax on the basis of the above provision should be remitted abroad, which shall be collected and paid as
assessed on the amount actually remitted abroad provided in Sections 53 and 54 of this Code."
CIR Contention: in computing the 15% remittance tax, the Where the law does not qualify that the tax is imposed and
tax should be inclusive of the sum deemed remitted. collected at source based on profit to be remitted abroad,
(meaning the profit of the branch before it will be remitted) that qualification should not be read into the law. It is a basic
The Court of Tax Appeals upheld petitioner bank in its claim rule of statutory construction that there is no safer nor better
for refund. The Commissioner of Internal Revenue filed a canon of interpretation than that when the language of the
timely appeal to the Supreme Court (docketed G.R. No. law is clear and unambiguous, it should be applied as
76512) which referred it to the Court of Appeals, which set written. And to our mind, the term "any profit remitted
aside the CTA decision. abroad" can only mean such profit as is "forwarded, sent, or
Court of Appeals: The use of the word remitted may well be transmitted abroad" as the word "remitted" is commonly and
understood as referring to that part of the said total branch popularly accepted and understood.
profits which would be sent to the head office as The taxpayer is a single entity, and it should be
distinguished from the total profits of the branch (not all of understandable if, such as in this case, it is the local branch
which need be sent or would be ordered remitted abroad). of the corporation, using its own local funds, which remits the
tax to the Philippine Government.
ISSUE: We hold, accordingly, that the written claim for refund of the
excess tax payment filed, within the two-year prescriptive
period, with the Court of Tax Appeals has been lawfully
Whether or not tax on profits remitted by foreign corporations abroad
made.
(15%) should be based on profits actually remitted abroad
WHEREFORE, the decision of the Court of Appeals appealed
HELD + RATIO:
from is REVERSED and SET ASIDE, and that of the Court of Tax
Appeals is REINSTATED.
Yes, any profit remitted by a branch to its head office shall be subject
to 15% be based on total profits applied or earmarked for remittance
NOTES: (Kind of important, Rationale)
(NIRC Sec 28(A,5)). This means that what was actually remitted
must be subject to the 15% tax
The remittance tax was conceived in an attempt to equalize the
income tax burden on foreign corporations maintaining, on the one
On the other hand, there is absolutely nothing in Section
hand, local branch offices and organizing, on the other hand,
24(b) (2) (ii), (Sec 28(A,5 now)), which indicates that the subsidiary domestic corporations where at least a majority of all the
15% tax on branch profit remittance is on the total amount of latter's shares of stock are owned by such foreign corporations. Prior
profit to be remitted abroad which shall be collected and paid to the amendatory provisions of the Revenue Code, local branches
in accordance with the tax withholding device provided in were made to pay only the usual corporate income tax of 25%-35%
Sections 53 and 54 of the Tax Code.
on net income (now a uniform 35%) applicable to resident foreign
The statute employs "Any profit remitted abroad by a branch corporations (foreign corporations doing business in the Philippines).
to its head office shall be subject to a tax of fifteen per cent
While Philippine subsidiaries of foreign corporations were subject to which are already subjected to the final tax shall not be included for
the same rate of 25%-35% (now also a uniform 35%) on their net purposes of computing the branch profits remittance tax. On the
income, dividend payments, however, were additionally subjected to other hand, CIR contends that a) the 15% branch profit remittance
a 15% (withholding) tax (reduced conditionally from 35%). In order to tax is imposed and collected at source necessarily the tax base
avert what would otherwise appear to be an unequal tax treatment should be the amount actually applied for by the branch with
on such subsidiaries vis-a-vis local branch offices, a 20%, later Central Bank of the Philippines as profit to be remitted abroad
reduced to 15%, profit remittance tax was imposed on local branches pursuant to Revenue Memorandum No. 8-12 (March 17, 1982).
on their remittances of profits abroad. But this is where the tax pari- The issues in these cases are: 1) Whether or not the branch
passu ends between domestic branches and subsidiaries of foreign profits tax are computed based on the profits actually remitted
corporations. abroad or on the total branch profits out of which the
remittance is made; and 2) Whether or not passive income
22. COMPANIA GENERAL DE TABACOS DE FILIPINAS v. CIR which are already subjected to the final tax are still included for
CTA Case Nos. 4141 and 4451 purposes of computing the branch profits remittance tax.
August 23, 1993 and November 17, 1993 With regard to the first issue, CTA ruled in favor of CIR stating that
the taxable base in computing the 15% branch profit remittance
PM REYES NOTES: tax is the amount applied for with the Central Bank as profit to
Q74.2 What is the correct tax base for computing the branch profit be remitted abroad and not the total amount of branch profits.
remittance tax? Is it the “profit actually remitted” or the “amount In Case No. 4451, according to Sec 24(b)(2)(ii) of NIRC, the rule is
actually applied for”? interest and dividends received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be
The correct tax base is the amount actually applied for by the considered as branch profits unless the same are effectively
branch with the Central Bank as profit to be remitted abroad. connected with the conduct of its trade or business. The phrase
In Compania General v. CIR, Compania General contended “effectively connected” was interpreted to mean income derived
that the correct tax base for computing the branch profit remittance from the business activity in which the corporation is engaged.
tax is the profit actually remitted abroad given its reliance on previous In Case No. 4141, The applicable provision of the Tax Code is Sec
BIR ruling and the case of CIR v. Burroughs. On the other hand, CIR 24(b)(2)(ii)[now Sec 25(a)(5)] which provides: “Any profit remitted by
contends that because of RMC NO. 8-82 (March 17, 1982), the tax a branch to its head office shall be subject to a tax of 15%(except
base should be the amount actually applied for by the branch with those registered with EPZA); xxx”. The use of the word “remitted”
the central Bank of the Philippines as profit to be remitted. The CTA may be well understood as referring to that part of the said total
ruled in favor of CIR as the branch profit remittance taxes were branch profits which would be sent to the head offices as
paid after the effectivity of RMC No. 8-82. distinguished from the total profits of the branch. In both cases, CTA
held that because of RMC NO. 8-82 (March 17, 1982), the tax
base should be the amount actually applied for by the branch
CASE:
with the central Bank of the Philippines as profit to be remitted.
In both cases, Compania General filed a claim for refund with CIR for
Hence, CTA ruled in favor of CIR as the branch profit remittance
the alleged overpaid Branch Profit Remittance Tax in the amount of
taxes were paid after the effectivity of RMC No. 8-82.
P593, 948.61 and P1,768,931.05 for the year 1980-1985,
As to the second issue, the CTA ruled that, passive income already
respectively. Compania General, in both cases, alleged a) that the
subject to final tax shall not be included for purposes of
15% branch profit remittance tax should be based on the profits
computing the branch profits remittance tax. Pursuant to Sec 24
actually paid abroad; and b) the profits remitted abroad by a branch
(c) and (d) of NIRC, dividends and interests are subject to final tax.
office to its mother company is an income tax hence, passive income
To include them again as subject to branch profit remittance tax pursuant to Revenue Memorandum No. 8-12 (March 17,
under the same Section 24 (b)(2)(ii) would be contrary to the law. 1982)
For CTA Case No. 4451, CTA ruled that CIR should refund
Compania General, the amount of P121, 696. 34, representing ISSUES:
overpaid 15% branch profit remittance tax on interest and dividends 1. Whether or not the branch profits tax are computed based on the
received. The computation is based on RMC No. 8-82 and the profits actually remitted abroad or on the total branch profits out
jurisprudence cited, stating that the tax base should be the amount
of which the remittance is made.
applied for with the Central Bank for remittance without prior
2. Whether or not passive income which are already subjected to
deduction of the 15% branch profit remittance tax. While for CTA
Case No. 4141, CIR is ordered to refund in favor of Compania the final tax are still included for purposes of computing the
General, the amount of 152,690.61 representing overpaid 15% branch profits remittance tax.
branch profit remittance taxes on dividends, interests and
capital gain received during the years 1981-1983. RATIO:
NOTE: Sorry guys, tried my hardest but these cases are just beyond 1. The taxable base in computing the 15% branch profit
my competence. SORRY. remittance tax is the amount applied for with the Central
Bank as profit to be remitted abroad and not the total
CTA Case No. 4451 (August 23, 1993):
amount of branch profits.
FACTS:
According to Sec 24(b)(2)(ii) of NIRC, the rule is interest and
Compania General De Tobaccos de Filipinas (Compania
dividends received by a foreign corporation during each
General) duly licensed by Philippine Laws to engage in business
taxable year from all sources within the Philippines shall not
through its branch office. It is in the business as leaf tobacco
be considered as branch profits unless the same are
dealer, exporter, importer and general merchants.
Compania General filed a claim for refund with Commissioner of effectively connected with the conduct of its trade or
Internal Revenue (CIR) in the amount of P593, 948.61, business.
o The phrase “effectively connected” was interpreted to
representing allegedly overpaid Branch Profit Remittance Taxes.
Petitioner’s (Compania General) Contention: mean income derived from the business activity in
o The 15% branch profit remittance tax should be based on which the corporation is engaged.
the profits actually paid abroad. Compania General is in the business as leaf tobacco dealer,
o Basis: exporter, importer and general merchants. The interests
Sec 24(b)(2)(ii) of the National Internal Revenue Code received from savings deposit with PhilTrust, interests
(NIRC). received from money market placements and interest on
BIR Ruling dated January 21, 1980 Land Bank Bonds and cash dividends received from PLDT
CIR v Burroughs Limited and CA and Tabacalera Industrial Development Corporation of the
Respondent’s (CIR) Contention: Philippines are not effectively connected with its trade or
o The 15% branch profit remittance tax is imposed and business.
collected at source necessarily the tax base should be the The case in question is readily distinguishable from the
amount actually applied for by the branch with Central Burroghs Limited case, where the Supreme Court upheld the
Bank of the Philippines as profit to be remitted abroad application of BIR Ruling of January 1980 because the
branch profit remittance tax was paid on March 14, 1979. The
High added that Memorandum Circular No. 8-82 dated March 1. Whether or not the right to claim for refund of payments has
17, 1982 cannot be given retroactive effect in the light of already prescribed.
Section 327 of the NIRC. 2. Whether or not the branch profits tax are computed based on the
2. No, passive income already subject to final tax are not included profits actually remitted abroad or on the total branch profits out
for purposes of computing the branch profits remittance tax. of which the remittance is made.
Pursuant to Sec 24 (c) and (d) of NIRC, dividends and 3. Whether or not passive income which are already subjected to
interests are subject to final tax. To include them again as the final tax are still included for purposes of computing the
subject to branch profit remittance tax under the same branch profits remittance tax
Section 24 (b)(2)(ii) would be contrary to the law. 4. Whether or not Compania General is legally entitled to the refund
Compania Tobacco has sufficiently established a right to be of P1,768,931.05, representing the alleged excess branch profit
refunded the amount of profit remittance tax paid on these remittance tax during the years 1980-1985.
interests and dividends which were included as part of the
branch profits for 1985 (partial) and 1986. RATIO:
1. Yes, when the claim for refund was filed more than 2 years have
FINAL VERDICT: CIR should refund Compania General, the amount lapsed from the time the payment of the tax was made.
of P121, 696. 34, representing overpaid 15% branch profit remittance Accdg to Sec 230 of the Tax Code: No suit for the recovery
tax on interest and dividends received. The computation is based on of tax erroneously or irregularly collected shall begin after
RMC No. 8-82 and the jurisprudence cited, stating that the tax base the expiration of 2 years from the date of payment of the
should be the amount applied for with the Central Bank for tax or penalty regardless of any supervening cause that
remittance without prior deduction of the 15% branch profit may arise after payment.
remittance tax. It is evident that payment prior to April 9, 1985 had already
CTA Case No. 4141 (November 17, 1993)
FACTS: expired.
Compania General is foreign corporation duly licensed by When the claim for refund was filed more than 2 years
Philippine Laws to engage in business through its branch office. have lapsed from the time the payment of the tax was
It claims refund in the amount of P1,768,931.05, representing the made.
alleged overpaid branch profit remittance tax during the years
2. The taxable base in computing the 15% branch profit
1980-1985.
remittance tax is the amount applied for with the Central
The branch profit remittance tax corresponding to branch profit
Bank as profit to be remitted abroad.
for 1980 was paid on February 7, 1984.
The applicable provision of the Tax Code is Sec 24(b)(2)(ii)
It was on February 4, 1986 that Compania General filed a
[now Sec 25(a)(5)] which provides: “Any profit remitted by
request before CIR for the refund of the sum of P1,447,295.62.
a branch to its head office shall be subject to a tax of 15%
representing the alleged overpaid branch profit remittance tax
(except those registered with EPZA); xxx”
during the years 1980-1983.
The applicable RMC is RMC No. 8-82 since the branch
ISSUES: profit remittance taxed were paid after the effectivity of
such RMC. (as applied in CTA Case No. 4451).
o It states that the 15% branch profit remittance tax Norwegian enterprise in the Philippines and a domestic
is imposed and collected at the source, enterprise. Det Norske Philippines, a local branch of De Norske,
necessarily, the tax base should be the amount a Norwegian enterprise, invokes Article 25 for the non-
imposition of the branch profits remittance tax. Is its contention
actually paid for by the branch with the Central
valid?
Bank of the Philippines as profit to be remitted
abroad. No. In ITAD BIR RULING NO. 018-09 [JUNE 23, 2009], the CIR
The use of the word “remitted” may be well understood as ruled that the principle of equal treatment in Article 25 does not
referring to that part of the said total branch profits which prevent the imposition of the branch profit remittance tax. First, the
would be sent to the head offices as distinguished from the principle of equal treatment is limited to nationals of the Philippines
total profits of the branch. and of Norway who are both residents of the Philippines. While
indeed Det Norske is a national of Norway, it is not a resident of the
3. No, passive income already subject to final tax are not Philippines. Second, while the treaty lays down a principle of equal
treatment between a Norwegian enterprise in the Philippines and a
included for purposes of computing the branch profits
domestic enterprise, as long as the aggregate taxes imposed by the
remittance tax. Philippines on such Norwegian enterprise is not greater than the
Pursuant to Sec 24 (c) and (d) of NIRC, dividends and taxes imposed by the Philippines on a domestic enterprise, it cannot
interests are subject to final tax. To include them again as be considered that such Norwegian enterprise is treated less
subject to branch profit remittance tax under the same favourably in the Philippines than the domestic enterprise.
Section 24 (b)(2)(ii) would be contrary to the law.
4. Yes, Compania General is legally entitled to the refund of CASE/PM Reyes:
P152,690.61, corresponding to the overpaid branch profit Det Norske is a corporation organized and existing under the laws of
remittance tax during the years 1981-1983. Norway; it is also tax resident of Norway, and that based on the
Certification issued by the SEC, Det Norske is licensed to establish a
As to the 1984 & 1985 branch profit remittance taxes, no
branch office in the Philippines (Det Norske Philippine Branch). With
refund or tax credit is due to Compania General since the this, Det Norske Philippine Branch had remitted branch profits to Det
latter did not present any proof of passive income it Norske for taxable years 1998 to 2004. Now, Det Norske, AS A
received during said period. PHILIPPINE BRANCH, is asserting that it should be exempt from the
15% BPRT based on Article 25 of the Philippines-Norway tax treaty
FINAL VERDICT: CIR is ordered to refund in favor of Compania which provides for equal treatment between nationals of the two
General, the amount of 152,690.61 representing overpaid 15% countries and as between a Norwegian enterprise in the Philippines
branch profit remittance taxes on dividends, interests and and a domestic enterprise. The issue is whether the BPRT (branch
capital gain received during the years 1981-1983. profit remittance tax) is contrary to Article 25 of the Philippines
Norway Treaty? NO, the contention of Det Norske is invalid. First, the
23. ITAD BIR Ruling No. 018-09 principle of equal treatment is limited to nationals of the Philippines
and of Norway who are both residents of the Philippines. While
PM REYES: indeed Det Norske is a national of Norway, it is not a resident of the
Q74.3. Norway and the Philippines entered into a tax treaty. Philippines. Second, while the treaty lays down a principle of equal
Article 25 of the Convention provides for equal treatment treatment between a Norwegian enterprise in the Philippines and a
between nationals of the two countries and as between a domestic enterprise, as long as the aggregate taxes imposed by the
Philippines on such Norwegian enterprise is not greater than the to establish a branch office in the Philippines (that is, Det
taxes imposed by the Philippines on a domestic enterprise, it cannot Norske Philippine Branch)
be considered that such Norwegian enterprise is treated less It is also represented that Det Norske Philippine Branch had
favourably in the Philippines than the domestic enterprise. Thus, the remitted branch profits to Det Norske for taxable years 1998
BPRT can be imposed by the Philippines on a permanent to 2004
establishment without going against the principle of equal treatment In this case, Det Norske, AS A PHILIPPINE BRANCH, is
envisaged in paragraph 2, Article 25 of the Philippines-Norway tax asserting that the BPRT (branch profit remittance tax)
treaty. imposed on the remittance of branch profits by a local
branch of a Norwegian corporation to its head office in
Norway is more budrensome (or less favorable) than the tax
Relevant Laws: treatment on the local branch of a domestic corporation
whose remittance is not subject to BPRT.
Article 25 of the Philippines-Norway tax treaty Det Norske contends that it should thus be exempt from the
1. Nationals of a Contracting State shall not be subjected in the other 15% BPRT.
Contracting State to any taxation or any requirement connected
therewith, which is other or more burdensome than the taxation and Issue: W/N the BPRT (branch profit remittance tax) is contrary to
connected requirements to which nationals of that other State in the Article 25 of the Philippines Norway Treaty? NO, it is not
same circumstances are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of Held:
a Contracting State has in the other Contracting State shall not Despite it being an additional income tax, it is noteworthy
be less favourably levied in that other State than the taxation levied that the Philippines-Norway tax treaty recognizes the BPRT
on enterprises of that other State carrying on the same activities. and gives way to its imposition, as seen in Article 10
This provision shall not be construed as obliging a Contracting State paragraph 7 of the treaty (SEE TOP)
to grant to residents of the other Contracting State any personal o From that paragraph, it can be seen that the branch
allowances, reliefs and reductions for taxation purposes on account profits remitted by a branch office of a Norwegian
of civil status or family responsibilities which it grants to its own corporation in the Philippines to its head office in
residents Norway may be subject to an additional tax such as
Article 10, paragraph 7 of the Philippines-Norway Tax Treaty the BPRT as long as the rate does not exceed 15%
of the amount remitted.
" Nothing in this Convention shall be construed as preventing a Even in the absence of Article 10, paragraph 7, the BIR
Contracting State from imposing in accordance with its internal law, a pointed out the ff (BIR lifted these/ cited the OECD Model
tax apart from the corporate income tax on remittances of profits by a Tax Convention summary)
branch to its head office provided that the tax so imposed shall not o According to the OECD Model Convention, the
exceed fifteen per cent of the amount remitted."
phrase "in the same circumstances" (SEE Art. 25 on
Facts:
top) , the scope of this paragraph would be limited to
Det Norske is a corporation organized and existing under residents of the Philippines only.
the laws of Norway o the term 'resident of a Contracting State' means any
Det Norske is a tax resident of Norway; and that based on
person who, under the laws of that State, is liable to
the Certification issued by the SEC, Det Norske is licensed tax therein by reason of his domicile, residence,
place of management or any other criterion of a
similar nature. But this term does not include any long as the aggregate taxes imposed by the Philippines on a
person who is liable to tax in that State in respect permanent establishment of a foreign enterprise in the
only of income from sources in that State or capital Philippines are not greater than the taxes imposed by the
situated therein. Philippines on a domestic enterprise, it cannot be said that
Under this definition, Det Norske is a the permanent establishment is treated less favorably in the
resident of the State where it is liable to tax Philippines than the domestic enterprise.
by reason of its domicile, residence, place of Thus, the BPRT and other similar taxes on income, can be
management, or any other similar criterion imposed by the Philippines on a permanent establishment
of a similar nature. By the fact that Det without going against the principle of equal treatment
Norske is organized and existing under the envisaged in paragraph 2, Article 25 of the Philippines-
laws of Norway, that its head office is in Norway tax treaty provided that the aggregate taxes levied
Norway, and that it is issued a certificate of on the permanent establishment are not greater than the
residence by the Norwegian Directorate of taxes levied on a domestic enterprise.
Taxes of Norway, it follows that Det Norske's
domicile, residence, or place of From 2A Digest + a few extras
management is in Norway and as such is a
resident of Norway for purposes of the
Philippines-Norway tax treaty.
Regional or Area Headquarters and
o "Less favourably levied" ROHQs
The standard of 'less favorably levied', on its Sec. 22 (DD) & (EE), Tax Code
face, differs from the standard 'other or more RR 11-2010 (Oct. 26, 2010)
burdensome' that in certain treaties is used
in the nationality provision and the foreign-
controlled enterprise provision (ito talaga (3) Nonresident Foreign Corporations
yung nasa case sorry, basta iba yung Sec. 28 (B), Tax Code
meaning nila so you have to look at the
treaty)
The permanent establishment provision (in In general
paragraph 2 of Article 25 of the Philippines-
Norway Treaty) clearly does not prevent the
imposition of different ('other') taxes on a 24. CIR VS SC JOHNSON AND SONS
permanent establishment than those
imposed on a domestic business, as long as PM Reyes:
the taxes in the aggregate on the permanent Q. XYZ Corporation is a domestic corporation which entered
establishment are not greater than those on into a license agreement with ABC Corporation, a NON-
the domestic business. In effect, the focus is RESIDENT FOREIGN CORPORATION based in the US pursuant
on the result of the taxation, irrespective of to which the former was granted the right to use trademark,
the method." patents and technology owned by the latter. For such use, XYZ
paid royalties to ABC and subjected the same to the 25%
Consistent with the foregoing, this Office is of the opinion
withholding tax on royalty payments. XYZ claimed for a refund
and so holds that, as far as the Philippines is concerned, as
and argues that the withholding tax should only be 10%
pursuant to the most-favored nation clause of the RP-US tax Agreement, German Corporation given 10% withholding tax are
treaty in relation to the RP West Germany Tax Treaty. Is XYZ’s subject to be credited 20% tax of the gross amount of such royalties
contention correct? also known as the matching credit. This matching credit does not
NO. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25, 1999], exist in the RP-US Agreement. SC agrees with CIR.
the Supreme Court held that the concessional tax rate of 10%
provided for in the RP-Germany Tax Treaty could not apply to taxes FACTS:
imposed upon royalties in the RP-US Tax Treaty since the two taxes Respondent SC Johnson and Son, Inc is a domestic
imposed under the two tax treaties are not paid under similar corporation organized under Philippine Laws entered into a
circumstances and do not contain similar provisions on tax crediting. LICENSE AGREEMENT with SC Johnson and Son (United
It is not proved that the RP-US Tax Treaty grants similar tax reliefs to
States), a non-resident foreign corp. based in the USA.
residents of the US in respect of the taxes imposable upon royalties
Pursuant to the License Agreement, the SC Johnson and
earned from sources within the Philippines as those allowed to their
German counterparts. Further, the RP-Germany Tax Treaty allows for Son (US) allows SC Johnson (Phil) to use their trademark,
crediting against German income and corporate tax of 20% of the patents and technology, manufacture, package and distribute
gross amount of royalties paid under the law of the Philippines. On their products and secure assistance in the management,
the other hand, the RP-US Tax Treaty does not provide for the similar marketing and production of SC Johnson (USA) in the Php.
crediting of 20% of the gross amount of royalties paid. The similarity For the use of trademark or technology SC Johnson(Phil)
in the circumstances of payment of taxes is a condition for the was obliged to pay SC Johnson(US) royalties based on
enjoyment of most favored nation treatment precisely to underscore
percentage of net sales and subjected the same to 25%
the need for equality of treatment. since the RP-US Tax Treaty does
not give a matching tax credit of 20 percent for the taxes paid to the withholding tax on royalty payments. SC Johnson (Phil)
Philippines on royalties as allowed under the RP-West Germany Tax paid for the period covering July 1992 to May 1993 in the
Treaty, XYZ cannot be deemed entitled to the 10 percent rate total amount of P1,603,443.
granted under the latter treaty for the reason that there is no payment On October 29, 1993, SC Johnson (Phil) filed with the
of taxes on royalties under similar circumstances. International Tax Affairs Division (ITAD) of the BIR a claim for
SUMMARY refund of overpaid withholding tax on royalties (amounting to
SC JOHNSON Phil. is a domestic corporation which entered into a
P963,266) arguing that “the case of respondent has the
license agreement with SC Johnson (USA) for the use of the latter’s
trademark, patent, technology among others in exchange for royalty same circumstances under the MacGeorge and Gillete
fees. Hence SC Johnson (Phil) was required to pay 25% withholding rullings. That instead of 25% withholding tax they should only
tax on royalty payments paid which amounted to P1,603,443 for July pay 10% withholding tax pursuant to the most-favored nation
1992-May 1993. But on Oct. 1993, SC Johnson Phil. applied for tax clause of the RP-US Tax in relation to the RP-West Germany
refund citing that under ART. (2)(b)(iii) of the RP US Tax Treaty or Tax Treaty.
also known as the most favored nation clause that they are entitled The CIR did not act on the claim hence respondent filed a
to the lowest rate of Philippine tax that may be imposed on royalties petition for review before the CTA.
of the same kind paid under similar circumstances to a resident of a
third State. The similar circumstance they compare themselves to is
the 10% withholding tax pursuant to RP-west germany agreement.
CTA and CA RULINGS
CIR disagrees saying that the circumstance under the RP-Germany
CTA ruled in favor of SC Johnson (Phil) and ordered the CIR
and RP-US is not similar because under the RP-Germany
to issue a tax credit certificate in the amount of P963,266.
CIR filed a petition for review with the CA The similar circumstance that they compared themselves
CA affirmed CTA’s decision in toto, hence this case. to is the RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the
ISSUE: Contracting State in which they arise, and according to
THE COURT OF APPEALS ERRED IN RULING THAT SC the law of that State, but the tax so charged shall not
JOHNSON AND SON, USA IS ENTITLED TO THE “MOST exceed:
FAVORED NATION” TAX RATE OF 10% ON ROYALTIES AS xxx
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE b) 10 percent of the gross amount of royalties arising
RP-WEST GERMANY TAX TREATY from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or
Article 13(2)(b)(iii) of the RP US Tax Treaty or also known as the process, or from the use of or the right to use, industrial,
most favored nation clause commercial, or scientific equipment, or for information
1) Royalties derived by a resident of one of the Contracting States concerning industrial, commercial or scientific
from sources within the other Contracting State may be taxed by experience.
both Contracting States.
2) However, the tax imposed by that Contracting State shall not PETITIONER’S CONTENTION:
exceed. Petitioner contends that respondent’s taxes are not paid
a) In the case of the United States, 15 percent of the gross under SIMILAR CIRCUMSTANCES as those under in the
amount of the royalties, and RP-West Germany Tax Treaty.
b) In the case of the Philippines, the least of: Since in the RP-West Germany Tax Treaty, taxes in royalties
(i) 25 percent of the gross amount of the royalties; are only reduced to 10 or 15 percent if there will be a TAX
(ii) 15 percent of the gross amount of the royalties,
CREDIT OF 20 PERCENT OF THE GROSS AMOUNT OF
where the royalties are paid by a corporation
registered with the Philippine Board of Investments and engaged in SUCH ROYALTIES AGAINST GERMAN INCOME (this is
preferred areas of activities; and called the matching credit).
(iii) the lowest rate of Philippine tax that may be This 20% tax credit does not exist in the RP-US Treaty
imposed on royalties of the same kind paid under hence they don’t have similar circumstance.
similar circumstances to a resident of a third State. Further, Pet. sees the action of SC Johnson (Phil.) of citing
RESPONDENT’S CONTENTION the most favored clause as a claim for exception for the 25%
Petition must be denied due to: tax rate, the BIR states that the treaty must be construed
1) Defective certification against forum shopping,
against exemption.
certification was not executed by the petitioner herself
but by her counsel COURT’S RULING
2) That under the most favored clause of the RP-US tax 1. Ruling against forum shopping:
treaty, they are entitled to 10% royalty. As a general rule the party and not the counsel must certify
BASIS: Art. 13(2)(b)(iii) which states that the lowest rate under oath the certification of non-forum shopping. This is so
of Philippine tax that may be imposed on royalties of the because it is the party who knows whether they have
same kind paid under similar circumstances to a resident
of a third state. commenced any other action involving the same issues in
the SC or any other courts.
But since in this case, Since CIR is only handled by the impose tax on that income or capital. In order to eliminate
OSG, as required by the admin code, the certification double taxation, a tax treaty resorts to several methods.
executed by the OSG constitutes substantial compliance. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an
2. If Johnsons and Sons entitled to the most favorable exclusive right to tax is conferred on one of the contracting
clause. states; however, for other items of income or capital, both
No. The RP-US and the RP-West Germany Tax Treaties do
states are given the right to tax, although the amount of tax
not contain similar provisions on tax crediting. Article 24 of
that may be imposed by the state of source is limited.
the RP-Germany Tax Treaty, supra, expressly allows The second method for the elimination of double taxation
crediting against German income and corporation tax of 20% applies whenever the state of source is given a full or limited
of the gross amount of royalties paid under the law of the right to tax together with the state of residence. In this case,
Philippines. On the other hand, Article 23 of the RP-US Tax the treaties make it incumbent upon the state of residence to
Treaty, which is the counterpart provision with respect to allow relief in order to avoid double taxation. There are two
relief for double taxation, does not provide for similar methods of relief- the exemption method and the credit
crediting of 20% of the gross amount of royalties paid. method. In the exemption method, the income or capital
which is taxable in the state of source or situs is exempted in
Side Notes: the state of residence, although in some instances it may be
The RP-US Tax Treaty is one of the bilateral treaties entered taken into account in determining the rate of tax applicable to
by the Philippines to other countries to avoid double taxation. the taxpayer’s remaining income or capital. On the other
International juridical double taxation-imposition of hand, in the credit method, although the income or capital
comparable taxes in two or more states on the same which is taxed in the state of source is still taxable in the
taxpayer in respect of the same subject matter and for state of residence, the tax paid in the former is credited
identical periods. The apparent rationale for doing away with against the tax levied in the latter. The basic difference
double taxation is to encourage the free flow of goods and between the two methods is that in the exemption method,
services and the movement of capital, technology and the focus is on the income or capital itself, whereas the credit
persons between countries, conditions deemed vital in method focuses upon the tax.
creating robust and dynamic economies. Foreign In the case at bar, the state of source is the Philippines
investments will only thrive in a fairly predictable and because the royalties are paid for the right to use property or
reasonable international investment climate and the rights, i.e. trademarks, patents and technology, located
protection against double taxation is crucial in creating such within the Philippines. The United States is the state of
a climate. residence since the taxpayer, S. C. Johnson and Son, U. S.
Double taxation usually takes place when a person is A., is based there. Under the RP-US Tax Treaty, the state of
resident of a contracting state and derives income from, or residence and the state of source are both permitted to tax
owns capital in, the other contracting state and both states the royalties, with a restraint on the tax that may be collected
by the state of source. Furthermore, the method employed to effectively connected with its conduct or business in the
give relief from double taxation is the allowance of a tax Philippines as to be considered branch profits subject to the
credit to citizens or residents of the United States (in an 15% profit remittance tax.
appropriate amount based upon the taxes paid or accrued
Acting Commissioner Ruben Ancheta ruled that “only profits remitted
to the Philippines) against the United States tax, but such abroad by a branch office to its head office which are effectively
amount shall not exceed the limitations provided by United connected with its trade or business in the Philippines are subject to
States law for the taxable year. the 15% profit remittance tax. To be effectively connected it is
sufficient that the income arises from the business activity in which
the corporation is engaged. In the instant case, the dividends
25. MARUBENI V CIR received by Marubeni from AG&P are not income arising from
the business activity in which Marubeni is engaged.”
REYES NOTES/ CASE: A Japanese Corporation licensed to do
business in the Philippines has equity investments in a domestic Consequently, petitioner filed with the CIR a claim for refund which
corporation. The domestic corporation paid stock dividends to the was denied. CTA affirmed the denial.
Japanese Corporation and paid corresponding taxes thereon. The
latter now claims for a refund because of an alleged overpayment ISSUES: W/N whether [Petitioner] is a resident or a non-resident
arguing there is a principal-agent relationship between the foreign foreign corporation under Philippine laws (If petitioner is a resident
corporation and its branch office in the Philippines. corp it would not be liable to pay the 15% branch profit remittance
SC denied the claim for refund holding that the general rule that a tax)
foreign corporation and its branch office are the same juridical entity
is inapplicable to the instant case. It concluded that there was no HELD & RATIO: NON-RESIDENT. The general rule that a foreign
principal-agent relationship because the investment that resulted in corporation is the same juridical entity as its branch office in the
the dividends was made for purposes germane to the business of Philippines cannot apply here. This rule is based on the premise that
the foreign corporation and not its branch office. the business of the foreign corporation is conducted through its
branch office, following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that when
FACTS: Marubeni Corporation of Japan has equity investments in the foreign corporation transacts business in the Philippines
Atlantic Gulf and Pacific Co. of Manila (AG&P). AG&P declared and independently of its branch, the principal-agent relationship is set
paid cash dividends to petitioner. aside. The transaction becomes one of the foreign corporation, not of
the branch. Consequently, the taxpayer is the foreign corporation, not
AG&P directly remitted the cash dividends to petitioner's head office the branch or the resident foreign corporation. Corollarily, if the
in Tokyo, Japan. AG&P as withholding agent paid 10% final business transaction is conducted through the branch office, the
intercorporate dividend tax and 15% branch profit remittance tax latter becomes the taxpayer, and not the foreign corporation.
on cash dividends declared and remitted to petitioner at its head
office in Tokyo. In other words, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is a
Petitioner, through the accounting firm Sycip, Gorres, Velayo and separate and distinct income taxpayer from the branch in the
Company, sought a ruling from the Bureau of Internal Revenue on Philippines. There can be no other logical conclusion considering the
whether or not the dividends petitioner received from AG&P are undisputed fact that the investment was made for purposes
peculiarly germane to the conduct of the corporate affairs of contends that the exchange rate to be used must only be P2.00 on
Marubeni Japan, but certainly not of the branch in the Philippines. It the assumption that PET is a foreign corporation engaged in
is thus clear that petitioner, having made this independent investment business based on RR 2.
attributable only to the head office, cannot now claim the increments
as ordinary consequences of its trade or business in the Philippines WON PET is a foreign corporation engaged in trade or business or
and avail itself of the lower tax rate of 10 %. not.
WON the exchange rate of P3.90 is correct.
FINAL VERDICT: Petition is denied.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not
authorized or licensed to do business in the Philippines. It does not
Notes/ Source: copy paste from the orig have a branch office in the Philippines and it made only two calls in
Philippine ports, one in 1963 and the other in 1964.
In order that a foreign corporation may be considered engaged in
trade or business, its business transactions must be continuous. A
casual business activity in the Philippines by a foreign corporation,
as in the present case, does not amount to engaging in trade or
26. N.V. REEDERIJ “AMSTEDAM” AND ROYAL INTEROCEAN business in the Philippines for income tax purposes.
LINES V. CIR The transactions involved in this case are for the taxable years 1963
and 1964. Under Rep. Act No. 2609, the monetary board was
PM REYES NOTES authorized to fix the legal conversion rate for foreign exchange. The
free market conversion rate during those years was P3.90 to US
XYZ is a foreign shipping company. It does not have a branch office $1.00.
in the PH and it made only two calls n the PH ports. What kind of
foreign corp is XYZ?