Digested Cases in Taxation I, Part 1

1. Chamber of Real Estate and Associations, Inc., v. The Hon. Secretary Alberto Romulo, et al G.R. No. 160756. March 9, 2010

Builders’ Executive

Facts: Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an association of real estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on corporations. Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income, beginning on the 4th taxable year immediately following the year in which it commenced its business operations, when such MCIT is greater than the normal corporate income tax. If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. CREBA argued, among others, that the use of gross income as MCIT base amounts to a confiscation of capital because gross income, unlike net income, is not realized gain.

the income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable income as provided for under the Tax Code;  Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code provision which imposes income tax on net income at the end of the taxable period;  Go against the due process clause because the government collects income tax even when the net income has not yet been determined; gain is never assured by mere receipt of the selling price; and  Contravene the equal protection clause because the CWT is being charged upon real estate enterprises, but not on other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a real estate enterprise. Issues: (1) Is the imposition of MCIT constitutional? (2) Is the imposition of CWT on income from sales of real properties classified as ordinary assets constitutional?

CREBA also sought to invalidate the provisions of RR No. 298, as amended, otherwise known as the Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection of CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations:

Held: (1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is imposed on gross income which is computed by deducting from gross sales the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.

 Use gross selling price (GSP) or fair market value (FMV) as basis for determining

Various safeguards were incorporated into the law imposing MCIT.

Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in which the corporation commenced its operations. Secondly, the law allows the carry-forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years. Thirdly, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses. (2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property classified as ordinary assets remains as the entity’s net taxable income as provided in the Tax Code, i.e., gross income less allowable costs and deductions. The seller shall file its income tax return and credit the taxes withheld by the withholding agent-buyer against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and convenience. The knowledge of the withholding agent-buyer is limited to the particular transaction in which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to him.

Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to cancel its possible future tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. The withholding agent-buyer’s act of collecting the tax at the time of the transaction, by withholding the tax due from the income payable, is the very essence of the withholding tax method of tax collection. On the alleged violation of the equal protection clause, the taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. What distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts.

2.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU PORTLAND CEMENT

COMPANY and COURT OF TAX APPEALS, respondents. G.R. No. L-29059 December 15, 1987 FACTS: By virtue of a decision of the CTA, as modified on appeal by the Supreme Court, the CIR was ordered to refund to Cebu Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on cement produced and sold by it. When respondent moved for a writ of execution, petitioner opposed on the ground that the private respondent had an outstanding sales tax liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balance owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. The CTA granted the CIR’s motion. The CIR claims that the refund should be charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the Tax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt from sales taxes. The petitioner also denies that the sales tax assessments have already prescribed because the prescriptive period should be counted from the filing of the sales tax returns, which had not yet been done by the private respondent. Meanwhile, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a manufactured product but a mineral product. As such, it was exempted from sales taxes. Also, the alleged sales tax deficiency could not as yet be enforced against it because the tax assessment was not yet final, the same being still under protest and still to be definitely resolved on the merits. Besides, the assessment had

already prescribed, not having been made within the reglementary five-year period from the filing of the tax returns. ISSUE: Whether or not sales tax was properly imposed upon private respondent. HELD: Yes, because cement has always been considered a manufactured product and not a mineral product. This matter was extensively discussed and categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation, decided on August 10, 1983, stating that cement qua cement was never considered as a mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its components are minerals, for the simple reason that cement is the product of a manufacturing process and is no longer the mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax. 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 machinery of the state would grind to a halt and all government functions would be paralyzed. 3. Municipality of Makati v. Court of Appeals GR # 89898-9 10/01/90 Facts: An expropriation proceeding for a piece of land filed by the Municipality of Makati against Admiral Financial and Credit Corp resulted with the Municipality having to pay P 5,291,666.00 less initial payments by the municipality. After

that, private respondent filed a writ for execution for the balance. Regional Trial Court granted the motion and directed the bank to deliver the said balance. Subsequent motions for reconsideration and appeal to the respondent Court of Appeals by the municipality in order to stop the garnishment. Issues: Whether or not the court can validly subject government accounts/property to garnishment. Whether or not the the court erred with the decision of assessing the higher amount as to how much the municipality is willing to pay. Held: The court ruled that the Municipality of Makati's accounts or property cannot be held for garnishment as government's fund, held for public use, can not be held for garnishment. However, the court still held the Municipality liable for the assessed value of the land and improvements because the private respondent should be entitled to just compensation. 4. CIR –v– Algue, Inc., & CTA G.R. No. L-28896 February 17, 1988 FACTS: Algue, Inc., a domestic corporation engaged in engineering, construction and other allied activities. Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. [There was a sale for which] Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. The payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon, and there was no distribution of dividends was involved.

[Algue claimed the 75,000 to be deductible from their tax, to which the CIR disallowed.] ISSUE: Whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. HELD: NO – CIR is not correct. The burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to

must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. 5. BPI Family Savings Bank v. CA, et al. GR No. 122480; April 12, 2000 Facts: Petitioner BPI Family Savings Bank had an excess withholding taxes for the year 1989 amounting to P112,491.90. It indicated in its 1989 Income Tax Return that it would apply the said amount as a tax credit for the succeeding taxable year, 1990. However because of business losses, petitioner informed the Bureau of Internal Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals. The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that petitioner was

presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this presumption because it did not present its 1990 Return, which would have shown that the amount in dispute was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund. Issue: Whether or not petitioner is entitled to the refund of P112,491.90, representing excess creditable withholding tax paid for the taxable year 1989. Held: It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus entitled to a refund amounting to P112,491. Pursuant to Section 69 of the 1986 Tax Code which states that a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said amount for the succeeding taxable year. Petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit. A copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for Reconsideration filed before the CTA. A final adjustment return shows whether a corporation incurred a loss or gained a profit during the taxable year. In this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the amount in dispute as a tax credit. The BIR did not controvert the veracity of the said return. It did not even file an opposition to petitioner's Motion and the 1990 Final Adjustment Return attached thereto. Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax Court in

CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the Tax Court held that "petitioner suffered a net loss for the taxable year 1990 . . . ." Respondent, however, urges this Court not to take judicial notice of the said case. Respondents' reasoning underscores the weakness of their case. For if they had really believed that petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail the fact appearing therein — that petitioner suffered a net loss in 1990 — in the same way that it refused to controvert the same fact established by petitioner's other documentary exhibits Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness. 6.

COMMISSIONER OF INTERNAL REVENUE vs.TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS 244 SCRA 342; May 26, 1995

Facts: Tokyo Shipping a foreign corporation represented in the Philippines by Soriamont Steamship Agencies and owns and operates M/V Gardenia. NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. Soriamont Agency, 4 paid the required income and

common carrier's taxes P59,523.75 and P47,619.00, respectively (Total P107,142.75). 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 instituted a claim for tax credit or refund of the sum P107,142.75 from CIR. Petitioner failed to act promptly on the claim , hence Tokyo filed a petition for review 6 before Court of Tax Appeals. CTA decided for Tokyo and denied MR of CIR. Issue: WON Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit – whether it was able to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government. Ruling: Yes. Pursuant to Section 24 (b) (2) of the National Internal Revenue Code which at that time, 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. Indeed, a claim for refund is in the nature of a claim for exemption 8 and should be construed in strictissimi juris against the taxpayer. And Tokyo has the burden of proof to establish the factual basis of its claim for tax refund. But sufficient evidence has already been adduced by Tokyo proving that it derived no receipt from its charter agreement with NASUTRA - M/V "Gardenia" arrived in Iloilo on January

10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board.

Atlas. Thus, it does not come within the ambit of Section 29(b) (7)(A), and it is not exempt from the payment of taxes.

7. COMMISSIONER OF INTERNAL REVENUE V.

Notes: Findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax court. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.

MISTUBISHI SCRA 214)

METAL

CORPORATION

(181

Facts: Atlas Consolidated Mining andDevelopment Corporation, a domestic corporation, entered into a Loan and Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in business in the Philippines. To be able to extend the loan to Atlas, Mitsubishi entered into another loan agreement with Export-Import Bank (Eximbank), a financing institution owned, controlled, and financed by the Japanese government. After making interest payments to Mitsubishi, with the corresponding 15% tax thereon remitted to the Government of the Philippines, Altas claimed for tax credit with the Commissioner of Internal Revenue based on Section 29(b)(7) (A) of the National Internal Revenue Code, stating that since Eximbank, and not Mitsubishi, is where the money for the loan originated from Eximbank, then it should be exempt from paying taxes on its loan thereon. Issue: WON the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation. NO. Mitsubishi secured the loan from Eximbank in its own independent capacity as a private entity and not as a conduit of Eximbank. Therefore, what the subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to

8. Phil Bank of Communications vs. CIR, et. al. 302 SCRA 241 January 28, 1999 Facts: Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

Subsequently, Petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. ISSUE: Whether the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription HELD: No. Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes

adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected. The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year. 9. Sison v. Ancheta GR No. L-59431; 25 July 1984 F A C T S: Batas Pambansa 135 was enacted. Sison, as taxpayer, alleged that its provision (Section 1) unduly discriminated against him by the imposition of higher rates upon his income as a professional, that it amounts to class legislation, and that it transgresses against the equal protection and due process clauses of the Constitution as well as the rule requiring uniformity in taxation.

I S S U E: Whether or not BP 135 violates the due process and equal protection clauses, and the rule on uniformity in taxation. H E L D: There is a need for proof of such persuasive character as would lead to a conclusion that there was a violation of the due process and equal protection clauses. Absent such showing, the presumption of validity must prevail. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the differentiation conforms to the practical dictates of justice and equity, similar to the standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore uniform. Taxpayers may be classified into different categories, such as recipients of compensation income as against professionals. Recipients of compensation income are not entitled to make deductions for income tax purposes as there is no practically overhead expense, while professionals and businessmen have no uniform costs or expenses necessary to produce their income. There is ample justification to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units or of lands on which another's dwelling is located, where such rentals do not exceed three hundred pesos (P300.00) a month but allowing an increase in rent by not more than 10% thereafter. On October 12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below P300.00 and by indefinitely suspending the aforementioned provision of the Civil Code, excepting leases with a definite period. Consequently, the Reyeses were precluded from raising the rentals and from ejecting the tenants thereof. The City Assessor of Manila assessed the value of the Reyeses property on the schedule of market values duly reviewed by the Secretary of Finance. The revision entailed an increase to the tax rates and the petitioners averred that the reassessment imposed upon them greatly exceeded the annual income derived from their properties. ISSUE: WON income approach is the method to be used in the tax assessment and not the comparable sales approach.

10. Reyes vs. Almanzor 196 SCRA 322; April 26, 1991 FACTS: Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants were paying

HELD: The income approach and not the comparable sales approach must be used. “By no strength of the imagination can the market value of properties covered by P.D. No. 20 be equated with the market

value of properties not so covered. The former has naturally a much lesser market value in view of the rental restrictions. In the case at bar, not even the factors determinant of the assessed value of subject properties under the "comparable sales approach" were presented by the public respondents, namely: (1) that the sale must represent a bonafide arm's length transaction between a willing seller and a willing buyer and (2) the property must be comparable property. Nothing can justify or support 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.” 11. PAL v. Sec of Finance GR No. 115852; 30 October 1995 F A C T S: The Value-Added Tax [VAT] is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. These are various suits for certiorari and prohibition challenging the constitutionality of RA 7716:

In the case at bar, PAL attacks the formal validity of Republic Act No. 7716. PAL contends that it violates Art. VI, Section 26[1] which provides that "Every bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL transactions from the payment of the VAT and that this was made only in the Conference Committee bill which became Republic Act No. 7716 without reflecting this fact in its title. The title of Republic Act No. 7716 is: AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. Furthermore, section 103 of RA 7716 states the following: Section 103. Exempt Transactions.- The following shall be exempt from the value-added tax: [q] Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned. Philippine Airlines [PAL] claims that its franchise under P.D. No. 1590 which makes it liable for a franchise tax of only 2% of

gross revenues "in lieu of all the other fees and charges of any kind, nature or description, imposed, levied, established, assessed or collected by any municipal, city, provincial, or national authority or government agency, now or in the future," cannot be amended by Rep. Act No. 7716 as to make it [PAL] liable for a 10% value-added tax on revenues, because Sec. 24 of P.D. No. 1590 provides that PAL's franchise can only be amended, modified or repealed by a special law specifically for that purpose. I S S U E: Whether or not this amendment of Section 103 of the NIRC is fairly embraced in the title of Republic Act No. 7716, although no mention is made therein of P. D. No. 1590 H E L D: The court ruled in in the affirmative. The title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to widen its base by withdrawing some of the exemptions granted before. To insist that P. D. No. 1590 be mentioned in the title of the law, in addition to Section 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill should be a complete index of its content. The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall be expressed in its title is intended to prevent surprise upon the members of Congress and to inform the people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the same reason other statutes, although published, pass unnoticed until some event somehow calls attention to their existence.

Republic Act No. 7716 expressly amends PAL's franchise [P. D. No. 1590] by specifically excepting from the grant of exemptions from the VAT PAL's exemption under P. D. No. 1590. This is within the power of Congress to do under Art. XII, Section 11 of the Constitution, which provides that the grant of a franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the common good so requires.

12.

ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 115455 August 25, 1994

FACTS: Herein various petitioners seek to declare RA 7166 as unconstitutional as it seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. The valueadded tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall "evolve a progressive system of taxation." With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale of real

property by installment or on deferred payment basis would result in substantial increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is something that the buyer did not anticipate at the time he entered into the contract. It is next pointed out that while Section 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property which is equally essential. The sale of real property for socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be exempted. Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, Section 28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." ISSUE: Whether or not RA 7166 violates the principle of progressive system of taxation. HELD: No, there is no justification for passing upon the claims that the law also violates the rule that taxation must be progressive and that it denies petitioners' right to due process and that equal protection of the laws. The reason for this different treatment has been cogently stated by an eminent authority on constitutional law thus: "When freedom of the mind is imperiled by law, it is freedom that commands a momentum of respect; when property is imperiled it is the lawmakers' judgment that commands respect. This dual standard may not precisely reverse the presumption of

constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the due process clause." Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption goods of those who are in the higherincome bracket, which before were taxed at a rate higher than 10%, has been reduced, while basic commodities, which before were taxed at rates ranging from 3% to 5%, are now taxed at a higher rate. Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by respondents that in fact it distributes the tax burden to as many goods and services as possible particularly to those which are within the reach of higher-income groups, even as the law exempts basic goods and services. It is thus equitable. The goods and properties subject to the VAT are those used or consumed by higherincome groups. These include real properties held primarily for sale to customers or held for lease in the ordinary course of business, the right or privilege to use industrial, commercial or scientific equipment, hotels, restaurants and similar places, tourist buses, and the like. On the other hand, small business establishments, with annual gross sales of less than P500,000, are exempted. This, according to respondents, removes from the coverage of the law some 30,000 business establishments. On the other hand, an occasional paper of the Center for Research and Communication cities a NEDA study that the VAT has minimal impact on inflation and income distribution and that while additional expenditure for the lowest income class is only P301 or 1.49% a year, that for a family earning P500,000 a year or more is P8,340 or 2.2%. Lacking empirical data on which to base any conclusion regarding these arguments, any discussion whether the VAT is

regressive in the sense that it will hit the "poor" and middleincome group in society harder than it will the "rich," is largely an academic exercise. On the other hand, the CUP's contention that Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives, not only goes against the constitutional policy to promote cooperatives as instruments of social justice (Art. XII, § 15) but also denies such cooperatives the equal protection of the law is actually a policy argument. The legislature is not required to adhere to a policy of "all or none" in choosing the subject of taxation. 44 Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90% any more concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its members out of circulation because their profits from advertisements will not be enough to pay for their tax liability, while purporting to be based on the financial statements of the newspapers in question, still falls short of the establishment of facts by evidence so necessary for adjudicating the question whether the tax is oppressive and confiscatory. Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1). These provisions are put in the

Constitution as moral incentives to legislation, not as judicially enforceable rights.

13. ABAKADA v. Ermita (Delegation President) 469 SCRA 1: September 1, 2005

to

the

Facts: RA 9337: VAT Reform Act enacted on May 24, 2005. Sec. 4 (sales of goods and properties), Sec. 5 (importation of goods) and Sec. 6 (services and lease of property) of RA 9337, in collective, granted the Secretary of Finance the authority to ascertain: (a) whether by 12/31/05, the VAT collection as a percentage of the 2004 GDP exceeds 2.8% or (b)the national government deficit as a percentage of the 2004 GDP exceeds 1.5%. If either condition is met, the Sec of Finance must inform the President who, in turn, must impose the 12% VAT rate (from 10%) effective January 1, 2006. ABAKADA maintained that Congress abandoned its exclusive authority to fix taxes and that RA 9337 contained a uniform proviso authorizing the President upon recommendation by the DOF Secretary to rasie VAT to 12%. Sen Pimentel maintained that RA 9337 constituted undue delegation of legislative powers and a violation of due process since the law was ambiguous and arbitrary. Same with Rep. Escudero. Pilipinas Shell dealers argued that the VAT reform was arbitrary, oppressive and confiscatory.

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 two conditions arise. Issue: WON there was undue delegation. Held: No delegation but mere implementation of the law. Constitution allows as under exempted delegation the delegation of tariffs, customs duties, and other tolls, levies on goods imported and exported. VAT is tax levied on sales of goods and services which could not fall under this exemption. Hence, its delegation if unqualified is unconstitutional. Legislative power is authority to make a complete law. Thus, to be valid, a law must be complete in itself, setting forth therein the policy and it must fix a standard, limits of which are sufficiently determinate and determinable. No undue delegation when congress describes what job must be done who must do it and the scope of the authority given. (Edu v Ericta) Sec of Finance was merely tasked to ascertain the existence of facts. All else was laid out. Mainly ministerial for the Secretary to ascertain the facts and for the president to carry out the implementation for the VAT. They were agents of the legislative dept 14. CIR and Commissioner of Customs vs. Botelho Shipping Corp. & General Shipping Co., Inc. G.R. Nos. L-21633-34 June 29, 1967

FACTS: Reparations Commission of the Philippines sold to Botelho the vessel "M/S Maria Rosello" for the amount of P6,798,888.88. The former likewise sold to General Shipping the vessel "M/S General Lim" at the price of P6,951,666.66. Upon arrival at the port of Manila, the Bureau of Customs placed the same under custody and refused to give due course [to applications for registration], unless the aforementioned sums of P483,433 and P494,824 be paid as compensating tax. The buyers subsequently filed with the CTA their respective petitions for review. Pending the case, Republic Act No. 3079 amended Republic Act No. 1789 — the Original Reparations Act, under which the aforementioned contracts with the Buyers had been executed — by exempting buyers of reparations goods acquired from the Commission, from liability for the compensating tax. Invoking [section 20 of the RA 3079], the Buyers applied, for the renovation of their utilizations contracts with the Commission, which granted the application, and, then, filed with the Tax Court, their supplemental petitions for review. The CTA ruled in favor of the buyers. [On appeal, the CIR and COC maintain that such proviso should not be applied retroactively], upon the ground that a tax exemption must be clear and explicit; that there is no express provision for the retroactivity of the exemption, established by Republic Act No. 3079, from the compensating tax; that the favorable provisions, which are referred to in section 20 thereof, cannot include the exemption from compensating tax; and, that Congress could not have intended any retroactive exemption, considering that the result thereof would be prejudicial to the Government.

ISSUE: Whether or not the tax exemption can be applied retroactively

15. Tan v. Del Rosario G.R. No. 109289. October 3, 1994

HELD: YES. The inherent weakness of the last ground becomes manifest when we consider that, if true, there could be no tax exemption of any kind whatsoever, even if Congress should wish to create one, because every such exemption implies a waiver of the right to collect what otherwise would be due to the Government, and, in this sense, is prejudicial thereto. It may not be amiss to add that no tax exemption — like any other legal exemption or exception — is given without any reason therefor. In much the same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-making body considers sufficient to offset the monetary loss entitled in the grant of the exemption. Indeed, section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its favorable provisions, namely, the voluntary assumption, by the end-user who bought reparations goods prior to June 17, 1961 of "all the new obligations provided for in" said Act.

Facts: Petitioners assail RA 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code, as violative of the constitutional requirement that taxation shall be "shall be uniform and equitable." The law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships.

Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax, not particular persons, but persons belonging to a particular class. Indeed, appellants do not assail the constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval of Republic Act No. 3079, on June 17, 1961, purchased reparations goods procured by the Commission. From the viewpoint of Constitutional Law, especially the equal protection clause, there is no difference between the grant of exemption to said end-users, and the extension of the grant to those whose contracts of purchase and sale mere made before said date, under Republic Act No. 1789.

Held: Petition denied. Uniformity of taxation means that (1) the standards that are used therefore are substantial and not arbitrary, (2) the categorization is germane to achieve legislative purpose, (3) the law applies, all things being equal, to both present and future conditions and (4) the classification applies equally well to all those belonging to the same class.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. Issue: Whether or not RA 7496 is violative of the constitutional requirement that taxation shall be uniform and equitable.

With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to

confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us. 16.

MACEDA vs. MACARAIG, JR 223 SCRA 217 June 8, 1993 Topic: Classification of Taxes According to Burden or Incidence (Direct or Indirect)

Facts: This matter of indirect tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision We promulgated on May 31, 1991 petitioner Ernesto Maceda asks this Court to reconsider said Decision. A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions. 1. On November 3, 1936, Commonwealth Act No. 120: creating the National Power Corporation. The main source of funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds...“issued under the authority of this Act shall be exempt from the payment of all taxes by the Commonwealth of the Philippines…” 2. On June 24, 1938, C.A. No. 344, the provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted. 3. On September 30, 1939, C.A. No. 495, the provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

4. On June 4, 1949, Republic Act No. 357, any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions and restrictions of the Republic of the Philippines 5. On the same date, R.A. No. 358, to facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes. 6. On July 10, 1952, R.A. No. 813 amended R.A. No. 357. The tax provision as stated in R.A. No. 357, was not amended. 7. On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. 8. On September 8, 1955, R.A. No. 1397, the tax exemption provision related to the payment of this total indebtedness was not amended nor deleted. 9. On June 13, 1958, R.A. No. 2055, the tax provision related to the repayment of loans was not amended nor deleted. 10. On June 18, 1960, R.A. No 2641 converted the NPC from a public corporation into a stock corporation. No tax exemption was incorporated in said Act. 11. On June 17, 1961, R.A. No. 3043. No tax provision was incorporated in said Act. 12. On June 17, 1967, R.A. No 4897. No tax provision was incorporated in said Act. 13. On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC. The bonds issued shall be exempt from the payment of all taxes. As to the foreign loans the NPC was authorized to contract, shall also be exempt from all taxes, 14. On January 22, 1974, P.D. No. 380…shall also be exempt from all direct and indirect taxes, 15. On February 26, 1970, P.D. No. 395, no tax exemption provision was amended, deleted or added.

16. On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which amount would be taken from taxes accruing to the General Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or notes to be issued 17. On May 27, 1976 P.D. No. 938, declared exempt from the payment of all forms of taxes… 18. On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports 19. On July 30, 1977, P.D. 1177, All units of government, including government-owned or controlled corporations, shall pay income taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that organizations otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General Fund 20. On July 11, 1984, P.D. No. 1931, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of governmentowned or controlled corporations including their subsidiaries, are hereby withdrawn. 21. On December 17, 1986, E.O. No. 93 was issued with a view to correct presidential restoration or grant of tax exemption to other government and private entities without benefit of review by the Fiscal Incentives Review Board, “WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored”

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC. Issue: WON NPC is exempted to pay Indirect Income Tax Held: Yes. Classifications or kinds of Taxes: According to Persons who pay or who bear the burden: a. Direct Tax — that where the person supposed to pay the tax really pays it. WITHOUT transferring the burden to someone else. Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence tax, immigration tax b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who ultimately pays for it, not as a tax, but as a part of the purchase price. Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and customs indirect taxes (import duties, special import tax and other dues) 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. P.D. No. 380 added phrase "directly or indirectly,"

P.D. No. 938 amended into “exempt from the payment of ALL FORMS OF taxes” President Marcos must have considered all the NPC statutes from C.A. No. 120 up to P.D. No. 938. One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved. The tax exemption stood as is — with the express mention of "direct and indirect" tax exemptions. Lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect. Therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No. 938. The Court rules and declares that 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. Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect taxation

17. ESSO

STANDARD EASTERN, INC COMMISSIONER OF INTERNAL REVENUE G.R. Nos. L-28508-9, July 7, 1989

vs.

FACTS: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted from its gross income for 1959, as part of itso r d i n a r y a n d n e c e s s a r y b u s i n e s s e x p e n s e s , t h e amount it had spent for drilling and exploration o f i t s p e t r o l e u m concessions. This claim was disallowed by the Commissioner of Internal Revenue (CIR) on the ground that the expensesshould be capitalized and might be written off as a loss only when a "dry hole" should result. Esso then filed an amendedreturn where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells.Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representingmargin fees it had paid to the Central Bank on its profit remittances to its New York head office.On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for themargin fees paid on the ground that the margin fees paid to the Central Bank could not be considered taxes or allowed asdeductible business expenses.Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin fees it had earlier paid contendingthat the margin fees were deductible from gross income either as a tax or as an ordinary and necessary businessexpense. However, Esso’s appeal was denied. ISSUE: (1) Whether or not the margin fees are taxes.(2) Whether or not the margin fees are necessary and ordinary business expenses.

RULING: (1) No. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee areapplied to strengthen our country's international reserves. The margin fee was imposed by the State in the exercise of itspolice power and not the power of taxation.(2) No. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful inthe development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to thebusiness of the taxpayer and the surrounding circumstances. Since the margin fees in question were incurred for theremittance of funds to Esso's Head Office in New York, which is a separate and distinct income taxpayer from the branchin the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpfulin the development of Esso's business in the Philippines exclusively or were incurred for purposes proper to the conductof the affairs of Esso's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss inthe Philippines exclusively. 18. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION vs. THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL G.R. No. L-24265 December 28, 1979 TOPIC: Nature and amount of license FACTS: Plaintiff-appellant is a domestic corporation with principal offices in Manila. lt is a consolidated corporation of Procter & Gamble Trading Company and Philippine Manufacturing Company, which later became Procter & Gamble Trading Company, Philippines. It is engaged in the

manufacture of soap, edible oil, margarine and other similar products, and for this purpose maintains a "bodega" in defendant Municipality where it stores copra purchased in the municipality and therefrom ships the same for its manufacturing and other operations. On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance No. 4, Series of 1957 or An Ordinance imposing storage fees of all exportable copra deposited in the bodega within the jurisdlcti0n of the municipality of jagna bohol. For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under protest, storage fees in the total sum of P42,265.13. On March 3, 1964, plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it prayed that 1) Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and void for being beyond the power of the Municipality to enact; and 2) that defendant Municipality be ordered to refund to it the amount of P42,265.13 which it had paid under protest; and costs. The trial Court upheld its jurisdiction as well as defendant Municipality's power to enact the Ordinance in question under section 2238 of the Revised Administrative Code, otherwise known as the general welfare clause. ISSUES: Whether defendant Municipality was authorized to impose and collect the storage fee provided for in the challenged Ordinance under the laws then prevailing. Whether the imposition of P0.10 per 100 kilos of copra stored in a bodega within the municipality ofJagnas' territory is beyond the cost of regulation and surveillance

HELD: The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon municipalities by Commonwealth Act No. 472, which was the prevailing law when the Ordinance was enacted. A municipality is authorized to impose three kinds of licenses: (1) a license for regulation of useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or enterprises; and (3) license for revenue. 4 It is thus unnecessary, as plaintiff would have us do, 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. The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on persons, firms and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within the Municipality's territorial jurisdiction. For the term "license tax" has not acquired a fixed meaning. It is often used indiseriminately to designate impositions exacted for the exercise of various privileges. In many instances, it refers to revenue-raising exactions on privileges or activities. (2) Municipal corporations are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures. In the absence of proof as to municipal conditions and the nature of the business being taxed as well as other factors relevant to the issue of arbitrariness or unreasonableness of the questioned rates, Courts will go slow in writing off an Ordinance. In the case at

bar, appellant has not sufficiently shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive. 19. Golden Ribbon Lumber Co., Inc. v. City of Butuan GR No. L-18534 24 December 1964 F A C T S: Golden Ribbon Lumber Co., Inc., a duly organized domestic corporation, operated a lumber mill and lumber yard in Butuan City. Pursuant to Ordinance No. 5, as amended by Ordinance Nos. 9, 10, 47, and 49 of the said city, it paid the taxes provided therein. Claiming that said ordinance, as amended, was void, it later brought the present action to have it so declared; to recover the amount paid, and to have appellants permanently enjoined from enforcing said ordinance as amended. I S S U E: Whether or not Ordinance No. 5 falls within the Charter of the City of Butuan. H E L D: No. The tax imposed is and was really intended to be on lumber sold and not a tax on, or, license fee for the privilege of operating a lumber mill and/or a lumber yard. It violates RA 2264 as municipal corporations are prohibited from imposing charges of taxes of such nature. Appellants’ claim that the questioned tax is one on business or a privilege tax for the operation of a lumber mill or a lumber yard is without merit. The character or nature of a tax is determined by its operation, practical results and incidents. Neither the original ordinance in question nor the amendatory ones provide that payment thereof is a condition precedent to

the enjoyment of such privilege or that its non-payment would result in the cancellation of any previous license granted. Lastly, the rule is well-settled that municipal corporations are clothed with no power of taxation; that its charter or a statute must clearly show an intent to confer that power or the municipal corporation cannot assume and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity arising out from the terms of the grant to be resolved against the municipality. 20.

VICTORIAS MILLING CO. V PPA 153 SCRA 317; August 27, 1987

FACTS: This is a petition for review on certiorari of the July 27, 1984 Decision of the Office of the Presidential Assistant For Legal Affairs dismissing the appeal from the adverse ruling of the Philippine Ports Authority on the sole ground that the same was filed beyond the reglementary period. On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for short) wrote petitioner Victorias Milling Co., requiring it to have its tugboats and barges undergo harbor formalities and pay entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA, likewise, requiring petitioner to secure a permit for cargo handling operations at its Da-an Banua wharf and remit 10% of its gross income for said operations as the government's share. Victorias Milling Co. maintained that it is except from paying PPA any fee or charge because: 1. The wharf and its facilities are built and installed on it’s own land; 2. Repairs and

maintenance are solely paid by it; 3. Maintenance and dredging of the channel are done by the Company personnel; 4. At not time has the government paid any centavo for such activities. ISSUE: WON the Victorias Milling Co. claim of exception for PPA fees is meritorious. HELD: No, the petitioners claim that there is no basis for the PPA to assess and impose the dues and charge is devoid of merit. As correctly stated by the Solicitor General, the fees and charges PPA collects are not for the use of the wharf that petitioner owns but for the privilege of navigating in public waters, of entering and leaving public harbours and berthing on public streams or waters. As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises, works, appliances, facilities, or for services provided by or belonging to the Authority, or any organization concerned with port operations." This 10% government share of earnings of arrastre and stevedoring operators is in the nature of contractual compensation to which a person desiring to operate arrastre service must agree as a condition to the grant of the permit to operate. 21. CIR v. CA, CTA, AdMU GR No.115349; 18 April 1997

F A C T S: Private respondent, Ateneo de Manila University, is a non-stock, non-profit educational institution with auxiliary units and branches all over the country. The Institute of Philippine Culture (IPC) is an auxiliary unit with no legal personality separate and distinct from private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. On 8 July 1983, private respondent received from CIR a demand letter dated 3 June 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor’s tax, and an assessment dated 27 June 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended 31 March 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a memorandum contesting the validity of the assessments. After some time petitioner issued a final decision dated 3 August 1988 reducing the assessment for deficiency contractor’s tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest. The lower courts ruled in favor of respondent. Hence this petition. Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law. Petitioner states that the "term 'independent

contractor' is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." I S S U E: Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code and is subject to a 3% contractors tax. H E LD: The petition is unmeritorious. The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. Interpretation of Tax Laws. The doctrine in the interpretation of tax laws is that “(a) statute will not be

construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.” In case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. Ateneo’s Institute of Philippine Culture 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 the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are “tax-exempt” as shown by private respondent’s compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution. Transaction of IPC not a contract of sale nor a contract for a piece of work. The transactions of Ateneo’s Institute of Philippine Culture 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 certain price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the

thing. . . .” In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture.

22.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS PHILIPPINES, INC. and THE HON. COURT OF TAX APPEALS, respondents. G.R. No. 108358 January 20, 1995

Facts: On 22 August 1986, Executive Order No. 41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985. Respondent R.O.H. Auto Products Philippines, Inc., availing of the amnesty, filed in October 1986 and November 1986, its Tax Amnesty Return and Supplemental Tax Amnesty Return No. and paid the corresponding amnesty taxes due. Prior to this availment, petitioner Commissioner of Internal Revenue, in a communication received by private respondent on August 13, 1986, assessed the latter deficiency income and business taxes for its fiscal years 1981 and 1982 in an aggregate amount of P1,410,157.71. Meanwhile, respondent averred that since it had been able to avail itself of the tax amnesty, the deficiency tax notice should forthwith be cancelled and withdrawn. This was denied by the CIR Revenue Memorandum Order No. 4-87, implementing Executive Order No. 41, had construed the amnesty coverage to include only assessments issued by the Bureau of Internal Revenue after

the promulgation of the executive order on August 22 1986 and not to assessments theretofore made. On appeal, The Court of Tax appeal upheld for the respondent, which was further upheld by the Court of Appeals. ISSUE: Whether or not the the deficiency assessments were extinguished by reason of respondent’s availment of the tax amnesty. HELD: Yes, as the scope of the amnesty covers the unpaid income taxes for the years 1981 to 1985. If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively) prior to August 22, 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it. Further, the law provides that, upon full compliance with the conditions of the tax amnesty and the rules and regulations issued pursuant to this Executive order, the taxpayer shall be relieved of any income tax liability on any untaxed income from January 1, 1981 to December 31, 1985, including increments thereto and penalties on account of the nonpayment of the said tax. Civil, criminal or administrative liability arising from the non-payment of the said tax, which are actionable under the National Internal Revenue Code, as amended, are likewise deemed extinguished.

23.HYDRO RESOURCES V. COURT APPEALS ET AL. GR 80276; December 21, 1990

OF

TAX

FACTS Hydro Resources Contractors Corporation entered into a contract of sale with the National Irrigation Authority (NIA) for the construction of Magat River Multipurpose Project in Isabella in August 1978. The contract provided that Hydro will import parts, construction equipment and tools and taxes and duties to be paid by NIA. Tools and equipment arrived during 1978 and 1979. NIA reneged on the contract. Therefore causing the transfer its sale to Hydro in seperate dates in December 6, 1982 and March 24, 1983. Executive Order 860 took effect during December 21, 1982 provided for 3% ad valorem tax on importations and it specifically provided that it should have no retroactive effect. During the contract of sale execution, Hydro was assessed and paid the said 3% ad valorem tax worth P 281,591 under protest. The Hydro when filing for refund with Customs Commissioner who indorsed the approval of the refund but was denied by the Secretary of Finance and motion was denied by the Court of Tax Appeals. ISSUE Whether or not should the Executive Order 860 should have a retroactive effect. HELD The Court of Tax Appeals erred in applying a retroactive effect for the Executive Order therefore should not have been subject to the additional 3% ad valorem tax. In general tax laws are not retroactive in nature. Not only that Executive Order 860 specifically provides that it is not retroactive in nature, but also when the conditional contract of sale was executed, its had a suspensive condition contemplated in the Civil Code (Article 1187) where it returned ownership to the seller Hydro because NIA was not able to comply with its

part of the contract, it was deemed executed as if during the constitution of the obligation which was in 1978 and not in 1982. 24.Central Azucarera Don Pedro –v– CIR and CTA G.R. Nos. L-23236 and L-23254 May 31, 1967 FACTS: Central Azucarera Don Pedro, a domestic corporation with office at Nasugbu, Batangas, had been filing its income tax returns on the "fiscal year" basis ending August 31, of every year. [It had been assessed deficiency tax plus interest. It paid the deficiency tax but protested on the imposition of the interest], claiming that the imposition of ½% monthly interest on its deficiency tax for the fiscal year 1954 to 1958, Pursuant to Section 51 (d) of the Revenue Code, as amended by Republic Act No. 2343, is illegal, because the imposition of interest on efficiency income tax earned prior to the effectivity of the amendatory law (Rep. Act 2343) [on 1959] will be tantamount to giving it (Rep. Act No. 2343) retroactive application. [It further contends that] the application of the amended provision (now Sec. 51-d of the Tax Code) to the cases at bar would run counter to the constitutional restriction against the enactment of ex post facto laws. ISSUE: Whether or not the imposition of the interest, is unconstitutional HELD: NO – [the interest was correctly imposed]. It is to be noted that the collection of interest in these cases is not penal in nature, thus —

the imposition of . . . interest is but a just compensation to the state for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's hands (U.S. vs. Goldstein, 189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp. 330; U.S. vs. Joffray, 97 Fed. [2d] 488). The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory. (Castro vs. Collector of Internal Revenue, G.R. No. L-12174, Resolution on Motion for Reconsideration, December 28, 1962) and we had already held that — The doctrine of unconstitutionality raised by appellant is based on the prohibition against ex post facto laws. But this prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or proceedings generally, or which affect or regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; 16 C.J.S., 889-891). (Republic vs. Oasan Vda. de Fernandez, 99 Phil. 934, 937). Finally, section 13 of the amendatory Republic Act No. 2343 refers only to the basic tax rates, which are made applicable to income received in 1959 onward, but does not affect the interest due on deficiencies, which are left to be governed by section 51 (d).

25.Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan G.R. No. L-31156; February 27, 1976 Facts: In February 1963, plaintiff commenced a complaint seeking to declare Section 2 of R.A. 2264 (Local Autonomy Act) unconstitutional as an undue delegation of taxing power and to declare Ordinance Nos. 23 and 27 issued by the Municipality of Tanauan, Leyte as null and void. Municipal Ordinance No. 23 levies and collects from soft drinks producers and manufacturers one-sixteenth (1/16) of a centavo for every bottle of soft drink corked. On the other hand, Municipal Ordinance No. 27 levies and collects on soft drinks produced or manufactured within the territorial jurisdiction of the municipality a tax of one centavo (P0.01) on each gallon of volume capacity. The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.” Issues: (1) Is Section 2 of R.A. 2264 an undue delegation of the power of taxation? (2) Do Ordinance Nos. 23 and 24 constitute double taxation and impose percentage or specific taxes? Held: (1) NO. The power of taxation is purely legislative and cannot be delegated to the executive or judicial department of the government without infringing upon the theory of separation of powers. But as an exception, the theory does not apply to municipal corporations. Legislative powers may be delegated to local governments in respect of matters of local concern. (2) NO. The Municipality of Tanauan discovered that

manufacturers could increase the volume contents of each bottle and still pay the same tax rate since tax is imposed on every bottle corked. To combat this scheme, Municipal Ordinance No. 27 was enacted. As such, it was a repeal of Municipal Ordinance No. 23. In the stipulation of facts, the parties admitted that the Municipal Treasurer was enforcing Municipal Ordinance No. 27 only. Hence, there was no case of double taxation. 26.

COMMISSIONER OF INTERNAL REVENUE vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS 309 SCRA 87 ; June 25, 1999 Topic: Double Taxation

Facts: SC. JOHNSON AND SON, INC., a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products. License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064. SC. JOHNSON AND SON, INC was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid from July 1992 to May 1993. Respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that Since the agreement was approved by the Technology Transfer Board, the

preferential tax rate of 10% should apply hence royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty. The Commissioner did not act on said claim for refund. Respondent filed a petition for review before the CTA to claim a refund of the overpaid withholding tax on royalty payments. CTA decided for Respondent and ordered CIR to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. CIR filed a petition for review with CA. CA upheld CTA. CIR contends that under RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided in RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RPWest Germany Tax Treaty. Also petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it. Respondent countered that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances"

does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". Issue: WON SC Johnson can refund. Ruling: NO. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the contracting parties. This dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany. The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer

in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in

the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. 15 The phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related". In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. the concessional tax rate of 10 percent provided for in the RPGermany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RPGermany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. If the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some

form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. Respondent cannot be deemed entitled to the 10 percent rate granted under the RP-West Germany Tax Treaty for the reason that there is no payment of taxes on royalties under similar circumstances in RP-US treaty.

27. CIR v Rufino GR Nos> L-33665-68; February 27, 1987 Facts: This is a petition for review on certiorari of the CTA decision which absolved petitioners from liability for capital gains tax on stocks received by them from Eastern Theatrical,

Inc. The Rufinos were majority stockholders of Eastern Theatrical Co., Inc (hereinafter Old ETC) which had a corporate term of 25 years, which terminated on January 25, 1959, president of which was Ernesto Rufino. On December 8, 1958, the Eastern Theatrical Co, Inc. (hereinafter New ETC, with a corporate term of 50 years) was organized, and the Rufinos were also the majority stockholders of the corporation, with Vicente Rufino as the General-Manager. Both ETCs were engaged in the same business. Old ETC held a stockholder’s meeting to merge with the New ETC on December 17, 1958 to continue its business after the end of Old ETC’s corporate term. The merger was authorized by a board resolution. It was expressly declared that the merger was necessary to continue operating the Capitol and Lyric Theaters in Manila even after the expiration of corporate existence, to preserve both its booking contracts and to uphold its collective bargaining agreements. Through the two Rufinos (Ernesto and Vicente), a Deed of Assignment was executed, which conveyed and transferred all the business, property, assets and good will of the Old ETC to the New ETC in exchange for shares of stock of the latter to be issued to the shareholders at the rate of one stock for each stock held in the Old ETC. The Deed was to retroact from January 1, 1959. New ETC’s Board approved the merger and the Deed of Assignment on January 12, 1959 and all changes duly registered with the SEC. The BIR, after examination, declared that the merger was not undertaken for a bona fide business purpose but only to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. He then imposed deficiency assessments against the private respondents, the Rufinos. The Rufinos requested for a reconsideration, which was denied.

Therefore, they elevated their matter to the CTA, who reversed the judgment of the CIR, saying that they found that there was “no taxable gain derived from the exchange of old stocks simply for new stocks for the New Corporation” because it was pursuant to a valid plan of reorganization. The CIR raised it to the SC on petition for review on certiorari. Issue: WON there was a valid merger and that there was no taxable gain derived therefrom. Held: YES, the CTA was correct in ruling that there WAS a merger and that no taxable gain was derived. CTA decision is AFFIRMED. Rationale: • Validity of transfer. In support of its argument that the Rufinos were trying to avoid the payment of capital gains tax, the CIR said that the New ETC did not actually issue stocks in exchange for the properties of the Old ETC. The increase in capitalization only happened in March 1959, or 37 days after the Old ETC expired. Prior to registration, the New ETC could not have validly performed the transfer. The SC ruled that the retroactivity of the Deed of Assignment cured the defect and there was no impediment. • Bona Fide Business Purpose. The criterion of the law is that the purpose of the merger must be for a bona fide business purpose and not for the purpose of escaping taxes. The case of Helvering v. Gregory stated that a mere “operation having no business or corporate purpose—a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character and the sole object and accomplishment

of which was the consummation of a preconceived plan, not to reorganize a business but to transfer a parcel of corporate shares.” When the corporation created is nothing more than a contrivance, there is no legitimate business purpose. The Court states that there is no such furtive intention in this case. In fact, the New ETC continues to operate the Capitol and Lyric movie theaters even up to 27 years after the merger. There is as yet no dissolution, so the Rufinos haven’t gained any benefit yet from the merger, which makes them no more liable than the time the merger took place. The government’s remedy: The merger merely deferred the payment for taxes until the future, which the government may assert later on when gains are realized and benefits are distributed among the stockholders as a result of the merger. The taxes are not forfeited but merely postponed and may be imposed at the proper time later on.

28. DELPHER TRADES CORPORATIONvs. IAC G.R. No. L-69259 January 26, 1988 Facts: Delfin Pacheco and sister Pelagia were the owners of a parcel of land in Polo (now Valenzuela). On April 3, 1974, they leased to Construction Components International Inc. the property and providing for a right of first refusal should it decide to buy the said property. Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and

consent of Delfin and Pelagia. In 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the Pachecos conveyed to the latter the leased property together with another parcel of land also located in Malinta Estate, Valenzuela for 2,500 shares of stock of defendant corporation with a total value of P1.5M.

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, the private respondent has no basis for its claim of a light of first refusal 29. CIR v. Toda, Jr.

GR No. 147188; 14 September 2004 On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of the lot. Issue: WON the Deed of Exchange of the properties executed by the Pachecos and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the Hydro Phil's right of first refusal over the leased property included in the "deed of exchange," Held: No, by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit 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. The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the

F A C T S: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its outstanding capital stock, to sell the Cibeles Building. On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. Three and a half years later Toda died. On 29 March 1994, the BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989. On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special coadministrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment from the CIR for deficiency income tax for the year 1989. The Estate thereafter filed a letter of protest. The Commissioner dismissed the protest. On 15 February 1996, the Estate filed a petition for review with the CTA. In its decision the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a preconceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. Hence, the CTA declared that the Estate is not liable for deficiency of income tax. The Commissioner filed a petition for review with the Court of Appeals. The Court of Appeals affirmed the decision of the CTA, hence, this recourse.

I S S U E: Whether or not this is a case of tax evasion or tax avoidance. H E L D: Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e. the payment of less than that known by the taxpayer to be legally due, or the nonpayment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being “evil,” in “bad faith,” “willfull,” or “deliberate and not accidental”; and (3) a course of action or failure of action which is unlawful. All these factors are present in the instant case. 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. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.

30. CIR v. ESSO (Set-off) 172 SCRA 369; April 18, 1989 Facts: ESSO overpaid its 1959 income tax by P221, 033.00. It was accordingly granted a tax credit. However, ESSO’s payment of its income tax for 1960 was found to be short byP367,994. So the Commissioner demanded payment of the deficiency, with interest. ESSO paid under protest, including the interest as reckoned by the Commissioner. ESSO’s contention: The interest was more than that properly due. It should not have been required to pay interest on the total amount of the deficiency tax, P367,994.00, but only on the amount of P146,961.00—representing the difference between said deficiency and ESSOs earlier overpayment. ESSO thus asked for a refund. CIR’s contention: It denied the claim for refund. Income taxes are determined and paid on an annual basis, such determination and payment are separate and independent transactions; and a tax credit could not be considered until it has been finally approved and the taxpayer notified. Since in this case, the tax credit was approved only on August 5, 1964, it could not be availed of in reduction of ESSOs earlier tax deficiency for 1960; as of that year there was no tax credit to speak of. In support of this, the Commissioner invokes the Section 51 of the Tax Code: (d) Interest on deficiency. — Interest upon the amount determined as deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax. ESSO appealed to the Court of Tax Appeals, which in turn ordered payment to ESSO of its "refund-claim. Hence, this appeal by the Commissioner. ISSUE: Was it proper to apply ESSO’s tax credit in reducing the total deficiency subject to interest?

HELD: Yes, regardless of CIR’s assertions, the fact is that as early as July 15, 1960, the Government already had in its hands the sum representing excess payment. Having been paid and received by mistake, that sum unquestionably belonged to ESSO, and the Government had the obligation to return it to ESSO. The obligation to return money mistakenly paid arises from the moment that payment is made, and not from the time that the payee admits the obligation to reimburse. The obligation of the payee to reimburse results from the mistake, not from the payee's confession of the mistake or recognition of the obligation to reimburse. In other words, since the amount of P221,033.00 belonging to ESSO was already in the hands of the Government as of July, 1960, it was neither legally nor logically possible for ESSO thereafter to be considered a debtor of the Government; and whatever other obligation ESSO might subsequently incur in favor of the Government would have to be reduced by that sum, in respect of which no interest could be charged. Nothing is better settled than that courts are not to give words a meaning which would lead to absurd or unreasonable consequences.” "Statutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or absurd conclusion."

31. Domingo v. Garlitos

GR No. L-18993

29 June 1963

F A C T S: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory the order of the Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges and penalties amounting to P40,058.55 by the Estate of the late Walter Scott Price. The petition for execution filed by the fiscal, however, was denied by the lower court. The Court held that the execution is unjustified as the Government itself is indebted to the Estate for 262,200; and ordered the amount of inheritance taxes be deducted from the Government’s indebtedness to the Estate. I S S U E: Whether a tax and a debt may be compensated. H E L D: The court having jurisdiction of the Estate had found that the claim of the Estate against the Government has been recognized and an amount of P262,200 has already been appropriated by a corresponding law (RA 2700). Under the circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount. In other words, the estate and inheritance taxes are set off, by virtue of the government’s indebtedness to the estate.

32.

COMMISSIONER OF INTERNAL REVENUE V. ISABELA CULTURAL CORP. (515 SCRA 556); February 12, 2007 Topic: The all-events test; when deductions from income taxes may be claimed Facts: When the Bureau of Internal Revenue disallowed Isabela Cultural Corporation¶s claimed deductions for the years 1984-1986 in their 1986 taxes for expense deductions, to wit: (1) Expenses for auditing services for the year ending 31December 1985; (2) Expenses for legal services for the years 1984 and 1985; and

(3) Expense for security services for the months of April and May 1986. As such, the former charged the latter for deficiency income taxes. Isabela Cultural Corporation contests the assessment. Issue No. 1. For a taxpayer using the accrual method, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? Ruling: The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. Issue No. 2. WON the deductions were properly claimed by Isabela Cultural Corporation. Ruling: The deductions for expenses for professional fees consisting of expenses for legal and auditing services are NOT allowable. However, the deductions for expenses for security services were properly claimed by

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Isabela Cultural Corporation. For the legal and auditing services, Isabela Cultural Corporation could have reasonably known the fees of those firms that it hired, thus satisfying the ³all-events test.´ As such, per Revenue Audit Memorandum Order No. 1-2000, they cannot validly be deducted from its gross income for the said year and were therefore properly disallowed by the BIR. As for the security services, because they were incurred in 1986, they could be properly claimed as deductions for the said year. Notes The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: a. The expense must be ordinary and necessary; b. It must have been paid or incurred during the taxable year; c. It must have been paid or incurred in carrying on the trade or business of the taxpayer; and d. It must be supported by receipts, records, or other pertinent papers. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.

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