COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

TAX DIGESTS
INCOME TAXATION (SECTIONS 31-33)
DISCLAIMER: The risk of use, non-use and misuse of this reviewer shall be borne solely by the user. INSTRUCTIONS
These Tax Digests are for purposes of classroom discussion and recitation. The order of the digests follows the order provided in the assignment given by Dean Gruba. Burroughs filed a written claim for the refund or tax credit representing alleged overpaid branch profit remittance tax. Thereafter Burroughs filed with the CTA a petition for review for the recovery of the amount. CTA ordered the CIR to grant a tax credit in favour of Burroughs Limited. ISSUE: Whether the tax base upon which the 15% branch profit remittance tax shall be imposed is the amount applied for remittance on the profit actually remitted and not the amount before profit remittance tax? HELD: Yes. Section 24(b)(2)(ii) (Now Section 28(A)(5) states that Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15 %). In a BIR Ruling dated 1980, the CIR held that the provision should mean that "the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the profit actually remitted abroad and not on the total branch profits out of which the remittance is to be made. " Applying therefore, the aforequoted ruling, the claim of Burrough that it made an overpayment is valid.

BANK OF AMERICA VS. COURT OF APPEALS

FACTS: Bank of America is a foreign corporation duly licensed to engage in business in the Philippines. It paid the 15% branch profit remittance tax on profit from its foreign currency deposit unit operations. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Thereafter, Bank of America filed a claim for refund with the BIR. Of that portion of its payment which corresponds to the 15% branch profit remittance tax. It based its claim on Section 24(B)(2)(ii) (Now Section 28(A)(5)) of the NIRC which provides that any profit remitted abroad by a branch of a foreign corporation to its head office shall be subject to 15% tax. The Bank of America argues that the 15% branch profit remittance tax should be assessed on the amount actually remitted or in other words, the 15% profit remittance tax should not form part of the tax base. The CTA upheld Bank of America in its claim for refund. The CA reversed. Hence, this appeal by Bank of America ISSUE: Whether the 15% branch profit remittance tax should be assessed on the amount actually remitted and not on the amount before profit remittance tax? HELD: There is absolutely nothing in Section 24(b)(2)(ii) (Now Section 28(A)(5)) which indicates that the 15% tax on branch profit remittance is on the total amount of profits of the branch (not all of which need be sent or would be ordered remitted abroad). The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. And to our mind, the term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing further. Hence, the Bank of America is entitled to the refund.

COMMISSIONER OF INTERNAL REVENUE VS. AMERICAN AIRLINES

FACTS: American Airlines, is a corporation duly organized under the laws of the US. It is an off-line international carrier without any flight originating from the Philippines. However, by virtue of BOI Certificate of Authority No. 267 and a license issued by the SEC, a liaison office was established by it in this country for passenger and flight information and reservation and to render ticketing services. In 1979, CIR assessed American Airlines for deficiency income tax, interest and compromise penalty for the year 1974. American Airlines received from the CIR a letter of demand with an assessment which was computed on American Airlines gross Philippine billings. American Airlines protested. CIR denied the request. American Airlines filed a petition for review with the CTA contending that it was not doing business in the Philippines and that selling tickets is not an activity subject to the assessed tax on gross Philippine billings. CTA reversed the decision of CIR, and held that the acts of an international air carrier in maintain an office in the Philippines for promotion and information purposes; and the receipt of payments for passage tickets sold in the Philippines from passengers from the Philippines do not make such international air carrier engaged in business in the Philippines. Hence, this appeal by the CIR to the SC. ISSUE: Whether an off-line international carrier without flight operations in the Philippines but rendering ticketing services is liable to pay the 2.5% tax on its gross Philippine billings pursuant to Section 24(b)(2) (Now Section 28(A)(3))? HELD: YES. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activities within this country. The sale of tickets in the Philippines is an activity that produces income. The absence of flight operations within Philippine territory cannot alter this fact. True, Section 37(a) (Now Section 32) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets of international transportation. However, that does not render it less an income from within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the

COMMISSIONER VS. BURROUGH, LTD.

FACTS: Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through a branch office located at Makati. Sometime in 1979, said branch office applied with the Central Bank for authority to remit to its parent company abroad, branch profit. It paid the 15% branch profit remittance tax. Claiming that the 15% profit remittance tax should have been computed on the basis of the amount actually remitted and not on the amount before profit remittance tax,

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types of income listed therein be treated as income from sources within the Philippines. The 2.5% tax on gross Philippine billings imposed under Section 24(b)(2) (Now Section28(A)(3)) is an income tax levied on the presumed gain of the airline companies. It ensures that international airlines are taxed on the income they derive from Philippine sources. The revenues from the sale of tickets having been derived from Philippine sources, there is no cogency to the contention that said airlines are not subject to the aforestated tax. The inexorable conclusion, therefore, is that respondent American Airlines, Inc., being a resident foreign corporation engaged in business in the Philippines and deriving income from Philippine sources, the assessment of the deficiency tax against it was correct and valid.

COMMISSIONER VS. MANNING

FACTS: Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reeses death, the company woul d purchase back all of its shares. Reese died. MANTRASCO repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700 shares be declared as stock dividends to be distributed to the stockholders. The BIR ordered an examination of MANTRASCOs books and discovered that the 24,700 shares declared as dividends were not disclosed by respondents as part of their taxable income for the year 1958. Hence, the CIR issued notices of assessment for deficiency income taxes to respondents. Respondents protested but the CIR denied. Respondents appealed to the CTA. The CTA ruled in their favor. Hence, this petition by the CIR ISSUE: Whether the respondents are liable for deficiency income taxes on the stock dividends? HELD: Dividends means any distribution made by a corporation to its shareholders out of its earnings or profits. Stock dividends which represent transfer of surplus to capital account is not subject to income tax. But if a corporation redeems stock issued so as to make a distribution, this is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. The distinctions between a stock dividend which does not and one which does constitute taxable income to the shareholders is that a stock dividend constitutes income if its gives the shareholder an interest different from that which his former stockholdings represented. On the other hand, it does constitute income if the new shares confer no different rights or interests than did the old shares. Therefore, whenever the companies involved parted with a portion of their earnings to bnuy the corporate holdings of Reese, they were making a distribution of such earnings to respondents. These amounts are thus subject to income tax as a flow of cash benefits to respondents. Hence, respondents are liable for deficiency income taxes.

children executed a public document formally accepting the donation and the Board of Directors took official notice of this acceptance. Two years thereafter, the majority stockholders revoked said donation. De La Rama was ordered by the SC in a case (remember Pirovano vs. De La Rama Steamship!) to pay. The CIR assessed the amount as donees gift tax inclusive of surcharges, interests and other penalties. The heirs contested the assessment and imposition of the donees gift taxes and donors gift tax and also made a claim for refund of the said collected taxes. The claims were denied by the CIR. CTA affirmed. Hence, this petition. Petitioners contend that that the proceeds of the insurance was made not for an insufficient or inadequate consideration but rather it a was made for a full and adequate compensation for the valuable services rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the donation does not constitute a taxable gift under the provisions of the then Section 108 of the National Internal Revenue Code. ISSUE: Whether the donation constitute a taxable gift? HELD: Yes. As provided in Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of the Philippines), w hen a person gives to another thingon account of the latters merits or of the services rendered by him to the donor, provided they do not consisted a demandable debt,, there is also a donation There is nothing on record to show that when the late Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. Also, whether remuneratory or simple, the conveyance remained a gift, taxable under the Code. But then appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the value of the services rendered should be considered as a taxable gift. But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were rendered long before the Company ceded the value of the life policies to said heirs. What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's gratitude to Pirovano; so that under the Code there is no consideration the value of which can be deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value and is not "consideration" in the sense that the word is used in this section of the Tax Code. (Note: In other words, the whole proceed of the insurance is taxable income given that gratitude cannot be deducted for taxation purposes.)

COLLECTOR VS. HENDERSON

FACTS: The spouses Arthur Henderson and Marie B. Henderson filed with the BIR returns of annual net income for the years 1948 to 1952. In due time the Henderson received from the BIR assessment notices and paid the amounts assessed. In 1953, after investigation and verification, the BIR reassessed the taxpayers' income for the years 1948 to 1952 and demanded payment of the deficiency taxes. In the foregoing assessments, the BIR considered as part of their taxable income the taxpayer-husband's allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to the Marikinagun and Country Bluc paid by his employer for his account; and travelling allowance of his wife.

PIROVANO VS. COMMISSIONER

FACTS: Enrico Pirovano is the father of herein petitioners. In early 1941, De la Rama Steamship Co. insured the life of Enrico, its President and General Manager. During the Japanese Occupation, Enrico died. De la Rama issued a Resolution granting P400,000 to the hiers of Pirovano converted into 4,000 shares of stock. This was modified thereafter. Instead, the company would renounce its title to the proceeds of the insurance in favor of the heirs. Mrs. Estefania Pirovano, in behalf of heir

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Henderson asked for reconsideration of the assessment. BIR denied and hence, taxpayers filed in the CTA a petition to review the decision of the CIR. The CTA held that the ratable value to him of the quarters furnished constitutes part of taxable income, that since the taxpayers did not receive any benefit from the travelling expense allowance as the trip was a business one, the same could not be considered income, and even if it was considered as such, it is not subject to tax as it was deductible as travel expense. The CTA ordered the CIR to refund the taxpayers. Hence, this petition. ISSUE: Whether the allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his employer-corporation to his wife in 1952 part of taxable income? HELD: "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid , or from professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rents dividend, securities, or the transaction of any business carried on for gain or profit, or gains, profits, and income derived from any source whatever. The evidence substantially supports the findings of the Court of Tax Appeals. The quarters, therefore, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the husband-taxpayer's employer-corporation were not his predominant occupation as president, yet he and his wife had to entertain and put up houseguests in their apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Nevertheless, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a ratable value of the allowances in question, and only the amount of P4,800 annually, the reasonable amount they would have spent for house rental and utilities such as light, water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the corporation. Likewise, the findings of the CTA that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporation to help in drawing up the plans and specifications of a proposed building, is also supported by the evidence. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. Hence, the CIR is ordered to refund the taxpayers. (Note: What is the taxable income here? Gross income! The Court held basically upheld the CTA in (1) only the ratable value of the allowances for housing shall form part of the income as the apartment is used for his business functions as well and (2) the trip allowances does not form part of income as they are for business purposes.

FACTS: PAL filed with the CIR a written request for refund of amounts representing the 20% final withholding tax (on interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) allegedly erroneously withheld from PAL by various withholding agent banks (RCBC, UPCB, PNB, et al) and remitted to the BIR. CIR failed to act on the request. Thus, a petition was filed before the CTA. The CTA ruled that PAL was not entitled to the refund. Sec 13 of PD 159 0 (PALs franchise) allegedly gave PAL the option to pay either its corporate income tax under the provisions of the NIRC or a franchise tax of two percent of its gross revenues. Payment of either tax would be in lieu of all other taxes. The CTA held that the "in lieu of all other taxes" proviso implied the existence of something for which a substitution would be made. Final withholding taxes come under basic corporate income tax liability; hence, payment of the latter cannot mean an exemption from the former. To be exempt from final withholding taxes, PAL should have paid the franchise tax of two percent, which would have been in lieu of all other taxes including the final withholding tax. The CA, on the other hand, held that the "in lieu of all other taxes" proviso includes final withholding taxes. When PAL availed itself of the basic corporate income tax as its chosen tax liability, it became exempt from final withholding taxes. The CA further added that PAL chose to pay its basic corporate income tax, which after considering the factors allowed by law, resulted in zero tax liability and such should not be taken against PAL to deprive it of the exemption. ISSUE: Whether PAL is liable for the 20% final withholding tax? HELD: NO. As provided in Section 13 of PD 1590, the tax liability of PAL under the option it chose is to be "computed in accordance with the provisions of the National Internal Revenue Code Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for these types of income. Under Section 32 of the Tax Code, gross income means income derived from whatever source, including compensation for services; the conduct of trade or business or the exercise of a profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partners distributive share in the net income of a general professional partnership. Section 34 enumerates the allowable deductions; Section 35, personal and additional exemptions. The definition of gross income is broad enough to include all passive incomes subject to specific rates or final taxes. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of gross income, which determines taxable income. Under the Tax Code, "taxable income" does not include passive income subjected to final withholding taxes. Clearly, then, the "basic corporate income tax" identified in Section 13 (a) of the franchise relates to the general rate. The final 20 percent taxes disputed in the present case are not covered under Section 13 (a) of PALs franchise; thus, a refund is in order.

CHINA BANKING CORP. VS. COURT OF APPEALS

FACTS: Chinabank (CBC) paid as gross receipts tax on its passive investment incomes during the second quarter of 1994. In 1996, the CTA ruled in Asian Bank vs. CIR that the 20% final withholding tax (FWT) on a banks passive interest income does not form part of its taxable gross receipts. CBC filed with the CIR a claim for tax refund or credit from the gross receipts tax (GRT) that CBC paid. Citing the Asian Bank case, CBC argued that it was not liable for the sums withheld by the BSP as final withholding tax on CBCs passive interest income. The CIR, on the other hand, argued that the FWT on a banks interest income forms part of its gross receipts in computing the GRT. The Commissioner contended that the term gross receipts means the entire income or receipt, without

CIR VS. PHILIPPINE AIRLINES,

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any deduction. The CTA ruled in favour of CBC and held that the 20% FWT on interest income does not form part of CBCs taxable gross receipts. The CA affirmed. ISSUE: Whether the 20% FWT on interest income should form part of the CBCs taxable gross receipts? HELD: YES. the amount of interest income withheld in payment of the 20% final withholding FWT receipts tax on banks. There are two related legal concepts that come into play in the resolution of the first issue raised in the instant case. First is the meaning of the term gross receipts. Second is the determination of the circumstance when interest income becomes part of gross receipts for tax purposes. As commonly understood, the term gross receipts means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. Under RR Nos. 12-80 and 17-84, as well as in several numbered rulings, the BIR has consistently ruled that the term gross receipts does not admit of any deduction. This interpretation has remained unchanged throughout the various re-enactments of the present Section 121 of the Tax Code. The only conclusion that can be drawn is that the legislature has adopted the BIRs interpretation, following the principle of legislative approval by re-enactment. Under Section 27(D)(4) of the Tax Code, dividends received by a domestic corporation from another corporation are not subject to the corporate income tax. Such intracorporate dividends are some of the passive incomes that are subject to the 20% final tax, just like interest on bank deposits. Intracorporate dividends, being already subject to the final tax on income, no longer form part of the banks gross income under Section 32 of the Tax Code for purposes of the corporate income tax. However, Section 121 expressly states that dividends shall form part of the banks gross receipts for purposes of the GRT on banks. In addition, Section 8 of RR No. 12-80 expressly states that interest income, even if subject to the FWT and excluded from gross income for income tax purposes, should still form part of the banks taxable gross receipts. Thus, interest earned by banks, even if subject to the final tax and excluded from taxable gross income, forms part of its gross receipts for GRT purposes. The interest earned refers to the gross interest without deduction since the regulations do not provide for any deduction. The gross interest, without deduction, is the amount the borrower pays, and the income the lender earns, for the use by the borrower of the lenders money. The amount of the final tax plainly comes from the interest earned and is consequently part of the banks taxable gross receipts. Hence, CBCs claim for refund must fail.

ISSUES: (1) Whether the 20% FWT on a banks interest income forms part of the taxable gross receipts in computing the GRT? (2) Whether the imposition of the FWT and GRT constitute double taxation? HELD: (1) YES. The same issue has been raised in China Banking Corporation v. CA, where the Court held that the amount of interest income withheld in payment of the 20% FWT forms part of gross receipts in computing for the GRT on banks (see ration in case above). The FWT and GRT are two different taxes and as a bank, Solidbank is covered by both. Under the Tax Code, the earnings of banks from passive income are subject to a twenty percent final withholding tax (20% FWT). This tax is withheld at source and is thus not actually and physically received by the banks, because it is paid directly to the government by the entities from which the banks derived the income. Apart from the 20% FWT, banks are also subject to a five percent gross receipts tax (5% GRT) which is imposed by the Tax Code on their gross receipts, including the passive income. Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or earnings, it follows that it is subject to the 5% GRT. After all, the amount withheld is paid to the government on their behalf, in satisfaction of their withholding taxes. That they do not actually receive the amount does not alter the fact that it is remitted for their benefit in satisfaction of their tax obligations. Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this 20 percent portion of the passive income of banks would actually be paid to the banks and then remitted by them to the government in payment of their income tax. The institution of the withholding tax system does not alter the fact that the 20 percent portion of their passive income constitutes part of their actual earnings, except that it is paid directly to the government on their behalf in satisfaction of the 20 percent final income tax due on their passive incomes. (2) NO. Double taxation means taxing the same property twice when it should be taxed only once; that is, x x x taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding. Hence, there is no double taxation

COMMISSIONER VS. SOLIDBANK CORP

FACTS: For the calendar year 1995, Solidbank seasonably filed its Quarterly Percentage Tax Returns reflecting gross receipts with corresponding gross receipts tax payments. Solidbank alleges that the total gross receipts included gross receipts from passive income which was already subjected to 20% final withholding tax. In 1996, the CTA held in Asian Bank vs. CIR that the 20% final withholding tax on banks interest income should not form part of its taxable gross receipts for purposes of computing the gross receipts tax. Hence, Solidbank filed with the BIR a claim for refund or tax credit for its allegedly overpaid gross receipts tax for the year 1995. Solidbank also field a petition for review with the CTA. CTA ordered CIR to refund Solidbank. The CA likewise held that the 20% FWT on a banks interest income did not form part of the taxable gross receipts in computing the GRT.

COMMISSIONER OF INTERNAL REVENUE VS. CA & EFREN CASTANEDA

FACTS: Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London. Upon retirement, he received, among other benefits, terminal leave pay from which the CIR withheld a portion allegedly representing income tax thereon. Castaneda filed a claim with the CIR for refund contending that the cash equivalent

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of his terminal leave is exempt from income tax. He likewise filed a petition for review with the CTA. The CTA ruled in favor of Castaneda and ordered the CIR to refund Castaneda. CA affirmed the decision of the CTA. Hence, this petition by the CIR. The Solgen, acting on behalf of the CIR, contends that the terminal leave pay is income derived from employer-employee relationship; that as part of the compensation for services rendered, terminal leave pay is actually part of gross income of the recipient. ISSUE: Whether terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income tax)? HELD: NO. Terminal leave pay received by a government official or employee is not subject to withholding (income) tax. The rationale behind the employees entitlement to an exemption from withholding tax on his terminal leave is that commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.

Philippines. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount objective. (2) YES. `Gross income' includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transaction of any business carried on for gain or profit, or gains, profits and income derived from any source whatever. The definition is broad and comprehensive to include proceeds from sales of transport documents. The words `income from any source whatever' discloses a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In the British Overseas Airways case (see case below), the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. True, Section 37(a) (now Section 42(A)) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines.Section 37 (now Section 42), by its language does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines.

COMMISSIONER OF INTERNAL REVENUE VS. JAPAN AIRLINES

FACTS: Japan Air Lines, Inc. (JAL) is a foreign corporation engaged in the business of international air carriage. From 1959 to 1963, JAL did not have planes that lifted or landed passengers and cargo in the Philippines as it had not been granted then by the Civil Aeronautics Board (CAB) a certificate of public convenience and necessity to operate here. However, since 1957, JAL had maintained an office in Manila. Said office did not sell tickets but was maintained merely for the promotion of the company's public relations and to hand out brochures, literature and other information playing up the attractions of Japan as a tourist spot and the services enjoyed in JAL planes. In 1957, JAL constituted PAL as its general sales agent in the Philippines. Thereafter, JAL received deficiency income tax assessment notices and a demand letter from the CIR. JAL protested alleging that as a non-resident foreign corporation, it was taxable only on income from Philippine sources as determined under Section 37 (Now Section 42) of the Tax Code, and there being no such income during the period in question, it was not liable for the deficiency income tax liabilities assessed. CIR denied JALs protest. CTA reversed the CIRs decision and denied the CIRs MR. Hence, this petition. ISSUE: (1) Whether JAL a resident foreign corporation? (2) Whether the proceeds from sales of JAL tickets sold in the Philippines are taxable as income from sources within the Philippines? HELD: (1) YES. The term `resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be no conclusion other than that JAL is a resident foreign corporation, doing business in the

COMMISSIONER VS. OVERSEAS AIRWAYS

FACTS: British Overseas Airways Corporation (BOAC) is a 100% British Government Owned airline corporation organized under the laws of the UK. BOAC maintains a general sales agent (of its tickets) in the Philippines namely Warner and Barnes and Qantas Airways. It also did not have landing rights in the Philippines. It was assessed deficiency income taxes by CIR in the years 1959-1963 and 1968-1979. However, on appeal, the CTA held that the proceeds of sales of BOAC tickets in the Philippines do not constitute BOAC income from Philippine sources since no service of carriage of passengers or freight was performed by BOAC within the Philippines therefore said income is not subject to income tax. The CTA held that the place where services are rendered determines the source of the income. The petitioner contends that the revenue derived by BOAC from sales of tickets in the Philippines are taxable and that BOAC should be considered a resident foreign corporation and accordingly taxed as such. ISSUE: (1) Whether BAOC is a resident foreign corporation? (2) Whether the sales of BAOC tickets sold in the Philippines are taxable as income from sources within the Philippines? HELD: (1) YES. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. During the periods covered by the CTA assessment, it maintained a general sales agent and it was engaged in selling or issuing tickets, which is considered

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the main lifeblood of an airline. Resident foreign corporations can be taxed on its total net income received from all sources within the Philippines. (2) YES. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOACs case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here in the country and the payments for fares were also made with Philippine currency. The site of the source of payments is the Philippines. The absence of flight operations to and from the Philippines is not determinative of the source of income/site of income taxation for the test of taxability is the source.

FACTS: William Reagan, a US citizen was a civilian employee of an Bendix Radio (an American corporation) providing technical assistance to the US Air Force in the Philippines. He sold an automobile imported into the Philippines to a member of the US Marine Corps, the transaction having taken place at the Clark Air Base. As a result of the transaction, the CIR, rendered him liable for income tax on the amount realized from the sale. After paying the sum, Reagan sought a refund from the CIR claiming he was exempt. He filed a case with the CTA seeking recovery of the sum. Reagan contends that the sale was made outside the Philippine territory and therefore beyond the Philippines jurisdictional power to tax. CTA ruled in favor of the CIR and held that the sale took place on what indisputably is Philippine territory and, hence, petitioner's liability for the income tax due as a result thereof was unavoidable. ISSUE: (1) Whether the sale took place in Philippine territory? (2) Whether the income tax was legally collected by the CIR on Reagan? HELD: (1) YES. Nothing is better settled than that the Philippines being independent and sovereign, its authority may be exercised over its entire domain. There is no portion thereof that is beyond its power. Within its limits, its decrees are supreme, its commands paramount. Its laws govern therein, and everyone to whom it applies must submit to its terms. That is the extent of its jurisdiction, both territorial and personal. It is to be admitted that any state may, by its consent, express or implied, submit to a restriction of its sovereign rights. That is the concept of sovereignty as auto-limitation. It is not precluded from allowing another power to participate in the exercise of jurisdictional right over certain portions of its territory. If it does so, it by no means follows that such areas become impressed with an alien character. They retain their status as native soil. They are still subject to its authority. Its jurisdiction may be diminished, but it does not disappear. So it is with the bases under lease to the American armed forces by virtue of the military bases agreement of 1947. They are not and cannot be foreign territory. (2) YES. Having held that Clark Air Base has not become foreign soil or territory, the country's jurisdictional rights therein, certainly not excluding the power to tax, have been preserved. Reagan is liable for the income tax arising from a sale of his automobile in the Clark Field Air Base, which clearly is and cannot otherwise be other than, within our territorial jurisdiction to tax.

NATIONAL DEVELOPMENT CO. VS. COMMISSIONER

FACTS: The NDC entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 vessels and the NDC secured it with 14 PNs at 5% interest. Further, the Republic of the Philippines guaranteed this obligation. The NDC made initial payments and thereafter remitted to the shipbuilders in Tokyo the total amount of $4M as interest on the balance of the purchase price and no tax was withheld. The CIR held the NDC liable on such withholding tax. This was sustained by the CTA. Hence, the appeal. NDC argues that the Japanese shipbuilders were not liable on the tax because all the related activities (signing of the contract, payment, delivery of vessels) were done in Tokyo. Moreover, the NDC argues that the interest payments were obligations of the Republic and that the promissory notes of the NDC were government securities exempt from taxation. ISSUE: (1) Whether the promissory notes were government securities exempt from taxation? (2) Whether the NDC is liable to withholding tax despite the fact that all the related activities were done in Tokyo? HELD: (1) NO. CA 182 does not provide such authorization exempting interest under the old Tax Code, but like RA 1407 invoked by NDC, it does not exempt from taxes the interest on such securities. It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the Secretary of Finance in each of the promissory notes. There is nothing in the undertaking exempting the interests from taxes. NDC has not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in favor of the taxing power. The NDC also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. (2) YES. As per Section 37 (Now Section 42) of the tax code, interestbearing obligations of residents, corporate or otherwise, shall be treated as gross income from sources within the Philippines . NDC is a domestic and resident corporation with principal offices in Manila. The SC affirmed the CTA ruling that indeed, the NDC should have withheld the tax because the tax on interest received by foreign corporations not engaged in trade or business within the Philippines is not conditioned on the fact that the sale or activity from which the interest income came from took place in the Philippines. The residence of the debtor (in this case, NDC) who pays the interest is the determining factor of the source of interest income . Since NDC is a domestic corporation, it follows that the interest payment it made is sourced within the Philippines and is therefore subject to taxation. Also, the fact that the RP guaranteed the obligation doesnt mean that it waived its right to tax

E. RODRIGUEZ INC. VS. COLLECTOR

G.R. NO. L-23041, JULY 31, 1969 FACTS: In 1948, Congress enacted RA 333, pursuant to which the Republic sued petitioner Rodriguez, among four other defendants for the expropriation of about 1.36 million square meters of land owned by it and situated within the area delimited for the new capital city site. After due trial, the court declared that the Republic was entitled to appropriate the property involved and ordered the Republic to pay Rodriguez just compensation. However, a compromise agreement was reached and pursuant to the terms thereof, the Government paid Rodriguez a sum of which a portion was in Government Bonds. In 1951, Rodriguez filed his ITR. In said ITR, Rodriguez did not include the sum received by it from the government in the form of bonds in payment of its expropriated properties, in the belief that the said amount was free or exempt from taxation. When this was examined by the BIR, the Collector assessed against Rodriquez a deficiency income tax. Rodriguez protested. CIR then sought the collection of said deficiency by means of an action in the CFI of Manila. Rodriquez offered to compromise but the offer was rejected by the CIR. Rodriguez filed a petition for review before the CTA which affirmed the assessment. Hence, this appeal by Rodriguez. Rodriguez maintains that the portion (paid in tax-exempt Government Bonds) of the profit it derived from the expropriation of its property

REAGAN VS. COMMISSIONER

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should not be made subject to income tax. RA 333 provides that Said bonds shall be exempt from taxation by the Government of the Republic of the Philippines or by any political or municipal subdivisions thereof . On the other hand, the CIR claims that the exemption of Government bonds refers only the documentary stamps on the bonds and does not include income tax on the income derived by Rodriguez which was paid to him in the form of bonds. ISSUE: Whether in determining the profit realized from the payment of the purchase price of Rodriquezs expropriated property for income tax purposes, the portion of the purchase price paid in the form of taxexempt bonds issued under RA 333 should be included? HELD: There can be no question that Rodriguez is taxable on its income derived from the sale of its property to the Government. The fact that a portion of the purchase price of the property was paid by the Government in the form of tax exempt bonds does not operate to exempt said income from income tax. The income from the sale of the land in question and the bond are two different and distinct taxable items so that the exemption of one does not operate to exempt the other, unless the law expressly so provides. What the law exempts is documentary stamp tax and the interest derived from such bonds. It has been the constant and uniform holding of this Court that exemption from taxation is not favored and is never presumed; in fact, if it is granted, the grant must be strictly construed against the taxpayer. This should be applied to the case at bar where the law invoked (Section 9 of Republic Act No. 333) does not make any reference whatsoever to exemption of income derived from sale of expropriated property thereunder.

tax that was previously paid by telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or municipaties. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government. VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit

SANTOS VS. SERVIER PHILIPPINES

FACTS: Santos was the Human Resource Manager of Servier Philippines, Inc. Santos attended a meeting of all human resource managers of Servier, held in Paris, France. Since the last day of the meeting coincided with the graduation of Santos only child, she arranged for a European vacation with her family right after the meeting. She, thus, filed a vacation leave. Santos, together with her husband Antonio P. Santos, her son, and some friends, had dinner at Leon des Bruxelles, a Paris restaurant known for mussels as their specialty. While having dinner, Santos complained of stomach pain, then vomited. Eventually, she was brought to a hospital where she fell into coma for 21 days; and later stayed at the ICU for 52 days. The hospital found that the probable cause of her sudden attack was "alimentary allergy. During the time that Santos was confined at the hospital, her husband and son stayed with her in Paris. Santos hospitalization expenses, as well as those of her husband and son, were paid by Servier. Santos was then allowed to go back to the Philippines to continue her medical treatment. She was confined at St. Lukes. During the period of Santos rehabilitation, Servier continued to pay Santos salaries and to assist her in paying her hospital bills. Thereafter, Servier informed Santos that it requested her physician to conduct an evaluation of her condition to determine her fitness to resume her work at the company. It was concluded that she was not fully recovered mentally and physically. Hence, Servier was constrained to terminate Santos services. As a consequence of her termination from employment, Servier offered a retirement package. Of the promised retirement benefit, a portion was withheld allegedly for taxation purposes. Servier also failed to give other benefits in the package. Santos filed a case against Servier. Santos raised the legality of said deduction and stated that it formed an "unpaid balance of the retirement package." ISSUE: Whether the retirement benefits to be received by Santos from Servier are taxable? HELD: YES. Section 32 of the NIRC provides for the exclusion of retirement benefits from gross income. For the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once. In this case, petitioner was qualified for disability retirement. However, at the time of such retirement, Santos was only 41 years of age; and had been in the service for more or less eight (8) years. As such, the above provision is not applicable for failure to comply with the age and length of service requirements. Therefore, Servier cannot be faulted for deducting from Santos total retirement benefits the said amount for taxation purposes.

SMART COMMUNICATIONS VS. CITY OF DAVAO

FACTS: Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is exempt from payment of franchise tax to the City. RTC denied the petition. Smart filed an appeal before the SC but was denied. Hence, Smart filed a the motion for reconsideration. Smart argues that the in lieu of all taxes clause in Smarts franchise covers local taxes According to its franchise, Smart shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings. Moreover, it argues that the in in lieu of all taxes " clause is not rendered ineffective by the Expanded VAT Law. ISSUE: Whether Smart is liable to pay franchise tax to the City of Davao in view of the "in lieu of all taxes" clause in its franchise? HELD: YES. Tax exemptions are highly disfavored and that a tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even in the instances when it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Jurisprudence suggests that aside from the national franchise tax, the franchisee is still liable to pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority. Moreover, the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax. It merely replaced the national franchise

INTERCONTINENTAL AMARILLA

BROADCASTING

CORPORATION

VS.

FACTS: Intercontinental Broadcasting Corporation (IBC) employed at its Cebu Station the petitioners Amarilla, Quinones, Lagahit and Otadoy. The four employees retired from the company and received, on staggered

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basis, their retirement benefits under the collective bargaining agreement (CBA) between IBC and the bargaining unit of its employees. In the meantime, a salary increase was given to all employees, current and retired. However, when the four retirees demand theirs, the IBC refused and instead informed them that their differentials would be used to offset the tax due on their retirement benefits in accordance with the NIRC. The retirees thus lodged a complaint with the NLRC questioning said withholding. They averred that their retirement benefits were exempt from income tax; and IBC had no authority to withhold their salary differentials. For its part, the IBC averred that the retirement benefits received by employees from their employers constitute taxable income. While retirement benefits are exempt from taxes under the Code, the law requires that such benefits received should be in accord with a reasonable retirement plan duly registered with the BIR after compliance with the requirements therein enumerated. Since its retirement plan in the CBA was not approved by the BIR, the retirees were liable for income tax on their retirement benefits. The Labor Arbiter rendered judgment in favour of the retirees. The NLRC affirmed. IBC appealed to the CA. The CA dismissed the petition and held that the salary differentials of the respondents are part of their taxable gross income, considering that the CBA was not approved, much less submitted to the BIR. However, petitioner could not withhold the corresponding tax liabilities of respondents due to the then existing CBA, providing that such retirement benefits would not be subjected to any tax deduction, and that any such taxes would be for its account. ISSUES: (1) Whether the retirement benefits of respondents are part of their gross income (2) whether IBC is estopped from reneging on its agreement with respondent to pay for the taxes on said retirement benefits. HELD: (1) YES. Pursuant to the Code, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once. The retirement plan must be approved by the BIR. In this case, the retirees were qualified to retire optionally from their employment with IBC under the CBA. However, there is no that the CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of respondents are taxable. (2) YES. IBC did not withhold the taxes due on the retirement benefits and in fact, obliged itself to pay the taxes due thereon. This was done to induce the retirees to avail of the optional retirement scheme. Respondents received their retirement benefits from the petitioner in three staggered installments without any tax deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its own funds conformably with its agreement with the retirees. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. Petitioner used this "failure" as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents retirement benefits on the pretext that the "new management" had found the policy disadvantageous.

FACTS: Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London. Upon retirement, he received, among other benefits, terminal leave pay from which the CIR withheld a portion allegedly representing income tax thereon. Castaneda filed a claim with the CIR for refund contending that the cash equivalent of his terminal leave is exempt from income tax. He likewise filed a petition for review with the CTA. The CTA ruled in favor of Castaneda and ordered the CIR to refund Castaneda. CA affirmed the decision of the CTA. Hence, this petition by the CIR. The Solgen, acting on behalf of the CIR, contends that the terminal leave pay is income derived from employer-employee relationship; that as part of the compensation for services rendered, terminal leave pay is actually part of gross income of the recipient. ISSUE: Whether terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income tax)? HELD: NO. Terminal leave pay received by a government official or employee is not subject to withholding (income) tax. The rationale behind the employees entitlement to an exemption from withholding tax on his terminal leave is that commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.

COMMISSIONER OF INTERNAL REVENUE VS. CA & EFREN CASTANEDA

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