Tax Digests Last Part of General Principles

TAX DP | Atty.
Martin | Pages 8 to 11 of the syllabus
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KINDS OF TAXES:
1. As to tax rates: CIR v Mobil (FRANCISCO)
Doctrine:
Kinds of excise taxes imposed in respect of the manufacture or production of petroleum
products:
1. Specific Tax
imposed and based on weight or volume capacity or any other physical unit of
measurement
specific tax on petroleum products is computed on a per liter basis (Specific
taxes on petroleum products are simply computed on the basis of a given
number of pesos or centavos per liter or other relevant unit of physical
measurement)
2. Ad Valorem Tax
imposed on the manufacture of petroleum products based on selling price or
other specified value of the article
is computed on the wholesale posted price, net of specific and domestic ad
valorem taxes on the oil products as approved by the Board of Energy.
Domestically refined and manufactured mineral oils and motor fuel become subject to
excise taxes as soon as they come into existence as such, but in the case of locally
manufactured petroleum products, the manufacturer is given a fifteen-day grace period.
Petroleum products become subject to excise taxes the moment they come to existence.
Facts:
Mobil is a corporation engaged in marketing aviation turbo (jet) fuel, diesel and bunker
fuel oil to international carriers.
It obtains its supply of these petroleum products from Caltex Phiils., drawing
product from the Caltexs refinery in Batangas or from Caltexs entitlement to
processed product from the Bataan refinery of the Bataan Refining Corporation.
07 Feb 1987, by its Resolution 87-02, the Board of Energy (BOE) (now the Energy
Regulatory Board [ERB]) increased by an average amount of 30.2 centavos per liter
the cost recovery of oil companies on the various petroleum products refined and
marketed by them locally. The effectivity of this Resolution was, by its terms, made
retroactive to 01 January 1987.
20 Feb 1987, BIR addressed a demand letter informing Mobil that it still has due
of P981K as additional ad valorem taxes for the month of January 1987.
12 March 1987, Mobil paid the demanded amount
16 March 1987, by its Resolution 87-03, BOE once again increased the cost of recovery
oil to 54.7 cents/liter of product sold. The effectivity was retroactively set at 01 March
1981.
TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus
24 April 1987, BIR again sent a demand letter to Mobil demanding additional
payment of P1.3M ad valorem taxes plus 25% surcharge for failure to pay within
15 days from the respective dates of the 2 resolutions (07-02-87 and 16-03-87).
15 May 1987, Mobil paid the amount of 1.3M BUT protested for the
imposition of the 25% surcharge as arbitrary and unfair.
Mobil added that the adjustment in the tax base resulting from the
adjustment of the posted price under the BOE Resolutions dated
Feb. 7, 1987 and March 16, 1987 were post facto or retroactive to
January 1, 1987. At the time the excise tax or ad valorem tax on
the products were due (which was 15 days after removal of the
products), the additional tax base was not yet in existence,
hence we could not pay the appropriate tax due per said BOE
Resolution.
CIR: rejected the protest of Mobil. Commissioner stated
that the dates of the two (2) BOE Resolutions were by
inference the date of removal of the products from the
place of production mentioned in Section 110 [1977 Tax
Code, as amended].
Mobil went to CTA assailing the 25% surcharge by the BIR.

CTA: Sustained the position taken by CIR
Mobil went to CA
CA: Reversed CTAs judgment. CA rejected the position of the BIR that the date
of payment of the adjusted or additional ad valorem taxes should be fifteen (15)
days from the dates of the BOE Resolutions, such dates being deemed to be the
dates of removal of the covered product from the petroleum refinery.
A surcharge is an amount imposed by law as an addition to the main tax
in case of delinquency.
Section 282 of the 1987 Tax Code, a penalty equivalent to 25% of the
amount due shall be imposed in case of failure to pay the tax within the
time prescribed for its payment, among others. In other words, they are
imposed in case of delay in the payment of the tax due.
In the case at bar, Mobil is not guilty of delay in the payment of the
adjusted excise tax for the reason that there was no period specified in
the Resolutions for the payment of the said taxes. One cannot incur in
delay when there is no period fixed for payment.
Issue:
W/n Mobil is liable for the 25% surcharge for late payment of additional ad valorem taxes
which became due by reason of the operation of the 2 BOE resolutions.
Held:
Yes.
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There are two kinds of excise taxes imposed in respect of the manufacture or production
of the particular kinds of petroleum products covered by BOE resolution, i.e. specific tax
and ad valorem tax. (See differences above)
The time prescribed for payment of both kinds of excise taxes imposed upon petroleum
products was specified in Section 110 of the 1977 Tax Code, as amended, in the
following manner:
Sec. 110. Payment of excise taxes on domestic products.(a) Persons liable; time for paymentUnless
otherwise especially allowed, excise taxes on domestic products shall be paid by the manufacturer or producer
before removal from the place of productions; Provided, however, That excise tax on locally manufactured
petroleum products levied under Section 128 of this Title shall be paid within fifteen (15) days from the date of
removal thereof from the place of production. Should domestic products be removed from the place of
production without the payment of the tax, the owner or person having possession thereof shall be liable for the
tax due thereon.
Section 110 should be read with Section 128 of the same Code:
Sec. 128. Manufactured Oils and Other Fuels.There shall be collected on refined and manufactured mineral
oils and motor fuels, the following excise taxes which shall attach to the articles hereunder enumerated as soon
as they are in existence as such: x x x
Reading Section 128 and Section 110 together, it will be seen that domestically refined
and manufactured mineral oils and motor fuels become subject to excise taxes as soon
as they come into existence.
In respect of most other kinds of articles also subject to excise taxes, the excise
taxes are payable by the manufacturer or producer even before removal from the
place of production.
In the case of locally manufactured petroleum products, however, the
manufacturer is given what is in effect a fifteen (15)-day grace period: those
excise taxes must be paid within fifteen (15) days from the date of removal of the
petroleum product from the place of production.
In the case...
Contentions of Mobil - It is literally true that the adjusted tax base, or the wholesale
posted price as increased by or as a result of the operation of the two (2) BOE
Resolutions, did not exist fifteen (15) days after physical removal of the product from the
refinery provided such product had been physically removed more than fifteen (15) days
before the actual dates of promulgation of the two (2) BOE Resolutions.
The basic contention of Mobil may hence be seen to be that the liability to pay ad
valorem taxes accrued fifteen (15) days after physical removal of product from
the oil refinery. At the time such physical removal had been effected, the
adjusted tax base, i.e., the wholesale posted price as increased by the effects of
the two (2) BOE Resolutions, did not exist and was not determinable. There
was, therefore, in Mobils contention, no prescribed time for payment of the
additional ad valorem taxes which became due by reason of the increases in cost
recovery in respect of product withdrawn from the refinery during the period of
the retroactive application of the two (2) BOE Resolutions.
If there was no prescribed time for payment, it followed, as a matter of strict logic
that no liability for delay in payment of such additional ad valorem taxes could
arise.
Mobils contentions were rejected by the SC
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BIR considered the product as having been constructively removed from the refinery
only on the dates of promulgation of the two (2) BOE Resolutions and counted the
statutory fifteen (15) day-grace period from such dates.
This position appears reasonable and moderate and as close to the intent of
Sections 110 and 128, 1977 Tax Code.
SC noted that whether the fifteen (15) day grace period for payment be computed from
the dates of promulgation of the two (2) BOE Resolutions, or from the date of actual
receipt of a copy of those two (2) BOE Resolutions,
Mobil paid the additional ad valorem taxes due after expiration of such fifteen
(15) day period. Mobil was, in other words, late in any case in effecting payment
of the additional ad valorem taxes. Mobil paid the additional ad valorem taxes
arising as a result of BOE Resolution No. 87-02 on 12 March 1987, or thirty-one
(31) days after receipt of a copy of that BOE Resolution. Mobil paid the additional
ad valorem taxes arising as a result of BOE Resolution No. 87-03 on 15 May
1987, or fifty-nine (59) days after receipt of a copy of BOE Resolution No. 87-03.
SC: Petition is granted. Affirmed CTAs decision.
2. As to purpose: PAL v Edu (GATCHALIAN)
DOCTRINE: If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax.
FACTS:
The Philippine Airlines is existing under the laws of the Philippines and engaged in the air
transportation business under a legislative franchise, Act No. 42739. Under its franchise, PAL is
exempt from the payment of taxes.
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to
the National Government during the life of this franchise a tax of two per cent of the gross
revenue or gross earning derived by the grantee from its operations under this franchise. Such
tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or
description, levied, established or collected by any municipal, provincial or national automobiles,
Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal
Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the ten
days from the receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.
PAL has, since 1956, not been paying motor vehicle registration fees. Sometime in 1971,
however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax
exempt entities, among them PAL to pay motor vehicle registration fees.
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Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles
unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid,
under protest, the amount of P19,529.75.
PAL through counsel, wrote a letter to Commissioner Edu demanding a refund of the amounts
paid, invoking the ruling in Calalang v. Lorenzo where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its
legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., to the effect that motor vehicle registration fees are
regulatory exceptional and NOT revenue measures and, therefore, do not come within the
exemption granted to PAL.
Hence PAL filed a complaint. Defense filed a motion to dismiss citing against RP v Phil Rabbit.
CFI ruled in their favor. CA affirmed.
*NOTE: Below is a brief discussion of each of the case (decision) the parties raised
Philippine Rabbit Case:
Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading
speaks of "registration fees." The term is repeated four times in the body thereof. Equally
so, mention is made of the "fee for registration."
The conclusion is difficult to resist therefore that the Motor Vehicle Act requires
the payment not of a tax but of a registration fee under the police power.
Calalang v. Lorenzo Case:
For not the name but the object of the charge determines whether it is a tax or a fee.
Generally speaking, taxes are for revenue, whereas fees are exactions for purposes of
regulation and inspection and are for that reason limited in amount to what is necessary
to cover the cost of the services rendered in that connection.
Hence, a charge fixed by statute for the service to be person,-When by an officer,
where the charge has no relation to the value of the services performed and where
the amount collected eventually finds its way into the treasury of the branch of the
government whose officer or officers collected the chauffeur, is NOT a fee but a
tax.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act
shall be imposed," thus implying that the charges therein imposedthough called
feesare of the category of taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for
the registration or operation or on the ownership of any motor vehicle, or for the exercise
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of the profession of chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any provincial board,
city or municipal council or board, or other competent authority may exact and collect
such reasonable and equitable toll fees for the use of such bridges and ferries, within
their respective jurisdiction, as may be authorized and approved by the Secretary of
Public Works and Communications, and also for the use of such public roads, as may be
authorized by the President of the Philippines upon the recommendation of the Secretary
of Public Works and Communications, but in none of these cases, shall any toll fee." be
charged or collected until and unless the approved schedule of tolls shall have been
posted levied, in a conspicuous place at such toll station.
MAIN ISSUE: WON the motor vehicle registration fee is considered as tax? YES
HELD:
Section 73 of Commonwealth Act 123 states:
Section 73. Disposal of moneys collected.Twenty per centum of the money collected under
the provisions of this Act shall accrue to the road and bridge funds of the different provinces and
chartered cities in proportion to the centum shall during the next previous year and the remaining
eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the
construction and maintenance of national and provincial roads and bridges. as well as the streets
and bridges in the chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public Works in the different
provinces and chartered cities. ....
Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of this Act
shall be deposited in a special trust account in the National Treasury to constitute the Highway
Special Fund, which shall be apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and
equip the Land Transportation Commission but not to exceed twenty per cent of the total
collection during one year, shall be set aside for the purpose.
It appears clear from the above provisions that the legislative intent and purpose behind
the law requiring owners of vehicles to pay for their registration is mainly to raise funds
for the construction and maintenance of highways and to a much lesser degree, pay for
the operating expenses of the administering agency.
Fees may be properly regarded as taxes even though they also serve as an instrument of
regulation, As stated by a former presiding judge of the CTA and writer on various aspects of
taxpayers
It is possible for an exaction to be both tax and regulation. License fees are often looked to as a
source of revenue as well as a means of regulation. This is true, for example, of automobile license fees.
Isabela such case, the fees may properly be regarded as taxes even though they also serve as an
instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real
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and substantial purposes, then the exaction is properly called a tax. These exactions are
sometimes called regulatory taxes.
Indeed, taxation may be made the implement of the state's police power. If the purpose is
primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax. Such is the case of motor vehicle registration fees. The
conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the
Calalang case. Same provision appears as Sec 59(b) in the Land Transportation Code.
Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a
tax, Section 59 (b) speaks of "taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..."
making the intent to impose a tax more apparent.
In view of the foregoing, we rule that motor vehicle registration fees as at present
exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended
for additional revenues of government even if one fifth or less of the amount collected is
set aside for the operating expenses of the agency administering the program.
SIDE ISSUE: May the respondent administrative agency be required to refund the amounts
stated in the complaint of PAL? NO
The claim for refund is made for payments given in 1971. It is not clear from the records as to
what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act
No. 5448 dated June 27, 1968, repealed all earlier tax exemptions of corporate taxpayers found
in legislative franchises similar to that invoked by PAL in this case.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly
imposed because the tax exemption in the franchise of PAL was repealed during the period.
However, an amended franchise was given to PAL in 1979.
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier
law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration
and licensing of motor vehicles. Such payments are already included in the basic tax or
franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer
be exacted.
3. As to graduation: British American Tobacco v Camacho (HAUTEA)

Facts:
- The Bureau of Internal Revenue (BIR) issued Revenue Regulation 1-97. The said
regulation classifies cigarette brands into 2 categories, Active brands and New Brands.
The New Brands, or those registered after January 1, 1997 shall be initially assessed at
their suggested retail price until such time that the appropriate survey to determine their
current net retail price is conducted.
- Jan. 1, 1997: RA 8284 amendments; Sec. 145 of the NIRC provides for four tiers of tax
rates (low, medium, high, premium) based on the net retail price per pack of cigarettes
which is based on a survey done in October 1, 1996 for the duly registered and active
brands as of that time. Meanwhile, those brands not covered will be classified based on
their current net retail price.
- Rev. Reg. No. 1-97: Classified existing brands (brands registered on or before Jan. 1,
1997/RA 8424) from new brands which were registered thereafter providing that their
(new brands) tax category will be based on their suggested retail price (SRP) until a
survey by the Bureau has been conducted to determine its actual retail price after three
months of its introduction to the market.
- June 2001: Petitioner introduced their Lucky Strike brand of cigarettes which had an
SRP of P9.90/pack therefore belonging to the high tax rate of P8.96/pack.
- Rev. Reg. No. 9-2003: Empowered the BIR to make survey every two years on the
current retail price of the products for the reclassification of their tax rates or for new tax
category.
- Rev. Mem. No. 6-2003: Issued guidelines for the net retail price of new brands of
cigarettes and alcohol products.
- Rev. Reg. 22-3003: Issued to implement the revised tax classification of the new
brands (after Jan. 1, 1997) based on the survey (RR No. 1-97), which revealed that
Lucky Strike has a current net retail price of P22 thus should be categorized in the
premium rate of P13.44/pack.
- On Sept. 4, 2003, the RTC denied the TRO, saying that it has no power to restrain tax
collection. Then it also denied the Motion to Dismiss on March 2004 but issued the Writ
of Preliminary Injunction for the Revenue Regulations and Memorandums. On a motion
for reconsideration, both the parties agreed that it was their (the law and rules/orders)
constitutionality that is being ultimately questioned.
- On May 2004, RTC uplifted the writ and upheld their constitutionality, thus this petition
for review in the Supreme Court.
- Jan. 2005: RA 9334 amendments provided for the legislative freeze on brands of
cigarettes introduced between Jan. 2, 1997- Dec. 31, 2003, saying that their current tax
rate/category will be that which the BIR has assigned to them together with those old
brands (prior to said date) contained in Annex D of the petition shall remain in their
categories until revised by Congress. Thus, it resulted for petitioner having higher tax for
their products, prompting them to amend their petition to assail the validity of RA 9334
and praying for a lower tax category, citing other brands such as Philip Morris and
Marlboro being unduly benefited because their category are still based on the Oct. 1996
tax base (and all those listed in Annex D) and thus having lower taxes than them
despite the disparity in their prices. Said companies filed their respective motion for
intervention which the Court granted.
Petitioner argues that the classification freeze provision is a form of regressive and
inequitable tax system which is proscribed under Article VI, Section 28(1) of the
Constitution.
Issues & Held:

1. Whether the assailed law is Regressive in nature? YES
Whether the Regressive nature of the assailed law violates Article VI Section
28(1) of the Constitution? NO
It may be conceded that the assailed law imposes an excise tax on cigarettes which is a form of
indirect tax, and thus, regressive in character. While there was an attempt to make the
imposition of the excise tax more equitable by creating a four-tiered taxation system where
higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of
a cigarette brand within a specific tax bracket pays the same tax rate. To this extent, the tax
does not take into account the persons ability to pay. Nevertheless, this does not mean that the
assailed law may be declared unconstitutional for being regressive in character because the
Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress
shall evolve a progressive system of taxation. As we explained in Tolentino v. Secretary of
Finance
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, Section 1] or for the
promotion of the right to "quality education" [Art. XIV, Section 1]. These
provisions are put in the Constitution as moral incentives to legislation, not as
judicially enforceable rights.
NIRC of 1997 as amended

1. Income Tax Systems: Tan v Del Rosario (LIM)
DOCTRINES/ DEFINITIONS:
Schedular Approach:
A system employed where the income tax treatment varies and made to depend on the kind or category
of taxable income of the taxpayer.
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Global Treatment:
A system where the tax treatment views indifferently the tax base and generally treats in common all
categories of taxable income of the taxpayer.
Uniformity in taxation means those that are similarly situated are to be treated alike. There is
uniformity as long as:
o
(1) the standards that are used therefor are substantial and not arbitrary,
o
(2) the categorization is germane to achieve the legislative purpose,
o
(3) the law applies, all things being equal, to both present and future conditions, and
o
(4) the classification applies equally well to all those belonging to the same class
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not) with
others in the exercise of a common profession. Indeed, outside of the gross compensation income tax
and the final tax on passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the same manner and under
a common set of rules.
FACTS:
Consolidated petitions assailing the constitutionality of RA No. 7496 or Simplified Net Income Taxation
Scheme (SNIT). (Each petition has a different issue, both concern income tax systems)
ISSUES:
1. W/N RA 7496 is unconstitutional (G.R. No. 109289) [No]
2. W/N in RA 7496, respondents have exceeded their rule making authority in applying it to general
professional partnerships (G.R. No. 109446) [No]
HOLDING AND RATIO:
ISSUE #1 (G.R. No. 109289): NO. The RA did not violate any constitutional provision.
Petitioner: The said law violates the ff. provisions of the 3 Constitutional provisions:
1.) Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which
shall be expressed in the title thereof.
The title of the bill "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" is a misnomer
HELD:
The full text title of the bill is An Act Adopting the Simplified Net Income Taxation Scheme For The
Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21
and 29 of the National Internal Revenue Code, as Amended
Amended Sec. 21 of the National Internal Revenue Code speaks of imposing tax on taxable net
income received from all sources of self-employed/ practicing professionals while Sec. 29 speaks of the
allowed deductions from gross income of the said group of people. However, deductible items on income
are now more limited as compared to the law before the said amendment.
Petitioner contends that the law now impose taxes on gross as opposed to net income.
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Court held that limiting the deductible items is still within the purview of the concept of net income. It
is still income less the expenses and then the remaining amount determines the tax to be paid. The
amendment just limited the items that fall under the expenses.
The objectives of the law on bill titles are: (a) to prevent log-rolling legislation intended to unite the
members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to
avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such
publications of its proceedings as are usually made, of the subjects of legislation. The above objectives of
the fundamental law appear to us to have been sufficiently met.
2.) Petitioner contends that the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships violating the ff.
constitutional provisions:
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall
any person be denied the equal protection of the laws.
HELD:
Uniformity in taxation means those that are similarly situated are to be treated alike. There is
uniformity as long as:
o
(1) the standards that are used therefor are substantial and not arbitrary,
o
(2) the categorization is germane to achieve the legislative purpose,
o
(3) the law applies, all things being equal, to both present and future conditions, and
o
(4) the classification applies equally well to all those belonging to the same class
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations.
We certainly do not view this classification to be arbitrary and inappropriate.
The court does not view the classification in this instance as arbitrary or inappropriate. Moreover, the
legislature has the discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. The Court only intervenes when there is a violation of the
constitution, which in this case there is none.
ISSUE # 2 (G.R. No. 109446): NO. Respondents did not exceed authority.
Petitioners revolve around the question of whether or not public respondents have exceeded their
authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.
This is anchored on the administrative interpretation of public respondents that would apply SNIT to
partners in general professional partnerships.
Petitioners cited the deliberations in the house of representatives regarding the implementation of the
said rule in which it was shown that framers did not intend for the bill to be applicable to business
corporations or partnerships.
HELD:
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A business partnership itself is not a taxpayer, the income tax is imposed on the partners themselves
in their individual capacity which is computed on their distributive shares of partnership profits.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not) with
others in the exercise of a common profession. Indeed, outside of the gross compensation income tax
and the final tax on passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the same manner and under
a common set of rules.
RA 7496 should be takes as an amendatory legislation which is still under the National Internal
Revenue Code. Under such code income taxpayers cover all persons with taxable income. It classifies
taxpayers into: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable
Trusts (irrevocable both as to corpus and as to income).
o
Partnerships are, no matter how created or organized, are subject to income tax (and thus
alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law
assimilated to be within the context of, and so legally contemplated as, corporations.
o SNIT is not intended to cover corporations and partnerships which are independently subject to the
payment of income tax.
o
SNIT speaks of general professional partnership which focuses on the partners themselves as
individuals and not on the partnership.
2. Criteria in imposing Phil Income Tax

a. Residence Principle: CIR v De Lara (MEJILLANO)
These are two separate appeals, one by the Collector of Internal Revenue and the other by
Domingo de Lara as Ancilliary Administrator of the estate of Hugo H. Miller, from the decision of
the Court of Tax Appeals of June 25, 1955, with the following dispositive part:
WHEREFORE, respondent's assessment for estate and inheritance taxes upon the
estate of the decedent Hugo H. Miller is hereby modified in accordance with the
computation attached as Annex "A" of this decision. Petitioner is hereby ordered to pay
the amount of P2,047.22 representing estate taxes due, together with the interests and
other increments. In case of failure to pay the amount of P2,047.22 within thirty (30)
days from the time this decision has become final, the 5 per cent surcharge and the
corresponding interest due thereon shall be paid as a part of the tax.
Facts:
Hugo H. Miller, an American citizen, was born in Santa Cruz, California, U.S.A., in 1883.
In 1905, he came to the Philippines.
From 1906 to 1917, he was connected with the public school system, first as a teacher
and later as a division superintendent of schools, later retiring under the Osmeiia
Retirement Act.
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After his retirement, Miller accepted an executive position in the local branch of Ginn &
Co., book publishers with principal offices in New York and Boston, U.S.A., up to the
outbreak of the Pacific War.
From 1922 up to December 7, 1941, he was stationed in the Philippines as Oriental
representative of Ginn & Co.
In or about the year 1922, Miller lived at the Manila Hotel.
His wife remained at their home in California, but she used to come to the Philippines for
brief visits with Miller, staying three or four months.
Miller also used to visit his wife in California. He never lived in any residential house in
the Philippines.
After the death of his wife in 1931, he transferred from the Manila Hotel to the Army and
Navy Club, where he was staying at the outbreak of the Pacific War.
On January 17, 1941, Miller executed his last will and testament in Santa Cruz,
California, in which he declared that he was "of Santa Cruz, California".
On December 7, 1941, because of the Pacific War, the office of Ginn & Co. was closed,
and Miller joined the Board of Censors of the United States Navy.
During the war, he was taken prisoner by the Japanese forces in Leyte, and in January,
1944, he was transferred to Catbalogan, Samar, where he was reported to have been
executed by said forces on March 11, 1944, and since then, nothing has been heard
from him.
At the time of his death in 1944, Miller owned the following properties:
Real Property situated in Ben-Lomond, Santa Cruz, California valued at
Real property situated in Burlingame, San Mateo, California valued at
Tangible Personal property, worth
16,200.00
2,140.00
Cash in the banks in the United States
21,178.20
Accounts Receivable from various persons in the United States including

notes
36,062.74
Stocks in U.S. Corporations and U.S. Savings Bonds, valued at
Shares of stock in Philippine Corporations, valued at
P 5,000.00
123,637.16
51,906.45
Testate proceedings were instituted before the Court of California in Santa Cruz County,
in the course of which Miller's will of January 17, 1941 was admitted to probate on May
10, 1946.
14
Court of California: issued an order and decree of settlement of final account and final
distribution, wherein it found that Miller was a "resident of the County of Santa Cruz,
State of California" at the time of his death in 1944.
Thereafter ancillary proceedings were filed by the executors of the will before the Court
of First Instance of Manila.
CFI of Manila: admitted to probate the will of Miller probated in the California court, and
found that Miller was a resident of Santa Cruz, California, at the time of his death.
On July 29, 1949, the Bank of America, National Trust and Savings Association of San
Francisco California, co-executor named in Miller's will, filed an estate and inheritance
tax return with the Collector, covering only the shares of stock issued by Philippines
corporations, reporting a liability of P269.43 for taxes and P230.27 for inheritance taxes.
After due investigation, the Collector assessed estate and inheritance taxes, which was
received by the said executor on April 3, 1950.
The estate of Miller protested the assessment of the liability for estate and inheritance
taxes, including penalties and other increments at P77,300.92, as of January 16, 1954.
This assessment was appealed by De Lara as Ancillary Administrator before the Board
of Tax Appeals, which appeal was later heard and decided by the Court of Tax Appeals.
In determining the "gross estate" of a decedent, under Section 122 in relation to section
88 of our Tax Code, it is first necessary to decide whether the decedent was a resident
or a non-resident of the Philippines at the time of his death.
The Collector maintains that:
Under the tax laws, residence and domicile have different meanings; that tax
laws on estate and inheritance taxes only mention resident and non-resident, and
no reference whatsoever is made to domicile except in Section 93 (d) of the Tax
Code.
That Miller during his long stay in the Philippines had required a "residence" in
this country, and was a resident thereof at the time of his death, and
consequently, his intangible personal properties situated here as well as in the
United States were subject to said taxes.
However, the Ancillary Administrator equally maintains:
That for estate and inheritance tax purposes, the term "residence" is
synonymous with the term domicile.
Issue(s):
1. WON the term "residence" is synonymous with the term domicile in tax laws.
2. WON Miller, at the time of his death, had his residence/domicile in the Philippines.
Held:
1. YES
We agree with the Court of Tax Appeals that at the time that The National Internal
Revenue Code was promulgated in 1939, the prevailing construction given by the courts
15
to the "residence" was synonymous with domicile and that the two were used
interchangeably.
Cases were cited in support of this view, particularly that of Velilla vs. Posadas, 62 Phil.
624, wherein this Tribunal used the terms "residence" and "domicile" interchangeably
and without distinction, the case involving the application of the term residence
employed in the inheritance tax law at the time (section 1536- 1548 of the Revised
Administrative Code), and that consequently, it will be presumed that in using the term
residence or resident in the meaning as construed and interpreted by the Court.
Moreover, there is reason to believe that the Legislature adopted the American (Federal
and State) estate and inheritance tax system.
In the United States, for estate tax purposes, a resident is considered one who at the
time of his death had his domicile in the United States, and in American jurisprudence,
for purposes of estate and taxation, "residence" is interpreted as synonymous with
domicile, and that
The incidence of estate and succession has historically been determined by domicile
and situs and not by the fact of actual residence. (Bowring vs. Bowers, (1928) 24 F 2d
918, at 921, 6 AFTR 7498, cert. den (1928) 272 U.S.608).
2. NO
We also agree with the Court of Tax Appeals that at the time of his death, Miller had his
residence or domicile in Santa Cruz, California.
During his country, Miller never acquired a house for residential purposes for he stayed
at the Manila Hotel and later on at the Army and Navy Club.
The bulk of his savings and properties were in the United States.
In November, 1940, Miller took out a property insurance policy and indicated therein his
address as Santa Cruz, California, this aside from the fact that Miller, as already stated,
executed his will in Santa Cruz, California, wherein he stated that he was "of Santa Cruz,
California".
From the foregoing, it is clear that as a non-resident of the Philippines, the only
properties of his estate subject to estate and inheritance taxes are those shares of stock
issued by Philippines corporations, valued at P51,906.45.
It is true, as stated by the Tax Court, that while it may be the general rule that personal
property, like shares of stock in the Philippines, is taxable at the domicile of the owner
(Miller) under the doctrine of mobilia secuuntur persona, nevertheless, when he during
his life time, extended his activities with respect to his intangibles, so as to avail himself
of the protection and benefits of the laws of the Philippines, in such a way as to bring his
person or property within the reach of the Philippines, the reason for a single place of
taxation no longer obtains- protection, benefit, and power over the subject matter are no
longer confined to California, but also to the Philippines (Wells Fargo Bank & Union
Trust Co. vs. Collector (1940), 70 Phil. 325).
In the instant case, the actual situs of the shares of stock is in the Philippines, the
corporation being domiciled herein: and besides, the right to vote the certificates at
stockholders' meetings, the right to collect dividends, and the right to dispose of the
16
shares including the transmission and acquisition thereof by succession, all enjoy the
protection of the Philippines, so that the right to collect the estate and inheritance taxes
cannot be questioned (Wells Fargo Bank & Union Trust Co. vs. Collector supra).
It is recognized that the state may, consistently with due process, impose a tax upon
transfer by death of shares of stock in a domestic corporation owned by a decedent
whose domicile was outside of the state (Burnett vs. Brooks, 288 U.S. 378; State
Commission vs. Aldrich, (1942) 316 U.S. 174, 86 L. Ed. 1358, 62 ALR 1008)." (Brief for
the Petitioner, p. 79-80).
The Ancillary Administrator for purposes of exemption invokes the proviso in Section 122
of the Tax Code, which provides as follows:
. . ."And Provided, however, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of
a foreign country which at the time of his death did not impose a transfer tax or death tax
of any character in respect of intangible personal property of citizens of the Philippines
not residing in that country, or (b) if the laws of the foreign country of which the decedent
was resident at the tune of his death allow a similar exemption from transfer taxes or
death taxes of every character in respect of intangible personal property owned by
citizen, of the Philippine not residing in that foreign country.
The Ancillary Administrator bases his claim of exemption on (a) the exemption of nonresidents from the California inheritance taxes with respect to intangibles, and (b) the
exemption by way of reduction of P4,000 from the estates of non-residents, under the
United States Federal Estate Tax Law.
Section 6 of the California Inheritance Tax Act of 1935, now reenacted as Section
13851, California Revenue and Taxation Code, reads as follows:
SEC. 6. The following exemption from the tax are hereby allowed:
xxx
xxx
xxx.
(7) The tax imposed by this act in respect of intangible personal property shall not be
payable if decedent is a resident of a State or Territory of the United States or a foreign
state or country which at the time of his death imposed a legacy, succession of death tax
in respect of intangible personal property within the State or Territory or foreign state or
country of residents of the States or Territory or foreign state or country of residence of
the decedent at the time of his death contained a reciprocal provision under which nonresidents were exempted from legacy or succession taxes or death taxes of every
character in respect of intangible personal property providing the State or Territory or
foreign state or country of residence of such non-residents allowed a similar exemption
to residents of the State, Territory or foreign state or country of residence of such
decedent.
Considering the State of California as a foreign country in relation to section 122 of Our
Tax Code we believe and hold, as did the Tax Court, that the Ancillary Administrator is
17
entitled to exemption from the tax on the intangible personal property found in the
Philippines.
Incidentally, this exemption granted to non-residents under the provision of Section 122
of our Tax Code, was to reduce the burden of multiple taxation, which otherwise would
subject a decedent's intangible personal property to the inheritance tax, both in his place
of residence and domicile and the place where those properties are found.
As regards the exemption or reduction of P4,000 based on the reduction under the
Federal Tax Law in the amount of $2,000, we agree with the Tax Court that the amount
of $2,000 allowed under the Federal Estate Tax Law is in the nature of deduction and
not of an exemption. Besides, as the Tax Court observes--.
. . . this exemption is allowed on all gross estate of non-residents of the United States,
who are not citizens thereof, irrespective of whether there is a corresponding or similar
exemption from transfer or death taxes of non-residents of the Philippines, who are
citizens of the United States; and thirdly, because this exemption is allowed on all gross
estates of non-residents irrespective of whether it involves tangible or intangible, real or
personal property; so that for these reasons petitioner cannot claim a reciprocity. . .
Furthermore, in the Philippines, there is already a reduction on gross estate tax in the
amount of P3,000 under section 85 of the Tax Code, before it was amended, which in
part provides as follows:
SEC. 85. Rates of estate tax.There shall be levied, assessed, collected, and paid
upon the transfer of the net estate of every decedent, whether a resident or non-resident
of the Philippines, a tax equal to the sum of the following percentages of the value of the
net estate determined as provided in sections 88 and 89:
One per centrum of the amount by which the net estate exceeds three thousand pesos
and does not exceed ten thousand pesos;. . .
It will be noticed from the dispositive part of the appealed decision of the Tax Court that
the Ancillary Administrator was ordered to pay the amount of P2,047.22, representing
estate taxes due, together with interest and other increments. Said Ancillary
Administrator invokes the provisions of Republic Act No. 1253, which was passed for the
benefit of veterans, guerrillas or victims of Japanese atrocities who died during the
Japanese occupation.
The provisions of this Act could not be invoked during the hearing before the Tax Court
for the reason that said Republic Act was approved only on June 10, 1955.
We are satisfied that inasmuch as Miller, not only suffered deprivation of the war, but
was killed by the Japanese military forces, his estate is entitled to the benefits of this Act.
Consequently, the interests and other increments provided in the appealed judgment
should not be paid by his estate.
With the above modification, the appealed decision of the Court of Tax Appeals is
hereby affirmed.
18
b. Source Principle: NDC v CIR (MORA)
DOCTRINE:
Taxation; Income from the sources within the Philippines; Residence of obligor who
pays the interest rather than the physical location of the securities bonds or notes or
the place of payment is the determining factor of the source of interest income.
FACTS:
The national Development Company entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going
vessels. The purchase price was to come from the proceeds of bonds issued by the
Central Bank.
Initial payments were made in cash and through irrevocable letters of credit.
Fourteen promissory notes were signed for the balance by the NDC and, as required
by the shipbuilders, guaranteed by the Republic of the Philippines.
The remaining payments and the interests thereon were remitted in due time by the
NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in
Tokyo.
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70
as interest on the balance of the purchase price. No tax was withheld. The
Commissioner then held the NDC liable on such tax in the total sum of
P5,115,234.74.
The BIR thereupon served on the NDC a warrant of distraint and levy to enforce
collection of the claimed amount.
CTA sustained the BIR.
ISSUE:
Whether NDC should be the tax on the interest paid to the Japanese shipbuilding
companies? ---YES
HELD:
The Japanese shipbuilders were liable to tax on the interest remitted to them under
Section 37 of the Tax Code, thus:
SEC. 37. Income from sources within the Philippines. (a) Gross income from
sources within the Philippines. The following items of gross income shall be
treated as gross income from sources within the Philippines:
19
(1) Interest. Interest derived from sources within the Philippines, and interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise;
xxx xxx
xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under
the above provision because all the related activities the signing of the contract,
the construction of the vessels, the payment of the stipulated price, and their delivery
to the NDC were done in Tokyo. The law, however, does not speak of activity but
of "source," which in this case is the NDC. This is a domestic and resident
corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right
to levy and collect income tax on interest received by foreign corporations
not engaged in trade or business within the Philippines is not planted upon
the condition that 'the activity or labor and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies:
'Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed. The
residence of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income.
Accordingly, if the obligor is a resident of the Philippines the interest
payment paid by him can have no other source than within the Philippines.
The interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor.
Here in the case at bar, petitioner National Development Company, a
corporation duly organized and existing under the laws of the Republic of the
Philippines, with address and principal office at Calle Pureza, Sta. Mesa,
Manila, Philippines unconditionally promised to pay the Japanese
shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-going vessels
purchased and acquired by it from the Japanese corporations, including the
interest on the principal sum at the rate of five per cent (5%) per annum. And
pursuant to the terms and conditions of these promissory notes, which are
duly signed by its Vice Chairman and General Manager, petitioner remitted
to the Japanese shipbuilders in Japan during the years 1960, 1961, and
1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00,
20
respectively, as interest on the unpaid balance of the purchase price of the
aforesaid vessels.
The law is clear. Our plain duty is to apply it as written. The residence of the
obligor which paid the interest under consideration, petitioner herein, is Calle
Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized
and existing under the laws of the Philippines, it is a domestic corporation,
resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.)
The interest paid by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it. Clearly, therefore, the
interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and
1962 on the unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines subject to
income tax under the then Section 24(b)(1) of the National Internal Revenue
Code.
The petitioner 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.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for
its failure to withhold the same from the Japanese shipbuilders. Such liability is
imposed by Section 53(c) of the Tax Code, thus:
Section 53(c).
Return and Payment. Every person required to deduct and
withhold any tax under this section shall make return thereof, in duplicate, on or
before the fifteenth day of April of each year, and, on or before the time fixed by law
for the payment of the tax, shall pay the amount withheld to the officer of the
Government of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and demands of
any person for the amount of any payments made in accordance with the provisions
of this section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court
of Tax Appeals, the Court quoted with approval the following regulation of the BIR on
the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be addressed to
the Commissioner of Internal Revenue for the determination whether or not
the income paid to an individual is not subject to withholding. In case the
Commissioner of Internal Revenue decides that the income paid to an
individual is not subject to withholding, the withholding agent may thereupon
21
remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax
Regulations).
"Strict observance of said steps is required of a withholding agent before he could be
released from liability," so said Justice Jose P. Bengson, who wrote the decision.
"Generally, the law frowns upon exemption from taxation; hence, an exempting
provision should be construed strictissimi juris."
The petitioner was remiss in the discharge of its obligation as the withholding agent
of the government and so should be held liable for its omission.
3. Types of Philippine Income Tax: CREBA v Romulo (PABALAN)

4. Kinds of Taxpayers
a. Resident Aliens: CIR v Lednicky (SUPAPO)
DOCTRINES:
1. An alien resident who derives income wholly from sources within the Philippines may
not deduct from gross income the income taxes he paid to his home country.
2. An alien residents right to deduct from gross income the income taxes he paid to a
foreign government is given only as an alternative of his right to claim tax credit for
such foreign income taxes, so that unless he has a right to claim such tax credit if he
chooses, he is precluded from said deduction.
3. An alien resident is not entitled to tax credit for foreign income taxes paid when his
income is derived wholly from sources within the Philippines.
FACTS:
1. Spouses Lednicky, both American Citizens residing in the Philippines, derived all
their income from Philippine sources for the taxable years 1955-1957
2. In compliance with local law, they filed their ITR for taxable years and paid the
amount due.
3. Thereafter, the spouses filed an amended ITR for the taxable years in question
claiming a deduction for the amount theyve paid to the US government as federal
income tax.
4. Simultaneously, they requested for a refund.
5. Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in
Manila their federal income tax return for the years 1947, 1951, 1952, 1953, and
1954 on income from Philippine sources on a cash basis.
6. The CTA ruled in favor of the spouses.
Legal basis of Lednicky spouses:
22
SEC. 30. Deduction from gross income. In computing net income there shall be
allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by the authority
of any foreign country; but this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) of this subsection (relating to credit
for foreign countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to increase
the value of the property assessed.
ISSUE: whether an American citizen residing in the Philippines, who derives income
wholly from sources within the Republic of the Philippines, may deduct from his gross
income the income taxes he has paid to the United States government for the taxable
year on the strength of section 30 (C-1) of the Philippine Internal Revenue Code.
HELD: NO! A resident alien is not entitled to tax credit for the foreign income taxes paid
when his income is derived wholly from sources within the Philippines.
The Tax Court held that they may be deducted because of the undenied fact that the
respondent spouses did not "signify" in their income tax return a desire to avail
themselves of the benefits of paragraph 3 (B) of the subsection, which reads:
Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his
return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be
credited with
(A) ...;
(B) Alien resident of the Philippines. In the case of an alien resident of the Philippines, the
amount of any such taxes paid or accrued during the taxable year to any foreign country, if the
foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows
a similar credit to citizens of the Philippines residing in such country;
It is well to note that the tax credit so authorized is limited under paragraph 4 (A and B)
of the same subsection, in the following terms:
Par. (c) (4) Limitation on credit. The amount of the credit taken under this section shall be
subject to each of the following limitations:
(A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed
the same proportion of the tax against which such credit is taken, which the taxpayer's net
income from sources within such country taxable under this Title bears to his entire net income
for the same taxable year; and
23
(B) The total amount of the credit shall not exceed the same proportion of the tax against which
such credit is taken, which the taxpayer's net income from sources without the Philippines taxable
under this Title bears to his entire net income for the same taxable year.
Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to
deduct income taxes paid to foreign government from the taxpayer's gross income is
given only as an alternative or substitute to his right to claim a tax credit for such foreign
income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a
right to claim such tax credit if he so chooses, he is precluded from deducting the foreign
income taxes from his gross income. For it is obvious that in prescribing that such
deduction shall be allowed in the case of a taxpayer who does not signify in his return
his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes
paid to foreign countries), the statute assumes that the taxpayer in question also may
signify his desire to claim a tax credit and waive the deduction; otherwise, the foreign
taxes would always be deductible, and their mention in the list of non-deductible items in
Section 30(c) might as well have been omitted, or at least expressly limited to taxes on
income from sources outside the Philippine Islands.
Had the law intended that foreign income taxes could be deducted from gross income in
any event, regardless of the taxpayer's right to claim a tax credit, it is the latter right that
should be conditioned upon the taxpayer's waiving the deduction; in which Case the right
to reduction under subsection (c-1-B) would have been made absolute or unconditional
(by omitting foreign taxes from the enumeration of non-deductions), while the right to a
tax credit under subsection (c-3) would have been expressly conditioned upon the
taxpayer's not claiming any deduction under subsection (c-1). In other words, if the law
had been intended to operate as contended by the respondent taxpayers and by the
Court of Tax Appeals section 30 (subsection (c-1) instead of providing as at present
would have merely provided:
SEC. 30. Decision from grow income. In computing net income there shall be allowed as
deductions:
(a) ...
(b) ...
(c) Taxes paid or accrued within the taxable year, EXCEPT
(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:
Income, war profits and excess profits taxes imposed by authority of any foreign country on
income earned within the Philippines if the taxpayer does not claim the benefits under paragraph
3 of this subsection;
(C) Estate, inheritance or gift taxes;
(D) Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed.
while subsection (c-3) would have been made conditional in the following or equivalent terms:
(3) Credits against tax for taxes of foreign countries. If the taxpayer has not deducted such
taxes from his gross income but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ... (etc.).
24
Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from
claiming twice the benefits of his payment of foreign taxes, by deduction from gross
income (subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly
can not exist if the taxpayer can not claim benefit under either of these headings at his
option, so that he must be entitled to a tax credit (respondent taxpayers admittedly are
not so entitled because all their income is derived from Philippine sources), or the option
to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are not allowed to
deduct the income taxes they are required to pay to the government of the United States
in their return for Philippine income tax, they would be subjected to double taxation.
What respondents fail to observe is that double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same governmental entity. In the
present case, while the taxpayers would have to pay two taxes on the same income, the
Philippine government only receives the proceeds of one tax. As between the
Philippines, where the income was earned and where the taxpayer is domiciled, and the
United States, where that income was not earned and where the taxpayer did not reside,
it is indisputable that justice and equity demand that the tax on the income should accrue
to the benefit of the Philippines. Any relief from the alleged double taxation should come
from the United States, and not from the Philippines, since the former's right to burden
the taxpayer is solely predicated on his citizenship, without contributing to the production
of the wealth that is being taxed.
Aside from not conforming to the fundamental doctrine of income taxation that the right
of a government to tax income emanates from its partnership in the production of
income, by providing the protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the revenue law provision in
question operates, in its application, to place a resident alien with only domestic sources
of income in an equal, if not in a better, position than one who has both domestic and
foreign sources of income, a situation which is manifestly unfair and short of logic.
Finally, to allow an alien resident to deduct from his gross income whatever taxes he
pays to his own government amounts to conferring on the latter the power to reduce the
tax income of the Philippine government simply by increasing the tax rates on the alien
resident. Every time the rate of taxation imposed upon an alien resident is increased by
his own government, his deduction from Philippine taxes would correspondingly
increase, and the proceeds for the Philippines diminished, thereby subordinating our
own taxes to those levied by a foreign government. Such a result is incompatible with
the status of the Philippines as an independent and sovereign state.
b. Non-resident aliens: CIR v Nickel (VELASCO)
25
FACTS
JULIANE NICKEL is a non-resident German Citizen. She is also the President of
JUBANITEX, Inc., a domestic corporation engaged in "manufacturing, marketing on
wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling
and disposing embroidered textile products."
The corporation appointed and engaged the services of Nickel as commission agent. It
was agreed that respondent will receive 10% sales commission on all sales actually
concluded and collected through her efforts.
NICKEL received the amount of P1,707,772.64, representing her sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax
amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue
(BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a
taxable income of P1,707,772.64 and a tax due of P170,777.26
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged
to have been mistakenly withheld and remitted by JUBANITEX to the BIR.
Respondent contended that her sales commission income is not taxable in the
Philippines because the same was a compensation for her services rendered in
Germany and therefore considered as income from sources outside the
Philippines.
The Commissioner of Internal Revenue maintains that the income earned by respondent
is taxable in the Philippines because the source thereof is JUBANITEX, a domestic
corporation located in the City of Makati.
It thus implied that source of income means the physical source where the
income came from.
It further argued that since respondent is the President of JUBANITEX, any
remuneration she received from said corporation should be construed as
payment of her overall managerial services to the company and should not be
interpreted as a compensation for a distinct and separate service as a sales
commission agent.
NICKEL, on the other hand, claims that the income she received was payment for her
marketing services.
She contended that income of nonresident aliens like her is subject to tax only if
the source of the income is within the Philippines. Source, according to
respondent is the situs of the activity which produced the income. And since the
source of her income were her marketing activities in Germany, the income she
derived from said activities is not subject to Philippine income taxation.
Issue & Held:
1. Whether NICKEL is entitled to a refund?
NO. She is not entitled. The settled rule is that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a
26
refund rest the burden of proving that the transaction subjected to tax is actually exempt from
taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that
the activity or the service which would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts." What she presented as evidence to prove that
she performed income producing activities abroad, were copies of documents she allegedly
faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be
used in the finished products as well as samples of sales orders purportedly relayed to her by
clients.
However, these documents do not show whether the instructions or orders faxed
ripened into concluded or collected sales in Germany. At the very least, these
pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to
consummated sales and whether these sales were truly concluded in Germany,
respondent presented no such evidence. Neither did she establish reasonable
connection between the orders/instructions faxed and the reported monthly sales
purported to have transpired in Germany.
In sum, we find that the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to support
the conclusion that it was in Germany where she performed the income producing service which
gave rise to the reported monthly sales in the months of March and May to September of 1995.
She thus failed to discharge the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our income tax law. Hence, the
claim for tax refund should be denied.
Important:
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines
shall be subject to an income tax in the same manner as an individual citizen and a resident
alien individual, on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines, Section 22(G) of this Code
notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines.
There shall be levied, collected and paid for each taxable year upon the entire income received
27
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income.
xxx
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged
in trade or business, are subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the incomes "source."
The US Supreme Court has said, in a definition much quoted but often debated, that income
may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale
of capital assets. While the three elements of this attempt at definition need not be accepted as
all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from
"sources within the United States" and suggest an investigation into the nature and location of
the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in
this country, the income should be from "sources within the US." If the income is from capital,
the place where the capital is employed should be decisive; if it is employed in this country, the
income should be from "sources within the US." If the income is from the sale of capital assets,
the place where the sale is made should be likewise decisive.
With respect to rendition of labor or personal service, as in the instant case, it is the place
where the labor or service was performed that determines the source of the income.
There is therefore no merit in petitioners interpretation which equates source of income in labor
or personal service with the residence of the payor or the place of payment of the income.
c. Not engaged in trade of industry: Phil Guaranty v CIR (VILLAFUERTE)

Doctrines:
Reinsurance premiums ceded to foreign reinsurers subject to withholding tax.
Reinsurance premiums ceded to foreign reinsurers considered income from Philippine
sources.
Section 24 of the Tax Code does not require a foreign corporation to engage in business
in the Philippines in subjecting its income to tax. It suffices that the activity creating the
income is performed or done in the Philippines. What is controlling, therefore, is not the
place of business but the place of activity that created an income.
Section 37 of the Tax Code is not an all-inclusive enumeration, for it merely directs that
the kinds of income mentioned therein should be treated as income from sources within
the Philippines but it does not require that other kinds of income should not be
considered likewise.
28
FACTS:
The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered
into reinsurance contracts with foreign insurance companies not doing business in the
country, thereby ceding to foreign reinsurers a portion of the premiums on insurance it
has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers the premiums worth P842,466.71 in 1953 and P721,471.85 in
1954.
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income
when it filed its income tax returns for 1953 and 1954. Furthermore, it did not withhold or
pay tax on them. Consequently, the Commissioner of Internal Revenue (CIR) assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance
premiums
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not
subject to withholding tax. Its protest was denied and it appealed to the Court of Tax
Appeals.
Petitioner maintain that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, nor did they have office here.
ISSUE: Whether or not reinsurance premiums ceded to foreign reinsurers not doing business in
the Philippines are subject to withholding tax.
HELD: Yes.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from
sources within the Philippines. The word "sources" has been interpreted as the activity,
property or service giving rise to the income. The reinsurance premiums were income
created from the undertaking of the foreign reinsurance companies to reinsure Philippine
Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking,
as explained above, took place in the Philippines. These insurance premiums, therefore,
came from sources within the Philippines and, hence, are subject to corporate income
tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions while activity
may consist of only a single transaction. An activity may occur outside the place of
business.
Section 24 of the Tax Code does not require a foreign corporation to engage in business
in the Philippines in subjecting its income to tax. It suffices that the activity creating the
income is performed or done in the Philippines. What is controlling, therefore, is not the
place of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources
within the Philippines because they are not specifically mentioned in Section 37 of the
29
Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the
kinds of income mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not be considered
likewise.
Finally, petitioner contends that the withholding tax should be computed from the amount
actually remitted to the foreign reinsurers instead of from the total amount ceded. And
since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding
tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign
corporations subject to taxation under this Title not engaged in trade or business
within the Philippines and not having any office or place of business therein,
there shall be deducted and withheld at the source in the same manner and upon
the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and
subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships
(compaias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity,
executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from
such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in
the case of dividends paid by a foreign corporation unless (1) such corporation is
engaged in trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the gross income
of such corporation for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-seven: Provided,
further, That the Collector of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which
are not known to the withholding agent.
5. Special Class of Individual Employees
30
a. Non resident foreign corporation: Howden v Collector (BUENAVENTURA)
FACTS: In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into
reinsurance contracts with 32 British insurance companies not engaged in trade or business in
the Philippines, whereby the former agreed to cede to them a portion of the premiums on
insurances on fire, marine and other risks it has underwritten in the Philippines. Alexander
Howden & Co., Ltd., also a British corporation not engaged in business in this country,
represented the aforesaid British insurance companies. The reinsurance contracts were
prepared and signed by the foreign reinsurers in England and sent to Manila where
Commonwealth Insurance Co. signed them.
Pursuant to the aforesaid contracts, Commonwealth Insurance Co., in 1951, remitted
P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of
Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed in April 1952 an income tax
return declaring the sum of P798,297.47, with accrued interest thereon in the amount of
P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for calendar year 1951. It also paid
the Bureau of Internal Revenue P66,112.00 income tax thereon.
On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd.
filed with the Bureau of Internal Revenue a claim for refund of the P66,112.00, later reduced to
P65,115.00, because Alexander Howden & Co., Ltd. agreed to the payment of P977.00 as
income tax on the P4,985.77 accrued interest. A ruling of the Commissioner of Internal
Revenue, dated December 8, 1953, was invoked, stating that it exempted from withholding tax
reinsurance premiums received from domestic insurance companies by foreign insurance
companies not authorized to do business in the Philippines. Subsequently, Alexander Howden
& Co., Ltd. instituted an action in the Court of First Instance of Manila for the recovery of the
aforesaid amount claimed. Pursuant to Section 22 of Republic Act 1125 the case was certified
to the Court of Tax Appeals. On November 24, 1961 the Tax Court denied the claim.
ISSUE: WON they are subject to withholding tax under Section 54 in relation to Section 53 of
the Tax Code. YES
HELD: Subsection (b) of Section 53 subjects to withholding tax the following: interest,
dividends, rents, salaries, wages,premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits, and income of
any non-resident alien individual not engaged in trade or business within the Philippines and not
having any office or place of business therein. Section 54, by reference, applies this provision to
foreign corporations not engaged in trade or business in the Philippines.
Appellants maintain that reinsurance premiums are not "premiums" at all as contemplated by
Subsection (b) of Section 53; that they are not within the scope of "other fixed or determinable
annual or periodical gains, profits, and income"; that, therefore, they are not items of income
subject to withholding tax.
31
The argument of appellants is that "premiums", as used in Section 53 (b), is preceded by "rents,
salaries, wages" and followed by "annuities, compensations, remunerations" which connote
periodical income payable to the recipient on account of some investment or for personal
services rendered. "Premiums" should, therefore, in appellants' view, be given a meaning
kindred to the other terms in the enumeration and be understood in its broadest sense as "a
reward or recompense for some act done; a bonus; compensation for the use of money; a price
for a loan; a sum in addition to interest."
We disagree with the foregoing proposition. Since Section 53 subjects to withholding tax various
specified income, among them, "premiums", the generic connotation of each and every word or
phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word
"premiums", which is neither qualified nor defined by the law itself, should mean income and
should include all premiums constituting income, whether they be insurance or reinsurance
premiums.
Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they
may be classified as determinable and periodical income under the same provision of law.
Section 199 of the Income Tax Regulations defines fixed, determinable, annual and periodical
income:
Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand, it is
determinable whenever there is a basis of calculation by which the amount to be paid may be
ascertained.
The income need not be paid annually if it is paid periodically; that is to say, from time to time,
whether or not at regular intervals. That the length of time during which the payments are to be
made may be increased or diminished in accordance with someone's will or with the happening of
an event does not make the payments any the less determinable or periodical. ...
Reinsurance premiums, therefore, are determinable and periodical income: determinable,

because they can be calculated accurately on the basis of the reinsurance contracts; periodical,
inasmuch as they were earned and remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of the Commissioner of Internal
Revenue dated December 8, 1953. Appellants' brief also cited rulings of the same official, dated
October 13, 1953, February 7, 1955 and February 8, 1955, as well as the decision of the
defunct Board of Tax Appeals in the case of Franklin Baker Co., thereby attempting to show that
the prevailing administrative interpretation of Sections 53 and 54 of the Tax Code exempted
from withholding tax reinsurance premiums ceded to non-resident foreign insurance companies.
It is asserted that since Sections 53 and 54 were "substantially re-enacted" by Republic Acts
1065 (approved June 12, 1954), 1291 (approved June 15, 1955), 1505 (approved June 16,
1956) and 2343 (approved June 20, 1959) when the said administrative rulings prevailed, the
rulings should be given the force of law under the principle of legislative approval by reenactment.
32
The principle of legislative approval by re-enactment may briefly be stated thus: Where a statute
is susceptible of the meaning placed upon it by a ruling of the government agency charged with
its enforcement and the Legislature thereafter re-enacts the provisions without substantial
change, such action is to some extent confirmatory that the ruling carries out the legislative
purpose.
The aforestated principle, however, is not applicable to this case. Firstly, Sections 53 and 54
were never reenacted. Republic Acts 1065, 1291, 1505 and 2343 were merely amendments in
respect to the rate of ta ximposed in Sections 53 and 54. Secondly, the administrative rulings of
the Commissioner of Internal Revenue relied upon by the taxpayers were only contained in
letters to taxpayers and never published, so that the Legislature is not presumed to know said
rulings. Thirdly, in the case on which appellants rely, Interprovincial Autobus Co., Inc. vs.
Collector of Internal Revenue, L-6741, January 31, 1956, what was declared to have acquired
the force or effect of law was a regulation promulgated to implement a law; whereas, in this
case, what appellants would seek to have the force of law are opinions on queries submitted.
It may not be amiss to note that in 1963, after the Tax Court rendered judgment in this case,
Congress enacted Republic Act 3825, as an amendment to Sections 24 and 54 of the Tax
Code, exempting from income taxes and withholding tax, reinsurance premiums received by
foreign corporations not engaged in business in the Philippines. Republic Act 3825 in effect took
out from Sections 24 and 54 something which formed a part of the subject matter therein,
thereby affirming the taxability of reinsurance premiums prior to the aforestated amendment.
b. General Professional Partnerships: Tan v Del Rosario (DORIA)
DOCTRINE:
A system of income taxation, wherein single proprietorships and professionals are taxed
in a manner different from corporations and partnerships, has long been the prevailing
rule.
Uniformity of taxation, like the concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated, are to be treated alike both in privileges
and liabilities.
A general professional partnership, unlike an ordinary business partnership, is not itself
an income taxpayer.
The income tax is imposed not on the professional partnership, which is tax exempt, but
on the partners themselves in their individual capacity computed on their distributive
shares of partnership profits.
FACTS:
These are 2 consolidated special civil actions for prohibition
G.R. No. 109289: challenges the constitutionality of R.A. 7496 (Simplified Net
Income Taxation Scheme SNIT), amending certain provisions of the NIRC.
33
G.R. No. 109446: challenges the validity of Sec. 6, Revenue Regulations No. 293 (Implementing Rules and Regulations for R.A. 7496), promulgated by the
Secretary of Finance and the CIR.
Petitioners claim to be taxpayers adversely affected by the continued implementation of
the SNIT.
1st case: Rufino Tan asserted that the enactment of the SNIT violates the provisions of
the Constitution:
Art. VI, Sec. 26(1) Every bill passed by the Congress shall embrace only one
subject which shall be expressed in the title thereof.
Art. VI, Sec. 28(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Art. III, Sec. 1 No person shall be deprived of . . . property without due process
of law, nor shall any person be denied the equal protection of the laws.
2nd case: Carag, Caballes, Jamora and Somera Law Offices, asserted that the Secretary
of Finance and the CIR have exceeded their rule-making authority in applying SNIT to
general professional partnerships.
SolGen: agrees with the Secretary of Finance and CIR.
Tans contention: the SNIT desecrates the constitutional requirement that taxation "shall
be uniform and equitable" in that the law would now attempt to tax single proprietorships
and professionals differently from the manner it imposes the tax on corporations and
partnerships.
CCJS Law Offices contention: the Secretary of Finance and CIR exceeded their
authority in promulgating Sec. 6, Revenue Regulations No. 2-93, to carry out the SNIT
Sec. 6. General Professional Partnership The general professional partnership
(GPP) and the partners comprising the GPP are covered by R.A. 7496
The real objection is focused on the interpretation that would apply SNIT to
partners in general professional partnerships.
Petitioners cited that the deliberations in Congress during the enactment
of SNIT expressed that its application is limited only to individuals and not
to partnerships and corporations.
ISSUE:
1. WON R.A. 7496/SNIT is unconstitutional for being violative of due process. NO
2. WON the Secretary of Finance and CIR exceeded their rule-making authority. NO
WON R.A. 7496/SNIT is applicable to general professional partnerships. YES
HELD:
1. The contention clearly forgets that a system of income taxation, wherein single
proprietorships and professionals are taxed in a manner different from corporations and
partnerships, has long been the prevailing rule even prior to the SNIT.
The plea to have the law declared unconstitutional for being violative of due process
must fail. The due process clause may correctly be invoked only when there is a clear
34
contravention of inherent or constitutional limitations in the exercise of the tax power.
No such transgression is so evident in this case.
Uniformity of taxation, like the concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and
liabilities.
Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to achieve
the 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.
What is apparent from the SNIT is the legislative intent to increasingly shift the income tax
system towards the schedular approach in the income taxation of individual taxpayers and
to maintain the present global treatment on taxable corporations. This classification is not
arbitrary and inappropriate.
2. There is an apparent misconception that general professional partnerships are subject to the
payment of income tax or that there is a difference in the tax treatment between individuals
engaged in business or in the practice of their respective professions and partners in general
professional partnerships.
A general professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes; subject to the corporate income tax), is
not itself an income taxpayer.
The income tax is imposed not on the professional partnership, which is tax
exempt, but on the partners themselves in their individual capacity computed on
their distributive shares of partnership profits. Sec. 23 of the Tax Code has not
been amended at all by the SNIT.
Sec. 23. Tax liability of members of general professional partnerships.
(a) Persons exercising a common profession in general partnership shall
be liable for income tax only in their individual capacity, and the share in
the net profits of the general professional partnership to which any
taxable partner would be entitled whether distributed or otherwise, shall
be returned for taxation and the tax paid in accordance with the
provisions of this Title
There is no distinction in income tax liability between a person who practices his profession
alone or individually and one who does it through partnership (registered or not) with others
in the exercise of a common profession. Indeed, outside of the gross compensation income
tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the
same manner and under a common set of rules.
Partnerships are, either "taxable partnerships" or "exempt partnerships."
35
Taxable Partnerships: no matter how created or organized, are subject to income tax
and are, by law, assimilated to be within the context of, and so legally contemplated as,
corporations.
SNIT is not intended or envisioned to cover corporations and partnerships which
are independently subject to the payment of income tax.
Exempt Partnerships: general professional partnerships included, are not identified as
corporations nor even considered as independent taxable entities for income tax
purposes.
The partners themselves, not the partnership (although it is still obligated to file
an income tax return [mainly for administration and data]), are liable for the
payment of income tax in their individual capacity computed on their respective
and distributive shares of profits.
Under the Tax Code on income taxation, the general professional partnership is
deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to, each of
the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed the rule on the
extent of allowable deductions applicable to all individual income taxpayers on their noncompensation income. There is no evident intention of the law to place in an unequal footing
or in significant variance the income tax treatment of professionals who practice their
professions individually and of those who do it through a general professional partnership.
SC: the petitions are DISMISSED.
c. Estates and Trusts: Kiene v CIR (FRANCISCO)
Doctrine:
No estate or inheritance tax is collectible on properties left in the Philippines by a
deceased citizen of Liechtenstein, Europe, in virtue of the reciprocity clause contained in
section 122 of Commonwealth Act 466 as amended.
But gift tax may be collected on properties donated inter vivos by a citizen of the
same country, the donation not being covered by said reciprocity clause. And in
estimating the donee's gift tax, the CIR need not first deduct the donor's tax from the gift,
it appearing that the donor's tax has already been paid.
The gift tax shall apply whether the transfer is in trust or otherwise.
Facts:
14 March 1951, Ludwig Kiene, German citizen, died while a resident of
Liechtenstein, Europe. He was married to Maria Elizabeth Kiene, with whom he
had 3 children.
On the day of his death he had intangible personal property in the
Philippines (shares of stock of a domestic corporation) valued at P1.6M
which was acquired during their marriage.
36
September 1948, spouses Kiene executed a joint will bequeathing all their
property to their aforesaid children.
Before Ludwig's death, a deed of trust was executed by them establishing
the "Ludwig Kiene Family Trust" to which the entire community property
was transferred in trust for the benefit of the wife and 3 children.
CIR assessed a total of P143K as estate and inheritance taxes on the properties
left by Ludwig. And holding the deed of trust to be a donation by the mother to
her 3 children, he assessed P75K as donor's gift tax, and P91K as donees' gift
tax.
Maria and her 3 children resisted to pay
Instead, they brought the matter to Board of Tax Appeals (BTA)
contending:
First. that no estate or inheritance tax was due, in virtue of the
reciprocity clause, Sec. 122 of 67272-23 the NIRC
(Commonwealth Act No. 466 as amended);
BTA: sustained the first contention;
Second. that no gift tax was payable pursuant to the same clause;
and
BTA: it held the gift was taxable
Third. that if payable at all, the donor's tax should be deducted
from the gift in computing the donee's tax.
BTA: in estimating the donee's tax, the Collector must first
deduct the donor's tax from the amount donated
Both sides appealed to this Court.
CIR insists on collecting the estate and inheritance taxes. The Board relied on
section 122 of the NIRC;
That no tax shall be collected under this title in respect of intangible personal property (a) if the
decedent at the time of his death was a resident of a foreign country which at the time of his death did
not impose a transfer tax or death' tax of any character in respect of intangible personal property of
citizens of the Philippines not residing in that foreign country, or (6) if the laws of the foreign country
of which the decedent was a resident at the time of his death allow a similar exemption from the
transfer taxes or death taxes of every character in respect of intangible personal property owned by
citizens of the Philippines not residing in that country.
Issue:
1. W/n the intangible personal property in the Philippines belonging to non-resident
foreigner (Ludwig) and who died outside Philippines is subject to estate tax in
virtue of the reciprocity clause.
2. W/n the gift is taxable pursuant to reciprocity clause.
Held:
1. No.
No estate or inheritance tax is collectible on properties left in the

Philippines by a deceased citizen of Liechtenstein, Europe, in virtue of the
reciprocity clause contained in section 122 of Commonwealth Act 466 as
amended.
37
2. Yes.
Gift tax may be collected on properties donated inter vivos by a citizen of

the same country, the donation not being covered by said reciprocity
clause.
Inasmuch as Section 122 (the reciprocity clause) grants exemption (a) if
the decedent at the time of his death etc. and (b) if the laws of the foreign
country of which the decedent was a resident, etc., and inasmuch as in
the matter of donation there was no decedent, both donor and donees
being alive, the exemption may not be claimed since the condition for the
exemption has not been fulfilled.
It is enough to point out that section 108 of the said Code imposing a gift
tax provides that "the tax shall apply whether the transfer is in trust or
otherwise."
SC: Affirmed BTAs decisions except the ruling on the third contention of Kiene.
d. Co-ownerships: Pascual v CIR (GATCHALIAN)
FACTS:
In 1965, petitioners Pascual and Dragon bought 2 parcels of land from Santiago Bernardino, et
al. and in 1966, they bought another 3 parcels of land from Juan Roque.
The first 2 parcels to in 1968 to Marenir Development Corporation (net profit of P165,224.70),
while the 3 parcels were sold to Erlinda Reyes and Maria Samson on1970 (net profit of
P60,000.00).
The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of
the tax amnesties granted in the said years.
However, in 1979 then Acting BIR Commissioner Efren I. Plana, assessed and required the
petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate income
taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.
In a reply respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income
was subject to the taxes prescribed under Section 24, both of the National Internal
Revenue Code that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to
individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual income tax liabilities but
did not relieve them from the tax liability of the unregistered partnership.
38
CTA ruled in favor of respondent Commissioner. It ruled that on the basis of the principle
enunciated in Evangelista an unregistered partnership was in fact formed by petitioners which
like a corporation was subject to corporate income tax distinct from that imposed on the
partners.
ISSUE: WON unregistered partnership exists in this case hence the petitioners should be held
liable for corporate income taxes? NO. case involves CO-OWNERSHIP
HELD:
Below are provisions cited in Evangelista case: (NIRC provisions)
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides: By the contract of partnership two or
more persons bind themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement
to contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties.
In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to
divide the profits among themselves. Respondent commissioner and/ or his representative
just assumed these conditions to be present on the basis of the fact that petitioners
purchased certain parcels of land and became co-owners thereof.
In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common
fund or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land
from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did
not make any additional or new purchase. The remaining three (3) parcels were sold by them in
39
1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the individual
partners, and the freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners.
There is no adequate basis to support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make them partners. They shared in
the gross profits as co- owners and paid their capital gains taxes on their net profits and
availed of the tax amnesty thereby. Under the circumstances, they cannot be considered
to have formed an unregistered partnership which is thereby liable for corporate income
tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for this unpaid obligation of the partnership
p. However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are thereby relieved of any further tax liability arising therefrom.
6. Income
a. Realization of income: CIR v Filinvest (HAUTEA)
Facts:
- FILINVEST DEVELOPMENT CORP (FDC) is a holding company that owns 80% of
outstanding shares of FILINVEST ALABANG INC. (FAI) and 67.42% of the outstanding shares
of FILINVEST LAND (FLI)
- FDC and FAI entered into a Deed of Exchange with FLI
- FDC and FAI transferred in favor of FLI parcels of land appraised at P4,306,777,000.00
- In return, FLI issued 463,094,301 shares of stock to FDC and FAI
- FLI requested a ruling from the BIR to the effect that no gain or loss should be recognized in
the aforesaid transfer of real property
- BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is
among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code
(NIRC) which provides that (n)o gain or loss shall be recognized if property is transferred to a
corporation by a person in exchange for a stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains
control of said corporation." With the BIRs reiteration of the foregoing ruling upon the 10
40
February 1997 request for clarification filed by FLI, the latter, together with FDC and FAI,
complied with all the requirements imposed in the ruling.
- In 1996 -1997, FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao
Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI)
- On November 15, 1996, FDC also entered into a Shareholders Agreement with Reco Herrera
PTE Ltd. (RHPL) for the formation of Filinvest Asia Corporation (FAC), tasked to develop and
manage FDCs 50% ownership of its PBCom Office Tower Project (the Project). FDC
subscribed to P500.7 million worth of shares in said joint venture company to RHPLs
subscription worth P433.8 million. Having paid its subscription by executing a Deed of
Assignment transferring to FAC a portion of its rights and interest in the Project worth P500.7
million,
- For the year 1996, FDC eventually reported a net loss ofP190,695,061.00 in its Annual Income
Tax Return
- On January 3, 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency
income, documentary stamp tax, interest, and compromise penalties for the years 1996-1997.
The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by
1) FDC from the Deed of Exchange it executed with FAI and FLI, (covering the taxes
purportedly realized by FAI from the Deed of Exchange it executed with FDC and FLI)
2) On the dilution resulting from the Shareholders Agreement FDC executed with
RHPL as well as
3) The arms-length interest rate and documentary stamp taxes imposable on the
advances FDC extended to its affiliates.
- FDC & FAI filed their requests for reconsideration/protest ground: assessed taxes were
bereft of factual and legal basis
- The Commissioner of Internal Revenue failed to resolve the request within the said period
- The case was thus elevated to the Court of Tax Appeals
- FDCs argument:
1. That as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should
have been assessed from the subject Deed of Exchange since FDC and FAI
collectively gained further control of FLI as a consequence of the exchange
2. CIR's lack of authority to impute theoretical interests on the cash advances FDC
extended in favor of its affiliates, the rule is settled that interests cannot be
demanded in the absence of a stipulation to the effect
3. not being promissory notes or certificates of obligations, the instructional letters as
well as the cash and journal vouchers evidencing said cash advances were not
subject to documentary stamp taxes; and, that no income tax may be imposed on the
prospective gain from the supposed appreciation of FDC's shareholdings in FAC.
- CIRs argument:
1. The cash advances FDC extended to its affiliates were interest free despite the
interest bearing loans it obtained from banking institutions, the CIR invoked
41
Section 43 of the old NIRC
which, as implemented by Revenue Regulations No. 2,
Section 179 (b) and (c), gave him "the
power to allocate, distribute or apportion
income or deductions between or among such
organizations, trades or business in
order to prevent evasion of taxes."
2. CIR justified the imposition of documentary stamp taxes on the instructional letters
as well as cash and journal vouchers for said cash advances on the strength of Section
180 of the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions
are subject to said tax
irrespective of whether or not they are evidenced by a
formal agreement or by mere office memo. The CIR also argued that FDC realized
taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders'
Agreement with RHPL.
Issues & Held
1. Can theoretical interests be imputed on the advances of FDC to its affiliates during the
years 1996 and 1997
NO. The CIR's powers of distribution, apportionment or allocation of gross income and
deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2
does not include the power to impute "theoretical interests
Section 43 of the 1993 NIRC: "(i)n any case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions between or among
such organization, trade or business, if he determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of
any such organization, trade or business."
Pursuant to Section 28 of the 1993 NIRC, after all, the term gross income is understood to
mean all income from whatever source derived, including, but not limited to the following items:
compensation for services, including fees, commissions, and similar items; gross income
derived from business; gains derived from dealings in property; interest; rents; royalties;
dividends; annuities; prizes and winnings; pensions; and partners distributive share of the gross
income of general professional partnership. While it has been held that the phrase "from
whatever source derived" indicates a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws, the term "income" has been
variously interpreted to mean "cash received or its equivalent", "the amount of money coming to
a person within a specific time" or "something distinct from principal or capital." Otherwise
stated, there must be proof of the actual or, at the very least, probable receipt or realization by
the controlled taxpayer of the item of gross income sought to be distributed, apportioned or
allocated by the CIR.
42
Our perusal of the record yielded no evidence of actual or possible showing that the advances
FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR.
Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been
expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed
beyond what the applicable statute expressly and clearly declares, the rule is likewise settled
that tax statutes must be construed strictly against the government and liberally in favor of the
taxpayer.
2. Whether the purported gain realized by FDC & FAI from the Deed of Exchange with
FLI can be subjected to income tax?
NO.
Requisites for the non-recognition of gain or loss under Section 34 (c) (2) of the 1993 NIRC
1. The transferee is a corporation;
2. The transferee exchanges its shares of stock for property/ies of the transferor;
3. The transfer is made by a person, acting alone or together with others, not exceeding four
persons; and,
4. As a result of the exchange the transferor, alone or together with others, not exceeding four,
gains control of the transferee.
The BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of
Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97.
Likewise, there can be no dispute that said transferee and transferors subsequently complied
with the requirements provided for the non-recognition of gain or loss from the exchange of
property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC, as attested to by the
BIRs reiteration of the said ruling.
Moreover, "the law would apply even when the exchangor already has control of the corporation
at the time of the exchang, as penned by Justice Acosta.
b. Actual vis--vis constructive receipt: Ericson v City of Pasig (LIM)

DOCTRINE:
Gross receipts include money or its equivalent actually or constructively received in consideration of
services rendered or articles sold, exchanged or leased, whether actual or constructive.
In contrast, gross revenue covers money or its equivalent actually or constructively received, including the
value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be
received.
43
The imposition of local business tax based on petitioner's gross revenue will inevitably result in the
constitutionally proscribed double taxation taxing of the same person twice by the same jurisdiction for
the same thing inasmuch as petitioner's revenue or income for a taxable year will definitely include its
gross receipts already reported during the previous year and for which local business tax has already
been paid.
FACTS:
Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in Pasig City, is
engaged in the design, engineering, and marketing of telecommunication facilities/system. In an
Assessment Notice dated October 25, 2000 issued by the City Treasurer of Pasig City, petitioner was
assessed a business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00 and
P4,993,682.00, respectively, based on its gross revenues as reported in its audited financial statements
for the years 1997 and 1998. Petitioner filed a Protest dated December 21, 2000, claiming that the
computation of the local business tax should be based on gross receipts and not on gross revenue.
The City of Pasig (respondent) issued another Notice of Assessment to petitioner on November 19, 2001,
this time based on business tax deficiencies for the years 2000 and 2001, amounting to P4,665,775.51
and P4,710,242.93, respectively, based on its gross revenues for the years 1999 and 2000. Again,
petitioner filed a Protest on January 21, 2002, reiterating its position that the local business tax should be
based on gross receipts and not gross revenue.
Respondent denied petitioner's protest and gave the latter 30 days within which to appeal the denial. This
prompted petitioner to file a petition for review with the Regional Trial Court (RTC) of Pasig praying for the
annulment and cancellation of petitioner's deficiency local business taxes totaling P17,262,205.66.
Respondent and its City Treasurer filed a motion to dismiss on the grounds that the court had no
jurisdiction over the subject matter and that petitioner had no legal capacity to sue. The RTC denied the
motion in an Order dated December 3, 2002 due to respondents' failure to include a notice of hearing.
Thereafter, the RTC declared respondents in default and allowed petitioner to present evidence ex- parte.
The RTC canceled and set aside the assessments made by respondent and its City Treasurer. The CA
sustained respondent's claim that the petition filed with the RTC should have been dismissed due to
petitioner's failure to show that Atty. Ramos, petitioner's Manager for Tax and Legal Affairs and the
person who signed the Verification and Certification of Non-Forum Shopping, was duly authorized by the
Board of Directors.
ISSUES:
1. W/N the CA is in error for taking cognizance of factual issues as well as legal issues. (Yes)
2. W/N local business tax on contractors should be based on gross receipts or gross revenues. (This is a
purely academic issue as the CA was in error for taking cognizance of factual errors, but the SC decided
that it must resolve this issue to guide the bench and the bar, and to prevent further misapplication of the
law)
HELD:
44
1. Yes.The CA seriously erred in ruling that the appeal involves a mixed question of law and fact
necessitating an examination and evaluation of the audited financial statements and other documents in
order to determine petitioner's tax base.the test of whether a question is one of law or of fact is not the
appellation given to such question by the party raising the same; rather, it is whether the appellate court
can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a
question of law; otherwise it is a question of fact.
There is no dispute as to the veracity of the facts involved in the present case. While there is an issue as
to the correct amount of local business tax to be paid by petitioner, its determination will not involve a look
into petitioner's audited financial statements or documents, as these are not disputed; rather, petitioner's
correct tax liability will be ascertained through an interpretation of the pertinent tax laws, i.e., whether the
local business tax, as imposed by the Pasig City Revenue Code (Ordinance No. 25-92) and the Local
Government Code of 1991, should be based on gross receipts, and not on gross revenue which
respondent relied on in computing petitioner's local business tax deficiency. This, clearly, is a question of
law, and beyond the jurisdiction of the CA.
Section 2(c), Rule 41 of the Rules of Court provides that in all cases where questions of law are raised or
involved, the appeal shall be to this Court by petition for review on certiorari under Rule 45.
Thus, as correctly pointed out by petitioner, the appeal before the CA should have been dismissed,
pursuant to Section 5(f), Rule 56 of the Rules of Court, which provides that error in the choice or mode of
appeal is a ground for dismissal of appeal.
2. The tax assessment should be based on gross receipts and not gross revenue.
Respondent assessed deficiency local business taxes on petitioner based on the latter's gross revenue
as reported in its financial statements, arguing that gross receipts is synonymous with gross
earnings/revenue, which, in turn, includes uncollected earnings. Petitioner, however, contends that only
the portion of the revenues which were actually and constructively received should be considered in
determining its tax base.
Respondent is authorized to levy business taxes under Section 143 in relation to Section 151 of the Local
Government Code. Section 143 (e), which covers contractors like herein petitioner provides that their tax
must be assessed using gross receipts (and a schedule enumerated in the same provision).
Further, the LGC also defines Gross Sales or Receipts to include the total amount of money or its
equivalent representing the contract price, compensation or service fee, including the amount charged or
materials supplied with the services and the deposits or advance payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another person
excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax
(VAT)
The law is clear. Gross receipts include money or its equivalent actually or constructively received in
consideration of services rendered or articles sold, exchanged or leased, whether actual or constructive.
45
The Court interpreted gross receipts as including those which were actually or constructively received.
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical
receipt or constructive receipt. Receipt of income may be actual or constructive. The withholding process
results in the taxpayer's constructive receipt of the income withheld.
Revenue Regulations No. 16-2005 dated September 1, 200520 defined and gave examples of
"constructive receipt", to wit:
"Constructive receipt" occurs when the money consideration or its equivalent is placed at the control of
the person who rendered the service without restrictions by the payor. The following are examples of
constructive receipts:
(1) deposit in banks which are made available to the seller of services without restrictions;
(2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller
as payment for services rendered; and
(3) transfer of the amounts retained by the payor to the account of the contractor.
There is, therefore, constructive receipt, when the consideration for the articles sold, exchanged or
leased, or the services rendered has already been placed under the control of the person who sold the
goods or rendered the services without any restriction by the payor.
In contrast, gross revenue covers money or its equivalent actually or constructively received, including the
value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be
received. This is in consonance with the International Financial Reporting Standards, which defines
revenue as the gross inflow of economic benefits (cash, receivables, and other assets) arising from the
ordinary operating activities of an enterprise (such as sales of goods, sales of services, interest, royalties,
and dividends), which is measured at the fair value of the consideration received or receivable.
As stated by the RTC: "[R]evenue from services rendered is recognized when services have been
performed and are billable." It is "recorded at the amount received or expected to be received." (Section E
[17] of the Statements of Financial Accounting Standards No. 1).
In petitioner's case, its audited financial statements reflect income or revenue which accrued to it during
the taxable period although not yet actually or constructively received or paid. This is because petitioner
uses the accrual method of accounting, where income is reportable when all the events have occurred
that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable
accuracy; the right to receive income, and not the actual receipt, determines when to include the amount
in gross income.
The imposition of local business tax based on petitioner's gross revenue will inevitably result in the
constitutionally proscribed double taxation taxing of the same person twice by the same jurisdiction for
the same thing inasmuch as petitioner's revenue or income for a taxable year will definitely include its
gross receipts already reported during the previous year and for which local business tax has already
been paid.
46
Thus, respondent committed a palpable error when it assessed petitioner's local business tax based on
its gross revenue as reported in its audited financial statements, as Section 143 of the Local Government
Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should be computed
based on gross receipts.
c. Cash method vis--vis accrual method: Filipinas Synthetic v CIR (MEJILLANO)

Facts:
Filipinas Synthetic Fiber Corporation (a domestic corporation) received on

December 27, 1979 a letter of demand from the Commissioner of Internal
Revenue, assessing it for deficiency withholding tax at source in the total amount
of P829,748.77 (inclusive of interest and compromise penalties) for the period
from the fourth quarter of 1974 to the fourth quarter of 1975.
The bulk of the deficiency withholding tax assessment, however, consisted of
interest and compromise penalties for alleged late payment of withholding taxes
due on interest loans, royalties and guarantee fees paid by the petitioner to nonresident corporations. The assessment was seasonably protested by the
petitioner.
Respondent: "For Philippine internal revenue tax purposes, the liability to
withhold and pay income tax withheld at source from certain payments due to a
foreign corporation is at the time of accrual and not at the time of actual payment
or remittance thereof", citing BIR Ruling No. 71-003 and BIR Ruling No. 24-71003-154-84 as well as the decision of the Court of Tax Appeals in "Construction
Resources of Asia, Inc., vs. Commissioner of Internal Revenue":
"The liability of the taxpayer to withhold and pay the income tax withheld
at source from certain payments due to a non-resident foreign corporation
attaches at the time of accrual payment or remittance thereof" and
"The withholding agent/corporation is obliged to remit the tax to the
government since it already and properly belongs to the government.
Since the taxpayer failed to pay the withholding tax on interest, royalties,
and guarantee fee at the time of their accrual and in the books of the
corporation the aforesaid assessment is therefore legal and proper.
Petitioner: the withholding taxes on the said interest income and royalties were
paid to the government when the subject interest and royalties were actually
remitted abroad. Stated otherwise, whatever amount has accrued in the books,
the withholding tax due thereon is ultimately paid to the government upon
remittance abroad of the amount accrued.
CTA: ordered petitioner to pay respondent the amount of P306,165.35 as
deficiency withholding tax at source plus 10% surcharge and 14% annual interest
from November 29, 1979 to July 31, 1980, plus 20% interest from August 1, 1980
until fully paid but not to exceed that which corresponds to a period of three (3)
years pursuant to P.D. No. 1705.1wphi1.nt
CA: affirmed the CTA decision.
47
Issue: Whether the liability to withhold tax at source on income payments to nonresident foreign corporations arises upon remittance of the amounts due to the foreign
creditors or upon accrual thereof. (UPON REMITTANCE OF THE AMOUNTS DUE)
Held:
Sec. 53 of the National Internal Revenue Code, in force at that time (1975),
reads:
Withholding Tax at source . . .
xxx xxx xxx
(b) Non-resident aliens and foreign corporations Every individual, corporation,
partnership, or association, in whatever capacity acting, including a lessee or
mortgagor of real or personal property, trustee acting in any trust capacity,
executor, administrator, receiver, conservator, fiduciary, employer, and every
officer or employee of the Government of the Republic of the Philippines having
the control, receipt, custody, disposal, or payment of interest, dividends, rents,
royalties, salaries, wages, premiums, annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual, periodical, or casual gains,
profits, and income, and capital gains, of any non-resident alien not engaged in
trade or business within the Philippines, shall (except in the case provided in subsection (a) (1) of this Section) deduct and withhold from the annual, periodical, or
casual gains, profits, and income, and capital gains, a tax equal to 30 per cent
thereof.
xxx xxx xxx
(2) Non-resident foreign corporations In the case of foreign corporations
subject to tax under this Title, not engaged in trade or business within the
Philippines, there shall be deducted and withheld at the source in the same
manner and upon the same items as is provided in subsection (b) (1) of this
section, as well as on remunerations for technical services or otherwise, a tax
equal to thirty-five (35) per cent thereof. This tax shall be returned and paid in
and subject to the same conditions as provided in Section 54.
On the other hand, Section 54 of the same law, provides:

Returns and payments of taxes withheld at source
(a) Quarterly return and payment of taxes withheld Taxes deducted and
withheld under Section 53 shall be covered by a return and paid to the
Commissioner of Internal Revenue or his collection agent in the province, city, or
municipality where the withholding agent has his legal residence or principal
48
place of business, or where the withholding agent is a corporation, where the
principal office is located. The taxes deducted and withheld by the withholding
agent shall be held as a special fund in trust for the Government until paid to the
collecting officers. The Commissioner of Internal Revenue may, with the approval
of the Secretary of Finance, require these withholding agents to pay or deposit
the taxes deducted and withheld at more frequent intervals when necessary to
protect the interest of the Government. The return shall be filed and the payment
made within 25 days from the close of each calendar quarter.
The aforecited provisions of law are silent as to when does the duty to withhold
the taxes arise. To determine the same, an inquiry as to the nature of accrual
method of accounting (the procedure used by the petitioner) and to the modus
vivendi of withholding tax at source comes to the fore.
The method of withholding tax at source is a procedure of collecting income
tax sanctioned by the National Internal Revenue Code. Section 53 (c) of which,
provides:
Return and Payment Every person required to deduct and withhold
any tax under this section shall make return thereof, . . . for the payment
of the tax, shall pay the amount withheld to the officer of the Government
of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and
demands of any person for the amount of any payments made in
accordance with the provision of this section.
In the aforecited provision of law, the withholding agent is explicitly made
personally liable for the income tax withheld under Section 54.
Ratio: The law sets no condition for the personal liability of the withholding agent
to attach. The reason is to compel the withholding agent to withhold the tax under
all circumstances. In effect, the responsibility for the collection of the tax as well
as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction.
Thus, the withholding agent is constituted the agent both the government and the
taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return
and the payment of the tax to the Government, he is the agent of the taxpayer.
The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas, the Commissioner of Internal Revenue and his
deputies are not made liable to law. (Phil. Guaranty Co., Inc. vs. Commissioner
of Internal Revenue)
On the other hand, "under the accrual basis method of accounting, income is
reportable when all the events have occurred that fix the taxpayer's right to
receive the income, and the amount can be determined with reasonable
49
accuracy. Thus, it is the right to receive income, and not the actual receipt, that
determines when to include the amount in gross income."
Requisites of accrual method of accounting:
1. That the right to receive the amount must be valid, unconditional and
enforceable, i.e., not contingent upon future time;
2. The amount must be reasonably susceptible of accurate estimate; and
3. There must be a reasonable expectation that the amount will be paid in
due course.
In the case at bar, the Court concurred in the finding by the CA "that there was a
definite liability, a clear and imminent certainty that at the maturity of the loan
contracts, the foreign corporation was going to earn income in an ascertained
amount, so much so that petitioner already deducted as business expense the
said amount as interests due to the foreign corporation. This is allowed under the
law, petitioner having adopted the "accrual method" of accounting in reporting its
incomes."
The Court is of the opinion, and holds that the Court of Appeals did not erred in
ruling that:
Petitioner cannot now claim that there is no duty to withhold and remit
income taxes as yet because the loan contract was not yet due and
demandable. Having "written-off" the amounts as business expense in its
books, it had taken advantage of the benefit provided in the law allowing
for deductions from gross income. Moreover, it had represented to the
BIR that the amounts so deducted were incurred as a business expense
in the form of interest and royalties paid to the foreign corporations. It is
estopped from claiming otherwise now.
WHEREFORE, the decisions of the Court of Appeals in CA GR. SP Nos. 32922
and 32022 are hereby AFFIRMED in toto. No pronouncement as to costs.
d. Instalment payment vis--vis deferred vis--vis:

Banas v CA (MORA)
DOCTRINE:
Installment Method; Initial payment under Section 43 of the 1977 National
Internal Revenue Code and Section 175 of the Revenue Regulation No. 2 means
the payment received in cash or property excluding evidences of indebtedness
due and payable in subsequent years, like promissory note or mortgages, given
of the purchaser during the taxable year of sale - it does not include amounts
received by the vendor in the year of sale from the disposition to a third person of
notes given by the vendee as part of the purchase price which are due and
payable in subsequent years.
FACTS:
50
On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment
Corporation 128,265 square meters of land located at Bayanan, Muntinlupa, for
P2,308,770.00
The Deed of Sale provided that upon the signing of the contract Ayala shall pay
P461,754.00
The balance of P1,847,016.00 was to be paid in four equal consecutive annual
installments, with twelve (12%) percent interest per annum on the outstanding
balance.
Ayala issued one promissory note covering four equal annual installments. Each
periodic payment of P461,754.00 pesos shall be payable starting on February
20, 1977, and every year thereafter, or until February 20, 1980.
The same day, petitioner discounted the promissory note with AYALA, for its face
value of P1,847,016.00, evidenced by a Deed of Assignment signed by the
petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated
February 20, 1976, drawn against Bank of the Philippine Islands with the uniform
amount of two hundred five thousand, two hundred twenty-four (P205,224.00)
pesos.
In the succeeding years, until 1979, petitioner reported a uniform income
P230,877.00 as gain from sale of capital asset. In his 1980 income tax amnesty
return, petitioner also reported the same amount of P230,877.00 as the realized
gain on disposition of capital asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax
examiners, Rodolfo Tuazon and Procopio Talon to examine the books and
records of petitioner for the year 1976. They discovered that petitioner had no
outstanding receivable from the 1976 land sale to Ayala and concluded that the
sale was cash and the entire profit should have been taxable in 1976 since the
income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy
P2,095,915.00 in petitioner's 1976 net income. They recommended deficiency
tax assessment for P2,473,673.00.
Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila
Region IV-A. After reviewing the examiners' report, Larin directed the revision of
the audit report, with instruction to consider the land as capital asset. The tax due
was only fifty (50%) percent of the total gain from sale of the property held by the
taxpayer beyond twelve months pursuant to Section 34 of the 1977 National
51
Internal Revenue Code (NIRC). The deficiency tax assessment was reduced to
P936,598.50, inclusive of surcharges and penalties for the year 1976.
On June 27, 1980, respondent Larin sent a letter to petitioner informing of the
income tax deficiency that must be settled him immediately.
Petitioner acknowledged receipt of the letter but insisted that the sale of his land
to Ayala was on installment.
Larin filed a criminal complaint for tax evasion against the petitioner. News items
appeared which mentioned petitioner's false income tax return concerning the
sale of land to Ayala.
Reacting to the complaint for tax evasion and the news reports, petitioner filed
with the RTC of Manila an action for damages against respondents Larin, Tuazon
and Talon for extortion and malicious publication of the BIR's tax audit report. He
claimed that the filing of criminal complaints against him for violation of tax laws
were improper because he had already availed of two tax amnesty decrees,
Presidential Decree Nos. 1740 and 1840.
RTC: decided in favor of the respondents and awarded Larin damages
CA: affirmed the trial court's decision
ISSUE:
Whether respondent court erred in finding that petitioner's income from the sale
of land in 1976 should be declared as a cash transaction in his tax return for the
same year (because the buyer discounted the promissory note issued to the
seller on future installment payments of the sale, on the same day of the sale)
HELD:
Petitioner should not be reported as sale on installment since a taxable
disposition resulted and petitioner was required by law to report in his returns the
income derived from discounting.
Petitioner asserts that his sale of the land to Ayala was not on cash basis but on
installment as clearly specified in the Deed of Sale which states:
That for and in consideration of the sum of P2,308,770.00 Philippine Currency, to
be paid as follows:
1. P461,754.00, upon the signing of the Deed of Sale; and,
2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive,
annual installments with interest thereon at the rate of twelve percent (12%)
52
per annum, beginning on February 20, 1976, said installments to be
evidenced by four (4) negotiable promissory notes.
Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation
No. 2 to support his claim.
Sec. 43 of the 1977 NIRC states,
Installment basis. (a) Dealers in personal property. . . .
(b) Sales of realty and casual sales of personalty In the case (1) of a casual
sale or other casual disposition of personal property (other than property of a
kind which would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year), for a price exceeding one thousand pesos, or
(2) of a sale or other disposition of real property if in either case the initial
payments do not exceed twenty-five percentum of the selling price, the income
may, under regulations prescribed by the Minister of Finance, be returned on the
basis and in the manner above prescribed in this section. As used in this section
the term "initial payment" means the payments received in cash or property other
than evidences of indebtedness of the purchaser during the taxable period in
which the sale or other disposition is made. . . . (emphasis ours)
Revenue Regulation No. 2, Section 175 provides,
Sale of real property involving deferred payments. Under section 43 deferredpayment sales of real property include (1) agreements of purchase and sale
which contemplate that a conveyance is not to be made at the outset, but only
after all or a substantial portion of the selling price has been paid, and (b) sales in
which there is an immediate transfer of title, the vendor being protected by a
mortgage or other lien as to deferred payments. Such sales either under (a) or
(b), fall into two classes when considered with respect to the terms of sale, as
follows:
(1) Sales of property on the installment plan, that is, sales in which the
payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is
made do not exceed 25 per cent of the selling price;
(2) Deferred-payment sales not on the installment plan, that is sales in which
the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is
made exceed 25 per cent of the selling price;
In the sale of mortgaged property the amount of the mortgage, whether the
property is merely taken subject to the mortgage or whether the mortgage is
assumed by the purchaser, shall be included as a part of the "selling price" but
53
the amount of the mortgage, to the extent it does not exceed the basis to the
vendor of the property sold, shall not be considered as a part of the "initial
payments" or of the "total contract price," as those terms are used in section 43
of the Code, in sections 174 and 176 of these regulations, and in this section.
The term "initial payments" does not include amounts received by the vendor in
the year of sale from the disposition to a third person of notes given by the
vendee as part of the purchase price which are due and payable in subsequent
years. Commissions and other selling expenses paid or incurred by the vendor
are not to be deducted or taken into account in determining the amount of the
"initial payments," the "total contract price," or the "selling price." The term "initial
payments" contemplates at least one other payment in addition to the initial
payment. If the entire purchase price is to be paid in a lump sum in a later year,
there being no payment during the year, the income may not be returned on the
installment basis. Income may not be returned on the installment basis where no
payment in cash or property, other than evidences of indebtedness of the
purchaser, is received during the first year, the purchaser having promised to
make two or more payments, in later years.
Petitioner asserts that Sec. 43 allows him to return as income in the taxable
years involved, the respective installments as provided by the deed of sale
between him and AYALA. Consequently, he religiously reported his yearly
income from sale of capital asset, subject to tax, as follows:
Year 1977 (50% of P461,754) ..................................... P 230, 877. 00
1978 .................................................................... 230, 877. 00
1979 .................................................................... 230, 877. 00
1980 .................................................................... 230, 877. 00
Petitioner says that his tax declarations are acceptable modes of payment under
Section 175 of the Revenue Regulations (RR) No. 2. The term "initial payment",
he argues, does not include amounts received by the vendor which are part of
the complete purchase price, still due and payable in subsequent years. Thus,
the proceeds of the promissory notes, not yet due which he discounted to Ayala
should not be included as income realized in 1976. Petitioner states that the
original agreement in the Deed of Sale should not be affected by the subsequent
discounting of the bill.
On the other hand, respondents assert that taxation is a matter of substance and
not of form. Returns are scrutinized to determine if transactions are what they are
and not declared to evade taxes. Considering the progressive nature of our
income taxation, when income is spread over several installment payments
through the years, the taxable income goes down and the tax due
correspondingly decreases. When payment is in lump sum the tax for the year
54
proportionately increases. Ultimately, a declaration that a sale is on installment
diminishes government taxes for the year of initial installment as against a
declaration of cash sale where taxes to the government is larger.
As a general rule, the whole profit accruing from a sale of property is taxable as
income in the year the sale is made. But, if not all of the sale price is received
during such year, and a statute provides that income shall be taxable in the year
in which it is "received," the profit from an installment sale is to be apportioned
between or among the years in which such installments are paid and received.
Sec. 43 and Sec. 175 says that among the entities who may use the abovementioned installment method is a seller of real property who disposes his
property on installment, provided that the initial payment does not exceed 25% of
the selling price. They also state what may be regarded as installment payment
and what constitutes initial payment. Initial payment means the payment received
in cash or property excluding evidences of indebtedness due and payable in
subsequent years, like promissory notes or mortgages, given of the purchaser
during the taxable year of sale. Initial payment does not include amounts
received by the vendor in the year of sale from the disposition to a third person of
notes given by the vendee as part of the purchase price which are due and
payable in subsequent years. Such disposition or discounting of receivable is
material only as to the computation of the initial payment. If the initial payment is
within 25% of total contract price, exclusive of the proceeds of discounted notes,
the sale qualifies as an installment sale, otherwise it is a deferred sale.
Although the proceed of a discounted promissory note is not considered part of
the initial payment, it is still taxable income for the year it was converted into
cash. The subsequent payments or liquidation of certificates of indebtedness is
reported using the installment method in computing the proportionate income to
be returned, during the respective year it was realized. Non-dealer sales of real
or personal property may be reported as income under the installment method
provided that the obligation is still outstanding at the close of that year. If the
seller disposes the entire installment obligation by discounting the bill or the
promissory note, he necessarily must report the balance of the income from the
discounting not only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a
taxable disposition results, even if the seller guarantees its payment, continues to
collect on the installment obligation, or handles repossession of merchandise in
case of default. This rule prevails in the United States. Since our income tax laws
are of American origin, interpretations by American courts an our parallel tax
laws have persuasive effect on the interpretation of these laws. Thus, by
analogy, all the more would a taxable disposition result when the discounting of
55
the promissory note is done by the seller himself. Clearly, the indebtedness of
the buyer is discharged, while the seller acquires money for the settlement of his
receivables. Logically then, the income should be reported at the time of the
actual gain. For income tax purposes, income is an actual gain or an actual
increase of wealth. Although the proceeds of a discounted promissory note is not
considered initial payment, still it must be included as taxable income on the year
it was converted to cash. When petitioner had the promissory notes covering the
succeeding installment payments of the land issued by Ayala, discounted by
Ayala itself, on the same day of the sale, he lost entitlement to report the sale as
a sale on installment since, a taxable disposition resulted and petitioner was
required by law to report in his returns the income derived from the discounting.
What petitioner did is tantamount to an attempt to circumvent the rule on
payment of income taxes gained from the sale of the land to Ayala for the year
1976.
7. Tests in determining whether income is earned for tax purposes

a. Claim of right doctrine: Orozco v Araneta (PABALAN)
b. Economic benefit test/doctrine of proprietary interest: Ericson v City of Pasig
(SUPAPO)
DOCTRINES:
1. Gross receipts include money or its equivalent actually or constructively received in
consideration of services rendered or articles sold, exchanged or leased, whether
actual or constructive.
2. Gross receipts includes those which are actually or constructively received.
3. Constructive receipt occurs when the money consideration or its equivalent is placed
at the control of the person who rendered the service without restrictions by the
payor; There is constructive receipt, when the consideration for the articles sold,
exchanged or leased, or the services rendered has already been placed under the
control of the person who sold the goods or rendered the services without any
restriction by the payor.
4. Gross revenue covers money or its equivalent actually or constructively received,
including the value of services rendered or articles sold, exchanged or leased, the
payment of which is yet to be received.
FACTS:
1. Ericsson Telecommunications, Inc., a corporation with principal office in Pasig City,
is engaged in the design, engineering, and marketing of telecommunication
facilities/system.
2. The City treasurer of Pasig assessed Ericson Telecommunications having a
business tax deficiency for the taxable years 1998 2000 based on its 1997-2000
Audited Financial Statements.
56
3. The computation was based on the gross revenue reported in the FS.
4. Ericson filed a protest with the City of Pasig claiming that the computation of the local
business tax should be based on GROSS RECEIPTS and not on GROSS
REVENUE.
5. The Protest was denied which prompted Ericson to file a petition for review with the
RTC.
6. Pasig City filed a motion to dismiss on the grounds that the court had no jurisdiction
over the subject matter and that Ericson had no legal capacity to sue which was
denied.
7. As such, the RTC canceled and set aside the assessments made by the City of
Pasig and its City Treasurer.
8. The CA sustained Pasig citys claim that the petition filed with the RTC should have
been dismissed due to Ericsons failure to show that Atty. Ramos, was authorized by
the Board of Directors to sign the Verification and Certification of Non-Forum
Shopping in behalf of the corporation.
CITY OF PASIGs CONTENTION: Gross receipts is synonymous with gross
earnings/revenue, which, in turn, includes uncollected earnings.
(NOTE: The City of Pasig is authorized to levy business taxes under Section 143 in
relation to Section 151 of the Local Government Code.)
ERICSONs CONTENTION:
Only the portion of the revenues which were actually and constructively received should
be considered in determining its tax base. The applicable provision is subsection (e),
Section 143 of the same Code covering contractors and other independent contractors,
to wit:
SEC. 143. Tax on Business. - The municipality may impose taxes on the
following businesses: x x x x
(e) On contractors and other independent contractors, in accordance with the
following schedule:
With gross receipts for
preceding calendar year in
amount of:
the
the
Amount of Tax
Per Annum
ISSUE: Whether the local business tax, as imposed by the Pasig City Revenue Code
(Ordinance No. 25-92) and the Local Government Code of 1991, should be based on
gross receipts, and not on gross revenue.
HELD: The local business tax should be computed based on GROSS RECEIPTS.
57
(Note: The Court in its ruling focused on defining 3 terms: gross receipts, constructive
receipts, and gross revenue.)
(DEFINITION OF GROSS RECEIPTS)
Sec 143 (e) of LGC specifically refers to gross receipts which is defined under Section
131 of the Local Government Code, as follows:
xxxx
(n) Gross Sales or Receipts include the total amount of money or its equivalent
representing the contract price, compensation or service fee, including the amount
charged or materials supplied with the services and the deposits or advance payments
actually or constructively received during the taxable quarter for the services performed
or to be performed for another person excluding discounts if determinable at the time of
sales, sales return, excise tax, and value-added tax (VAT);
The law is clear.
Gross receipts include money or its equivalent actually or
constructively received in consideration of services rendered or articles sold, exchanged
or leased, whether actual or constructive.
In Commissioner of Internal Revenue v. Bank of Commerce, the Court interpreted gross
receipts as including those which were actually or constructively received, viz.:
Actual receipt of interest income is not limited to physical receipt. Actual
receipt may either be physical receipt or constructive receipt. xxxx (parts
omitted) Thus, the interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the amount withheld as
final tax.
The concept of a withholding tax on income obviously and necessarily implies
that the amount of the tax withheld comes from the income earned by the
taxpayer. xxxx (parts omitted) Because the amount withheld belongs to the
taxpayer, he can transfer its ownership to the government in payment of his tax
liability. The amount withheld indubitably comes from income of the taxpayer,
and thus forms part of his gross receipts.
(Relevant to DOCTRINE OF OWNERSHIP, COMMAND, OR CONTROL)
In Commissioner of Internal Revenue v. Bank of the Philippine Islands, the Court held
that the withholding process results in the taxpayers constructive receipt of the income
withheld. By analogy, we apply to the receipt of income the rules on actual and
constructive possession provided in Articles 531 and 532 of our Civil Code.
Article 531. Possession is acquired by the material occupation of a thing or the
exercise of a right, or by the fact that it is subject to the action of our will, or by
the proper acts and legal formalities established for acquiring such right.
58
Article 532. Possession may be acquired by the same person who is to enjoy it,
by his legal representative, by his agent, or by any person without any power
whatever; but in the last case, the possession shall not be considered as
acquired until the person in whose name the act of possession was executed has
ratified the same, without prejudice to the juridical consequences of negotiorum
gestio in a proper case.
The last means of acquiring possession under Article 531 refers to juridical actsthe
acquisition of possession by sufficient titleto which the law gives the force of acts of
possession. Respondent argues that only items of income actually received should be
included in its gross receipts. It claims that since the amount had already been withheld
at source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right
of possession is through the proper acts and legal formalities established therefor. The
withholding process is one such act. There may not be actual receipt of the income
withheld; however, as provided for in Article 532, possession by any person without any
power whatsoever shall be considered as acquired when ratified by the person in whose
name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding
agent of the government, because the taxpayer ratifies the very act of possession for the
government. There is thus constructive receipt. The processes of bookkeeping and
accounting for interest on deposits and yield on deposit substitutes that are subjected to
FWT are indeedfor legal purposestantamount to delivery, receipt or remittance.
(DEFINITION OF CONSTRUCTIVE RECEIPT)
According to Revenue Regulations No. 16-2005 SEC. 4. 108-4 Constructive receipt
occurs when the money consideration or its equivalent is placed at the control of the
person who rendered the service without restrictions by the payor. The following are
examples of constructive receipts:
(1) deposit in banks which are made available to the seller of services without
restrictions;
(2) issuance by the debtor of a notice to offset any debt or obligation and
acceptance thereof by the seller as payment for services rendered; and
(3) transfer of the amounts retained by the payor to the account of the contractor.
There is, therefore, constructive receipt, when the consideration for the articles sold,
exchanged or leased, or the services rendered has already been placed under the
control of the person who sold the goods or rendered the services without any restriction
by the payor.
59
(DEFINITION OF GROSS REVENUE) Relevant to economic benefit test
In contrast, gross revenue covers money or its equivalent actually or constructively
received, including the value of services rendered or articles sold, exchanged or
leased, the payment of which is yet to be received. This is in consonance with the
International Financial Reporting Standards, which defines revenue as the gross inflow
of economic benefits (cash, receivables, and other assets) arising from the ordinary
operating activities of an enterprise (such as sales of goods, sales of services, interest,
royalties, and dividends), which is measured at the fair value of the consideration
received or receivable.
As aptly stated by the RTC: [R]evenue from services rendered is recognized when
services have been performed and are billable. It is recorded at the amount received
or expected to be received. (Section E [17] of the Statements of Financial Accounting
Standards No. 1).
NOTE: Remember the Accrual basis and Cash Basis of accounting.
ON DOUBLE TAXATION: The imposition of local business tax based on gross revenue
will inevitably result in double taxation taxing of the same person twice by the same
jurisdiction for the same thing.

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TAX DP | Atty.

Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

Mobil went to CTA assailing the 25% surcharge by the BIR.

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

Sec. 61 of the Land Transportation and Traffic Code provides:

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

3. As to graduation: British American Tobacco v Camacho (HAUTEA)

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

Issues & Held:

NIRC of 1997 as amended

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

2. Criteria in imposing Phil Income Tax

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

Real property situated in Burlingame, San Mateo, California valued at

Tangible Personal property, worth

Cash in the banks in the United States

Accounts Receivable from various persons in the United States including

Stocks in U.S. Corporations and U.S. Savings Bonds, valued at

Shares of stock in Philippine Corporations, valued at

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

3. Types of Philippine Income Tax: CREBA v Romulo (PABALAN)

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

b. Non-resident aliens: CIR v Nickel (VELASCO)

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

c. Not engaged in trade of industry: Phil Guaranty v CIR (VILLAFUERTE)

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

5. Special Class of Individual Employees

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

Reinsurance premiums, therefore, are determinable and periodical income: determinable,

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

No estate or inheritance tax is collectible on properties left in the

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

Gift tax may be collected on properties donated inter vivos by a citizen of

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

b. Actual vis--vis constructive receipt: Ericson v City of Pasig (LIM)