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TAX REVIEW DIGESTS – MONTERO  A.

General Principles

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CONCEPT, NATURE AND CHARACTERISTICS OF TAXATION AND TAXES 

CIR v. Cebu Portland Cement Co. The Court of Tax Appeals ordered the Commission of Internal Revenue (CIR) to refund to Cebu Portland Cement Co. about P350k+, w/c represented overpayments of ad valorem taxes on cement produced and sold by it. CIR opposed the ruling, claiming that it had a right to apply the overpayment to another tax liability of Cebu Portland – sales tax on a manufactured product (the cement). CIR said that cement is a manufactured and NOT a mineral product and therefore NOT exempt from sales taxes. (mineral = exempt; manufactured = not exempt) On the other hand, Cebu Portland Portland said that it is exempt from sales tax under the Tax Code because cement is a mineral product and NOT a manufactured product. Court of Tax Appeals held that the alleged sales tax liability of Cebu Portland was still being questioned and therefore could not be set-off against the refund.  A petition for review was was filed by CIR. I: W/n CIR must refund the overpayment of the ad valorem tax R: NO. CIR has the right to apply the ov erpayment to Cebu Portland’s sales tax deficiency. The sales tax was properly imposed upon the company for the reason that cement has always been considered a manufactured product and NOT a mineral product. (CIR v Republic Cement) Cement was never considered a mineral product w/in the meaning of the Tax o Code, despite it being composed of 80% mineral, because cement is a PRODUCT of the manufacturing process. Reliance cannot be made on Cebu Portland v CIR saying that cement = mineral o because this case has been overruled. The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need to collect taxes as “the lifeblood of the government.” If the payment of taxes could be postponed by simply questioning their validity, the government would be paralyzed. Thus, the Tax Code provides that no court shall have authority to grant an injunction or restrain the collection of taxes, except when in the opinion of the Court of Tax Appeals, the collection by the BIR or the Bureau of Customs may  jeopardize the interest of the Government and/or the taxpayer . In such a case, the Court, at any stage of the proceeding may suspend the o collection and require the taxpayer to either: 1. deposit the amount claimed OR 2. file a surety bond for not more than double the amount with the Court. The exception does not apply in this case. In fact, there is all the more reason to enforce the rule given that even after crediting of the refund against the tax deficiency, a balance of more than P4 million was still due from the company. To require the Commissioner to actually refund to the company the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is an idle ritual. CLASSIFICATIONS CLASSIFICATIONS AND DISTINCTIONS 

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ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. The Commissioner on Internal Revenue (CIR) disallowed the claim on the ground that the expenses should be capitalized and might be written off as a loss only when a “dry hole” should result. Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on its profit remittances to its New York Office. I: W/n the margin fees are taxes OR necessary expenses which are deductible from its gross income R: No, they are neither taxes nor necessary expenses. 1) Margin fees are NOT taxes because they are NOT imposed as a revenue measure but as a police measure whose proceeds are applied to strengthen the country’s international reserves. Thus, the fee was imposed by the State in the exercise of its POLICE POWER and NOT taxation power. 2) Neither are they necessary and ordinary business expenses.  An expense is considered NECESSARY where the expenditure is helpful in the development of the taxpayer’s business. It is ORDINARY when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The expenditure being ordinary and necessary is determined based on its nature – the extent and permanency of the work accomplished by the expenditure. In this case, ESSO was unable to show that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. It merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations.

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Esso Standard Eastern Inc. v. CIR

PAL v. Edu Under a legislative franchise, Philippine Airlines is exempt from all taxes except for the payment of 2% of its gross revenue to the National Government. On the strength of an opinion of the Secretary of Justice, PAL was determined not to have been paying motor vehicle registration fees since 1956. Eventually, the Land Transportation Commissioner required all tax exempt entities, including PAL, to pay motor vehicle registration fees. PAL protested. I: W/n PAL is exempt from the payment of motor vehicle registration fees R: YES, PAL is exempt. The motor vehicle registration fee is a tax, to which PAL is exempt. Taxes are for revenue, while fees are exactions for purposes of regulation and inspection. Thus, fees are limited in amount to what is necessary to cover the cost of the services rendered in that connection. It is the OBJECT of the charge, and NOT the name, that determines whether a charge is a tax or a fee. In this case, the money collected under the Motor Vehicle Law is not intended for the expenditures of the Motor Vehicle Office but for the construction and maintenance of public roads, streets and bridges. 

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Thus, since the said fees are collected NOT for the regulating motor vehicles on public highways but for providing REVENUE for the gov in order to construct public highways, they are TAXES, not merely fees. PAL is exempt from paying such fees, except for the period between 27 June 1968 to 9 April 1979, where its tax exeption in the franchise was repealed.

Osmeña v. Orbos Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from: exchange rate adjustments AND o increases in the world market prices of crude oil o  A portion of the OPSF was taken from collections of ad valorem taxes levied on oil companies. Subsequently, by virtue of an EO, t he OPSF was reclassified into a trust liability account and ordered released from the NATIONAL TREASURY to the MINISTRY of Energy. Said EO also authorized the investment of the fund in government securities, with the earnings accruing to the fund.  Aquino then amended PD 1956 by promulgating EO 137, w/c expanded the grounds for reimbursement to oil companies for possible COST UNDERRECOVERY inccured resulting from the reduction of domestic prices on petroleum products. The said cost underrecovery was left to the determination of the Ministry of Finance. Osmena then questioned the creation of the trust fund, saying that it violates the Constitution. • This is because the money collected pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is collected for a specific purpose, the revenue generated from it shall be treated as a SPECIAL FUND to be used only for the indicated purpose. It must not be channeled to another government objective. I: W/n the creation of the trust fund is v iolative of the Constitution R: NO, creation of the trust fund was valid. In order for the funds to fall under the prohibition, it must be shown that they were collected as TAXES – as a form of revenue While the funds collected may be referred to as taxes, they are exacted in the exercise of the POLICE POWER of the State . The main objective was NOT revenue but to stabilize the price of oil and petroleum. The OPSF is actually a SPECIAL FUND, as seen from the special treatment given to it by EO 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. These measures thus comply with the constitutional description of a "special fund." What is here involved is not so much the power of taxation as police power. For a valid delegation of power, it is essential that the law delegating the power must be: 1) complete in itself -- must set forth the policy to be executed by the delegate o 2) it must fi x a standard — limits of whichare sufficiently determinate or o determinable determinable — to which the delegate must conform. Such was fulfilled in this case. 

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Commissioner Commissioner on Internal Revenue v PLDT

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PDLT paid the BIR about P164k+ for equipment and spare parts it imported for its business. The amount included compensating, advance sales and other internal revenue taxes. PLDT also paid VAT.  As a franchise holder, PLDT was entitled to a tax exemption privilege under RA7082 (grant of franchise), which provided that the grantee should pay a franchise tax equivalent to 3% of all gross receipts, and that the said percentage shall be i n LIEU of all taxes on the franchise/ its earnings. PLDT wrote to the BIR requesting confirmation of its exemption privilege, and BIR confirmed this, saying that PLDT was liable for the 3% franchise tax and exempt from  VAT on its importation of equipment. PLDT filed a claim for tax refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying erroneously from October, 1992- December, 1994. CTA granted the petition (although ruling that a portion from Oct-Dec16, 1992 had already prescribed and was beyond the 2-yr period allowed by law for refunds), ordering CIR to REFUND or to ISSUE in favor of petitioner a Tax Credit Certificate in the reduced amount of about P223k+ representing erroneously paid VAT and other taxes (compensating, advance sales, importation) from 1992 to 1994. Judge Saga dissented, saying who clarified that the “in lieu of” provision of Sec12 refers only to DIRECT taxes and not to indirect taxes such as VAT, compensating tax, and advance sales tax. BIR moved for reconsideration and the same was denied. CA also dismissed its appeal. I: W/n PLDT is exempt from payment of VAT other taxes by virtue of the provision in its franchise that the 3% franchise tax on its gross receipts shall be in lieu of all taxes on its franchise / earnings R: NO, PLDT is not exempt from VAT and other taxes Court has always ruled that TAXATION is the RULE, and exemption is the exception. Thus, statutes granting tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The burden of justfying exemption is imposed on the one who claims a refund. The clause “in lieu of all taxes” in Sec 12 of RA 7082 is immediately followed by the limiting or qualifying clause clause “on this franchise or earnings thereof”, suggesting that the exemption is limited to taxes imposed DIRECTLY on PLDT since taxes pertaining to PLDT’s franchise or earnings are its direct liability. Thus, indirect taxes, not being taxes on PLDT’s franchise or earnings, are OUTSIDE the purview of the “in lieu” provision. The 10% VAT on importation of goods partakes of an excise tax l evied on the privilege of importing articles. It is NOT a tax on the franchise of a business enterprise, but is imposed on all taxpayers who import goods whether or not the goods will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on importation replaces the advance sales tax payable by regular importers who import articles for sale or as raw materials in the manufacture of finished articles for sale. Direct taxes - impositions for which a taxpayer is directly liable on the transaction or business he is engaged in Indirect taxes - those where the liability for the payment of the tax falls o n one person but the burden can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it In this case, advance sales tax has the attributes of an indirect tax because o the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax / lay the “economic burden of

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the tax” on the purchaser, by subsequently adding the tax to the selling price of the imported article or finished product Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not. (Purpose: to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries)

Planters Products Inc v Fertiphil Marcos issued LOI 1465, imposing a capital recovery component of Php10.00 per bag of fertilizer. The levy was to continue until adequate capital was raised to make PPI financially viable Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which then remitted said amount to Far East Bank and Trust Company, the depository bank of PPI. P6k+ was remitted from 1985 to 1986.  After EDSA, Fertiphil demanded from PPI a refund of the amount it remitted; PPI refused. Fertiphil filed a complaint for collection and damages, questioning the constitutionality of LOI 1465. They claimed it was unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process FPA on the other hand said that the issuance of LOI 1465 was a valid exercise of police power of the state in insuring the fertilizer industry, and that Fertiphil did not sustain any damage because the burden imposed by the levy fell on the ultimate consumer, not the seller I: 1. W/m the issuance of LOI 1465 was an exercise of the police power of the state - NO 2. W/n the levy was for a public purpose - NO R: 1. The imposition of the levy was a exercise of the taxation power of the state. While it is true that the power to tax can be used as an implement of police power, the primary purpose of the levy was revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. In this case, the imposition of Php10 per bag is too excessive to serve a mere regulatory purpose. Even if it was an exercise of the police power of the state, the LOI would still be invalid as it did not comply with the test of “lawful subjects” and “lawful means” -- specifically, that the interest of the public, generally, requires its exercise, and that the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2. LOI 1465 is not for a public purpose. The purpose for the issuance of LOI 1465 was to support a private company: First, it is expressly provided that the levy be imposed to benefit a private o company – PPI. Second, the levy was conditional and dependent on PPI becoming financially o viable. Third, the levies were directly remitted and deposited in FEBTC, the bank of PPI, o which used said remittances to pay of PPI’s debts.

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LIMITATIONS ON THE POWER OF TAXATION

Tiu v. CA: Equal Protection of the Laws Congress passed RA 7227 which created the Subic Special Economic Zone, granting tax and duty incentives (tax and duty-free importations of raw materials, capital and equipment) to businesses and residents within th e area encompassed by the zone. The law provides that no local and national taxes shall be imposed within the zone. In lieu of taxes, 3% of the gross income of enterprises operating within the zone shall be remitted to the National Government, 1% to the local government units, and 1% to a development fund to be utilized for the development of municipalities outside Olangapo and Subic. Pres. Ramos later issued an EO specifying a “secured area” area within the zone in which the privileges were operative. o EO97 tax and duty-free importations will only apply to raw materials,  capital goods and equipment brought in by business enterprises into the SSEZ. Except for import tax and duties, all business are required to pay  the specified taxes in Section 12(c) o f RA7227. EO97-A   the tax incentives are only applicable to business enterprises o and individuals residing within the secured area. Petitioners outside the “secured area” challenged the constitutionality of this EO for allegedly being violative of their right to equal protection of the laws. 

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SSS v City of Bacolod

The SSS had an office building in Bacolod City. It failed to pay realty taxes for three consecutive years. The City levied upon the property and forfeited it in its favor. SSS protested the forfeiture on the ground that the SSS, being a government owned and controlled corporation, is exempt from payment of real estate taxes. The CFI ruled that SSS is NOT covered by the exemption, saying that the exemption only applies to properties owned by government agencies and instrumentalities performing governmental/ sovereign functions. It excluded from the coverage of the exemption those performing proprietary functions, such as the SSS. It relied on the case of NACOCO v. Bacani in which the Court held that government agencies performing proprietary functions are NOT exempt from paying legal fees. I: W/n a GOCC performing proprietary functions like the SSS, is exempt from paying realty taxes. R: Yes. The SSS is exempt from paying realty taxes. The Charter of the City of Bacolod provides that lands and buildings owned by the government are exempt from realty taxes. The application of the NACOCO v. Bacani case is incorrect, since that case was referring to legal fees and NOT to realty taxes. For purposes of exemptions in the payment of realty taxes, the distinction between government agencies performing constituent and ministrant function is not important. What is decisive is merely that the properties possessed by the SSS are in fact owned by the government of the Philippines. As such, they are exempt from realty taxes. To make such a distinction would have the effect of taking money from one pocket and putting it in another pocket. It would not serve the main purpose of taxation and would even tend to defeat it, because of the paperwork, time, and expenses that it would entail. When public property is involved, exemption is the rule and taxation, the exception

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They assert that the SSEZ encompasses (1) the City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within which the special privileges granted to the entire zone would apply to the present “fenced-in former Subic Naval Base” only. It has hereby excluded the residents of the first two components of the zone from enjoying the benefits granted by the law. I: W/N the EO confining the application of the privileges under RA 7227 within the secured area and excluding the residents of the zone outside the secured area violates the equal protection clause. NO. R: There are real and substantive distinctions between the circumstances obtaining inside and outside the Subic Naval base, thereby justifying avalid and reasonable classification. For a valid classification, the following requisites must be present: 1. it must rest on substantial differences; 2. must be germane to the purpose of the law; 3. must not be limited to existing conditions only; a nd 4. must apply equally to all members of the same class. In this case, the purpose of the law is to accelerate the conversion of military reservations into productive areas (economic or industrial areas) . Thus, the lands covered under the Military Bases Agreement are its object. To achieve purpose, Congress deemed it necessary to extend economic incentives to attract and encourage investors. It was thus reasonable for the President to have delimited the application of some incentives to the confines of the former Subic military base, since it is this specific area which the government intends to transform and develop into a selfsustaining industrial and economic zone, particularly for the use of big foreign and local investors to use as operational bases for their businesses and industries. These big investors possess the capital necessary to spur economic growth and generate employment opportunities. There are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called “secured area” and the present business operators outside the area.

Big investors lured into secured areas -billion-peso investments & thousand of new  jobs -national economic impact -

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Present biz operators outside the are -no such magnitude -only local economic impact -biz activities outside secured areas are not likely to have any impact in achieving purpose of law which is to turn former military base to productive use for the benefit of the Phil economy There is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in RA 7227

John Hay Peoples Alternative Coalition v. Lim RA No. 7227 created the Bases Conversion and Development Authority (BCDA), which also created the Subic Special Economic Zone (Subic SEZ). Aside from granting incentives to Subic SEZ, RA 7227 also granted the President is an express authority to create other SEZs in the areas covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La Union, and Camp John Hay through executive proclamations.

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BCDA entered into a MOA and Escrow Agreement with TUNTEX and ASIAWORLD, private corporations under the laws of the British Virgin Islands, preparatory to the formation of a joint venture for the development of Poro Point La Union and Camp John Hay as premier tourist destinations and recreation centers. BCDA, TUNTEX and ASIAWORLD executed a JVA to put up the Baguio International Development and Management Corporation which would lease areas within Camp John Hay and Poro Point for the attainment of the tourist and recreation spots in La Union and Camp John Hay. President Ramos issued Proclamation No. 420 which established a SEZ on a portion of Camp John Hay. 2nd sentence of Section 3 of said Proclamation provided for national and local tax exemption within and graned other economic incentives to the John Hay Special Economic Zone.  “Section 3: Investment Climate in John Hay Special Economic Zone.- Pursuant to Section 5(m) and Section 15 of RA No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted.” Petitioners filed this case to enjoin the respondents from implementing Proc. 420. is unconstitutional on grounds of: o For being illegal and invalid in so far as it grants tax exemptions thus amounting to unconstitutional exercise of by the President of power granted only to legislature Limits powers and interferes with the autonomy of the city o  Violates rule that all taxes should be uniform and equitable o I: W/N Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone. NO, 2nd sentence, Section 3 of said proclamation is unconstitutional. W/N Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City. YES R: The 2nd  Sentence of SECTION 3 of Proclamation No. 420 is hereby declared NULL and VOID  and is accordingly declared of no legal force and effect. Public respondents are hereby enjoined from implementing the aforesaid void provision. Proclamation No. 420, without the invalidated portion, remains valid and effective. Under Section 12 of RA No. 7227 it is clear that ONLY THE SUBIC SEZ which was granted by Congress with tax exemption, investment incentives and the like. THERE IS NO EXPRESS EXTENSION OF THE SAID PROVISION IN PRESIDENTIAL PROCLAMATION No. 420.   (Section 12 kept mentioning Subic Special Economic Zone, specifically…)  Also found in the deliberations of the Senate, a confirmation of the exclusivity of the tax and investment privileges to Subic SEZ. “Senator Angara: The Gentleman is absolutely correct. Mr. President. SO WE MUST CONFINE THESE POLICIES ONLY TO SUBIC.”  It is the legislature, unless limited by a provision of the state constitution that has full power to exempt any person, corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than the Congress, the

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Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption must have concurrence of a majority of all members of Congress. In same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon. Tax exemption cannot be implied as it must be categorically and un mistakably expressed – if it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to Subic SEZ, it would have so expressly provided in RA 7227. BCDA, under R.A 7227, is expressly entrusted with broad rights of ownership and administration over Camp John Hay, as the governing agency of the John Hay SEZ.

COCONUT OIL REFINERS ASSOCIATION INC. V. BCDA RA 7227 was enacted providing for the sound and balanced conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of special economic zones. President Ramos issued EO 80 which declared that Clark (CSEZ) shall have all the applicable incentives granted to the Subic Special Economic and Free Port Zone (SSEZ) under RA 7227. Petitioners claim that the said E.O as well as RA 7227 are replete with constitutional infirmities and must be declared invalid and void. Petitioner assail: EO 80 and BCDA Board Resolution: allowing the tax and duty-free sale at retail o of consumer goods imported via clark for consumption outside CSEZ. o EO 97, EO 97-A: granting $100 monthly and $200 yearly tax-free shopping privileges to SSEZ residents living outside secured area of SSEZ and to Filipinos aged 15 and over residing outside SSEZ Petitioners argue that the Executive Department, by allowing thru questioned issuances the setting up of tax and duty free shops and the removal of consumer ggoods and items from the zones without payment of correspondning duties and taxes arbitrarily provided additional exemptions to the limitations imposed by RA 7227. I: (other issues: equal protection clause, preferential use of Filipino labor, prohibition against unfair competition) W/N assailed issuances amounts to violation of the rule on separation of powers being executive legislation. R: Petitioners claim that the wording of RA 7227 clearly limits the grant of tax incentives to the importation of raw materials and capital equipment only, hence they claim that assailed issuances constitute executive legislation for invalidly granting tax incentives in importation of consumer goods. The court however said that to limit the tax-free importation privilege of enterprises to those located inside the special zone only to raw materials clearly runs counter to the intention of the legislature to create a free port where “free flow of goods or capital within, into and out of the zones” is insured. The records of the Senate containing the discussion of the concept of SEZ in Sec 12a RA 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine laws. According to Senator Guingona: The SEZ could embrace the needs of tourism, servicing, financing and o ther investment aspects. However with regard to the executive order issued by President Ramos concerning Clark as being a SEZ (and thus enjoy tax exemptions and incentives) the court declared that such was an invalid exercise of executive legislation. As was decided in the case of Camp John 

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Jay, wherein the court held that John Hay was not granted any tax exemption as it was not anywhere stated in the law. As in this case, RA 7227 expressly provides for the grant of incentives to the SSEZ it fails to make any similar grant however to the other economic zones including Clark. Tax and duty free incentives being in t he nature of tax exemptions the basis thereof should be categorically and unmistakably expressed from the language of the statute.

 ABAKADA v Ermita R.A. 9337 / the EVAT Law was enacted in May 2005. This law: 1) authorized the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12% effective January 1, 2006 , if two conditions are satisfied:  VAT collection as a percentage of GDP of the previous year exceeds 2 4 /5 o % National government deficit as a percentage of GDP of the previous year o exceeds 1 ½% maintaining the rate of 10% until the conditions above took place o It also inserted a provision imposing a 70% limit on the amount of input tax to be credited against the output tax. Petitions were thus filed assailing the constitutionality of the law:  ABAKADA argued that Congress abandoned its exclusive authority to fix o taxes by giving the President the authority upon the Finance Sec’s recommendation to raise VAT to 12% o Sen. Pimentel and Rep. Escudero argued that the law was an undue delegation of legislative powers and a violation of due process Pilipinas Shell dealers argued that the VAT reform was arbitrary, oppressive o and confiscatory. On the other hand, respondents countered that the law was complete, that it left no discretion to the President, and that it merely charged the President with carrying out the rate increase once any of the 2 conditions arise. I: W/n RA 9337 is constitutional R: YES, it is valid and constitutional. 1) Law was NOT an undue delegation of legislative power Congress didn’t delegate the power to tax but the mere implementation of the law – the ascertainment of facts contingent on conditions already provided. In this case, the legislature made the operation of the 12% rate contingent upon 2 specified conditions. Thus, no discretion would be exercised by the President, and he would only exercise the ministerial duty of imposing the 12% rate. Moreover, the President can’t alter or modify / nullify / set aside the findings of fact of the Secretary of Finance, who will ascertain the said conditions because the SoF will not act as alter ego of President but AGENT of the legislative department. 2) The 12% increase does NOT impose an unfair and unnecessary additional tax burden. Because of the country’s gloomy states of economic affairs, it is necessary to raise revenue to meet government expenditures. 3) The 70% limitation on input tax does NOT v iolate due process and EPC Input tax is NOT a property right but a STATUTORY privilege, w/c may be regulated. Besides, the unutilized input tax may be credited in the subsequent periods or even refunded, so it is NOT completely lost.  

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Neither does it violate EPC w/ regard to the 5% creditable withholding tax imposed on payments made by the government for TAXABLE TRANSACTIONS. This is because it is applied equally to members of the same class. Taxable transactions with the government are subject to a uniform 5% rate, in contrast to its different rates prior to amendment. It is clear that Congress intended to treat differently taxable transactions with the government. 4) The law is consistent w/ Uniformity and Equitability of Taxation Uniformity of taxation means that all taxable articles/property of the SAME CLASS be taxed at the SAME RATE. In this case, the tax law is uniform  as it provides for a standard rate of 10% / 12% on all goods and services. It does NOT even make any distinction as to the type of industry / trade that will bear the 70% limitation on the creditable input tax, 5year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. The law is also equitable  because it is equipped with a threshold margin—the 10/12%  VATE rate will not apply to the sale of goods w/ gross annual sales at P1.5 or below. Small corner sari-sari stores are consequently exempt from its application. 5) Even if VAT is regressive, it is still constitutional. The constitution does NOT prohibit the imposition of indirect taxes / a regressive system of taxation. It simply provides that Congress shall EVOLVE a progressive system of taxation, meaning direct taxes must be preferred to indirect taxes. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions.

Sison v. Ancheta BP 135 amended Section 21 of the N ational Internal Revenue Code. The amendment provided a different schedule of tax rates for compensation income and net income. It provided that: The tax base for those earning compensation income at fixed rates would be o GROSS INCOME, The tax base for the income of businesses and professionals would be NET o INCOME Sison, as taxpayer, challenged the validity of the amendment on the ground that he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession as compared to those which are imposed upon fixed income or salaried individual taxpayers. He claims that it amounts to class legislation, in violation of EPC, due process and the rule on uniformity in taxation. I: W/n it is violative of EPC, dp and the rule on uniformity in taxation R: NO! 1) Due process clause may only be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. (ie. When it amounts to confiscation of property / not used for a public purpose) 2) As for EPC, t he Constitution does not require things which are different be treated the same. It is inherent in the power to tax that a state be free to select the subjects of taxation and 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation. *Thus, there was no violation of due process or EPC. 3) There was also no violation of unifor mity.  

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Uniformity does NOT call for perfect equality. It merely means that all taxable articles  / property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. In this case, there is a discernible basis of classification, which is the SUSCEPTIBILITY of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of th em . Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income . It would not be just to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification for the law to adopt gross system of income taxation to compensation income, while continuing the system of net income taxation as regards the professional and business income.

British American Tobacco v Camacho R.A. 8240 was passed recodifying the NIRC where Sec 142 was renumbered Sec 145. British American Tobacco assailed the validity of Sec. 145 of the NIRC (amended by RA 8240), arguing that the said provisions are violative of the equal protection and uniformity clause of the Constitution. Section 145 provides for a four-tier tax rate based on net retail price per pack of cigarettes: (1) low-priced, (2) medium-priced, (3) high-priced, and (4) premiumpriced. Section 145 further provides that NEW BRANDS (registered after January 1, 1997) of cigarettes shall be taxed at their current retail price. If the current net retail price has not been established, the suggested net retail price shall be used to determine the specific tax classification. On the other hand, old or existing brands (registered before January 1, 1997) shall be taxed at their net retail price as of October 1, 1996. Net retail price = price @ which cigarettes are sold on retail in 20 o supermarkets in MM o Suggested net retail price = net retail price @ which brands of cigarettes are intended by the manufacturer to be sold To implement RA 8240, BIR issued a Revenue Regulation (RR No. 1-97) classifying existing brands of cigarettes as those existing or active (old) brands prior to January 1, 1997, while new brands of cigarettes are those registered after January 1, 1997.  Another Revenue Regulation was issued amending the first (RR No. 9-2003) by providing BIR with the power to periodically review every two years / earlier the current net retail price of new brands to ESTABLISH / UPDATE their tax classification. In June 2001, British American Tobacco introduced the Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights. Lucky Strike was taxed based on its suggested gross retail price from the time of its introduction in the market in 2001 until the BIR market survey in 2003. The brands were sold at P22.54, P22.61 and P21.23 so the  

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applicable tax rate is P13.44 per pack. BAT now argues that the "classification freeze provision" violates the equal protection and uniformity of taxation clauses because the Lucky Strike brands are taxed based on their 1996 net retail prices while new brands are taxed based on their present day net retail prices. Thus, Lucky Strike suffers from higher taxes while its competitors pay a lower amount. BAT further argued that the tobacco excise law w as discriminatory because under it, brands that entered the market after 1996 were imposed taxes based on their current retail prices while older brands paid taxes based on their 1996 retail prices. Meanwhile, Philip Morris, Fortune Tobacco, Mighty Corp. and JT International (respodnents-in-intervention) claim that no inequality exists between cigarettes and that nullification of said annex would bring about tremendous loss. I: 1. W/n Sec. 145 of the NIRC violates EPC and uniformity of taxation clauses W/N the Revenue Regulations are invalid in so far as they empower BIR to reclassify and update the classification of new brands every two years or earlier R: Sec 145 NIRC is constitutional but the RRs are invalid for gratning the BIR the power to reclassify and update the classification. 1) NIRC is constitutional The classification freeze provision does not violate the equal protection and uniformity of taxation. It meets the standards for valid classification: rests on a substantial distinction, is germane to the purpose of the law, applies to present and future conditions and applies equally to all those belonging to the same class. (NOTE: The second condition, however, was not fully satisfied as it failed to promote fair competition among the players in the industry. However, this does not make the assailed law unconstitutional) The classification freeze provision was done in good faith and is germane to the purpose of the law. It was i nserted for reasons of practicality and expediency. Since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands as of October 1, 1996, was thus the logical and practical choice. With the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to old brands (cigarettes which are taxed on the basis of average net retail price as of October 1, 1996) but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be i ntroduced in the future. Thus, the classification freeze provision could hardly be considered biased towared older brands over newer brands. Congress was even willing to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF and the BIR. Thus, the provision was the result of Congress’s earnest efforts to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with other State interests. On Uniformity: Uniformity of taxation requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. In the instant case, there is no question that the CFP meets the geographical uniformity requirement because the assailed law applies to ALL CIGARETTE BRANDS n the Philippines. On Inequitablity and Regressivity:  BAT claims that the use of different tax bases for old brands as against new brands is discriminatory / inequitable, and that the CFP is regressive in character. This cannot be sustained because the CFP meets the requirements of the EPC.

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On regressivity -- the excise tax imposed on cigarettes is an indirect tax, and thus, regressive in character. HOWEVER, this does not mean that the law may be declared unconstitutional because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall EVOLVE progressive system of taxation. 2) The BIR RR is invalid because the NIRC does NOT authorize the BIR to update the tax classification of new brands every 2 years or earlier. The power to reclassify cigarette brands remains in Congress.  Allowing the periodic reclassification of brands might tempt cigarette manufacturers to manipulate their brands' price levels or bribe the tax implementers to allow their brands to be classified as a lower tax bracket.

 ABAKADA v Purisima RA 9335 (Attrition Act of 2005) was enacted to optimize the revenue-generation capability and collection of the BIR and BOC by providing a system of rewards and sanctions. This is done through the creation of a Rewards and Incentives Fund (Fund) and a Revenue Performance Evaluation Board (Board). It covers all officials and employees of the BIR and the BOC with at least six months of service, regardless of employment status. The Fund is sourced from the collection of the BIR and the BOC in excess of their revenue targets for the year. Any incentive or reward is taken from the fund and allocated to the BIR and the BOC in proportion to their cont ributions. Petitioners including ABAKADA, invoking their right as taxpayers, challenged the constitutionality of RA 9335: They claimed that limiting the scope of the system of rewards and incentives only to officials and employees of the BIR and the BOC violates the constitutional guarantee of equal protection . There is no reason why such system should NOT apply to OTHER officials and employees of all other government agencies. They assert that the law unduly delegates the power to fix revenue targets to the President as it lacks a sufficient standard on that matt er. I: 1) W/n limiting the scope of the system of rewards and incentives only to officials and employees of the BIR and the BOC violates the constitutional guarantee of equal protection 2) Whether or not the law unduly delegates the power to fix revenue targets to the President . R: NO, it does not violate EPC and does NOT unduly delegate power to the President 1) The equal protection clause recognizes a valid and reasonable classification. RA 9335 has an expressed public policy, w/c is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Since the BIR and BOC perform the special function of taxation, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. 2. Two tests determine the validity of delegation of legislative power: 1) the completeness test 2) the sufficient standard test

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TAX REVIEW DIGESTS – MONTERO  A law is complete when it sets forth therein the policy to be executed and is sufficient when it provides adequate guidelines or limitations of the delegate’s authority RA 9335 adequately states the policy and standards to guide the President in fixing revenue targets and the implementing agencies in carrying out t he provisions of the law. Revenue targets are based on the original estimated revenue collection expected respectively of the BIR and the BOC for a given fiscal year as approved by the Development Budget and Coordinating Committee (DBCC) and submitted by the President to Congress. Thus, the determination of revenue targets does not rest solely on the President as it also undergoes the scrutiny of the D evelopment Board  Also, Section 7 specifies the limits of the Bo ard’s authority and i dentifies the conditions under which officials and employees whose revenue collection falls short of the target by at least 7.5% may be removed from the service.

Meralco v. Province of Laguna: Delegation to LGUs, Impairment Clause Meralco was granted by several municipalities of the Province of Laguna a franchise to operate. RA 7160 or the Local Gov Code of 1991 was then issued w/c allowed local government units to create their own sources of revenue and to levy taxes, fees and charges consistent w/ the basic policy of autonomy. Purusant to this, the province of Laguna enacted an ordinance imposing on businesses enjoying a franchise a franchise tax of 50% of 1% of gross annual receipts. Meralco paid under protest and sent a formal claim for refund to the Provincial Treasurer claiming that the franchise tax it had paid to the National Government (pursuant to P.D. 551) already included the franchise tax imposed by the Provincial Tax Ordinance. Meralco also contended that Laguna’s imposition of franchise tax contravened the provisions of P.D. 551 Section 1 which provided that the franchise tax payable by all grantees of electric franchises shall be 2% of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current I: W/n the province of Laguna had the power to levy the franchise tax R: Yes. Under the present Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to e xist although Congress may provide statutory limitations and guidelines. The reason for this is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. The LGC of 1991 explicitly authorizes provincial governments, notwithstanding any exemption granted by law, to impose a tax on businesses enjoying a franchise. While the Court has referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being STRICTLY CONTRACTUAL. However, contractual tax exemptions should not be confused w/ tax exemptions under franchises. Contractual tax exemptions are those agreed to by the taxing authority in contracts, such as those contained in government bonds, where the government acts in its private capacity and waives its governmental immunity. Tax exemptions of this kind may NOT be revoked without impairing the obligations of contracts. On the other hand, a franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. 

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 Art 12 of the Consti provides that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

Cassanovas v. Hord: Impairment Clause In 1897, the Spanish Gov granted Cassanovas certain mines in Ambos Camarines. The Internal Revenue Act imposes on all mining concessions granted prior to 1899 a property tax of P100 + an ad valorem tax of 3% of the actual market value of the output of the mines. The CIR thus considered Cassanovas to fall under such. Cassanovas assailed the validity of this provision on the ground that it impairs the obligations of contracts. Under the decree of the Spanish Government, the mining claim was subject only to P20 property tax + ad valorem tax of 3%. The decree provided that no other taxes except those mentioned shall be imposed upon mining industries. I: W/n there was a violation of the impairment clause R: Yes. Therefore, the provision is void. 1) There was a contract between the Spanish Government and Cassanovas, the obligation of which contract was impaired by the Internal Revenue Law.  A State may by contract based on consideration exempt the property of an individual or corporation from taxation either for a specified period or permanently.  And it is equally well settled that the exemption is presumed to be on sufficient consideration, and binds the State if the charter containing it is accepted. Such contract can be enforced against the State at the instance of the corporation. 2) Also, the provision conflicts with Section 60 of the Act of Congress of 1 July 1902, which indicate that concessions can be cancelled only by reason of ILLEGALITY in the procedure by which they were obtained, or for FAILURE to comply with the conditions prescribed. The grounds were not shown or claimed in the case. The important distinction in this case is that there was consideration between both parties for entering into the contract. From the provisions of the deed, it was not a unilateral grant of a privilege by the Spanish Government. Cassanovas undertook to perform some things with respect to the mining claim in consideration of the privilege. Hence, there was a binding contract with reciprocal obligations, which the State cannot abrogate.  

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CIR v CA and YMCA  YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. In 1980, YMCA, among others, an amount of income (about P700k+) from leasing out a portion of its premises to sm all shop owners, like restaurants and canteen operators, and from parking fees collected from non-members. The CIR thus issued an assessment to YMCA totaling about P415k+ including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages.  YMCA protested the assessment and filed a letter. In reply, the CIR denied the claims of YMCA.  YMCA thus filed a petition to the CTA to take out the taxes and CTA ruled in favor of  YMCA. 

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CIR filed a petition with the CA to reverse, but CA affirmed CTA's decision. I: W/n the income derived from rentals of real property owned by YMCA (established as "a welfare, educational and charitable non-profit corporation") is subject to income tax under the NIRC and Constitution R: YES, the income derived by YMCA from rentals of its real property is subject to income tax. Under the NIRC: While Section 27 of the NIRC provides that non-profit organizations and clubs shall not be taxed on their income, it also provides that this exemption will NOT apply to income derived from 1) properties, real or personal, and 2) any other activities conducted for profit shall be subject to tax (amended by PD 1457).  Applying the doctrine of strict interpretation of tax exemptions, the phrase "any of their activities conducted for profit” does NOT qualify the word “properties.” This makes income from the property of the organization taxable, regardless of how that income is used -whether for profit or for lofty non-profit purposes. Under the Constitution:  Article VI, Section 28 of the Constitution exempts “charitable institutions” from the payment not only of taxes. HOWEVER, acdg to consti framers, the exemption does NOT pertain to income tax but only property taxes. For the YMCA to be granted the exemption as an “educational institution” under the Consti (Art 14 Sec 4), it must prove with substantial evidence that: a. it falls under the classification non-stock, non-profit educational institution; and b. the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes However, no evidence was submitted by YMCA to prove that they met the requisites. The term “educational institution” or “institution of learning” has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers to schools, which is synonymous with formal education OR a school seminary, college, or educational establishment. The Court, upon examining the “Amended Articles of Incorporation” and “By-Laws” of the YMCA, but found nothing in them that even hints that it is a school or an educational institution. Even if YMCA is an educational institution, the Court also notes that YMCA did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively used for educational purposes.

NOTE  (if Sir asks about how this differs with OTHER cases): The cases relied on by YMCA do not support its cause. YMCA of Manila v. CIR and Abra Valley College, Inc. v. Aquino are not applicable, because the controversy in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City is not in point either, because it involves a claim for exemption from the payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that involved in a claimed exemption from the payment if income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. Of Internal Revenue, the party therein, which claimed an exemption from the payment of income tax, was an educational institution which submitted substantial evidence that the income subject of the controversy had been devoted or used solely for educational purposes. On the other hand, YMCA in the present case had not given any proof that it is an educational institution, or that of its rent income is actually, directly and exclusively used for educational purposes. Lung Center of the Phils v QC The Lung Center of the Philippines, a non-stock and non-profit entity established by virtue of PD 1823, was the owner of a parcel of land in QC. In the middle of the lot was a hospital known as the Lung Center of the Philippines. 

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 A big space at the ground floor was being leased to private parties, for canteen and small store spaces, and to medical practitioners who use the same as their private clinics for their patients whom t hey charge for their professional services.  Almost ½ of the entire area on the left side of the building along Q Ave was vacant and idle, while a big portion on the right side, at the corner of Q Ave and Elliptical Road, was being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The Lung Center accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, it also received gov subsidies. The City Assessor of QC assessed both the land and the hospital building for real property taxes amounting to about P4M. Lung Center filed a Claim for exemption from real property taxes saying it was a charitable institution. The Lung Center’s request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA) for the reversal of the resolution of the City Assessor. The Lung Center alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. However, the Local Board held Lung Center liable for real property taxes. Decision was affirmed by QC Central Board. Petition was elevated to SC. I: 1)W/n Lung Center is a charitable institution within the context of PD 1823 and under the Consti - YES 2) W/n the real properties of the Lung Center are exempt from real property taxesNO R: 1) YES, the Lung Center is a charitable institution. To determine whether an enterprise is a charitable institution, the elements which should be considered include the statute creating it, its purpose, by-laws, services and nature/ use of properties. Under PD 1823, the Lung Center is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The Articles of Incorporation of LC provide th at its medical services are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination.  A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is used for the CHARITABLE objective it is intended for, and no money inures to the private benefit of the persons managing or operating the institution. In this case, the money received by the Lung Center becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit.

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Under PD 1823, the Lung Center is entitled to receive donations. The Lung Center does not lose its character as a charitable institution simply because of gov subsidies (donation). 2) NO, not all are exempt from real property tax. The portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. Since taxation is the rule and exemption is the exception, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Under PD 1823, the Lung Center does NOT enjoy any property tax exemption privileges for its real properties and buildings. If the intentions were otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2 thereof. Under the 1973 and 1987 Constitutions and RA 7160 in order to be entitled to the exemption of property tax, the Lung Center should prove that a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. If real property is used for one or more commercial purposes, it is not exclusively o used for the exempted purposes but is subject to taxation. THUS, “exclusively” means SOLELY. o What is meant by actual, direct and exclusive use of the property for charitable purposes is the DIRECT, IMMEDIATE, ACTUAL application of the PROPERTY itself to the purposes for which the charitable institution is organized. It is NOT the use of INCOME of the property w/c is the controlling factor (to exempt). In this case, while portions of the hospital are used for the treatment of patients, other parts are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden Center." Thus, portions of the land leased to private entities and individuals are NOT tax exempt, while those used for patients, paying and non-paying, are exempt.

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SITUS OF TAXATION AND DOUBLE TAXATION Proctor & Gamble v Municipality of Jagna The Municipal Council of Jagna, Bohol, enacted Municipal Ordinance 4 w/c imposed STORAGE FEES on all exportable copra deposited in the bodega w/in the jurisdiction of Jagna, Bohol at the rate of 10 cents PER 100 kilos . It also provides that all exportable copra  deposited in the bodega within the Municipality of Jagna Bohol, is part of the surveillance and lookout of the Municipal Au thorities. In this light, P&G, a domestic corp engaged in the manufacture of oil, soap and others, w/c maintained a bodega in the municipality where it stored COPRA (purchased from the municipality and shipped for its manufacturing ops), paid storage fees for 6 yrs from 1958 to 1963. The fees totalled P1M+. P&G then filed a suit in the CFI of Manila, praying: to declare Ordinance 5 INAPPLICABLE Tto it or, that it be pronounced ultra-vires o and void for being beyond the power of the Municipality to enact and that defendant Municipality be ordered to refund to it the amount of P42k+ o which it paid under protest; and costs P&G argues that the tax imposed in the said ordinance is an “EXPORT TAX” on EXPORTABLE COPRA and thus, the said levy was inapplicable to their business because they are store copra for their EXCLUSIVE USE in connection w/ the manufacture of soap, edible 

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oil, margarine and other similar products, for purposes of profit / revenue. TC ruled in favour of the Municipality, saying it had the power to enact the Ordinance under the Revised Admin Code (sec 2238), otherwise known as the General Welfare Clause. It also declared P&G’s right of action had prescribed under the 5-year period provided for by Article 1149 of the Civil Code. Thus, this direct appeal. I: 1) W/n MO 4 is ultra vires and void- NO, it is VALID! 2) W/n P&G is entitled for the reimbursement of excess amount paid.-NO! R: Ordinance No. 4 is valid as a municipality is authorized to impose 3 kinds of licenses, pursuant to the broad authority conferred upon municipalities by Commonwealth Act No. 472: a license for regulation of useful occupation or enterprises;  license for restriction or regulation of non-useful occupations or enterprises;  and license for revenue  It is thus unnecessary to determine whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse defendant Municipality for service of supervision because defendant Municipality is authorized not only to impose a license fee but also to tax for revenue purposes. It has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration because the oil content of the copra when ignited is difficult to put under control by water and the use of chemicals is necessary to put out the fire.  And as the Ordinance itself states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of municipal authorities. P&G's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within defendant's territory is beyond the cost of regulation and surveillance is not well taken. As enunciated in the case of Victorias Milling Co. vs. Municipality of Victorias, supra. Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures. In the case at bar, appellant has not sufficiently shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive. When the Ordinance itself speaks of "exportable" copra, the meaning conveyed is NOTexclusively export to a foreign country but shipment out of the municipality. The storage fee impugned is not a tax on export because it is imposed not only upon copra to be exported but also upon copra SOLD AND USED for DOMESTIC PURPOSES if stored in any warehouse in the Municipality and the weight thereof is 100 kilos or more. Double taxation has also been defined as taxing the same person twice by the same  jurisdiction for the same thing. In this case, a tax on P&G's products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality. However, lower court erred in ruling that action had prescribed. In Municipality of Opon vs. Caltex Phil: the period for prescription of actions to recover municipal license taxes is 6 years under Article 1145(2) of the Civil Code. Thus, P&G's action brought within six years from the time the right of action first accrued in 1958 has not yet prescribed.

Province of Bulacan v CA

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The Sangguniang Panlalawigan of Bulacan passed a provincial ordinance which provided for the imposition of a 10% tax on the fair market value in the locality per cubic meter of ordinary stones, sand, grave, earth and other quarry resources, extracted from public lands or other public waters within its territorial jurisdiction. Thus the provinicial treasurer of Bulacan assessed Republic Cement Corporation for taxes from several parcels of private land in the province. Republic paid under protest, claiming that the imposition of such tax is beyond the power of the taxing authority of Bulacan. The case was eventually elevated to CA and CA ruled that the Province of Bulacan had NO authority to impose the tax I: W/n the Province of Bulacan has the authority to impose such tax. R: No, they do not have the authority. Petitioners contend that their authority comes from Section 186 of the LGC w/c provides that the province may levy taxes and fees not more than 10% of the fair market value per cubic meter of ordinary stones, sand, gravel etc, extracted from public lands. However, a perusal of the said law shows that the tax imposed is an excise tax being a tax upon the performance, carrying on, or exercise of an activity and the LGC provides that cities, municipalities, and barangays shall NOT extend to excise taxes enumerated under the NIRC. The NIRC levies a tax on all quarry resources, regardless of origin, whether extracted from public or private land. Thus, a province may not ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources, as the same are already taxed under t he NIRC. HOWEVER, the province can impose a tax on stones, sand, gravel, earth and other quarry resources extracted from public land because it is expressly empowered to do so under the Local Government Code.  As to the quarry resources extracted from PRIVATE LAND, it may not do so due to the limitations in the LGC (sec 133) in relation to the NIRC ( Sec 151). Finally the petitioners cannot invoke the Regalian Doctrine to extend the coverage to quarry resources because taxes, being burdens are NOT presumed beyond what the applicable statute expressly and clearly declares. Tax statutes are construed strictissimi juris against the government.

FORMS OF ESCAPE FROM TAXATION Delpher Trades Corp v IAC Pacheco and his sister owned a parcel of real estate land identified that was registered in Bulacan. They then leased the land to Construction Components Inc, and providing that during the existence or after the term of the lease, the lessor (Pacheco,sister) should he decide to sell the property leased, shall first offer the same to the l essee(Construction) and the lessee has the priority to buy under similar conditions. Construction then assigned its rights and obligations to Hydro Pipes w/ the consent of the Pachecos.  A deed of exchange was executed between the Pachecos and Delpher Trades where Pachecos conveyed to Delpher the leased property together w/ another parcel of land also located in Malinta Estate, Valenzuela for 2,500 shares of stock of Delpher w/ a to tal value of P1.5M. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, Hydro Pipes filed an amended complaint for 

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reconveyance of the subject lot in its favor under conditions similar to those where Delpher acquired the property from the Pacheco’s. The CFI of Bulacan ruled in favor of Hydro Pipes who had the preferential right to acquire the property (right of first refusal), and Pacheco was ordered to immediately convey the property to Hydro Pipes. The IAC affirmed this decision. Delpher argued that the “deed of exchange” executed between Pacheco and Delpher was NOT a contract of sale, so it did not prejudice the right of first refusal in the contract between Pacheco and Hydro Pipes I: W/n the deed of exchange was a contract of sale R: W/n there was a violation of the right of first refusal entitled to Hydro Pipes R: NO, the deed of exchange was NOT a contract of sale; thus, there was no violation of the right of first refusal The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale because there was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, Hydro Pipes has no basis for its claim of a light of first refusal under the lease contract. In order to perpetuate their control over the property through the corporation and to avoid taxes, the two pieces of real estate w/c had been leased to Hydro Pipes, were transferred to the corporation by virtue of a deed of exchange of property. In exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; they refer to this scheme as "estate planning." In effect, the Delpher Trades Corporation is a business conduit or alter ego of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. Its other advantages are continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.  A no-par value share does no t purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. Thus, by removing the par value of shares, the attention of persons interested in t he financial condition of a corporation is focused upon the value of assets and the amount of its debts.

CIR v Toda CIC authorized Benigno Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90M. Toda purportedly sold the property for P100 million to Rafael Altonaga, who, in turn, sold the same property on the same day to Royal Match for P200M. For the sale of the property to Royal Match (RMI), Altonaga paid capital gains tax in the amount of P10M.

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TAX REVIEW DIGESTS – MONTERO CIC then filed its corporate annual income tax return for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of about P75k+.  After crediting withholding taxes of P254k+, it paid P26k+ for its net taxable income of P75k+ Toda sold his entire shares of stocks in CIC to Choa for P12.5M. Three and a half years later, Toda died. Subsequently, the BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of about P79k+. The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. The Estate of Toda received a Notice of Assessment from the CIR for deficiency income tax for the year 1989 in the amount of P79k+. The Estate thereafter filed a protest, which the CIR dismissed. The estate filed a Petition for Review before the CTA alleging, among others, that the CIR erred in holding the estate liable for income tax deficiency. Holding that CTA ruled in favour of the Estate. I:W/n CTA erred in holding that Toda committed no fraud with intent to evade the tax on the sale of the properties of Cibelles Insurance Corporation R: YES, CTA erred. Toda committed fraud so his Estate should pay the P79k+ deficiency income tax for 1989, plus legal interest until the amount is fully paid. Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation: Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. It connotes the integration of three factors: EBU! 1) end to be achieved (payment of < taxes) o 2) bad faith / evil state of mind o 3) unlawful course of action / failure of action o  All these factors are present in the instant case. Prior to the purported sale of the Cibeles property by CIC to Altonaga, CIC received P40M from from RMI, and NOT Altonaga. The P40M was debited by RMI and reflected in its trial balance as "other inv. – Cibeles Bldg." Another ₱40M was debited and reflected in RMI’s trial balance as "other inv.  – Cibeles Bldg." This shows that the real buyer of the properties was RMI, and NOT Altonaga. The Estate admitted that the sale was made to Toda as part of the tax planning scheme of CIC. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud pertains to acts and omissions for purposes of deception, breach of trust or taking advantage is taken of another. In this case, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and NOT the 35% corporate income tax.

 Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale t ransactions should be treated as a single direct sale by CIC to RMI.

EXEMPTION FROM TAXATION Phil Acetylene v CIR Philippine Acetylene Co. Inc (PAC). is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. From 1953 to 1958, it made various sales of its products to the NAPOCOR, a Phil gov agency, and the VOICE OF AMERICA, a US gov agency. The CIR assessed deficiency sales tax and surcharge on the sales, w/c amounted to about P12k+, pursuant to the NIRC. The company denied liability for the payment of the tax on the ground that both NAPOCOR and the VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed to the CTA. The CTA ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the MANUFACTURER and NOT the BUYER. PAC, being a manufacturer, CANNOT claim exemption from the payment of sales tax simply because its buyer, Napocor, is exempt. With respect to the sales made to the VOA, CTA held that goods purchased by the  American Government or its agencies from manufacturers or producers are exempt from the payment of the sales tax under the agreement between the Government of the Philippines and that of the United S tates, provided the purchases are supported by certificates of exemption. I: W/n PAC should be exempt from sales tax R: NO. PAC should pay P12k+ deficiency tax. Statutes which impose a tax on sales, have been described as “acts with schizophrenic symptoms,” as they apparently have two faces — one that of a vendor tax, the other, a vendee tax. HOWEVER, this is clarified by the NIRC W/c provides that the sales tax “shall be paid by the MANUFACTURER or producer,” who must “make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed from the factory or mill warehouse and within Sec 186, NIRC provides that a tax = to 7% of the gross selling price shall be levied on articles sold, to be paid by the manufacturer or producer. Sec 183 further provides that it persons conducting businesses should pay the percentage tax, because otherwise, the amount of the tax shall be increased by 25%, the increment to be a part of the tax. When the economic burden of the tax finally falls on the purchaser, the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross receipts 

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as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the amount of the t ax. The effect is still the same, namely, that the purchaser does NOT pay the tax. He pays or may pay the seller more for the goods because of the seller’s obligation, but that is all and the amount added because of the tax is paid to get the goods and for nothing else. But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a matter of economics. Then it can no longer be contended that a sales tax is a tax on the purchaser. The tax imposed by section 186 of the NIRC is a tax on the manufacturer or producer and NOT a tax on the purchaser except probably in a very remote and inconsequential sense.  Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible. The agreement between RP and the US concerning military bases provides tax exemption for goods that will be used EXCLUSIVELY in the construction, maintenance, operation and defense of bases. THUS, only SALES to the quartermaster are exempt from taxation. Hence, the circular of the Bureau of Internal Revenue w/c gives the tax exemptions in the  Agreement an expansive construction it is void. T he s ales to the VOA are subject to the payment of percentage taxes under section 186 of the Code. HOWEVER, the Napocor enjoys tax exemption by virtue of an act of Congress, in order to facilitate indebtedness.

CIR v CA and Ateneo de Manila  Ateneo de Manila University, is a non-stock, non-profit educational institution, was conducting research through an auxiliary unit, the Institute of Philippine Culture. In 1983, Ateneo received from CIR a demand letter assessing Ateneo of the the sum of about P170k+ for alleged deficiency contractor’s tax , and an assessment in the sum of about P1M+ for alleged deficiency income tax for the fiscal year of March 1978. Denying said tax liabilities, Ateneo sent CIR a letter-protest contesting the validity of the assessments. CIR rendered a letter-decision canceling the assessment for deficiency income tax but modified the assessment for deficiency contractor’s tax by increasing the amount due to P190k+.  Ateneo requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the CTA a petition for review of the said letter-decision. While the petition was pending before the CTA, CIR issued a final decision reducing the assessment for deficiency contractor’s tax from P190k+ to P46k+, exclusive of surcharge and interest. CTA canceled the deficiency contractor’s tax assessment, w/c was affirmed by the CA. CIR filed a petition for review before the SC. I: W/n Ateneo should pay the 3% contractor’s tax under Sec 205 of the T ax Code R: NO. 1) In case of doubt, statutes on tax imposition are to be construed strongly against the GOV and in favor of citizens, because burdens are NOT to be imposed nor presumed beyond what is expressed.  Ateneo’s IPC NEVER sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Funds received by Ateneo are technically not a fee. They may however fall as gifts or donations which are “tax-exempt” as shown by Ateneo’s compliance w/ the NIRC requirement providing for the exemption of such gifts to an educational institution. 2) The term ‘independent contractors’ include persons whose activity consists essentially of the sale of all kinds of services for a fee. 

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The term ‘gross receipts’ means all amounts received by the prime or principal contractor as the total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the su bcontractor.  Ateneo’s IPC cannot be deemed either as a contract of sale or a contract for a piece of work. By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. In the case of a contract for a piece of work, the contractor binds himself to execute a piece of work for the employer, in consideration of a c ertain price or compensation. HOWEVER, it is clear in from the evidence on record that there was no sale either of objects or services because there was no t ransfer of ownership over the research data obtained or the results of research projects undertaken by the IPC. TO SUM: Ateneo is NOT a contractor selling its services for a fee but an academic institution conducting these researches pursuant to its commitments to education and, ultimately, to public service. Education is and NOT profit is the motive for undertaking the research projects.

National Development Company v CIR  The NDC entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through irrevocable letters of credit. 14 promissory notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. The remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. NDC remitted to the shipbuilders in Tokyo the total amount of about US$4M+ as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5k+. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the CTA, w/c ruled in favor of the BIR, except for a slight reduction of the tax deficiency in the sum of P900, representing the compromise penalty. I: W/n NDC should be held liable for for withholding taxes on the interest remitted to the Japanese corporation R: YES. The interest remitted to the Japanese shipbuilders in Japan on the UNPAID BALANCE of the purchase price of the vessels acquired by NDC is interest derived from sources within the Philippines and therefore subject to incom e tax under the NIRC. The law, however, does not speak of activity but of the SOURCE. The Government’s right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is NOT based on the condition that the ACTIVITY be in the Philippines. Instead, it is the RESIDENCE of the obligor who pays the interest that is material in determining the source of interest. It is not the physical location of the securities, bonds or notes or the place of payment. 

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The law specifies: “interest derived from SOURCES within the Philippines and interests on bonds, notes or other interest bearing obligations of residents, corporate or otherwise.” In this case, NDC is a Philippine corporation engaged in the business in the Philippines, it is a domestic corporation and resident of the Philippines. Thus, it is subject to tax. 2) NDC also has no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the government notes were exempt from taxation. The law invoked (RA 1407) did NOT state any exemption on said interest on securities. NDC has not established any tax exemption on the said transaction. The government was NOT the one who issued the notes but merely guaranteed the said issuances. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in favor of the taxing power. 3) In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the NDC closes its eyes to the nature of the entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. 4) Lastly, it must be noted that NDC is NOT the one being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and NOT the Republic of the Philippines that was subject to the tax the NDC d id not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders, as imposed by the Tax Code. LASTLY, the court has stated that in case of the doubt, the one withholding can just the pay tax and ask for refund later when an error in the payment exists.

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Maceda v Macaraig Since May 27, 1976 (when PD 938 was issued) until June 11, 1984 when PD 1931 was promulgated (abolishing the tax exemptions of all GOCCs), oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to the NPC. This non-payment of taxes spanned for 8 years. The oil companies started to pay specific and ad v alorem taxes on their sales of oil products to NPC only after the promulgation of PD 1931 w/c withdrew all exemptions granted in favor of GOCCs and empowering the Fiscal Incentives Review Board (FIRB) to recommend to the President or to the Minister of Finance the restoration of the exemptions which were withdrawn. FIRB issued Resolution 10-85 w/c restored the tax exemption privileges of NPC effective retroactively to June 11, 1984 up to June 30, 1985. Thus, the NPC applied with the BIR for a refund of Specific Taxes paid on petroleum products in the total amount of about P58k+. Maceda, Senate member, introduced Resolution 22 w/c was aimed at conducting an inquiry in aid of legislation in line w/ the reported tax manipulations and evasions by oil companies (particularly Caltex, Shell and Petrophil) by availing of their non-existing exemption of NPC from indirect taxes, w/c resulted in obtaining a tax refund totaling P 1.55 Billion from the Department of Finance The Blue Ribbon Committee conducted a lengthy formal inquiry on the matter and recommended that the tax refund to NPC be cancelled, and also to cancel the approval of deed of Assignment by NPC to Caltex, and collect from Caltex its tax liabilities which were erroneously treated as paid or settled with the use of the tax credit certificate that NPC assigned to said firm. Maceda contended that the exemption of NPC from INDIRECT TAXATION was revoked and repealed by the latest amendment to the NPC charter by PD 938, by the deletion of the 

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phrases “directly or indirectly” and “on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power” The exemption of NPC provided in Section of PD 938 regarding the payments of “all forms of taxes, etc” cannot be interpreted to include indirect tax exception since tax statutes must be strictly construed against the one claiming the exemption must be strictly construed against the one claiming the exemption I: W/n NPC is liable for indirect tax R: NO, NPC is NOT liable for indirect tax Indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else. For example, the excise and ad valorem taxes that oil companies pay to the BIR upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the “cash” and/or “selling price”. In interpreting a statute, legislative intent must be ascertained -- the reason for its enactment should be kept in mind and the statute should be construed with reference to its intended purpose + the evil sought to be remedied. In this case, NPC is a non-profit public corporation created for the general good and welfare (development of hydroelectric generation of power and production of electricity from other sources) wholly owned by the government. From the very beginning of its corporate existence, the NPC enjoyed preferential tax treatment to enable the Corporation to pay the indebtedness and obligation and in furtherance and effective implementation of the policy enunciated in Sec 1 of RA 6395. From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious. In the earlier law, RA 358 the exemptions was worded in general terms, as to cover  “all taxes, duties, fees, imposts, charges, etc” However, the amendment under RA 6395 enumerated the details covered by the exemption. Subsequently, PD 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect on all petroleum products used in its operation. PD 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from “all forms of taxes, duties, fees, imposts” as well as costs and service fees including filing fees, appeal bonds, supersede as bonds, in any court or administrative proceedings.” The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions. Provisions granting exemptions to government agencies may be construed liberally, in favor of non-tax liability of such agencies. Thus, the rule that tax exemptions should be strictly construed is NOT applicable to NPC. The practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. In the case of property owned by the state or a city or other public corporations, the express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exception."

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Maceda v Macaraig MR Unfazed by the Decision that the SC decision, Maceda filed a motion for reconsideration. In the process, a hearing was held on July 9, 1992 where all parties presented their respective arguments. However, the MR was denied.

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1) What kind of tax exemption privileges does NPC have? Maceda contended that PD 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes etc.," i n its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly include "indirect taxes." The SC does not agree with this as a chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes — direct and indirect. NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its creation by virtue of C.A. No. 120. When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be completely tax exempt.  After the NPC was authorized to borrow from other sou rces of funds — aside issuance of bonds — it was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges of the NPC were maintained. NPC's tax exemption from real estate taxes was, however, specifically withdrawn by RA 987 but was restored by RA 6396. Moreover, PD 938, which raised its capital stock and USD borrowing rate, expressly states that the NPC must not only be able to pay its indebtedness but also to be exempt from ALL forms of taxes if its goal is to be achieved. 2) For what periods in time were these privileges being enjoyed? In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even a single public or private corporation — whose rights would be violated if NPC's tax exemption privileges were to be r estored. While there might have been a MERALCO before Martial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC in line with the State policy that NPC was to be the State implementing arm for the electrification of the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO — as a producer of electricity — which could have objected to the restoration of NPC's tax exemption privileges. It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just asking that its tax exemption privileges be restored. Thus, NPC had its tax exemption privileges restored from 1984 to the present. 3) If there are taxes to be paid, who shall pay for these taxes? The oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. HOWEVER, because NPC has been exempted from both direct and indirect taxation, the NPC must beheld exempted from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the "no rmal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies — because to do so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.

 A. Chr ono lo gi cal rev iew of th e rel eva nt NP C law s w it h res pe ct to ta x ex em pt ion provisions 1. November 3, 1936- CA 120 was enacted creating the National Power Corporation (NPC) to develop hydraulic power from all sources in the Philippines with a sum of P250,000 appropriated from the Philippine Treasury, whose main source of funds shall be exempt from taxation. 2. June 4, 1949- RA 357 was enacted authorizing the President to guarantee absolutely and unconditionally as primary obligor the payment of all NPC loans, wherein such loans shall be exempt from taxes. 3. On the same date, it was authorized for the first time to incur other types of indebtedness which shall also be exempt from taxation. 4. January 22, 1974- PD 380 was issued to give extra powers to NPC, wherein its capital stock was raised to P2 billion, and was authorized to borrow a total of USD 1 billion. 5. May 27, 1976- PD 938 was issued, raising its ceiling of indebtedness to P12 billion and its USD borrowing rate at USD 4 billion. Several tax laws were enacted that challenged the tax exemptions imposed on NPC. First, in 1976, PD 882 was passed withdrawing the tax exemption of NPC with regard to imports in order to reduce foreign exchange spending and to protect domestic industries. Second, PD 1177 was issued as it was the declared policy of the State to formulate and implement a National Budget that is an instrument of national development and that due to this, all units of government, including GOCCs, shall pay income taxes, customs duties and other taxes and fees imposed under revenue laws, provided that organizations otherwise exempted by law from the payment of such taxes/duties may ask from a SUBSIDY from the General Fund. Third, PD 1931 was passed in 1984, due to the economic morass after the Aquino Association. The Decree expressly repeals the grant of tax privileges to any GOCCs and all other units of the government. Lastly, in 1986, EO 93 (S’86) was issued with a view to correct presidential restoration or grant of tax exemption to other government and private entities without benefit of a review by the Fiscal Incentives Review Board.

CIR v Gotamco & Sons, Inc. The World Health Organization (WHO) is an international organization which has a regional office in Manila.  As an international organization, it enjoys privileges and immunities which are defined more specifically in the Host Agreement  entered into between the Philippines and the said Organization. Section 11 of the Agreement provides that the Organization, its assets, income and other properties shall be: exempt from all direct and indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges for public utility services. When the WHO decided to construct a building to house its own offices, as well as other UN offices in Manila, it entered into a further agreement with the Government of the Philippines which stated that the Organization may import into the country materials and fixtures required for the construction free from all duties and taxes and agrees not to utilize any portion of the international reserves of the Government. In inviting bids for the construction of the b uilding, the WHO informed the bidders that the building to be constructed belonged to an international organization with diplomatic status and thus exempt from the payment of ALL fees, licenses, and taxes. Thus, their bids "must take this into account and should not include items for such taxes, licenses and other payments to Government agencies. 

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The construction contract was awarded to John Gotamco & Sons, Inc. on February 10, 1958 for a price upon completion of P452k+ The CIR imposed a contractor’s tax and stated that "as the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the CONTRACTOR, the same is not covered by the Host Agreement. The CIR sent a letter of demand to Gotamco demanding payment of about P16k+ representing the 3% contractor's tax plus surcharges on the gross receipts it received from the WHO. Gotamco appealed the CIR's decision to the CTA, which rendered a decision in favor of Gotamco and reversed the CIR’s decision. I: W/n Gotamco should pay 3% contractor's tax under Section 191 of the NIrC from the construction of the WHO building in Manila R: NO. 1) CIR’s contention that the contractor’s tax is an excise tax imposed upon the contactor (privilege of doing business) with no bearing on the WHO (thus, NOT an indirect tax on WHO), cannot hold water. Direct taxes are those that are demanded from the very person who should pay them while indirect taxes are those that are demanded in from one person in the expectation that he can shift the burden to someone else. The contractor's tax is course payable by the contractor but in the last analysis it is the OWNER of the building that shoulders the burden of the tax because the same is shifted by the contractor to the ow ner as a matter of self-preservation. Thus, it is an indirect tax on WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. 2) CIR claims that in Philippine Acetylene Co. vs. CIR, the 3% contractor's tax fans directly on Gotamco and cannot be shifted to the WHO. HOWEVER, the said case is not controlling, since the Host Agreement specifically exempts the WHO from "indirect taxes." The Philippine Acetylene case involved a tax on SALES of goods which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser."

Republic v IAC The BIR initiated an action in the CFI of Manila to collect deficiency income taxes from the Spouses Pastor for the years 1955 to 1959 in the amount of about P17k+ with 5% surcharge and 1% interest, with costs.  After their Motion to Dismiss was denied, they filed an Answer, admitting that there was an assessment against them in the aforementioned amount but that they had availed of the TAX AMNESTY   under PD Nos. 23, 213 and 370 , paying the corresponding amnesty taxes to be able to remove their liabilities. The Government only filed the action against the spouses 10 years after the assessment on the deficient income taxes were made. The CFI ruled in favor of the spouses, saying that their tax liabilities were deemed settled under PD 213 (and not the other PDs) as shown in the Amnesty Income Tax Returns’ Summary Statement and the Tax Payment Acceptance Order which contain the assessment for the questioned years. By accepting payment, the Government has therefore WAIVED ITS RIGHT  to recover further deficiency income taxes under existing assessments against them. 

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The Gov filed an appeal w/ the IAC, alleging that the spouses were NOT qualified to avail of the tax amnesty because the benefits could only be availed of by persons WITHOUT pending assessment against them (according to Revenue Regulations Nos. 8-72 and 7-73). IAC dismissed the appeal, rulling that RR 7-73 was null and void for being contrary to/restrictive of PD 213. I: W/n payment of deficiency income taxes under a tax amnesty law operates to divest the government of the right to recover against the taxpayer even if there is an existing assessment against the latter R: YES. What was granted under PD 213 is not just an exemption but an amnesty, and the Government is estopped from collecting the difference between the deficiency tax assessment and the amount already paid by them as amnesty tax. Being in the nature of a general pardon/intentional overlooking of the State of its authority to impose penalties on persons otherwise guilty of evasion or like violations, it constitutes absolute forgiveness or a waiver by the Government of its right to collect what would otherwise be due it. The findings of respondent appellate court that the deficiency income taxes were paid by the spouses and accepted by the government under PD 213 are entitled the highest respect. In case of doubt, tax statutes are to be construed strictly against the Government and liberally in favor of the taxpayer.

Republic v Caguioa In 1992, Congress RA No. 7227   or the BASES CONVERSION AND DEVELOPMENT  ACT OF 1992 which, among other things, created the Subic Special Economic and Freeport Zone (SSEZ) and the Subic Bay Metropolitan Authority (SBMA). RA No. 7227 provided incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation from the SSEZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws. It also provided that in lieu of paying taxes, 3% of the gross income earned by all businesses and enterprises within the SSEZ shall be remitted to the National Government, 1% each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, it established a development fund of 1% of the gross i ncome earned by all businesses and enterprises within the SSEZ to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to be base areas. Pursuant to the law, respondent companies (Indigo Distribution, Star Trading, etc) applied for and were granted Certificates of Registration and Tax Exemption by the SBMA. The Certificate entitled them to tax and duty-free importation of materials for use solely within the Subic Bay Freeport Zone. Congress, however, subsequently passed R.A. No. 9334   w/c stated that the importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into the Philippines, even if destined for tax and duty free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes due thereon . This shall apply to those brought directly into the freeports of the SSEZ, under RA No. 7227. 

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Because of this, SBMA issued a Memorandum directing the departments concerned to require locators/importers in the SBF to pay the corresponding duties and taxes on their importations of cigars, cigarettes, liquors, and wines before said items are cleared and released from the freeport. In line w/ this, the NIRC was amended (Sec 1310 w/c also provided that taxes and charges shall apply to the importation of cigarettes, liquor, wine, etc. On the basis of the said amendment, SBMA issued a Memorandum declaring that all importations of cigars, cigarettes, distilled spirits, fermented liquors and wines into the SBF shall be treated as ordinary importations subject to all applicable taxes, duties and charges, including excise taxes. Respondent companies wrote to the Collector of Customs and the SBMA Administrator requesting for a reconsideration of the directives on the imposition of such. Despite this, they were not allowed to file any warehousing entry for their shipments. Thus, they brought the action before the RTC, w/c ruled in their favour. I: W/n RA 9334 effectively withdrew the tax exemption of respondent companies. R: YES, the companies are NOT exempt from tax. Flowing from the basic precept of constitutional law that no law is irrepealable, Congress, in the legitimate exercise of its lawmaking powers, can enact a law withdrawing a tax exemption just as efficaciously as it may grant the same under Section 28(4) of Article VI of the Constitution (There is no vested right in a tax exemption, more so when the latest expression of legislative intent renders its continuance doubtful.). THUS, Congress can amend Section 131 of the NIRC in a manner it sees fit, as it did when it passed R.A. No. 9334. The rights granted under the Certificates of Registration and Tax Exemption of private respondents are not absolute and unconditional as to constitute rights in esse – those clearly founded on or granted by law or is enforceable as a matter of law. These certificates granting private respondents a “permit to operate” their respective businesses are in the nature of licenses, which the bulk of jurisprudence considers as neither a property nor a property right. The licensee takes his license subject to such conditions as the grantor sees fit to impose, including its revocation at pleasure. A license can thus be revoked at any time since it does not confer an absolute right. While the tax exemption contained in the Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses in the SBF, this exemption, nevertheless, is far from being contractual in nature in the sense that the nonimpairment clause of the Constitution can rightly be invoked. Lastly, whatever right may have been acquired on the basis of the Certificates of Registration and Tax Exemption must yield to the State’s valid exercise of police power. The said law was passed to curb the practice of taking advantage of tax exemption privileges to smuggle goods.

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NATURE, CONSTRUCTION, APPLICATION AND SOURCES OF TAX LAWS Hilado v CIR Emilio Hilado filed his income tax return for 1951 with the treasurer of Bacolod City wherein he claimed, among other things, the amount of P12k+ as a deductible item from his gross income pursuant to General Circular V-123 issued by the CIR. (This circular was issued pursuant to certain rules laid down by the Secretary of Finance.) On the basis of said return, an assessment notice demanding the payment of P9k+ was sent to Hilado, who paid the tax in monthly installments. Meanwhile, the Secretary of Finance, through the CIR issued General Circular V-139 which not only revoked and declared void his general Circular V- 123 but laid down the rule that losses of property which occurred during the period of World War II from 

Smart Communications, Inc. v City of Davao The Tax Code of the City of Davao imposes a tax on businesses enjoying a franchise in the amount of ¾ of 1% of the gross annual receipts for the preceding calendar year. This is based on the income / receipts realized within its territorial jurisdiction, notwithstanding any exemption granted by any law or other special law. SMART filed for declaratory relief, contending that: Its telecenter in the aforementioned city was exempted from payment of such o franchise taxes pursuant to its franchise under RA 7294 

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RA 7160 (The Local Government Code) only applies to exemptions already existing at the time of its effectivity and NOT to fu ture exemptions The power of the City of Davao to impose a franchise tax is subject to o statutory limitations such as the “in lieu of all taxes” clause found in Section 9 of R.A. No. 7294 o Such franchise tax imposed by the City of Davao violates the constitutional provision against impairment of contracts. The City of Davao opposed, invoking the power granted by the Constitution to local government units to create their own sources of revenue. TC ruled against Smart, on the ground that tax laws are strictly construed against the taxpayer, and that LGUs are empowered to tax by a valid delegation of legislative power and the direct authority granted to it by the fundamental law, hence not violative of the non-impairment clause. I: W/n SMART is liable for franchise tax R: YES, SMART is liable. Section 137, in relation to Section 151 of the Local Government Code (RA 7160) allows local governments to impose franchise taxes, while Section 193 thereof withdrew all tax exemption privileges granted to franchises prior to its issuance, except local water districts, cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and educational institutions. Since Smart’s franchise (RA 7294) was granted two months AFTER the issuance of the Local Government Code, its tax exemption privileges are NOT deemed withdrawn by the Local Government Code. However, the phrase “in lieu of all taxes” in RA 7294 must be construed in the context of the whole Act g ranting the franchise to Smart. Tax statutes, and exemptions granted therein, are construed strictly against the taxpayer and liberally in favor of the Government. In this case, the 3% tax on all gross receipts “in lieu of all taxes” provision in RA 7294 was NOT clear whether it applies to both national and local taxes. Thus, this provision must be construed strictly against Smart which claims the exemption. Smart has the burden of proving that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes whether local or national. However, Smart failed in t his regard. The was also no violation of the non-impairment clause of the Constitution. In fact, aside from the ambiguous “in lieu of all taxes” phrase in the franchise, it also has an express condition that it is subject to amendment, alteration, or repeal. o

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fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of said property .  As a consequence, the amount of P12k+ was disallowed as a deduction from Hilado’s gross income for 1951. Consequently, the CIR demanded from him P3k+ as deficiency income tax for said y ear. When the petition for reconsideration filed by Hilado was denied, he filed a petition for review w/ CTA. CTA affirmed CIR’s assessment, so Hilado filed an appeal w/ the SC. I: W/n CIR’s assessment was correct R: YES, CIR was correct. 1) Assuming that the amount claimed as a loss represents a portion of the 75% of his war damage claim which was not paid, the same would NOT be deductible as a loss in 1951 because, according to Hilado, the last installment he received from the War Damage Commission was in 1950. Thus, deduction could only be made from his 1950 gross income.  Also, the amount cannot be considered a “business asset” which can be deducted as a loss because its collection is NOT enforceable as a matter of right, but is dependent merely upon the generosity of the US government. 2) As of the end of 1945, there was absolutely no law under which Hilado could claim compensation for the destruction of his properties during the battle for the liberation of the Philippines. 3) Under the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage Commission merely depended upon its discretion to be exercised in the manner it may see fit, but the non-payment of which cannot give rise to any enforceable right.  Also, t he second Gen circular, w/c nullified the first is consistent w/ the NIRC (Sec. 30), which provides that that losses sustained are allowable as deduction only within the corresponding taxable year. 4) Philippine internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter of fact, income tax returns were filed during that period and income tax payment were effected and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. 5) The Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or previous rulings of his predecessor in office because the construction of a statute by those administering it is NOT binding on their successors. Thus, in the present case, when the Commissioner determined in 1937 that the petitioner was not exempt and never had been, it was his duty to determine, assess and collect the tax due for all years not barred by the statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was NOT binding upon him. It did not exempt Hilado from tax. General Circular V-123, having been issued on a wrong construction of the law, cannot give rise to a vested right that can be invoked by a taxpayer. A vested right cannot spring from a wrong interpretation. CivCode also provides that “no vested o r acquired right can arise from acts or omissions which are against the law or which infringe upon the rights of others.”

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Philippine Bank of Communications v CIR Philippine Bank of Communications (PBCom) filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5M+. The taxes due were settled by applying PBCom's tax credit memos and a ccordingly, the BIR issued Tax Debit Memo for P3M+ and P1M+, respectively. 

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Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, it reported a net loss of P14M+ and thus declared no tax payable for the year. But during these two years (1985 and 1986), PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes for both 1986 and 1986 (about P200k+ for each of those years). PBCom then requested the CIR, among others, for a tax credit of P5M+ representing the overpayment of taxes in the first and second quarters of 1985. 3 yrs later, PBCom filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 and 1986 (the P200k+ each) Pending CIR’s investigation, PBCom instituted a Petition for Review before the CTA. CTA denied the request for a tax refund or credit (P5M+) given that it was filed beyond the 2-year reglementary period provided for by law. The petitioner's claim for refund in 1986 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. PBCom argued that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The RM Circular states that overpaid income taxes are NOT covered by the two-year prescriptive period under the Tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten 10 years under  Article 1144 of the Civil Code. I: W/n the tax refund should be denied on the ground of prescription, despite PBCom’s reliance on RMC No. 7-85, changing the prescriptive period of 2 years to 10 years. R: No. The relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law. The NIRC states that the taxpayer may file a claim for refund or credit with the CIR w/in 2 years after payment of tax, before any suit in CTA is commenced. The 2-year prescriptive period should be computed from the time of filing the  Adjustment Return and final payment of the tax for the year. Clearly, the prescriptive period of 2 years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. When the Acting CIR issued RMC 7-85, changing the prescriptive period of 2 years to 10 years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of the NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. Rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.  Art. 8 of the Civil Code recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition.  A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same.

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Moreover, the non-retroactivity of rulings by the CIR is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the CIR. Lastly, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.

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CERTAIN DOCTRINES IN TAXATION POWER TO TAX INVOLVES POWER TO DESTROY CIR v Tokyo Shipping Co, Ltd. Tokyo Shipping is a foreign corporation (represented by Soriamont Steamship Agencies in the Philippines) which owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA  chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, paid the required income and common carrier's taxes totalling about P107k+ based on the expected gross receipts of the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. NASUTRA and Soriamont mutually agreed to have the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the charter agreement, Tokyo Shipping instituted a claim for tax credit or refund of P107k+ before CIR. CIR failed to act promptly on the claim, so Tokyo filed a petition for review before CTA. CTA ruled in favour of Tokyo. CIR filed a petition contending that Tokyo had the burden of proof to support its claim of refund, Tokyo failed to prove that it did not realize any receipt from its charter agreement and it suppressed evidence when it did not present its charter agreement. I: W/n Tokyo is entitled to a refund or tax credit for amounts representing pre-payment of income and common carrier's taxes under the NIRC R: YES. CTA decision affirmed. Sec24 (b2) of the NIRC provides that a corporation organized under foreign law but doing business in the Phils shall be taxable upon the total net income derived in the preceding taxable year from all sources within the Philippines, PROVIDED that international carriers shall pay a tax of 2 1/2% on their gross Philippine billings . ("Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to final destination.) Pursuant to this, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of income it derives from sources within the Philippines. THUS, before such a tax liability can be enforced, the taxpayer must be shown to have earned income sourced from the Philippines.  A claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. The taxpayer has the burden of proof to show that he is entitled to refund. IN THIS CASE, there was sufficient evidence shown by Tok yo that it derived no receipt from its charter agreement with NASUTRA.. 

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Documents presented were the Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo and the Certification by the Officer-inCharge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not been contested by the petitioner. Taxpayers owe honesty to government just as government owes fairness to taxpayers. The court bewails the unyielding stance taken by the government in refusing to refund the sum of P107,142.75 erroneously prepaid by private respondent. The government delayed its refund for 15 years and thus rendered the refund  just worth a damaged nickel. This is not the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. In Roxas v. CTA, the power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

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Reyes v Almanzor JBL, Edmundo and Milagros Reyes are owners of parcels of land in Manila which are leased and occupied as dwelling sites by tenants for monthly rentals not exceeding P300. In 1971, RA 6359 was passed prohibiting an increase of monthly rentals of dwelling units or of land on which another dwelling is located for one year after effectivity for rentals not exceeding P300 but allowing an increase of rent thereafter by not more than 10%. The Act also suspended the operation of Article 1673 of the Civil Code (ejectment of lessess). PD 20 amended RA 6359 by absolutely prohibiting the increase and indefinitely suspending Article 1673. The Reyeses, thus, were precluded from raising the rentals and from ejecting the tenants. In 1973, the City Assessor of Manila reclassified and reassessed the value of the properties based on the schedule of market values duly reviewed by the Secretary of Finance.  As it entailed an increase of the corresponding tax rates, the Reyeses filed a memorandum of disagreement with the Board of Tax Assessment Appeals and averring that the reassessments were excessive, unwarranted, unequitable, confiscatory and unconstitutional inasmuch as the taxes imposed exceeded the annual income derived from their p roperties. They also argued that the “income approach” should have been used in determining land values instead of the “comparative sales approach” which the assessor adopted. I: W/n the assessment of the Board was proper R: NO. SC ruled in favor of Reyeses and board was askesd to make re-assessment. Taxation is equitable when its burden falls on those better able to pay. Taxation is progressive when its rate goes up depenfing on the resources of the person affected. Taxes are uniform when all taxable articles or kinds of property of the same class are taxed at the same rate. 

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The taxing power has the authority to make reasonable and natural classification for purposes of taxation. Laws should operate equally and uniformly, however, on all persons under similar circumstances. Under the Real Property Tax Code (PD 464), property must be appraised at its current and fair market value. The market value of the properties covered by PD 20, thus cannot be equated with the market value of properties not so covered. The property covered by PD 20 has naturally a much lesser market value in view of the rental restrictions. The factors determinant of the assessed value of the properties under the “comparable sales approach” were not presented by the Board/Assessors: 1) that the sale must represent a bonafide   arm's length transaction between a willing seller and a willing buyer 2) the property must be comparable property. Nothing can justify their view as it is of judicial notice that for properties covered by P.D. 20 especially during the time in question, there were hardly any willing buyers. As a general rule, there were no takers so that there can be no reasonable basis for the conclusion that these properties were comparable with other residential properties not burdened by P.D. 20.  Also, although taxes are the lifeblood of the government and should be collected without unnecessary hindrance, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. In this case, since the Reyeses are burdened by the Rent Freeze Laws (RA 6359 and PD 20), they should not be penalized by the same government by the imposition of excessive taxes they cannot ill afford and would eventually result in the forfeiture of their properties, under the principle of social justice.

SET-OFF OF TAXES Philex Mining Corp v CIR BIR sent a letter to Philex asking it to s ettle its tax liabilities for 1991 to 1992 . Philex protested that it has pending claims for VAT input credit/refund for the taxes it paid for 1989 and that the refund should be applied against the tax liabilities. BIR replied that the pending claims have NOT yet been established so it follows that no legal compensation can take place, hence, the reiteration of the demand for payment. Philex raised the issue to the CTA. Pending proceeding in CTA, BIR issued a Tax Credit Certificate 13M which, when applied to the total tax liabilities of Philex of P123M effectively lowered the Philex's tax obligation. Despite the reduction, CTA denied Philex’s petition for review and still ordered Philex to pay the remaining balance of P110M plus interest, saying that for legal compensation to take place, both obligations must be liquidated and demandable. The liquidated debt of the Philex to the government cannot, therefore, be set-off against the unliquidated claim  which Philex conceived to exist in its favour. It also invoked the principle that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." Philex appealed to the CA, which denied such appeal and its MR.  A few days after the denial of MR, Philex obtained its VAT input credit/refund not only for 1989 to 1991 but also for 1992 and 1994. THUS, Philex contended that the same should off-set its excise tax liabilities since both had already become "due and demandable, as well as fully liquidated” and legal compensation can properly take place.  

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I: 1) W/n legal compensation between the VAT input credit/refund and tax liability could take place- NO 2) W/n the imposition of interest and surcharge is unjustified – NO, it is justified 3) W/n BIR violated Section 106 of the NIRC when it gave the refunds only in 1996 –  YES R: 1) Taxes cannot be subject t o compensation . Government and the taxpayer are not creditors and debtors of each other. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. National Revenue Code of 1939 provided for offsetting but such provision was dropped in the NIRC of 1997. 2) Imposition of surcharges and interests are justified. T he logic of such imposition is the principle that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Tax is that it is compulsory and does not depend upon the consent of the taxpayer. Tax Code of 1977: The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 3) BIR, however, violated Section 106 of the NIRC.   BIR violated the NIRC, which requires the refund of input taxes within 60 days, when it took them 5 YEARS to grant Philex’ tax claim for VAT input credit/refund. Once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but  just that government render fair service to the taxpayers. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. BUT although it is admission of the lethargic manner by which the BIR handled Philex's tax claim, the State is not bound by t he neglect of its agents and officers.

TAXPAYER SUIT  Anti-Graft League of the Phils v San Juan President Marcos issued PD No. 674, establishing the Technological Colleges of Rizal. The PD, among others, directed the Board to provide funds for the purchase of a site and the construction of t he necessary structures thereon.  Acting upon an authority granted by the office of the President, the Province was able to negotiate with Ortigas & Co., Ltd. (Or tigas) for the acquisition of 4 parcels of land in Ugong Norte, Pasig. The projected construction, however, never materialized because of the decimation of the Province's resources brought about by the creation of the Metro Manila Commission (MMC) in 1976. 12 yrs later, with the property lying idle and the Province needing funds to propel its 5-years Comprehensive Development Program, the then incumbent Board passed Resolution No. 87-205 authorizing the Governor to sell the same. The said property was eventually sold to Valley View Realty Development Corporation (Valley View) for P135M+, where P30M was given as downpayment. Because of this, Ortigas filed a case of rescission against the Province because the Province violated the provisions of their contract which was that the land would be used for the construction of the Rizal Technological Colleges and Rizal Provincial Hospital. 

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New officials then assumed office and the Board adopted Resolution No. 88-65 which provided for the rescission of the deed of sale between the Province and Valley View on the ground that the sale price was exceedingly low and, thus, prejudicial to the Province. Because of this, Valley View then filed a complaint against the Province for specific performance and damages. (There are now two cases against the board: specific performance and damages by Valley View and rescission of contract by Ortigas) The cases against the Province was resolved by entering into compromise agreements. With  Valley View, the Province agreed to return the 30M downpayment. With Ortigas, the Province agreed to reconvey the 4 parcels of land to Ortigas for at P2,250 / sqm . This amount is higher than the market values separately determined by Asian Appraisal, Inc. and the Provincial Appraisal Committee which respectively pegged the price of the subject properties at P1,800 and P2,200/sqm . The Anti-Graft League filed a petition to nullify the agreement as taxpayers with legal standing. I: W/n this was a taxpayer's suit / Does petitioner possess the legal standing to question the transaction entered into by the Provincial Board of Rizal with private respondent Ortigas? R: NO, NOT A TAXPAYER SUIT AND NO LEGAL STANDING. To constitute a taxpayer's suit, two requisites must be met: o 1) that public funds are disbursed by a political subdivision or i nstrumentality and in doing so, a law is violated or some irregularity is committed, and 2) petitioner is directly affected by the alleged ultra vires act. o In this case, disbursement of public funds was only made in 1975 when the Province bought the lands from Ortigas at P110 per square meter in line with the objectives of P.D. 674. The AGL never referred to such purchase as an illegal disbursement of public funds but focused on the alleged fraudulent reconveyance of said property to Ortigas because the price paid was lower than the prevailing market value of neighboring lots. The first requirement, therefore, which would make this petition a taxpayer's suit is absent.  As to the 2nd ground (w/n petitioner is directly affected), undeniably, as a taxpayer, AGL would somehow be adversely affected by an i llegal use of public money. When, however, no such unlawful spending has been shown, as in the case at bar, AGL, even as a taxpayer, cannot question the transaction validly executed by and between the Province and Ortigas for the simple reason that it is not privy to said contract. In other words, AGL has absolutely no cause of action, and consequently no locus standi, in the instant case. The question in standing is whether such parties have "alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions.

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