Court Decsion on Tax Cases

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ANALYTICAL SURVEY OF 2006 SUPREME COURT DECISIONS IN TAXATION PROF. EDWIN R. ABELLA, CPA I. GENERAL PRINCIPLES OF TAXATION.............................................................................1 1. Bicolandia Drug Corp., vs. Com. of Internal Revenue, G.R. No. 142299, June 22, 2006....................1 2. Com. of Internal Revenue vs. Central Luzon Drug Corp., G.R. No. 148512, June 26, 2006.................3 3. Com. of Internal Revenue vs. Bicolandia Drug Corp., G.R. No. 148083, July 31, 2006......................3 4. Com. of Internal Revenue, vs. Benguet Corp., , G.R. No. 145559, July 14, 2006................................4 II. INCOME TAXATION.....................................................................................................5 5. The Manila Banking Corp. vs. Com. of Internal Revenue, , G.R. No. 168118, August 28, 2006..........5 6. Com. of Internal Revenue vs. Juliane Baier-Nickel, G.R. No. 153793, August 29, 206.........................5 7. Com. of Internal Revenue vs. Philippine Airlines, Inc., G.R. No. 160528, October 9, 2006;.................6 8. Carmelino F. Pansacola vs. Com. of Internal Revenue, G.R. No. 159991, November 16, 2006............6 III. VALUE-ADDED TAX.....................................................................................................7 9. Com. of Internal Revenue vs. Sekisui Jushi Philippines, Inc., G.R. No. 149671, July 21, 2006.............7 10. Com. of Internal Revenue vs. Magsaysay Lines, Inc., et. al, G.R. No. 146984, July 28, 2006............7 11. Com. of Internal Revenue vs. Phil. Global Communications, Inc., G.R. No.144696, Aug. 16, 2006.. .8 IV. OTHER BUSINESS TAXES.............................................................................................9 12. Com. of Internal Revenue vs. Trustworthy Pawnshop, Inc. G.R. No. 149834, May 2, 2006................9 13. Com. of Internal Revenue vs. Bank of Philippine Islands, G.R. No. 147375, June 26, 2006...............9 V. DOCUMENTARY STAMP TAX........................................................................................10 14. MJ Lhuiller Pawnshop, Inc vs. Com. of Internal Revenue, , G.R. No. 166786, May 3, 2006.............10 15. Bank of Philippines Islands vs. Com. of Internal Revenue, , G.R. No. 137002, July 27, 2006.........10 VI. REMEDIES IN TAXATION............................................................................................11 16. Com. of Internal Revenue, vs. Azucena T. Reyes, G.R. No. 159694, January 27, 2006....................11 17. Azucena T. Reyes vs. Com. of Internal Revenue, G.R. No. 163581, January 27, 2006......................11 18. RCBC vs. Com. of Internal Revenue, G.R. No. 168498, June 16, 2006.............................................12 19. Com. of Internal Revenue vs. Mirant Pagbilao Corp., G.R. No. 159593, October 12, 2006...............13 20. Benguet Corp. vs. Com. of Internal Revenue, . G.R. No. 141212, June 22, 2006............................13 21. Far East Bank vs. Com. of Internal Revenue and C.A., G.R. No. 138919, May 2, 2006....................14 22. San Pablo Manufacturing Corp. vs. Com. of Internal Revenue, G.R. No. 147749, June 22, 2006.....15 23. Barcelon, Roxas Securities, Inc. vs. Com. of Internal Revenue, G.R. No. 157064, August 7, 2006.. 15 24. Com. of Internal Revenue vs. Phil. Global Communication, Inc. G.R. No. 167146, Oct. 31, 2006....16 25. Com. of Internal Revenue vs. Citytrust Banking Corp., G.R. No. 150812, August 22, 2006.............17

I. GENERAL PRINCIPLES OF TAXATION How are the discounts given to senior citizens treated for income tax purpose? What are the distinctions between a tax credit and a tax deduction? If a tax privilege is given to the taxpayer, can it not opt to claim it as a refund? a. BICOLANDIA DRUG CORPORATION , petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 142299, June 22, 2006; Azcuna, J. Petitioner claimed the 20% discount granted to senior citizens as a deduction from its gross income thereby giving it a tax relief equivalent to 35% (corporate income tax rate) of the deduction. Later

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if filed a claim for refund of overpaid income tax due to the error in computation of its tax liability maintaining the position that the discounts should have been treated pursuant to R.A. No. 7432. The CTA ordered the refund but on lesser amount. The CTA made a recomputation of the income tax liability of the petitioner by allowing as tax credit the “cost of the discount” only which is computed by getting the percentage of cost of sales to total sales and multiplying it with total discounts granted. This ruling was affirmed by the CA. Issues: What is the amount allowed as tax credit? b) Can the discount be claimed by the taxpayer as a tax refund? A. Reading of the provisions of Section 4(a) of R.A. No. 7432, is as follows: “Sec. 4. Privilege for the Senior Citizens – The senior citizens shall be entitled to the following: a)

The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishments, restaurants and recreations centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit.”

The term “cost” when applied to the discounts granted, is susceptible to various interpretations. The BIR by virtue of RR No. 2-94 interpreted it to mean the tax cost which is the very reason why it was treated as a deduction from gross income. The economic effect of this treatment is the same as allowing 35% (tax cost) of the discount as tax credit. The CTA, on the other hand, interpreted it to be the cost of the goods sold corresponding to the discounts to the extent that they could have increased the sales if no discounts were granted. Said in another way, were it not for the discounts there could have been additional sales in the same amount as the discounts, so the cost is the cost of goods sold corresponding to these additional sales were it not for the discount. The CTA, in determining the amount allowed as a tax credit, came out with this formula, viz: Total Cost of Goods Sold Total Sales

x

Total discounts granted

= Cost of Discount

The SC is not convinced with either of the two interpretations advances. The SC ruled that the entity granting the discount is entitled to claim the entire amount of discount. The “cost” referred to in Section 4(a) of R.A. No. 7432 refers to the amount of the 20% discount extended to senior citizens in their purchase of medicines. This amount shall be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If there is no current tax due, of the establishment reports a net loss for the period, the credit may be carried over to the succeeding taxable year. (CIR vs. Central Drug Corp. April 15, 2005, 456 SCRA 414) Anent the second issue, the SC ruled that the remedy of refund is not available. The law expressly provides that the discount given to senior citizens may be claimed as a tax credit, and not a refund. Thus, where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. (Fianza vs. People’s Law Enforcement Board, G.R. No. 109638, March 31, 1995, 243 SCRA 165). Accordingly, the SC directed issuance of tax credit certificates to petitioner instead of the refund prayed for. arellano law This bring us to the issue of whether what is being asked to be refunded is the “discount” or the overpaid income tax. Which is to be applied first in paying the income tax liability of the petitioner, the tax credit or the amount of money tendered? It must be born in mind that there was an overpayment of the tax because of the re-computation that was made, treating this time the discount as tax credit instead of treating of it as deduction from gross income. The amount of the tax credit however, is not sufficient to offset petitioner’s income tax hence, a substantial amount was also paid for the years covered. Were it not for wrong treatment of the discount, there could have been no overpayment made. Will the

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overpayment not constitute an erroneously paid tax thereby giving the taxpayer the right to file a claim for refund under Section 204 and 229 of the NIRC? Another important point in this case is – if the discount is not allowed to be refunded but it is allowed to be refunded but it is allowed to be granted as a tax credit certificate, as in this case, then there seems to be a circumvention of the rule laid down in Central Drug (2005). This is because a tax credit certificate can not be used for payment of other tax liabilities or at the option of the owner can sale the same. Will his not be equivalent to the grant of cold cash to the taxpayer and therefore the effect is the same as that of a refund. What is not allowed directly should not be allowed indirectly. Or it might be that the SC is of the impression that tax credit certificate issued will only be used for future income tax liability which seems to be the inclination in the succeeding case. b. COMMISSIONER OF INTERNAL REVENUE, petitioner vs. CENTRAL LUZON DRUG CORPORATION, respondent G.R. No. 148512, June 26, 2006, Azcuna, J. Just like the first case herein discussed, this case delves on the 20% discount granted to senior citizens. The respondent filed a claim for refund on the unutilized portion for the discount which it claimed as a tax credit. The CTA ruled that the tax credit benefit is only to the extent of respondent’s tax liability during the year, hence the claim for refund is not allowed. The CA modified that decision and ruled that the unutilized portion can be carried over to the next taxable period if there is no current tax liability. This ruling by the CA was affirmed by the SC. In bringing the case to the SC, the CIR maintains that the discount should only be allowed as a deduction from gross income and not a reduction from the tax liability. The law (R.A. No. 7432) provides that the discount is available as a tax credit. However, the implementing regulations (RR No. 2-94) treat it as a deduction from gross income following the customary treatment of a sales discount. On this apparent conflict between the law and its implementing rules, the SC said that when the law says that the cost of the discount may be claimed as a tax credit, it means that the amount – when claimed – shall be treated as reduction from any tax liability. The law cannot be amended by a mere regulation. The administrative agencies issuing these regulations may not enlarge, alter or restrict the provisions of the law they administer. In fact, a regulation that operates to create a rule out of harmony with the statute is a mere nullity. (CIR vs. Vda. De Prieto, 109 Phil. 592) The SC also touched on the nature of the benefit granted to the establishment selling to senior citizens. It emphasized that “the tax credit benefit granted to the establishment can be deemed as their just compensation for private property taken by the State for public use. The privilege enjoyed by the senior citizens does not come directly from the State, but rather from the private establishments concerned. To deprive the taxpayer of their right to apply the tax credit against future tax liability will be to deny them the just compensation for the property taken. c. COMMISSIONER OF INTERNAL REVENUE, petitioner vs. BICOLANDIA CORPORATION, respondent. G.R. No. 148083, July 31, 2006; Velasco, Jr. J.

DRUG

The law (R.A. No. 7432) allows the discounts as a tax credit but its implementing regulations (RR No. 2-94) only allows the same as deductions from gross income. The SC ruled that in cases of conflict between the law and the rules and regulations implementing the law, the law shall always prevail. The distinction between a tax credit and a tax deduction was emphasized by the court, thus ‘ “ A tax credit is an amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer’s liability, compared to a deduction which reduces taxable income upon which the liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed.” (citing Black’s Law Dictionary)

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It bears emphasis that R.A. No. 7432 is now repealed by R.A. 9257 which was approved into law on February 26, 2004. Under this later law, discounts given to senior citizens are treated as deduction from gross income and no longer allowed as tax credit. The tax treatment thereby under the present law was made consistent with financial accounting treatment thereby making the tax system more attuned to the principle of administrative feasibility.

Can a ruling which is prejudicial to the taxpayer be given a retroactive application? This question was answered squarely in the following case. d. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BENGUET CORPORATION, respondent, G.R. No. 145559, July 14, 2006; Garcia, J. Since the inception of the VAT in 1988, sale of gold to Central Bank has been considered by the BIR to be zero-rated. (VAT Ruling 378-88 and RMC No. 59—88). On January 23, 1992, Commissioner Ong issued VAT Ruling No. 008-92 declaring and holding that the sale of gold to the CB are considered domestic sales subject to the 10% VAT. Subsequently, VAT Ruling No. 59-92 dated April 28, 1992 was issued reiterating the treatment of sales of gold to CB and expressly countenancing the retroactive application of VAT Ruling No. 008-92 to all such sales made starting January 1, 1988. Issue: Can a ruling, changing the tax treatment of a transaction from one subject to 0% to one subject to 10%, be given a retroactive application? The SC ruled in the negative. The CIR is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or when there has been a misrepresentation to the taxpayer. (citing ABS-CBN Broadcasting Corp. vs. CTA and CIR, 108 SCRA 142) Is there really an actual and imminent injury to the taxpayer if the ruling is given a retroactive application? While the CTA said there is none, the CA had taken a contrary view which was affirmed by the SC. The VAT system of taxation allows a VAT-registered taxpayer to recover its input VAT either by (1) passing on the 10% output VAT on the gross selling price or gross receipts, as the case may be, to its buyer, or (2) if the input tax is attributable to the purchase of capital gods or to zero-rated sales, by filing a claim for refund or tax credit with the BIR. Simply stated, a taxpayer subject to 10% output VAT on its sales of goods and services may recover its input VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only recover its input costs by filing a refund or tax credit with the BIR. The SC is correct in holding that a retroactive imposition of the VAT on the sale of gold to Central Bank will definitely result to substantial economic prejudice to respondent. First, the respondent could no longer pass-on to CB the 10% output VAT which would be retroactively imposed on said transactions, and second, it will also be prevented from claiming the refund because the sale is no longer zero rated. If this happens the entire cost of the input VAT will be borne by respondent Benguet without any avenue for recovery.

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II. INCOME TAXATION The Minimum Corporate Income Tax shall be imposed beginning on the fourth year following the commencement of business operations. e. THE MANILA BANKING CORPORATION, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent, G.R. No. 168118, August 28, 2006; Sandoval-Gutierrez, J. Manila bank was incorporated in 1961 and since had engaged in the commercial banking business until it was ordered closed by the BSP in 1987 due to insolvency. On June 23, 1999, the BSP authorized it to operate as a Thrift bank. The following years, specifically on April 7, 2000, it filed its annual corporate income tax return and paid P33, 816,164.00 as MCIT for taxable year 1999. It filed a claim for refund maintaining the position that since it CTA denied the claim for refund (which was affirmed by the CA) on the ground that petitioner is not a new corporation hence not entitled to the grace period of four years. Issue: What is the reckoning date for the MCIT in so far as thrift banks are concerned? Under the law (R.A. 8424), MCIT is imposed beginning on the fourth year following the commencement of business operations. Revenue Regulations No. 9-98 provides that “For purpose of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the BIR.” Petitioner registered as a commercial bank with the BIR in 1961 and again registered on January 21, 1999 as a thrift bank. However, with respect to thrift banks, the date of commencement of business operations is the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later (RR No. 4-95 implementing R.A. No. 7906). The SC ruled that what applied to petitioner is RR No. 4-95 and not RR No. 9-98. It is, therefore, entitled to a grace period of four years counted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank (it having been registered with SEC at an earlier date). Consequently, it should only pay it MCIT after four (4) years from 1999. A thrift bank is a different taxpayer from that of the commercial bank, hence, for purposes of the MCIT, the thrift bank will be considered as an entirely new entity although it continued to use the same corporate name used by it as a commercial bank. arellano law f.

COMMISSIONER OF INTERNAL REVENUE, petitioner vs. JULIANE BAIER-NICKEL, respondent. G.R. No. 153793, August 29, 206, Ynares-Santiago, J.

Respondent is a non-resident German citizen and employed as the President of Jubanitex, Inc., a domestic corporation engaged in manufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products. Respondent was likewise appointed as commission agent by Jubanitex whereby it was agreed that she will receive 10% sales commission on all sales actually concluded through her efforts. Issue: Whether or not the commissions earned by the non-resident alien-respondent are taxable in the Philippines. The SC ruled that a non-resident alien is taxable in the Philippines only on income earned from within. Commission are compensation for services and they are considered earned from within if the services are rendered within the Philippines (Section 42, NIRC). The important factor therefore which determined the source of income of personal services is not the residence of the payor, or the place

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where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered. Since the respondent failed to prove that the marketing services which gave rise to the commissions are rendered in Germany, she could not claim exemption from the imposition of the income tax. The SC heavily relied on the fact that respondent presented no evidence to prove that Jubanitex does not sell embroidered products in the Philippines and that her appointment as commission agent is exclusively for Germany and other European markets. Basic is the rule that he who claims exemption from a tax burden must assume the responsibility of proving the same. The rule availing under our jurisdiction has always been that, taxation is the rule and exemption is only an exception to that rule. g. COMMISSIONER OF INTERNAL REVENUE, petitioner vs. PHILIPPINE AIRLINES, INC. respondent. G.R. No. 160528, October 9, 2006; Panganiban, J. The case involves the application of the tax provision in PAL’s franchise defining its liability for taxes. P.D. 1590, the legislative franchise of PAL granted it an option to pay the lower of two alternatives: (1) the basic corporate income tax based on PAL’s annual net taxable income computed in accordance with the provisions of the NIRC, or (2) a franchise tax of two percent of gross revenues. Availment of either of these two alternatives shall exempt the airline from the payment of “all other taxes”. On this basis, a claim for refund of the 20% final withholding tax on its interest income with various banks was instituted. Issue: Will the “in lieu of all other taxes” provision in PAL’s franchise relieve it from paying the 20% final withholding tax on its interest on bank deposits even if there were in fact no taxes paid? The SC ruled that the “in lieu of all other taxes” provision in PAL’s franchise is broad enough to cover the 20% final withholding tax, thereby making it exempt from its imposition. The SC explained that for the year involved, PAL chose to be subjected to the basic corporate income “computed in accordance with the provisions of the National Internal Revenue Code”. The computation of the income tax is anchored on the definition of taxable income. Section 31 of the NIRC provides: “Taxable income means the pertinent items of gross income specifies in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for these types of income”. Section 32 enumerated the items of gross income to include interest and other passive income. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of the gross income, which determines taxable income. The SC concluded as follows: “Clearly, then, the basic corporate income tax identified in the franchise relates to the general rate of 35% as stipulated in Section 27 of the Tax Code. The final 20% taxes disputed in the present case are not covered under Section 13(a) of PAL’s franchise; thus, a refund is in order.” Even if PAL chooses the corporate income tax because it results to a Zero liability the fact remains that the income tax contemplated under the franchise is not the ordinary meaning we place on it – a tax of the privilege of earning an income – but it is still in the imposed in consideration of the franchise, the incomes tax if chosen is a tax on the privilege of engaging in the franchised activity and not a tax on the privilege of earning an income. The two options given to PAL give it only a computational discretion on how much franchise tax to pay. The tax paid in any of the two alternatives is in lieu of all other taxes including the 20% final withholding tax. h. CARMELINO F. PANSACOLA, petitioner vs. COMMISSIONER OF INTERNAL REVENUE , respondent. G.R. No. 159991, November 16, 2006; Quisumbing, J. Issue: Could the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for taxable year 1997?

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No. There is nothing in the law that expresses any such intent of making its application retroactive. The policy declaration in the enactment of R.A. No. 8424 do not indicate it was a social legislation that adjusted personal and additional exemption should retroact. What is the nature of personal exemptions? Personal exemptions are the theoretical personal, living and family expenses of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer.

III.

VALUE-ADDED TAX i.

COMMISSIONER OF INTERNAL REVENUE, petitioner vs. SEKISUI JUSHI PHILIPPINES, INC., respondent. G.R. No. 149671, July 21, 2006; Panganiban, J.

Respondent is a PEZA registered enterprise availing of the incentive under EO No. 226 thus entitled to an income tax holiday. It registered with the BIR as a VAT taxpayer and exported all of its products. Since it has unutilized input taxes, it claimed for a VAT refund. Issue: Can a PEZA-registered enterprise be covered by the VAT system? Business enterprise registered with the PEZA may choose between two fiscal incentive schemes: (1) t pay a five percent preferential tax rate on its gross income and thus be exempt from all other taxes; or (2) to enjoy an income tax holiday (ITH), in which case it is not exempt from other national revenue taxes including the VAT. Having availed of the second incentive scheme, respondent is covered by the VAT system. Since respondent was able to prove that all its manufactures products are in fact exported, all of its sales are zero-rated. Accordingly, it is entitled to claim as refund all unutilized input taxes. j.

COMMISSIONER OF INTERNAL REVENUE, petitioner vs. MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) AND NATIONAL DEVELOPMENT COMPANY, respondents. G.R. No. 146984, July 28, 2006; Tinga, J.

NDC is a VAT-registered enterprise. It sold five of its ship leased to Luzon Stevedoring Company to different buyers all in 1988. Issue: Is the sale of the five vessels subject to VAT? The SC ruled in the negative. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. In rendering this decision, the Court obviously did not give weight to the ruling issued by the Commissioner (VAT Ruling No. 568-88) on December 14, 1988, holding that the sale of the vessels was subject to 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its “transactions incident to its normal VAT-registered activity of leasing out personal property including sale of its own assets that are movable, tangible objects, which are appropriable or transferable are subject to the 10% VAT. As emphasized by the SC, a sale to be taxable must be a sale in the course of trade or business, which connotes regularity of activity (Imperial vs. Collector, G. R. No. L-7924, September 30, 1955). The Court further ruminates – “In the instant case, the sale was an isolated transaction. The sale whish was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property.”

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CTA granted the refund. CA reversed on the ground that while it is an isolated transaction, it qualifies as a deemed sale. On a motion for reconsideration, CA turned around saying that there is no cessation of business to warrant a deemed sale. The SC affirmed the grant of the refund because it is not a transaction in the course of trade or business. This rule may no longer apply at present in view of the amendment introduced by R.A. No. 7716 (EVAT Law which took effect, January 1, 1996). Section 105 of the NIRC in pertinent part now provides that “The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity.” k. COMMISSIONER OF INTERNAL REVENUE, petitioner vs. PHILIPPINE GLOBAL COMMUNICATIONS, INC., respondent. G.R. no. 144696, August 16, 2006; Carpio, J. This case revolves around the issue on the business tax liability of a franchise grantee during the time that the enforcement of the VAT law is suspended. It must be recalled that R.A. No. 7716 (EVAT) was enacted in 1993 to take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) newspaper of general circulation whichever comes earlier. Having been published earlier in the Malaya and the Journal on May 28, 1994. This law placed all franchise grantees (except water, gas and electric utilities) within the coverage of the VAT. However, the SC issued a TRO on June 30, 1994, enjoining the enforcement and/or implementation of the said law due to consolidated cases filed assailing its constitutionality. (Tolentino, et al. vs. Secretary of Finance). The TRO was only lifted on October 30, 1995 and the EVAT law was implemented beginning January 1, 1996. During the time that the implementation of the EVAT was suspended, respondent continued to pay the franchise tax. Later it filed a claim for refund of these franchise taxes paid (from 2 nd quarter of 1994 to 4th quarter of 1995) amounting to P70, 795,150.51. It was the respondent’s position that the passage of the EVAT law removed them from the ambit of the franchise tax and that the TRO issued in Tolentino et. al. enjoining the enforcement of the said law did not have the effect of extending the obligation to pay the 3% franchise tax since the exemption from or removal of liability for said 3% franchise tax under the EVAT law was not an issue in those cases. For failure of the BIR to act on the claim for refund, it was elevated to the CTA. The CTA granted the claim and was affirmed by the CA. Issue: When the franchise tax is replaced by the VAT but the latter’s enforcement is temporarily enjoined, will this exempt the franchise grantee from any business tax liability? The SC ruled that the abolition of the 3% franchise tax on telecommunication companies, and its replacement by the 10% VAT, was effective and implemented only on January 1, 1996. This means that the abolition and replacement must take place at the same time. Thus, respondent’s claim for refund must fail. It was further pointed out by the SC that “To grant a refund of the franchise it paid prior to the effectivity and implementation of the VAT would create a vacuum and thereby deprive the government from collecting either the VAT or the franchise tax”. Exemption from taxes is never presumed. It must be based on positive grant by the legislature in language too clear to be mistaken and too categorical to be misinterpreted. To uphold the right of the government to impose the tax is based on the principle “that taxes are the lifeblood of the

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Government and their prompt and certain availability are an imperious need.” (Commissioner vs. Pineda, 21 SCRA 105)

IV.

OTHER BUSINESS TAXES l.

COMMISSIONER OF INTERNAL REVENUE, petitioner vs. TRUSTWORTHY PAWNSHOP, INC. respondent. G.R. No. 149834, May 2, 2006; Sandoval, J.

The issue raised for resolution is whether pawnshops are included in the term leading investors for purposes of imposing the 5% percentage tax under Section 116 of the National Internal Revenue Code of 1977, as amended by Executive Order No. 273? This same issue was answered by the SC in the earlier case of CIR s. MJ Lhuiller Pawnshop, 2003, in the negative, holding that while pawnshops are indeed engaged in the business of lending money, they cannot bee deemed “lending investors” for the purpose of imposing the 5% lending investor’s tax. Such ruling is anchored on the following reasons: 1. Under Section 192 of the Tax Code imposing the fixed taxes on business, lending investors and pawnshops were found on different captions and were subject to different fixed taxes; 2. Congress never intended pawnshops to be treated in the same way as lending investors. Both the 1977 and 1986 NIRC dealth with pawnshops and lending investors differently; 3. Section 116 of the Tax Code of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only. There is no mention of pawnshops; 4. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC No. 43-91 that pawnshops were not subjected to the 5% percentage tax imposed on lending investors; 5. Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed; and 6. RMC No. 43-91 and RMO No. 15-91 are null and void for want of publication considering that they are not merely interpretative but in the nature of a subordinate legislation. Applying the principle of state decisis et non quieta movere (follow past precedents and do not disturb what has been settled), the SC feels that it is its duty to apply the previous ruling to the instant case. In 1996, the lending investor’s tax was abolished and was replaced with the VAT. Because of the RMC issued treating pawnshops as akin to lending investors, various VAT assessments were also issued against the pawnshops. Later, when the decision in MJ Lhuiller came out holding that pawnshops are not lending investors, the BIR insisted that pawnshops are still subject to VAT as sellers of services. The dispute, however, is now overtaken by events because the Commissioner in 2004 concluded an industry compromise with the pawnshop operators and came out with a new regulations, RR No. 102004,classifying pawnshops as non-bank financial intermediaries. Pawnshops are now liable to the 5% gross receipts tax imposed under Sections 122 of the NIRC. m. COMMISSIONER OF INTERNAL REVENUE, petitioner vs. BANK OF PHILIPPINE ISLANDS, respondent. G.R. No. 147375, June 26, 2006; Tinga, J. At issue is the question of whether the 20% final tax on a bank’s passive income, withheld from the back at source, still forms part of the bank’s gross income for the purpose of computing its gross receipts tax liability. Both the CTA and the CA answered in the negative but the SC reversed in favor of the petitioner.

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This same issue has already been ruled upon by the SC in the cases of China Banking Corp., vs. CA, 2003; CIR vs. Solidbank, 2003; and CIR vs. Bank of Commerce, 2005 and the SC finds no cogent reason to disturb what has been previously settled. IN all of these cases, the SC applied the ownership test in determining the composition of gross receipts. The SC ruminates in the China Bank case as follows: “In the instant case, CBC owns the interest income which is the source of payment of the final withholding tax. The Government subsequently becomes the owner of the money constituting the final tax when CBC pays the final withholding tax to extinguish its obligation to the government. This is the consideration for the transfer of ownership of the money from CBC to the government. Thus, the amount constituting the final tax, being originally owned by CBC as part of its interest income, should form part of its taxable receipts.”

V. DOCUMENTARY STAMP TAX n. MICHEL J. LHUILLER PAWNSHOP, INC, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent, G.R. No. 166786, May 3, 2006; September 11, 2006 (Resolution); Ynares-Santiago, J. This case stemmed from an assessment for deficiency documentary stamp taxes on pawn tickets issued by petitioners for the year 1997. The CTA ruled for the cancellation of the assessment by holding that a pawn ticket is neither a security not a printed evidence of indebtedness and therefore, cannot be subject to DST. Ruling on the petition filed by respondent, the CA reversed the CTA decision and sustained the assessment issued by the Commissioner. The CA ratiocinated that a pawn ticket, per se is not subject to DST; rather, it is the transaction involved, which in this case is pledge, that is being taxed Not convinced, petitioner filed with the SC a petition for review on certiorari raising this sole issue: Are pawn ticket subject to DST? The SC affirmed the decision of the CA and made the following justification, viz: “True, the law does not consider said ticket as an evidence of security of indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is nor said ticket that creates the pawnshops obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis for petitioner’s assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket.”

The SC in no certain terms said that contracts of pledge entered into by pawnshops are subject to DST. The DST is essentially an excise tax; it is not an imposition on the document itself but on the privilege to enter into a taxable transaction of pledge. This is clear under Section 195 of the National Internal Revenue Code. IN a motion for reconsideration that was filed, the SC issued a Resolution on September 11, 2006 ordering the deletion of the surcharges and interest on the assessment. It took cognizance of the existence of earlier rulings issued by the Commissioner that pawnshop tickets are not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.” (citing Connell Bros. Co. (Phil.) vs. Collector, 119 Phil. 40, 1963; Tuazon, Jr. vs. ingad, 157 Phil. 159; and Cir vs. Republic Cement Corporation, 124 SCRA 46) arellano law

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o. BANK OF PHILIPPINES ISLANDS, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent, G.R. No. 137002, July 27, 2006; Chico-Nazario, J. This case arose from the assessment of DST made by the former Banks Financing and Insurance Division of the BIR on the sale of foreign exchange to the BSP under a SWAP arrangement. The transaction starts with the offer of U.S. dollars (Spot sale) by BPI at a the prevailing exchange rate to the BSP subject to the redemption at maturity at an agreed exchange rate (forward). Upon acceptance of the offer, BPI will cable its correspondent bank abroad to remit the amount of U.S. dollars to the Federal Reserve Bank for credit to the account of the BSP. As soon as BSP receives the credit advice from the Federal Reserve Bank, it credits the account of BPI corresponding to the peso equivalent of the foreign exchange sold. Issue: Will the transaction give rise to the imposition of the DST? The SC ruled that the sale of foreign currency per se is not subject to DST. However, the facility used in the transaction of the business is the one that is subject to documentary stamp tax. The SC observed that Section 195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of credit, and orders for the payment of money, drawn in the Philippines but payable in a foreign country. From this enumeration, two common elements need to be present: (1) drawing the instrument or ordering a drawee, within the Philippines; and (2) ordering the drawee to pay another person a specified amount of money outside the Philippines. Clearly, what is being taxed is the facility that allows a party to draw the draft or make the order to pay within the Philippines and have the payment made in another country. It bears emphasis to mention at this point that while Section 195 (now Section 182) includes within its coverage “orders for payment of money by telegraph or otherwise drawn in but payable out of the Philippines” the documentary stamp tax regulations (RR No. 26) is more explicit when it said: “Section 51: What may be regarded as telegraphic transfer. – If a local bank cables to a certain bank in a foreign country with which bank said local bank has a credit, and directs that foreign bank to pay to another bank or person in the same locality a certain sum of money, the document for and in respect such transaction will be regarded as a telegraphic transfer, taxable under the provisions of Section 1449(i) of the Administrative Code.”

This makes the sale of foreign exchange under a swap arrangement a transaction subject to the DST because of the facility used in its consummation. There is a cable instruction from the local bank in the Philippines where payment of foreign currency has to take place abroad. This is a taxable telegraphic transfer within the contemplation of law.

VI.

REMEDIES IN TAXATION p. COMMISSIONER OF INTERNAL REVENUE,, petitioner vs. AZUCENA T. REYES, respondent G.R. No. 159694, January 27, 2006; q. AZUCENA T. REYES, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent G.R. No. 163581, January 27, 2006, Panganiban, C.J.

This case was borne out of these facts. Maria C. Tancinco died on July 8, 1993. A deficiency estate tax assessment was issued against her estate on April 22, 1998. The assessment notice followed the old procedure laid down RR No. 12-85 because at the time that the assessment was issued, no implementing rules were as yet issued on the new procedure for issuing an assessment under Section 228 of the NIRC, as amended by R.A. No. 8424. The procedure simply requires that the taxpayer must be notified of the findings of the Commissioner. However, the old provision of the NIRC (Section 229) was amended and renumbered as Section 228 which in explicit language provided- “The taxpayer otherwise

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shall be informed in writing of the law and facts on which the assessment is made: otherwise, the assessment shall be void.” This change was introduced by R.A. No. 8424 which took effect on January 1, 1998. Issues: What is the status of an assessment issued in 1998 if it failed to inform the taxpayer of the law and the facts on which the assessment is made? Can this assessment be the basis of a compromise? The SC ruled that the assessment is void ab initio. Under the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the perfection of a tax compromise. The Commissioner takes the position that since the assessment was issued at a time that the Regulations in force is RR No. 12-85, the old rule in making an assessment should therefore be followed. The provision of Section 228 which took effect on January 1, 1998 is self executing. While it is true that the implementing rules (RR No. 12-99) came out only on September 6, 1999, this is merely an administrative rule interpretative of the statute. The rule prevailing under our jurisdiction is that “an administrative rule interpretative of a statute, and not declarative of certain rights and corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute.” (Adamson Ozanom Education Institution, Inc. vs. Adamson University Faculty and Employees Association, November 9, 1989, 179 SCRA 279). r.

RIZAL COMMERCIAL BANKING CORPORATION, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 168498, June 16, 2006; Ynares-Santiago, J.

This case delves on the procedures of disputing an assessment provided for under Section 228 of the National Internal Revenue Code. It appears that on July 5, 2001, RCBC received a final assessment notice from the BIR. It filed a protest on July 20, 2001 and for failure of the Commissioner to render a decision thereon, RCBC filed its petition for review with the CTA on April 30, 2002. The CTA dismissed the petition for having been filed out of time. Issue: Was the dismissal of the petition for review proper due to its having been filed out of time? Applying the clear provisions of Section 228, the protest must be filed with thirty (30) days from receipt of the assessment which was properly complied with by petitioner on July 20, 2001. From this date the petitioner has until September 18, 2001, the Commissioner had until March 17, 2002 (180 days) to issue his decision. Since the Commissioner did not render a decision, the taxpayer has to file a petition for review within 30 days from March 17, 2002 or until April 16, 2002 within which to elevate the case to the CTA. Thus, when the petitioner filed its petition for review on April 30, 2002, the same is clearly filed out of time. The SC held that the failure of the petitioner to appeal from an assessment on time rendered the assessment final, executory and demandable. Consequently, petitioner is precluded from disputing the correctness of the assessment. This decision must be aligned with the Lascona case (a CTA case) wherein it was ruled that the treatment of the CIR’s inaction as an adverse decision is merely optional to the taxpayer. This means that if the CIR would later on rule on the protest despite the length of time it was pending in the administrative level, the aggrieved taxpayer can still appeal the adverse decision of the CIR. What is the CIR will not decide the protest but will just enforce the collection of the assessed tax? After all, the SC said that the assessment becomes final, executory and demandable if no appeal is filed after the lapse of the 180-day period prescribed under Section 228 of the Tax Code. IN that situation, the

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Lascona decision will be put into test although it is believed that it was already rendered moot and academic in view of the Provisions of R.A. No. 9282 defining the enlarged jurisdiction of the CTA. To hold otherwise would make an assessment never reach finality because of the expectation that the CIR may still decide on the assessment. The better view would be to automatically deprive the Commissioner of jurisdiction on a protest once the taxpayer avails of its right to appeal with the CTA. s. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MIRANT PAGBILAO CORPORATION, respondent. G.R. No. 159593, October 12, 2006; Chico-Nazario, J. The facts of this case are straight forward. Respondent is a registered VAT- taxpayer with a certificate of registration issued on January 26, 1996. For the period April 1, 1996 to December 31, 1996, respondent religiously filed its quarterly VAT returns reflecting thereon the amount of accumulated input taxes. These input taxes were paid to VAT suppliers of capital goods and services for the construction and development of the power generating plant in Pagbilao, Quezon. A claim for refund for these input taxes was filed with the BIR. Without waiting for its resolution in the administrative level, it filed a petition for review with the CTA on July 10, 1998, in order to toll the running of the toe-year prescriptive period for claiming a refund under the law. In answer to this petition, the Commissioner advanced as special and affirmative defenses that: MPC’s claim for refund is still pending investigation and consideration before his office, accordingly, the filing of the petition is premature; well-settled is the doctrine that provisions for refund and credit are construed strictly against the taxpayer as they are in the nature of tax exemption; the claimant has the burden to show that the taxes are erroneously paid and that the claim is filed within the prescriptive period. The CTA ruled in favor of MPC and declared that MPC had overwhelmingly proved, through the VAT invoices and official receipts it had presented, that its purchases of goods and services were necessary in the construction of power plant facilities which is used in its business of power generation and sale. On an appeal to the CA, the Commissioner raised new arguments which were never raised in the CTA – MPC is an electric utility subject to the franchise tax and since it is exempt from VAT, it is not entitled to the refund. The CA, finding no merit in the Commissioner’s petition, affirmed the CTA decision. Issue: Can the Commissioner change his theory of the case on appeal by raising for the first time on appeal questions of both fact and law not taken up in the tax court? The SC ruled against the petitioner. The SC emphasized that “The settled rule is that defenses not pleaded in the answer may not be raised for the first time on appeal. A party cannot, change fundamentally the nature of the issue in the case. When a party deliberately adopts a certain theory and the case is decided upon that theory in the court below, he will not be permitted to change the same on appeal, because to permit him to do so would be unfair to the adverse party”. ( Carantes v. Court of Appeals, G.R. No. L-33360, April 25, 1977, 76 SCRA 514). arellano law t.

BENGUET CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 141212, June 22,2006; Corona J.

Petitioner appointed L.C. Diaz and Co., an accounting firm, as its confidential payroll agent and tasked it with the remittance of withholding taxes on compensation with the BIR. For certain months in 1988 to 1991, there were unremitted withholding taxes of petitioner’s executives amounting to P6,188,672.50. The Commissioner’s issued a letter demanding the payment thereof and in said letter it was stated that all the payment orders and confirmation receipts reflected in petitioner’s annual return

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submitted to respondent’s Accounting Division were found to be fake, that is, not issued by the Bureau of Internal Revenue. The checks issued by the petitioner for the payment of the withholding taxes on compensation were not issued by the petitioner for the payment of the withholding taxes on compensation were not used as such but were found out to have been used in the purchase of loose documentary stamps of different clients of L.C. Diaz and Co. This fact is evident from the dorsal side of the subject checks which bears the handwritten notes that they were used to pay documentary stamps which findings is corroborated by the report of the Revenue Collection Agent who received these checks. This case centers on one main issue: What should be considered as the best evidence of payment of withholding taxes – the Pos and CRs which indicated that payment was made as insisted by petitioner, or the dorsal notes on the checks and reports of the BIR team that no such payments were made? The ruling issued by the CTA as affirmed by the CA is that – “When checks are used for payments in settling obligations, the best evidence are the checks themselves. Considering that the Pos and CRs of petitioner, although seemingly genuine, do not appear in respondent’s records, the best evidence in proving the petitioner’s alleged payments are the MTBC checks. A careful scrutiny of these checks, however, revealed that they were not used to pay withholding taxes. The checks themselves confirm respondent’s Special Project’s Team’s findings that they were used to purchase documentary stamps from the BIR. For on the dorsal sides of the subject checks are handwritten notes that they were used to pay documentary stamps. As to how many pieces of documentary stamps were purchased for each denominations of P5.00 or P3.00, and even their respective serial numbers were also indicated at the back of each checks. The SC ruled that the issue involves a question of fact which cannot be taken cognizance by it from the high tribunal is not a truer of facts. Accordingly, the findings of fact by the CTA are generally regarded as final, binding and conclusive on the SC, especially if these are substantially similar to the findings of the CA which is normally the final arbiter of questions of fact. As a final note, the SC ruminates – Petitioner, as a withholding agent, is burdened by law with public duty to collect the tax for the government. However, its payroll agent, L.C. Diaz and Co., failed to remit to the BIR the withholding taxes on compensation. Hence, no valid payment of the withholding taxes was actually made by petitioner. Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. It follows that petitioner is liable to pay the unremitted withholding taxes. u. FAR EAST BANK AND TRUST COMPANY AS TRUSTEE OF VARIOUS RETIREMENT FUNDS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF APPEALS, respondents. G.R. No. 138919, May 2, 2006; Tinga, J. This case hinges on a claim for refund of erroneously paid taxes due to the withholding of the final tax on interest income earned in 1993 by different employees trust managed by Far East Bank. The four claims for refund involving four quarters of 1993 were all filed with the BIR within two years from the date of remittance of the tax. The Commissioner denied the claims due to the failure of the trustee-bank to sufficiently substantiate the same. The petitioner did not appeal the denial to the CTA. However, on April 28,1995, the petitioner filed a Motion to Admit Supplemental Petition in CTA case No. 4848 (involving claim for refund for an earlier year) seeking to include in that case the tax refund claimed for the year 1993. The CTA denied the admission of the supplemental petition and advised the petitioner to instead file a separate petition for review to which it complied but only October 9, 1995. Issues: a) What evidentiary requirements must be complied to substantiate the claim for refund? b) Is the two-year prescriptive period under Section 229 of the Tax Code, tolled by the filing of a supplemental petition on a separate claim pending before the CTA?

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The evidentiary requirements that need to be introduced are the documentary proof of transactions such as confirmation receipts and purchase orders that would ordinarily show the fact of purchase of treasury bills or money market placements by the various funds, together with their individual bank account numbers. These documents are the best evidence on the participation of the funds, and without them, there is no way for the Court to verify the actual involvement of the funds in the alleged investment in treasury bills and money market placements. Since the petitioner failed to submit these vital documents, the claim for refund must fail. On the second issue, the SC said that the filing of the supplemental motion having been denied by the CTA has produced no judicial effect. The CTA acquired jurisdiction over the claim for refund for taxes paid by petitioner in 1993 only upon filing of the new Petition for Review on October 9, 1995 or more than two years from the date of payment of the taxes sought to be refunded. But even if the CTA allowed the filing of the supplemental petition on April 28, 1995, it will not alter the fact that taxes paid from January to April 27, 1993 are no longer available for refund for the right to file the claim has already prescribed. An appeal from the decision of the Commissioner must be an independent action. It can not be done in the guise of supplementing a pending case in the CTA. Allowing this would run counter to the provisions of Section 229 of the NIRC which etched in stone the “supervening event clause” in pursuing a claim for refund. v.

SAN PABLO MANUFACTURING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 147749, June 22, 2006; Corona, J.

This case pertains to the exemption from miller’s tax which was granted under Section 168 of the 1987 Tax Code. The law specifically exempts the exportation of rope, coconut oil, palm oil, copra byproducts and desiccated coconuts, whether in their original state or as an ingredients or part of any manufactured article or products, by the proprietor of the factory or by the miller himself. Petitioner sold crude coconut oil to United Coconut Chemicals, Inc. which were utilized by the buyer as raw materials in the production of products for export. On these local sales, petitioner seeks exemption from paying the 3% miller’s tax. Issue: Is the local sale of crude coconut oil by the miller covered by the exemption? The SC ruled in the negative. The rule is that the exemption must not be so enlarged by construction since the reasonable presumption is that the state has granted in express terms all it intended to grant and that, unless the privilege is limited to the very terms of the statute, the favor would be extended beyond what was meant. We have to adhere to the rule of expressio unius est exclusio alterius which is a canon of restrictive interpretation. Its application in this case is consistent with the construction of tax exemptions in strictissimi juris against the taxpayer. To allow SPMC’s claim for tax exemption will violate these established principles and unduly derogate sovereign authority. It must be noted that what is exempted by law are export sales made by the proprietor of the factory or by the miller himself. Local sales to another person, even if the buyer will eventually export the same, are undoubtedly beyond the scope of the exemption. w. BARCELON, ROXAS SECURITIES, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. G.R. No. 157064, August 7, 2006; Chico-Nazario, J. The core issue raised for resolution in this case is whether or not respondent’s right to assess petitioner’s alleged deficiency income tax is barred by prescription. Records show that petitioner filed its Annual Income Tax Return for taxable year 1987 on April 14, 1988. The last day for filing by petitioner of its return was on April 15, 1988, thus, giving respondent until

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April 15, 1991 within which to send an assessment notice. While respondent avers that it sent the assessment notice dated February 1, 1991 on February 6, 1991, within the three (3)- year period prescribed by law, petitioner denies having received an assessment notice from respondent. Petitioner alleges that it came to know of the deficiency tax assessment only on March 17, 1992 when it was served with the Warrant of Distraint and Levy. The SC ruled for the taxpayer. The high tribunal relied heavily on the failure on the part of respondent to prove by independent evidence, such as the registry receipt of the assessment notice to the taxpayer. What was merely presented is the BIR record book where the name of the taxpayer, the kind of tax assessed, the registry receipt number and the mailing were noted to which the custodian testified that she made the entries therein. But these are all self-serving. In the case of Nava v. Commissioner, 121 Phil. 117, the SC stressed on the importance of proving the release, mailing or sending of the notice and it said“While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (citing Collector vs. Bautista, L-12250 and L- 12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing, or sending of the notice be clearly and satisfactorily proved. Mere notations made without taxpayer’s intervention, notice or control, without adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue officer, without adequate protection or defense. It is clear that the evidence presented by respondent is insufficient to give rise to the presumption that the assessment was received in the regular course of mail. Consequently, the right of the government to assess and collect the alleged deficiency tax is barred by prescription. x. COMMISSIONER OF INTERNAL REVENUE, petitioner vs. PHILIPPINE GLOBAL COMMUNICATION, INC. respondent. G.R. No. 167146, October 31, 2006; Chico-Nzario, J. This involves a case of prescription so that the narration of specific dates on every action taken is indispensable for a proper understanding thereof. The relevant dates are as follows: 1. April 15, 1991 – respondent filed its ITR for income earned in 1990. 2. April 22, 1994 - Formal Assessment Notice was made assessing the taxpayer for deficiency income tax in the total amount of P118, 271, 672.00. 3. May 6, 1994 – filed a formal protest letter against the assessment. 4. May 23, 1994 - other protest was filed. The previous and present protest asked for the cancellation of the assessment for being invalid for lack of factual and legal basis. 5. October 16, 2002 (more than eight years after the assessment was issued) – taxpayer received a Final Decision, dated October 8, 2002, from the Commissioner denying the protest. 6. November 15, 2002 – respondent filed a Petition for Review with the CTA invoking prescription as a defense. 7. June 9, 2004 - CTA rendered a decision in favor of the respondent. After the filing a Motion for Reconsideration the CTA en banc affirmed. Issue: Will the filing of the timely protest by the taxpayer toll the running of the prescriptive period to collect the assessed deficiency income tax? The SC ruled in the negative. The running of the prescriptive period, by express provision of Section 224 (now 223), can be suspended “When the taxpayer requests for a reinvestigation which is granted by the Commissioner”. RR No. 12-85 defined what is a request for reinvestigation on one hand and a request for reconsideration on the other. The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from

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a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. While it is true that the provisions of Section 223 of the NIRC is clear, the ruling of the SC in the case of Wyeth Suaco (G.R. No. 76281, September 30, 1991, 202 SCRA 125) set a different tone when the Court ruled that “the prescriptive period provided by law to make a collection is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment.” In the case of BPI vs. CIR, G.R. No. 139736, October 17, 2005, the SC took occasion to examine carefully the Wyeth decision and found out that there are inconsistencies with the law. The provision of Section 223 is clear that a request for reinvestigation (not reconsideration) which is granted by the Commissioner can suspend the running of the prescriptive period to collect. arellano law y.

COMMISSIONER OF INTERNAL REVENUE, petitioner vs. CITYTRUST BANKING CORPORATION, respondent, G.R. No. 150812, August 22, 2006; Corona, J.

This case involves a claim for refund for 1984 and 1985. CTA ordered the Commissioner to grant the refund. The CIR filed a motion for reconsideration on the ground that the payment and remittance of the tax are not sufficiently proven and that Citytrust has an outstanding deficiency income and business tax liabilities for 1984. The CTA denied the motion which was affirmed by the CA. On a petition for review on certiorari before the SC, the SC took cognizance of the apparent contradiction between the claim for refund and the deficiency assessments against Citytrust, and that the government could not be held in estoppel due to the negligence of its officials or employees, especially in cases involving taxes. For that reason, the case was remanded by the SC to the CTA for reception of evidence. In compliance with the SC order, the CTA conducted further proceedings for the reception of the CIR’s evidence. In the course thereof, Citytrust paid the assessed deficiencies for 1984 to remove all administrative impediments to its claim for refund. Having fully settled its tax liabilities for 1984, respondent prays that it be granted a refund. The CIR interposed his objection, however, alleging that Citytrust still had unpaid deficiency income, business and withholding taxes for the year 1985. Due to these deficiency assessments, the CIR insisted that Citytrust was not entitled to any refund. The CTA set aside the CIR’s objections and granted the refund. On appeal, the CA denied the CIR’s petition for review for lack of merit and affirmed the CTA decision which is again the subject of this present petition for review on certiorari. Issue: Is a deficiency tax which was never raised as a defense on appeal be considered in determining the taxpayer’s entitlement to a refund? The CTA opines that it is not duty bound to receive evidence for these assessments pertaining to 1985 for the following reasons: 1. Although the SC in its earlier order did not specifically mention what kind of petitioner’s evidence should be entertained, logic, dictates that the evidence should pertain only to the 1984 assessments raised as a defense on appeal to the CA and the SC. The assessments for 1985 were never raised on appeal and so they should never be allowed as this will lead to an endless litigation. 2. The CTA has no jurisdiction to try as assessment case which was never appealed to it. The Supreme Court was convinced with the ratiocination made by the CTA and decided to affirm the grant of the refund. The SC once again said- “Because of the CTA’s recognized expertise in taxation, its findings are not ordinarily subject to review specially where there is no showing of grave error or abuse on its part.”

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It is thus clear that only an assessment and a claim for refund involving the same taxable period and under common jurisdiction are required to be settled in one proceeding consonant with the earlier City Trust case. There are compelling reasons why the concept of ‘settlement under one proceeding’ may not be followed as when it is expected to create utter confusion among taxpayers. It is of common knowledge that the laws governing claims for refund are separate and distinct from those applicable to assessment of appeals. For example, the period of time to appeal a refund case is within two (2) years from the date of the payment, while the filing of an assessment appeal requires the observance of thirty (30) days from the date of receipt of the denial of protest. To illustrate, let us take a taxpayer who has an erroneously paid capital gains tax in August 1992. Sometime in August 1994, an assessment was issued against him for deficiency income tax for the same taxable year. Supposing, he immediately protested the assessment but the BIR did not immediately act on his protest, will he still wait for the BIR’s decision before he can go to the CTA to file his claim for refund? What about if the two- year period appeal his refund is nearing expiration, will he still wait indefinitely for the decision on his protest, so he can file both suits simultaneously with the Court? Of course, the answer will be NO. Now, let us reverse the scenario. Supposing the BIR’s assessment came first but this time no protest was made by the taxpayer. Hence, the assessment became final and executory and so, the BIR filed a collection case in the regular trial court. During the pendency of the collect ion suit, taxpayer discovered that he made an erroneous payment of a different kind of tax. To avoid multiplicity of suits, will the BIR allow the taxpayer to ventilate his claim for refund in the same collection case? Of course, the BIR will object on the ground of jurisdiction. (These are the arguments relied upon by the CTA in not allowing the 1984 assessments to be settles along with the 1984 claim for refund citing their earlier resolution in Chemo-Technische Mfg. Vs. CIR promulgated in August 31, 1995 (CTA Case No. 4231) This observation is being highlighted in view of the position taken by the SC in this particular case covered by this Survey that: “This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which, which by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.” ARELLANO BAR REVIEW PROGRAM ARELLANO LAW FOUNDATION CENTER FOR LEGAL EDUCATION AND RESEARCH

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TAXATION | ANALYTICAL SURVEY OF 2006 S.C. DECISIONS IN TAXATION