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PHILAM LIFE VS. SECRETARY OF FINANCE, G.R. NO.

210987,
CASE DIGEST

Philam Life sold its shares in Philam Care Health Systems to STI Investments Inc.,
the highest bidder. After the sale was completed, Philam life applied for a tax
clearance and was informed by BIR that there is a need to secure a BIR Ruling due
to a potential donors tax liability on the sold shares.

ISSUE on DONORS TAX:


W/N the sales of shares sold for less than an adequate consideration be subject to
donors tax?
PETITIONERS CONTENTION:
The transaction cannot attract donors tax liability since there was no donative
intent and, ergo, no taxable donation, citing BIR Ruling [DA-(DT-065) 715-09]
dated November 27, 2009; that the shares were sold at their actual fair market
value and at arms length; that as long as the transaction conducted is at arms
lengthsuch that a bonafide business arrangement of the dealings is done in
the ordinary course of businessa sale for less than an adequate consideration
is not subject to donors tax; and that donors tax does not apply to sale of
shares sold in an open bidding process.

CIR DENYING THE REQUEST:


Through BIR Ruling No. 015-12. As determined by the Commissioner, the selling
price of the shares thus sold was lower than their book value based on the
financial statements of Philam Care as of the end of 2008. The Commissioner
held donors tax became imposable on the price difference pursuant to Sec. 100
of the National Internal Revenue Code (NIRC):
SEC. 100. Transfer for Less Than Adequate and full Consideration. - Where
property, other than real property referred to in Section 24(D), is transferred for
less than an adequate and full consideration in money or moneys worth, then
the amount by which the fair market value of the property exceeded the value of
the consideration shall, for the purpose of the tax imposed by this Chapter, be
deemed a gift, and shall be included in computing the amount of gifts made
during the calendar year.

RULING:
The price difference is subject to donors tax.
Petitioners substantive arguments are unavailing. The absence of donative
intent, if that be the case, does not exempt the sales of stock transaction from
donors tax since Sec. 100 of the NIRC categorically states that the amount by
which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift. Thus, even if there is no actual donation, the
difference in price is considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely
sets the parameters for determining the fair market value of a sale of stocks.
Such issuance was made pursuant to the Commissioners power to interpret tax
laws and to promulgate rules and regulations for their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after
the sale, was being applied retroactively in contravention to Sec. 246 of the
NIRC.26 Instead, it merely called for the strict application of Sec. 100, which was
already in force the moment the NIRC was enacted.

ISSUE on TAX REMEDIES:


The issue that now arises is thiswhere does one seek immediate recourse
from the adverse ruling of the Secretary of Finance in its exercise of its power of
review under Sec. 4?

Petitioner essentially questions the CIRs ruling that Petitioners sale of shares
is a taxable donation under Sec. 100 of the NIRC. The validity of Sec. 100 of the
NIRC, Sec. 7 (C.2.2) and RMC 25-11 is merely questioned incidentally since it was
used by the CIR as bases for its unfavourable opinion. Clearly, the Petition
involves an issue on the taxability of the transaction rather than a direct attack on
the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus,
the instant Petition properly pertains to the CTA under Sec. 7 of RA 9282.

As a result of the seemingly conflicting pronouncements, petitioner submits that


taxpayers are now at a quandary on what mode of appeal should be taken, to
which court or agency it should be filed, and which case law should be followed.

Petitioners above submission is specious (erroneous).

CTA, through its power of certiorari, to rule on the validity of a particular


administrative rule or regulation so long as it is within its appellate jurisdiction.
Hence, it can now rule not only on the propriety of an assessment or tax
treatment of a certain transaction, but also on the validity of the revenue
regulation or revenue memorandum circular on which the said assessment is
based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA
petition not only contested the applicability of Sec. 100 of the NIRC over the sales
transaction but likewise questioned the validity of Sec. 7(c.2.2) of RR 06-08 and
RMC 25-11 does not divest the CTA of its jurisdiction over the controversy,
contrary to petitioners arguments.

BANCO DE ORO vs. REPUBLIC OF THE PHILIPPINES


BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK AND PLANTERS DEVELOPMENT BANK, RIZAL COMMERCIAL
BANKING CORPORATION (RCBC) AND RCBC CAPITAL CORPORATION (RCBC
CAPITAL), CAUCUS OF DEVELOPMENT NGO NETWORKS (CODE-NGO)
(Petitioner-Intervenor) vs REPUBLIC OF THE PHILIPPINES, THE
COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE,
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL
TREASURER AND BUREAU OF TREASURY
G.R. No. 198756, January 13, 2015
LEONEN, J.:

FACTS:

By letter dated March 23, 2011, the CODE-NGO with the assistance of its financial
advisers, RCBC, RCBC Capital, Capex finance investment corporation (CAPEX) and
Seed Capital Ventures, Inc., (SEED), requested and approval from the Department
of Finance (DOF) for the issuance by the Bureau of Treasury (BTr) of 10- year zero-
coupon Treasury Certificates (T-Notes).

The t-notes would initially be purchased by a special purpose vehicle on behalf of


CODE-NGO, repackaged and sold at a premium to investors as the PEACe Bonds.

The net proceeds from the sale of the bonds will be used to endow a permanent
fund (Hanapbuhay fund) to finance meritorious activities and projects of
accredited non-government organization (NGOs) throughout the country.

Prior to and around the time of the proposal of CODE-NGO, other proposals for the
issuance of zero-coupon bonds were also presented by banks and financial
institutions. Both the proposal of First Metro Investment Corp. and ATR-Kim Eng
Fixed Income indicate that the interest income or discount earned on the
proposed zero-coupon bonds would be subject to the prevailing withholding tax.

On May 31, 2001, the Bureau of Internal Revenue (BIR), in reply to CODE-NGOs
Letters dated May 10,15 and 25, 2001, issued BIR Ruling no. 020-2001 on the tax
treatment of the proposed PEACe bonds. It confirmed that the PEACe bonds would
not be classified as deposit substitutes and would not be subject to the
corresponding withholding tax:

To be classified as Deposit Substitute:, the borrowing of funds must be obtained


from twenty (20) or more individuals or corporate lenders at any one time. In the
light of your representation that the PEACe Bonds will be issued only to one entity,
the same shall not be considered as deposit substitute falling within the
purview of the above definition. Hence, the withholding tax on deposit substitute
will not apply

The tax treatment of the proposed PEACe bonds was subsequently reiterated in
BIR Ruling no. 035-2001(2001) and BIR Ruling No.DA-175-01 (2001). The
determination of the phrase at any one time for purposes of determining the
20 or more lenders is to be determined at the time of the original issuance.
Meanwhile, Former Treasurer Eduardo Sergio G. Edeza questioned the propriety of
issuing the bonds directly to a special purpose vehicle considering that the latter
was not a Government Securities Eligible Dealer (GSED). Former Treasurer Edeza
recommended that the issuance of the Bonds be done through the Automated
Debt Auction Processing System (ADAPS) and that CODE-NGO should get a
GSED to bid in its behalf.

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury


Bonds, the Bureau of Treasury announced that P30.0B worth of 10-year Zero-
Coupon Bonds would be auctioned. The notice stated that the Bonds shall be
issued to not more than 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue.

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-
coupon bonds. Also on the same date, the Bureau of Treasury issued another
memorandum quoting excerpts of the ruling issued by the Bureau of Internal
Revenue concerning the Bonds exemption from 20% final withholding tax and
the opinion of the Monetary Board on reserve eligibility.

During the auction, there were 45 bids from 15 GSEDs. After the auction, RCBC
which participated on behalf of CODE-NGO was declared as the winning bidder
having tendered the lowest bids. Accordingly, on October 18, 2001, the Bureau of
Treasury issued P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC
for approximately P10.17 billion, resulting in a discount of approximately P24.83
billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting agreement
with CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and
Lead Underwriter for the offering of the PEACe Bonds. RCBC Capital agreed to
underwrite on a firm basis the offering, distribution and sale of the P35 billion
Bonds at the price of P11,995,513,716.51.47 In Section 7(r) of the underwriting
agreement, CODE-NGO represented that all income derived from the Bonds,
inclusive of premium on redemption and gains on the trading of the same, are
exempt from all forms of taxation as confirmed by BIR letter rulings.
RCBC Capital sold the Government Bonds in the secondary market for an issue
price of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.

BIR Ruling:

On October 7, 2011, the BIR issued the assailed 2011 BIR Ruling, in response to
a query of the Secretary of Finance on the proper tax treatment of the discount or
interest income derived from the Government Bonds, imposing a 20% FWT on the
Government Bonds and directing the BIR to withhold said final tax at the maturity
thereof, allegedly without consultation with Petitioners as bondholders, and
without conducting any hearing.

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds including PEACe Bonds, regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference
between face value and purchase price/discounted value of the bond) is treated
as interest income of the purchaser/holder. Thus, the Php 24.3 interest income
should have been properly subject to the 20% Final Tax as provided in Section
27(D)(1) of the Tax Code of 1997.

On October 17, 2011, replying to an urgent query from the BTr, the BIR issued BIR
Ruling No. DA 378-201157 clarifying that the final withholding tax due on the
discount or interest earned on the PEACe Bonds should be imposed and
withheld not only on RCBC/CODE NGO but also on all subsequent holders of the
Bonds.

Petitioners Actions

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus with urgent application for a temporary restraining order and/or writ of
preliminary injunction before this court.
On October 18, 2011, the Supreme Court issued a temporary restraining order
(TRO) enjoining the implementation of BIR Ruling No. 370-2011 against the
PEACe Bonds, subject to the condition that the 20% final withholding tax on
interest income therefrom shall be withheld by the petitioner banks and placed in
escrow pending resolution of the petition.
Meanwhile petitioners filed their Manifestation with Urgent Ex Parte Motion to
Direct Respondents to comply with the TRO. They alleged that on the same day
that the TRO was issued, the BTr paid to petitioners and other bondholders the
amounts representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20% final
withholding tax.

ISSUES:

1. Whether the PEACe Bonds are deposit substitutes and thus subject to
20% final withholding tax under the 1997 National Internal Revenue Code.
2. Interpretation of the phrase borrowing from twenty (20) or more individual
or corporate lenders at any one time under Section 22(Y) of the 1997 National
Internal Revenue Code
3. Whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market
4. If the PEACe Bonds are considered deposit substitutes, whether the
government or the Bureau of Internal Revenue is estopped from imposing and/or
collecting the 20% final withholding tax from the face value of these Bonds
5. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?
6. Will it constitute a deprivation of property without due process of law?
7. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?

ARGUMENTS:

Petitioners; RCBC, RCBC Capital, and CODE-NGO

1.The Government cannot impair the efficacy of the Bonds by arbitrarily,


oppressively and unreasonably imposing the withholding of 20% FWT upon the
Bonds a mere eleven (11) days before maturity and after several, consistent
categorical declarations that such bonds are exempt from the 20% FWT, without
violating due process and the constitutional principle on non-impairment of
contracts.

2. Petitioners insist that the PEACe Bonds are not deposit substitutes as
defined under Section 22(Y) of the 1997 National Internal Revenue Code because
there was only one lender (RCBC) to whom the BTr issued the Bonds. They allege
that the 2004, 2005, and 2011 BIR Rulings erroneously interpreted that the
number of investors that participate in the secondary market is the
determining factor in reckoning the existence or non-existence of twenty (20) or
more individual or corporate lenders.
3. They contend that the BIR unduly expanded the definition of deposit
substitutes under Section 22 of the 1997 National Internal Revenue Code in
concluding that the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of deposit substitutes. Thus,
the 2011 BIR Ruling clearly amounted to an unauthorized act of administrative
legislation.

4. Petitioners further argue that their income from the Bonds is a trading
gain, which is exempt from income tax. They insist that they are not lenders
whose income is considered as interest income or yield subject to the 20%
FWT under Section 27 (D)(1) of the 1997 National Internal Revenue Code
because they acquired the Government Bonds in the secondary or tertiary
market.

5. Even assuming without admitting that the Government Bonds are deposit
substitutes, petitioners argue that the collection of the final tax was barred by
prescription. They point out that under Section 7 of DOF Department Order No.
141-95, the final withholding tax should have been withheld at the time of their
issuance. Also, under Section 203 of the 1997 National Internal Revenue Code,
internal revenue taxes, such as the final tax, should be assessed within three (3)
years after the last day prescribed by law for the filing of the return.

6. Petitioners contend that the retroactive application of the 2011 BIR


Ruling without prior notice to them was in violation of their property rights, their
constitutional right to due process as well as Section 246 of the 1997 National
Internal Revenue Code on non-retroactivity of rulings. Allegedly, it would also
have an adverse effect of colossal magnitude on the investors, both local and
foreign, the Philippine capital market, and most importantly, the countrys
standing in the international commercial community.

7. Respondent Commissioner gravely and seriously abused her discretion


in the exercise of her rule-making power when she issued the assailed 2011 BIR
Ruling which ruled that all treasury bonds are deposit substitutes regardless
of the number of lenders, in clear disregard of the requirement of twenty (20) or
more lenders mandated under the NIRC. They argue that by her blanket and
arbitrary classification of treasury bonds as deposit substitutes, respondent CIR
not only amended and expanded the NIRC, but effectively imposed a new tax on
privately-placed treasury bonds.

8. Petitioners-intervenors RCBC and RCBC Capital further argue that the


2011 BIR Ruling will cause substantial impairment of their vested rights under the
Bonds since the ruling imposes new conditions by subjecting the PEACe Bonds
to the twenty percent (20%) final withholding tax notwithstanding the fact that
the terms and conditions thereof as previously represented by the Government,
through respondents BTr and BIR, expressly state that it is not subject to final
withholding tax upon their maturity. They added that [t]he exemption from the
twenty percent (20%) final withholding tax [was] the primary inducement and
principal consideration for [their] participat[ion] in the auction and underwriting of
the PEACe Bonds.

9. Petitioners-intervenors RCBC and RCBC Capital argue that the


implementation of the 2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011
will have pernicious effects on the integrity of existing securities, which is contrary
to the State policies of stabilizing the financial system and of developing capital
markets.

10. The tax exemption privilege relating to the issuance of the PEACe Bonds
partakes of a contractual commitment granted by the Government in exchange
for a valid and material consideration [i.e., the issue price paid and savings in
borrowing cost derived by the Government,] thus protected by the non-
impairment clause of the 1987 Constitution

Respondents

1.Respondents argue that petitioners direct resort to this court to challenge


the 2011 BIR Ruling violates the doctrines of exhaustion of administrative
remedies and hierarchy of courts, resulting in a lack of cause of action that
justifies the dismissal of the petition. According to them, the jurisdiction to
review the rulings of the CIR, after the aggrieved party exhausted the
administrative remedies, pertains to the Court of Tax Appeals.

2. Respondents contend that the discount/interest income derived from the


PEACe Bonds is not a trading gain but interest income subject to income tax. They
explain that with the payment of the PhP35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return
of capital the capital initially invested in the Bonds being approximately
PhP10.2 Billion.

3. Maintaining that the imposition of the 20% final withholding tax on the
PEACe Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: The BTr has no power to contractually grant a tax
exemption in favor of Petitioners thus the 2001 BIR Rulings cannot be considered
a material term of the Bonds; there has been no change in the laws governing
the taxability of interest income from deposit substitutes and said laws are read
into every contract; the assailed BIR Rulings merely interpret the term
deposit substitute in accordance with the letter and spirit of the Tax Code;
the withholding of the 20% FWT does not result in a default by the Government
as the latter performed its obligations to the bondholders in full; and if there
was a breach of contract or a misrepresentation it was between RCBC/CODE-
NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds.

4. Similarly, respondents counter that the withholding of the 20% final


withholding tax on the PEACe Bonds does not amount to a deprivation of property
without due process of law. Their imposition of the 20% final withholding tax is
not arbitrary because they were only performing a duty imposed by law; the
2011 BIR Ruling is an interpretative rule which merely interprets the meaning of
deposit substitutes and upheld the earlier construction given to the term by the
2004 and 2005 BIR Rulings. Hence, respondents argue that there was no need
to observe the requirements of notice, hearing, and publication.

5. They contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenues rule-making power; that it and the 2004 and
2005 BIR Rulings did not unduly expand the definition of deposit substitutes by
creating an unwarranted exception to the requirement of having 20 or more
lenders/purchasers; and the word any in Section 22(Y) of the National Internal
Revenue Code plainly indicates that the period contemplated is the entire term of
the bond and not merely the point of origination or issuance.

6. A retroactive application of the 2011 BIR Ruling will not unjustifiably


prejudice petitioners. With or without the 2011 BIR Ruling, Petitioners would be
liable to pay a 20% final withholding tax just the same because the PEACe Bonds
in their possession are legally in the nature of deposit substitutes subject to a
20% final withholding tax under the NIRC. Section 7 of DOF Department Order
No. 141-95 also provides that income derived from Treasury bonds is subject to
the 20% final withholding tax.144 While revenue regulations as a general rule
have no retroactive effect, if the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have retroactive operation as
to affect past transactions, because a wrong construction of the law cannot give
rise to a vested right that can be invoked by a taxpayer.

7. Respondents submit that there are a number of variables and factors


affecting a capital market. Capital market itself is inherently unstable. Thus,
petitioners argument that the 20% final withholding tax. will wreak havoc on
the financial stability of the country is a mere supposition that is not a justiciable
issue.

8. On the prayer for the temporary restraining order, respondents argue that
this order could no longer be implemented because the acts sought to be
enjoined are already fait accompli. They add that to disburse the funds
withheld to the Petitioners at this time would violate Section 29, Article VI of the
Constitution prohibiting money being paid out of the Treasury except in
pursuance of an appropriation made by law. The remedy of petitioners is to
claim a tax refund under Section 204(c) of the Tax Code should their position be
upheld by the Honorable Court.

9. Respondents also argue that the implementation of the TRO would violate
Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as
amended by Section 9 of Republic Act No. 9282) which prohibits courts, except
the Court of Tax Appeals, from issuing injunctions to restrain the collection of any
national internal revenue tax imposed by the Tax Code.

SUPREME COURTs RULING:

Non-exhaustion of administrative remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings
are reviewable by the Secretary of Finance. Thus, it was held that if superior
administrative officers can grant the relief prayed for, then special civil actions are
generally not entertained. The remedy within the administrative machinery
must be resorted to first and pursued to its appropriate conclusion before the
courts judicial power can be sought.
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies. It is disregarded:
(1) When there is a violation of due process,
(2) When the issue involved is purely a legal question,
(3) When the administrative action is patently illegal amounting to lack or excess
of jurisdiction,
(4) When there is estoppel on the part of the administrative agency concerned,
(5) When there is irreparable injury,
(6) When the respondent is a department secretary whose acts as an alter ego of
the President bears the implied and assumed approval of the latter,
(7) When to require exhaustion of administrative remedies would be
unreasonable,
(8) When it would amount to a nullification of a claim,
(9) When the subject matter is a private land in land case proceedings,
(10) When the rule does not provide a plain, speedy and adequate
remedy,
(11) When there are circumstances indicating the urgency of judicial
intervention.

The exceptions under (2) and (11) are present in this case. The question involved
is purely legal, namely:
(a) The interpretation of the 20-lender rule in the definition of the terms public
and deposit substitutes under the 1997 National Internal Revenue Code; and
(b) Whether the imposition of the 20% final withholding tax on the PEACe Bonds
upon maturity violates the constitutional provisions on non-impairment of
contracts and due process.
Judicial intervention is likewise urgent with the impending maturity of the PEACe
Bonds on October 18, 2011. The rule on exhaustion of administrative remedies
also finds no application when the exhaustion will result in an exercise in futility.
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR
Ruling would be a futile exercise because it was upon the request of the Secretary
of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal
Revenue. It appears that the Secretary of Finance adopted the Commissioner of
Internal Revenues opinions as his own. This position was in fact confirmed in the
letter dated October 10, 2011 where he ordered the Bureau of Treasury to
withhold the amount corresponding to the 20% final withholding tax on the
interest or discounts allegedly due from the bondholders on the strength of the
2011 BIR Ruling.

Doctrine on hierarchy of courts

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
amended by Republic Act No. 9282,160 the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection
with the implementation of the 1997 National Internal Revenue Code on the
taxability of the interest income from zero-coupon bonds issued by the
government.

In exceptional cases, however, the court entertained direct recourse to it when


dictated by public welfare and the advancement of public policy, or demanded
by the broader interest of justice, or the orders complained of were found to be
patent nullities, or the appeal was considered as clearly an inappropriate
remedy.

Here, the nature and importance of the issues raised to the investment and
banking industry with regard to a definitive declaration of whether government
debt instruments are deposit substitutes under existing laws, and the novelty
thereof, constitute exceptional and compelling circumstances to justify resort to
this court in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also
any other financial instrument or product that may be issued and traded in the
market. Due to the changing positions of the Bureau of Internal Revenue on this
issue, there is a need for a final ruling from this court to stabilize the expectations
in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies


and hierarchy of courts had been rendered moot by this courts issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling.
The temporary restraining order effectively recognized the urgency and necessity
of direct resort to this court.

Substantive issues

A. Tax treatment of deposit substitutes

Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal
Revenue Code, a final withholding tax at the rate of 20% is imposed on interest on
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements.
This tax treatment of interest from bank deposits and yield from deposit
substitutes was first introduced in the 1977 National Internal Revenue Code
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential
Decree No. 1959, effective on October 15, 1984, formally added the definition of
deposit substitutes:

Deposit substitutes shall mean an alternative form of obtaining funds from the
public, other than deposits, through the issuance, endorsement, or acceptance of
debt instruments for the borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their own needs or
the needs of their agent or dealer. These promissory notes, repurchase
agreements, certificates of assignment or participation and similar instrument
with recourse as may be authorized by the Central Bank of the Philippines, for
banks and non-bank financial intermediaries or by the Securities and Exchange
Commission of the Philippines for commercial, industrial, finance companies and
either non-financial companies: Provided, however, that only debt instruments
issued for inter-bank call loans to cover deficiency in reserves against deposit
liabilities including those between or among banks and quasi-banks shall not be
considered as deposit substitute debt instruments.

Revenue Regulations No. 17-84, issued to implement Presidential Decree No.


1959, adopted verbatim the same definition and specifically identified the
following borrowings as deposit substitutes;
1. All interbank borrowings by or among banks and non-bank financial
institutions authorized to engage in quasi-banking functions evidenced by deposit
substitutes instruments, except interbank call loans to cover deficiency in
reserves against deposit liabilities as evidenced by interbank loan advice or
repayment transfer tickets.
2. All borrowings of the national and local government and its instrumentalities
including the Central Bank of the Philippines, evidenced by debt instruments
denoted as treasury bonds, bills, notes, certificates of indebtedness and similar
instruments.
3. All borrowings of banks, non-bank financial intermediaries, finance
companies, investment companies, trust companies, including the trust
department of banks and investment houses, evidenced by deposit substitutes
instruments.

The definition of deposit substitutes was amended under the 1997 National
Internal Revenue Code with the addition of the qualifying phrase for public
borrowing from 20 or more individual or corporate lenders at any one time. Under
Section 22(Y), deposit substitute is defined thus:
The term deposit substitutes shall mean an alternative form of obtaining
funds from the public (the term 'public' means borrowing from twenty (20) or
more individual or corporate lenders at any one time) other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the
borrowers own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include, but need not be limited to,
bankers acceptances, promissory notes, repurchase agreements, including
reverse repurchase agreements entered into by and between the Bangko Sentral
ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments.
B. Interpretation of the phrase borrowing from twenty (20) or more
individual or corporate lenders at any one time under Section 22(Y) of
the 1997 National Internal Revenue Code

Under the 1997 National Internal Revenue Code, Congress specifically defined
public to mean twenty (20) or more individual or corporate lenders at any
one time. Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject to
the 20% final withholding tax.

Meaning of at any one time

From the point of view of the financial market, the phrase at any one time, for
purposes of determining the 20 or more lenders, would mean every
transaction executed in the primary or secondary market, in connection with the
purchase or sale of securities.

For example, where the financial assets involved are government securities like
bonds, the reckoning of 20 or more lenders/investors is made at any
transaction in connection with the purchase or sale of the Government Bonds,
such as:
Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary
market;
Sale and distribution by GSEDs to various lenders/investors in the
secondary market;
Subsequent sale or trading by a bondholder to another lender/investor in
the secondary market usually through a broker or dealer; or
Sale by a financial intermediary-bondholder of its participation interests in
the bonds to individual or corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously


obtained from 20 or more lenders/investors, there is deemed to be a public
borrowing and the bonds at that point in time are deemed deposit substitutes.
Consequently, the seller is required to withhold the 20% final withholding tax on
the imputed interest income from the bonds.

For debt instruments that are


not deposit substitutes, regular
income tax applies

It must be emphasized, however, that debt instruments that do not qualify as


deposit substitutes under the 1997 National Internal Revenue Code are subject to
the regular income tax.

The phrase all income derived from whatever source in Chapter VI,
Computation of Gross Income, Section 32(A) of the 1997 National Internal
Revenue Code discloses a legislative policy to include all income not expressly
exempted as within the class of taxable income under our laws.

The definition of gross income is broad enough to include all passive incomes
subject to specific tax rates or final taxes.197 Hence, interest income from
deposit substitutes are necessarily part of taxable income. However, since
these passive incomes are already subject to different rates and taxed finally at
source, they are no longer included in the computation of gross income, which
determines taxable income.198 Stated otherwise . . . if there were no
withholding tax system in place in this country, this 20 percent portion of the
passive income of [creditors/lenders] would actually be paid to the
[creditors/lenders] and then remitted by them to the government in payment of
their income tax.199chanRoblesvirtualLawlibrary
This court, in Chamber of Real Estate and Builders Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax
system:chanroblesvirtuallawlibrary

The withholding [of tax at source] was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be
lost or substantially reduced through failure to file the corresponding returns[;]
and third, to improve the governments cash flow. This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated
means and remedies.201 (Citations omitted)

The application of the withholdings system to interest on bank deposits or yield


from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the
source.202chanRoblesvirtualLawlibrary

Hence, when there are 20 or more lenders/investors in a transaction for a specific


bond issue, the seller is required to withhold the 20% final income tax on the
imputed interest income from the bonds.

C. Whether the reckoning of the 20 lenders includes trading of the


bonds in the secondary market

Financial markets

Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial markets.

The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities, namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less);
and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).

Whether referring to money market securities or capital market securities,


transactions occur either in the primary market or in the secondary market.
Primary markets facilitate the issuance of new securities. Secondary markets
facilitate the trading of existing securities, which allows for a change in the
ownership of the securities. The transactions in primary markets exist between
issuers and investors, while secondary market transactions exist among investors.

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.

With direct financing, the borrower and lender meet each other and exchange
funds in return for financial assets (e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a)
both borrower and lender must desire to exchange the same amount of funds at
the same time; and (b) both lender and borrower must frequently incur
substantial information costs simply to find each other.

In semidirect financing, a securities broker or dealer brings surplus and deficit


units together, thereby reducing information costs. In semidirect financing, the
ultimate lender still winds up holding the borrowers securities, and therefore the
lender must be willing to accept the risk, liquidity, and maturity characteristics of
the borrowers debt security. There still must be a fundamental coincidence of
wants and needs between lenders and borrowers for semidirect financial
transactions to take place.

The limitations of both direct and semidirect finance stimulated the


development of indirect financial transactions, carried out with the help of
financial intermediaries or financial institutions, like banks, investment banks,
finance companies, insurance companies, and mutual funds. Financial
intermediaries accept funds from surplus units and channel the funds to deficit
units. Depository institutions such as banks accept deposits from surplus units
and provide credit to deficit units through loans and purchase of debt
securities. Nondepository institutions, like mutual funds, issue securities of their
own (usually in smaller and affordable denominations) to surplus units and at the
same time purchase debt securities of deficit units. By pooling the resources of
small savers, a financial intermediary can service the credit needs of large firms
simultaneously.

D. If the PEACe Bonds are considered deposit substitutes, whether


the government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds

E. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?

F. Will it constitute a deprivation of property without due process of


law?

G. Will it violate Section 245 of the 1997 National Internal Revenue


Code on non-retroactivity of rulings? (the two rulings were declared
void)

H. Prescription

The collection of tax is not barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National
Internal Revenue Code to assess and collect internal revenue taxes is extended to
10 years in cases of:
(1) fraudulent returns;
(2) false returns with intent to evade tax; and
(3) failure to file a return, to be computed from the time of discovery of the
falsity, fraud, or omission

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20
or more lenders/investors, the Bureau of Internal Revenue may still collect the
unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of
the omission.

I. Grave abuse of discretion by CIR


The Bureau of Internal Revenue rulings

The Bureau of Internal Revenues interpretation as expressed in the three 2001


BIR Rulings is not consistent with law. Its interpretation of at any one time to
mean at the point of origination alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the
2004 and 2005 BIR Rulings) that all treasury bonds regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. Being the subject of this petition, it is, thus, declared void because
it completely disregarded the 20 or more lender rule added by Congress in the
1997 National Internal Revenue Code. It also created a distinction for government
debt instruments as against those issued by private corporations when there was
none in the law.

It may be granted that the interpretation of the Commissioner of Internal Revenue


in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction of great weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has issued an erroneous interpretation, the
error must be corrected when the true construction is ascertained.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts will
not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and implement.

This court further held that [a] memorandum-circular of a bureau head could
not operate to vest a taxpayer with a shield against judicial action because there
are no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same.

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance


Secretary, this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors, but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:

In considering a legislative rule a court is free to make three inquiries:


(i) Whether the rule is within the delegated authority of the administrative
agency;
(ii) Whether it is reasonable; and
(iii) Whether it was issued pursuant to proper procedure. But the court is not
free to substitute its judgment as to the desirability or wisdom of the rule for the
legislative body, by its delegation of administrative judgment, has committed
those questions to administrative judgments and not to judicial judgments.

In the case of an interpretative rule, the inquiry is not into the validity but into the
correctness or propriety of the rule. As a matter of power a court, when
confronted with an interpretative rule, is free to
(i) Give the force of law to the rule;
(ii) Go to the opposite extreme and substitute its judgment; or
(iii) Give some intermediate degree of authoritative weight to the
interpretative rule.
J. Tax Refund

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the gains
contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of
long-term securities from ordinary income tax.

The term gain as used in Section 32(B)(7)(g) does not include interest, which
represents forbearance for the use of money. Gains from sale or exchange or
retirement of bonds or other certificate of indebtedness fall within the general
category of gains derived from dealings in property under Section 32(A)(3),
while interest from bonds or other certificate of indebtedness falls within the
category of interests under Section 32(A)(4).204 The use of the term gains
from sale in Section 32(B)(7)(g) shows the intent of Congress not to include
interest as referred under Sections 24, 25, 27, and 28 in the
exemption.205chanRoblesvirtualLawlibrary

Hence, the gains contemplated in Section 32(B)(7)(g) refers to: (1) gain
realized from the trading of the bonds before their maturity date, which is the
difference between the selling price of the bonds in the secondary market and the
price at which the bonds were purchased by the seller; and (2) gain realized by
the last holder of the bonds when the bonds are redeemed at maturity, which is
the difference between the proceeds from the retirement of the bonds and the
price at which such last holder acquired the bonds. For discounted instruments,
like the zero-coupon bonds, the trading gain shall be the excess of the selling
price over the book value or accreted value (original issue price plus accumulated
discount from the time of purchase up to the time of sale) of the instruments.

Tax treatment of income derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-
NGO at P10.2 billion; and

The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of


the PEACe Bonds to undisclosed investors at P11.996 billion.

It may seem that there was only one lender RCBC on behalf of CODE-NGO to
whom the PEACe Bonds were issued at the time of origination. However, a
reading of the underwriting agreement221 and RCBC term sheet222 reveals that
the settlement dates for the sale and distribution by RCBC Capital (as underwriter
for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase
price of approximately P11.996 would fall on the same day, October 18, 2001,
when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality,
therefore, the entire P10.2 billion borrowing received by the Bureau of Treasury in
exchange for the P35 billion worth of PEACe Bonds was sourced directly from the
undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the
PEACe Bonds all at the time of origination or issuance. At this point, however,
we do not know as to how many investors the PEACe Bonds were sold to by RCBC
Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the


PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y)
of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would
have been obliged to pay the 20% final withholding tax on the interest or discount
from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on
the corresponding interest from the PEACe Bonds would likewise be required of
any lender/investor had the latter turned around and sold said PEACe Bonds,
whether in whole or part, simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal
Revenue Code, interest income received by individuals from long-term deposits or
investments with a holding period of not less than five (5) years is exempt from
the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case, as the
withholding agents.

Reiterative motion on the temporary restraining order

Respondents withholding of the


20% final withholding tax on
October 18, 2011 was justified

Under the Rules of Court, court orders are required to be served upon the
parties affected.224 Moreover, service may be made personally or by mail.225
And, [p]ersonal service is complete upon actual delivery [of the order.]226
This courts temporary restraining order was received only on October 19, 2011,
or a day after the PEACe Bonds had matured and the 20% final withholding tax on
the interest income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the
internet, is not a recognized mode of service of pleadings, court orders, or
processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18,
2011, and they did not give the exact contents of the temporary restraining order.

[O]ne cannot be punished for violating an injunction or an order for an


injunction unless it is shown that such injunction or order was served on him
personally or that he had notice of the issuance or making of such injunction or
order.228chanRoblesvirtualLawlibrary

At any rate, [i]n case of doubt, a withholding agent may always protect himself
or herself by withholding the tax due229 and return the amount of the tax
withheld should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in
withholding the amount corresponding to the 20% final withholding tax from the
proceeds of the PEACe Bonds, as it received this courts temporary restraining
order only on October 19, 2011, or the day after this tax had been withheld.

Respondents retention of the


amounts withheld is a defiance of
the temporary restraining order

Nonetheless, respondents continued failure to release to petitioners the amount


corresponding to the 20% final withholding tax in order that it may be placed in
escrow as directed by this court constitutes a defiance of this courts temporary
restraining order.231chanRoblesvirtualLawlibrary

The temporary restraining order is not moot. The acts sought to be enjoined are
not fait accompli. For an act to be considered fait accompli, the act must have
already been fully accomplished and consummated.232 It must be irreversible,
e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235 When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait accompli
cannot prosper.

The temporary restraining order enjoins the entire implementation of the 2011
BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of
Treasury had already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it withheld to the
Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been
fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which
prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes it withheld to the Bureau of Internal
Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the
10th day of the following month after the said taxes had been withheld.240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury,241 which shall be the basis for recording the remittance of
the tax collection.242 The Bureau of Internal Revenue will then record the
amount of taxes reflected in the TRA as tax collection in the Journal of Tax
Remittance by government agencies based on its copies of the TRA.243
Respondents did not submit any withholding tax return or TRA to prove that the
20% final withholding tax was indeed remitted by the Bureau of Treasury to the
Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasurys Journal Entry Voucher No. 11-10-10395244


dated October 18, 2011 submitted to this court shows:chanroblesvirtuallawlibrary

Account Code
Debit Amount
Credit Amount
Bonds Payable-L/T, Dom-Zero
442-360
35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) 10 yr
Sinking Fund-Cash (BSF)
198-001
30,033,792,203.59
Due to BIR
412-002
4,966,207,796.41

To record redemption of 10yr Zero coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No. 378-2011, value date, October 18,
2011 per BTr letter authority and BSP Bank Statements.

The foregoing journal entry, however, does not prove that the amount of
P4,966,207,796.41, representing the 20% final withholding tax on the PEACe
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on
October 18, 2011. The entries merely show that the monies corresponding to
20% final withholding tax was set aside for remittance to the Bureau of Internal
Revenue.

We recall the November 15, 2011 resolution issued by this court directing
respondents to show cause why they failed to comply with the [TRO]; and [to]
comply with the [TRO] in order that petitioners may place the corresponding funds
in escrow pending resolution of the petition.245 The 20% final withholding tax
was effectively placed in custodia legis when this court ordered the deposit of the
amount in escrow. The Bureau of Treasury could still release the money withheld
to petitioners for the latter to place in escrow pursuant to this courts directive.
There was no legal obstacle to the release of the 20% final withholding tax to
petitioners.

Congressional appropriation is not required for the servicing of public debts in


view of the automatic appropriations clause embodied in Presidential Decree Nos.
1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary

Section 31. Automatic Appropriations. All expenditures for (a) personnel


retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated:
provided, that no obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular budgetary
allotments.

Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary

Section 1. There is hereby appropriated, out of any funds in the National Treasury
not otherwise appropriated, such amounts as may be necessary to effect
payments on foreign or domestic loans, or foreign or domestic loans whereon
creditors make a call on the direct and indirect guarantee of the Republic of the
Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to


government-owned or controlled corporations and/or government financial
institutions;

b. government-owned or controlled corporations and/or government financial


institutions the proceeds of which were relent to public or private institutions;

c. government-owned or controlled corporations and/or financial institutions and


guaranteed by the Republic of the Philippines;

d. other public or private institutions and guaranteed by government-owned or


controlled corporations and/or government financial institutions.

The amount of P35 billion that includes the monies corresponding to 20% final
withholding tax is a lawful and valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of
the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for
the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to be
the subject of another appropriation legislation:chanroblesvirtuallawlibrary
SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the
National Treasury not otherwise appropriated, or from any sinking funds provided
for the purpose by law, any interest falling due, or accruing, on any portion of the
public debt authorized by law. He shall also cause to be paid out of any such
money, or from any such sinking funds the principal amount of any obligations
which have matured, or which have been called for redemption or for which
redemption has been demanded in accordance with terms prescribed by him prior
to date of issue . . . In the case of interest-bearing obligations, he shall pay not
less than their face value; in the case of obligations issued at a discount he shall
pay the face value at maturity; or if redeemed prior to maturity, such portion of
the face value as is prescribed by the terms and conditions under which such
obligations were originally issued. There are hereby appropriated as a continuing
appropriation out of any moneys in the National Treasury not otherwise
appropriated, such sums as may be necessary from time to time to carry out the
provisions of this section. The Secretary of Finance shall transmit to Congress
during the first month of each regular session a detailed statement of all
expenditures made under this section during the calendar year immediately
preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for
Treasury bills and bonds shall be made through the National Treasurys account
with the Bangko Sentral ng Pilipinas, to wit:chanroblesvirtuallawlibrary

Section 38. Demand Deposit Account. The Treasurer of the Philippines


maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to
which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as
amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.

Regarding these legislative enactments ordaining an automatic appropriations


provision for debt servicing, this court has held:chanroblesvirtuallawlibrary

Congress . . . deliberates or acts on the budget proposals of the President, and


Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution,
which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.

Debt service is not included in the General Appropriation Act, since authorization
therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic
Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, but largely with annual levels and approval
thereof upon due deliberations as part of the whole obligation program for the
year. Upon such approval, Congress has spoken and cannot be said to have
delegated its wisdom to the Executive, on whose part lies the implementation or
execution of the legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining
order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is
reprehensible.247chanRoblesvirtualLawlibrarychanrobleslaw

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED.


BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued


retention of the amount corresponding to the 20% final withholding tax despite
this courts directive in the temporary restraining order and in the resolution
dated November 15, 2011 to deliver the amounts to the banks to be placed in
escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and


pay to the bondholders the amount corresponding to the 20% final withholding
tax that it withheld on October 18, 2011.

COMMISSIONER OF INTERNAL
REVENUE vs. AICHI FORGING
COMPANY OF ASIA, INC.- Tax
Refund

FACTS:
On September 30, 2004, Aichi Forging filed a claim for refund/credit of input VAT
attributable to its zero-rated sales for the period July 1, 2002 to September 30, 2002
with the CIR through the DOF One-Stop Shop. On the same day, Aichi Forging filed a
Petition for Review with the CTA for the same action. The BIR disputed the claim and
alleged that the same was filed beyond the two-year period given that 2004 was a leap
year and thus the claim should have been filed on September 29, 2004. The CIR also
raised issues related to the reckoning of the 2-year period and the simultaneous filing
of the administrative and judicial claims.

ISSUES:
(1) Was the Petitioners administrative claim filed out of time?
(2) Was the filing of the judicial claim premature?

HELD:
(1) NO. The right to claim the refund must be reckoned from the close of the
taxable quarter when the sales were made in this case September 30, 2004. The
Court added that the rules under Sections 204 (C) and 229 as cross-referred to Section
114 do not apply as they only cover erroneous payments or illegal collections of taxes
which is not the case for refund of unutilized input VAT. Thus, the claim was filed on
time even if 2004 was a leap year since the sanctioned method of counting is the
number of months.

(2) YES. Section 112 mandates that the taxpayer filing the refund must either wait for
the decision of the CIR or the lapse of the 120-day period provided therein before
filing its judicial claim. Failure to observe this rule is fatal to a claim. Thus, Section
112 (A) was interpreted to refer only to claims filed with the CIR and not appeals to
the CTA given that the word used is application. Finally, the Court said that
applying the 2-year period even to judicial claims would render nugatory Section 112
(D) which already provides for a specific period to appeal to the CTA --- i.e., (a)
within 30 days after a decision within the 120-day period and (b) upon expiry of the
120-day without a decision.
G.R. NO. 187485 CIR V. SAN ROQUE POWER CORPORATION

FACTS:

San Roque is a domestic corporation with a principal office at Barangay San


Roque, San Manuel, Pangasinan. It was incorporated to design, construct, erect,
assemble, own, commission and operate power-generating plants and related
facilities pursuant to and under contract with the Phil. Government.
San Roque is VAT Registered as a seller of services. It is also registered with the
Board of Investments ("BOI") on a preferred pioneer status, to engage in the
design, construction, erection, assembly, as well as to own, commission, and
operate electric power-generating plants and related activities.
In 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with NPC.
The PPA provides that [San Roque] shall be responsible for the design,
construction, installation, completion, testing and commissioning of the Power
Station and shall operate and maintain the same, subject to NPC instructions.
During the cooperation period of twenty-five (25) years commencing from the
completion date of the Power Station, NPC will take and pay for all electricity
available from the Power Station.
On the construction and development of the San Roque Multi- Purpose, [San
Roque] allegedly incurred, excess input VAT which it declared in its Quarterly VAT
Returns filed for the same year. [San Roque] duly filed with the BIR separate
claims for refund, representing unutilized input taxes as declared in its VAT returns
for taxable year 2001.
On March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year
2001 since it increased its unutilized input VAT. Consequently, [San Roque] filed
with the BIR a separate amended claims for refund.
[CIRs] inaction on the subject claims led to the filing of the Petition for Review
with the CTA-Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was submitted for decision.

CTA Divisions Ruling:

The CTA Second Division initially denied San Roques claim on the following
grounds: lack of recorded zero-rated or effectively zero-rated sales; failure to
submit documents specifically identifying the purchased goods/services related to
the claimed input VAT which were included in its Property, Plant and Equipment
account; and failure to prove that the related construction costs were capitalized
in its books of account and subjected to depreciation.

The CTA 2nd Division required San Roque to show that it complied with the
following requirements of Section 112(B) of Republic Act No. 8424 (RA 8424)17 to
be entitled to a tax refund or credit of input VAT attributable to capital goods
imported or locally purchased: (1) it is a VAT-registered entity; (2) its input taxes
claimed were paid on capital goods duly supported by VAT invoices and/or official
receipts; (3) it did not offset or apply the claimed input VAT payments on capital
goods against any output VAT liability; and (4) its claim for refund was filed within
the two-year prescriptive period both in the administrative and judicial levels.

The CTA Second Division found that San Roque complied with the first, third, and
fourth requirements, thus:

The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts
Admitted, Joint Stipulation of Facts, Records, p. 157). It was also established that
the instant claim of 560,200,823.14 is already net of the 11,509.09 output tax
declared by [San Roque] in its amended VAT return for the first quarter of 2001.
Moreover, the entire amount of 560,200,823.14 was deducted by [San Roque]
from the total available input tax reflected in its amended VAT returns for the last
two quarters of 2001 and first two quarters of 2002 (Exhibits M-6, O-6, OO-1 &
QQ-1). This means that the claimed input taxes of 560,200,823.14 did not form
part of the excess input taxes of 83,692,257.83, as of the second quarter of
2002 that was to be carried-over to the succeeding quarters. Further, [San
Roques] claim for refund/tax credit certificate of excess input VAT was filed
within the two-year prescriptive period reckoned from the dates of filing of the
corresponding quarterly VAT returns.

For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT
returns on April 25, 2001, July 25, 2001, October 23, 2001 and January 24, 2002,
respectively (Exhibits "H, J, L, and N"). These returns were all subsequently
amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the other hand, [San
Roque] originally filed its separate claims for refund on July 10, 2001, October 10,
2001, February 21, 2002, and May 9, 2002 for the first, second, third, and fourth
quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH") and subsequently
filed amended claims for all quarters on March 28, 2003 (Exhibits "II, JJ, KK, and
LL"). Moreover, the Petition for Review was filed on April 10, 2003. Counting from
the respective dates when [San Roque] originally filed its VAT returns for the first,
second, third and fourth quarters of 2001, the administrative claims for refund
(original and amended) and the Petition for Review fall within the two-year
prescriptive period.18

San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In
its 29 November 2007 Amended Decision,19 the CTA Second Division found legal
basis to partially grant San Roques claim. The CTA Second Division ordered the
Commissioner to refund or issue a tax credit in favor of San Roque in the amount
of 483,797,599.65, which represents San Roques unutilized input VAT on its
purchases of capital goods and services for the taxable year 2001. The CTA based
the adjustment in the amount on the findings of the independent certified public
accountant. The following reasons were cited for the disallowed claims: erroneous
computation; failure to ascertain whether the related purchases are in the nature
of capital goods; and the purchases pertain to capital goods. Moreover, the
reduction of claims was based on the following: the difference between San
Roques claim and that appearing on its books; the official receipts covering the
claimed input VAT on purchases of local services are not within the period of the
claim; and the amount of VAT cannot be determined from the submitted official
receipts and invoices. The CTA Second Division denied San Roques claim for
refund or tax credit of its unutilized input VAT attributable to its zero-rated or
effectively zero-rated sales because San Roque had no record of such sales for the
four quarters of 2001.

The dispositive portion of the CTA Second Divisions 29 November 2007


Amended Decision reads:

WHEREFORE, [San Roques] "Motion for New Trial and/or Reconsideration" is


hereby PARTIALLY GRANTED and this Courts Decision promulgated on March 8,
2006 in the instant case is hereby MODIFIED.

Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to


ISSUE A TAX CREDIT CERTIFICATE in favor of [San Roque] in the reduced amount
of Four Hundred Eighty Three Million Seven Hundred Ninety Seven Thousand Five
Hundred Ninety Nine Pesos and Sixty Five Centavos (483,797,599.65)
representing unutilized input VAT on purchases of capital goods and services for
the taxable year 2001.

SO ORDERED.20
The Commissioner filed a Motion for Partial Reconsideration on 20 December
2007. The CTA Second Division issued a Resolution dated 11 July 2008 which
denied the CIRs motion for lack of merit.

The Court of Tax Appeals Ruling: En Banc

The Commissioner filed a Petition for Review before the CTA EB praying for the
denial of San Roques claim for refund or tax credit in its entirety as well as for
the setting aside of the 29 November 2007 Amended Decision and the 11 July
2008 Resolution in CTA Case No. 6647.

The CTA EB dismissed the CIRs petition for review and affirmed the challenged
decision and resolution.

The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and
Revenue Memorandum Circular No. 49-03,22 as its bases for ruling that San
Roques judicial claim was not prematurely filed. The pertinent portions of the
Decision state:

More importantly, the Court En Banc has squarely and exhaustively ruled on this
issue in this wise:

It is true that Section 112(D) of the abovementioned provision applies to the


present case. However, what the petitioner failed to consider is Section 112(A) of
the same provision. The respondent is also covered by the two (2) year
prescriptive period. We have repeatedly held that the claim for refund with the BIR
and the subsequent appeal to the Court of Tax Appeals must be filed within the
two-year period.

Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue that the two-year
prescriptive period for filing a claim for input tax is reckoned from the date of the
filing of the quarterly VAT return and payment of the tax due. If the said period is
about to expire but the BIR has not yet acted on the application for refund, the
taxpayer may interpose a petition for review with this Court within the two year
period.

In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the
Collector (now Commissioner) takes time in deciding the claim, and the period of
two years is about to end, the suit or proceeding must be started in the Court of
Tax Appeals before the end of the two-year period without awaiting the decision of
the Collector.

Furthermore, in the case of Commissioner of Customs and Commissioner of


Internal Revenue vs. The Honorable Court of Tax Appeals and Planters Products,
Inc., the Supreme Court held that the taxpayer need not wait indefinitely for a
decision or ruling which may or may not be forthcoming and which he has no legal
right to expect. It is disheartening enough to a taxpayer to keep him waiting for
an indefinite period of time for a ruling or decision of the Collector (now
Commissioner) of Internal Revenue on his claim for refund. It would make matters
more exasperating for the taxpayer if we were to close the doors of the courts of
justice for such a relief until after the Collector (now Commissioner) of Internal
Revenue, would have, at his personal convenience, given his go signal.

This Court ruled in several cases that once the petition is filed, the Court has
already acquired jurisdiction over the claims and the Court is not bound to wait
indefinitely for no reason for whatever action respondent (herein petitioner) may
take. At stake are claims for refund and unlike disputed assessments, no decision
of respondent (herein petitioner) is required before one can go to this Court.
(Emphasis supplied and citations omitted)

Lastly, it is apparent from the following provisions of Revenue Memorandum


Circular No. 49-03 dated August 18, 2003, that [the CIR] knows that claims for VAT
refund or tax credit filed with the Court [of Tax Appeals] can proceed
simultaneously with the ones filed with the BIR and that taxpayers need not wait
for the lapse of the subject 120-day period, to wit:

In response to [the] request of selected taxpayers for adoption of procedures in


handling refund cases that are aligned to the statutory requirements that refund
cases should be elevated to the Court of Tax Appeals before the lapse of the
period prescribed by law, certain provisions of RMC No. 42-2003 are hereby
amended and new provisions are added thereto.

In consonance therewith, the following amendments are being introduced to RMC


No. 42-2003, to wit:

I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read
as follows:

In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax
Appeals involving a claim for refund/TCC that is pending at the administrative
agency (Bureau of Internal Revenue or OSS-DOF), the administrative agency and
the tax court may act on the case separately. While the case is pending in the tax
court and at the same time is still under process by the administrative agency,
the litigation lawyer of the BIR, upon receipt of the summons from the tax court,
shall request from the head of the investigating/processing office for the docket
containing certified true copies of all the documents pertinent to the claim. The
docket shall be presented to the court as evidence for the BIR in its defense on
the tax credit/refund case filed by the taxpayer. In the meantime, the
investigating/processing office of the administrative agency shall continue
processing the refund/TCC case until such time that a final decision has been
reached by either the CTA or the administrative agency.

If the CTA is able to release its decision ahead of the evaluation of the
administrative agency, the latter shall cease from processing the claim. On the
other hand, if the administrative agency is able to process the claim of the
taxpayer ahead of the CTA and the taxpayer is amenable to the findings thereof,
the concerned taxpayer must file a motion to withdraw the claim with the CTA.23
(Emphasis supplied)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.


MINDANAO II GEOTHERMAL PARTNERSHIP, Respondent.
G.R. No. 191498; January 15, 2014
SERENO, CJ:

FACTS:

Mindanao II is a partnership registered with the SEC. 5 It is engaged in the


business of power generation and sale of electricity to the NAPOCOR
Mindanao II filed its Quarterly VAT Returns for the second, third and fourth
quarters of taxable year 2004 on the following dates:8

Date filed
Quarter Taxable Year
Original Amended
26 July 2004 12 July 2005 2nd 2004

22 October 2004 12 July 2005 3rd 2004

25 January 2005 12 July 2005 4th 2004


On 6 October 2005, Mindanao II filed with the BIR an application for the
refund or credit of accumulated unutilized creditable input taxes.
In support of the administrative claim for refund or credit, Mindanao II
alleged that it is registered with the BIR as a value-added taxpayer 10 and
all its sales are zero-rated under the EPIRA law. 11 It further stated that for
the second, third, and fourth quarters of taxable year 2004, it paid input
VAT in the aggregate amount of P7M+ which were directly attributable to
the zero-rated sales. The input taxes had not been applied against output
tax.
Pursuant to Section 112(D) of NIRC, CIR had a period of 120 days, or until 3
February 2006, to act on the claim. The administrative claim remained
unresolved on 3 February 2006.
Under the same provision, Mindanao II could treat the inaction of the CIR
as a denial of its claim, in which case, the former would have 30 days to
file an appeal to the CTA (on 5 March 2006). Mindanao II did not file an
appeal.
Mindanao II believed that a judicial claim must be filed within the two-year
prescriptive period provided under Section 112(A) and that such time
frame was to be reckoned from the filing of its Quarterly VAT Returns for
the second, third, and fourth quarters of taxable year 2004. Mindanao II,
claiming inaction on the part of the CIR and that the two-year prescriptive
period was about to expire, filed a Petition for Review with the CTA
While the application for refund or credit of unutilized input VAT was
pending before the CTA, this Court promulgated Atlas Consolidated
Mining and Development Corporation v. CIR13 (Atlas) 2007. Atlas
held that the two-year prescriptive period for the filing of a claim
for an input VAT refund or credit is to be reckoned from the date
of filing of the corresponding quarterly VAT return and payment of
the tax.
CTA ordered the CIR to grant a refund or a tax credit certificate, but only
the unutilized input VAT incurred for the second, third and fourth quarters
of taxable year 2004.
CTA held that Mindanao II complied with the twin requisites for VAT zero-
rating under the EPIRA law: first, it is a generation company, and second, it
derived sales from power generation. It also ruled that Mindanao II
satisfied the requirements for the grant of a refund/credit under Section
112 of the Tax Code: (1) there must be zero-rated or effectively zero-rated
sales; (2) input taxes must have been incurred or paid; (3) the creditable
input tax due or paid must be attributable to zero-rated sales or effectively
zero-rated sales; (4) the input VAT payments must not have been applied
against any output liability; and (5) the claim must be filed within the two-
year prescriptive period.
CIR filed a Motion for Partial Reconsideration - prescription had already set
in, since the appeal to the CTA was filed only on 21 July 2006, which was
way beyond the last day to appeal 5 March 2006 - Section 112(D) of the
1997 Tax Code.
On 12 September 2008, this Court promulgated CIR v. Mirant
Pagbilao Corporation (Mirant).22 Mirant fixed the reckoning date of
the two-year prescriptive period for the application for refund or
credit of unutilized input VAT at the close of the taxable quarter
when the relevant sales were made, as stated in Section 112(A).
CTA denied the CIRs Motion for Partial Reconsideration which denied the
same On the question whether the application for refund was timely filed,
it held that the CTA Second Division correctly applied the Atlas ruling. 31 It
reasoned that Atlas remained to be the controlling doctrine. Mirant was a
new doctrine and, as such, the latter should not apply retroactively to
Mindanao II who had relied on the old doctrine of Atlas and had acted on
the faith thereof.32
CIR filed this Rule 45 Petition, hence this petition.

ISSUES

(1) Whether or not the application for refund or credit of unutilized input VAT was
within the two-year prescriptive period for filing (2) Whether or not the CTA is
correct - 120+30 day period for filing an appeal with the CTA

HELD:

We deny Mindanao IIs claim for refund or credit of unutilized input VAT on the
ground that its judicial claims were filed out of time, even as we hold that its
application for refund was filed on time.

I. MINDANAO II S APPLICATION FOR REFUND WAS FILED ON TIME

We find no error in the conclusion of the tax courts that the application
for refund or credit of unutilized input VAT was timely filed. The problem
lies with their bases for the conclusion as to: (1) what should be filed within the
prescriptive period; and (2) the date from which to reckon the prescriptive period.

A. The Judicial Claim Need Not Be Filed Within the Two-Year Prescriptive
Period

Both the CTA Second Division and CTA En Banc decisions held that the phrase
"apply for the issuance of a tax credit certificate or refund" in Section 112(A) is
construed to refer to both the administrative claim filed with the CIR and the
judicial claim filed with the CTA. This view, however, has no legal basis.

In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi),


we dispelled the misconception that both the administrative and judicial claims
must be filed within the two-year prescriptive period:37

There is nothing in Section 112 of the NIRC to support respondents view. x x x.


The phrase "within two (2) years x x x apply for the issuance of a tax credit
certificate or refund" refers to applications for refund/credit filed with the CIR and
not to appeals made to the CTA. This is apparent in the first paragraph of
subsection (D) of the same provision, which states that the CIR has "120 days
from the submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory
Section 112 (D) of the NIRC, which already provides for a specific period within
which a taxpayer should appeal the decision or inaction of the CIR. The second
paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1) when a
decision is issued by the CIR before the lapse of the 120-day period; and (2) when
no decision is made after the 120-day period. In both instances, the taxpayer has
30 days within which to file an appeal with the CTA. As we see it then, the 120-day
period is crucial in filing an appeal with the CTA. The message of Aichi is clear: it is
only the administrative claim that must be filed within the two-year prescriptive
period; the judicial claim need not fall within the two-year prescriptive period.
B. Reckoning Date is the Close of the Taxable Quarter When the Relevant
Sales Were Made.

Section 112(A) is the Applicable Rule

The issue posed is not novel. In the recent case of Commissioner of Internal
Revenue v. San Roque Power Corporation 44 (San Roque), this Court resolved the
threshold question of when to reckon the two-year prescriptive period for filing an
administrative claim for refund or credit of unutilized input VAT under the 1997
Tax Code in view of our pronouncements in Atlas and Mirant. In that case, we
delineated the scope and effectivity of the Atlas and Mirant doctrines as follows:

Furthermore, San Roque distinguished between Section 112 and Section 229 of
the 1997 Tax Code:

Under Section 110(B) and Section 112(A), the prescriptive period for filing a
judicial claim for "excess" input VAT is two years from the close of the taxable
quarter when the sale was made by the person legally liable to pay the output
VAT. This prescriptive period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid for more than two
years but this does not bar the filing of a judicial claim for "excess" VAT under
Section 112(A), which has a different reckoning period from Section 229.
Moreover, the person claiming the refund or credit of the input VAT is not the
person who legally paid the input VAT. Such person seeking the VAT refund or
credit does not claim that the input VAT was "excessively" collected from him, or
that he paid an input VAT that is more than what is legally due. He is not the
taxpayer who legally paid the input VAT.

Under Section 110(B), a taxpayer can apply his input VAT only against his output
VAT. The only exception is when the taxpayer is expressly "zero-rated or
effectively zero-rated" under the law, like companies generating power through
renewable sources of energy. Thus, a non zero-rated VAT-registered taxpayer who
has no output VAT because he has no sales cannot claim a tax refund or credit of
his unused input VAT under the VAT System. Even if the taxpayer has sales but his
input VAT exceeds his output VAT, he cannot seek a tax refund or credit of his
"excess" input VAT under the VAT System. He can only carry-over and apply his
"excess" input VAT against his future output VAT. If such "excess" input VAT is an
"excessively" collected tax, the taxpayer should be able to seek a refund or credit
for such "excess" input VAT whether or not he has output VAT. The VAT System
does not allow such refund or credit. x x x

Two things are clear from the above quoted San Roque disquisitions. First, when it
comes to recovery of unutilized input VAT, Section 112, and not Section 229 of the
1997 Tax Code, is the governing law. Second, prior to 8 June 2007, the applicable
rule is neither Atlas nor Mirant, but Section 112(A).

We present the rules laid down by San Roque in determining the proper reckoning
date of the two-year prescriptive period through the following timeline:

Thus, the task at hand is to determine the applicable period for this case.
In this case, Mindanao II filed its administrative claims for refund or credit for the
second, third and fourth quarters of 2004 on 6 October 2005. The case thus falls
within the first period as indicated in the above timeline. In other words, it is
covered by the rule prior to the advent of either Atlas or Mirant. Accordingly, the
proper reckoning date in this case, as provided by Section 112(A) of the 1997 Tax
Code, is the close of the taxable quarter when the relevant sales were made.

C. The Administrative Claims Were Timely Filed

We sum up our conclusions so far: (1) it is only the administrative claim that must
be filed within the two-year prescriptive period; and (2) the two-year prescriptive
period begins to run from the close of the taxable quarter when the relevant sales
were made.

Bearing these in mind, we now proceed to determine whether Mindanao II's


administrative claims for the second, third, and fourth quarters of 2004 were
timely filed.

Second Quarter

Third Quarter

Fourth Quarter

II.

MINDANAO II S JUDICIAL CLAIMS WERE FILED OUT OF TIME

Notwithstanding the timely filing of the administrative claims, we find


that the CTA En Banc erred in holding that Mindanao IIs judicial claims
were timely filed.

A. 30-Day Period Also Applies to Appeals from Inaction


Section 112(D) speaks of two periods: the period of 120 days, which serves as a
waiting period to give time for the CIR to act on the administrative claim for
refund or credit, and the period of 30 days, which refers to the period for
interposing an appeal with the CTA. It is with the 30-day period that there is an
issue in this case.

The CTA En Bancs holding x x x The judicial claim is seasonably filed so long as
it is filed after the lapse of the 120-day waiting period but before the lapse of the
two-year prescriptive period under Section 112(A).46

We do not agree. The 30-day period applies not only to instances of actual denial
by the CIR of the claim for refund or tax credit, but to cases of inaction by the CIR
as well. This is the correct interpretation of the law, as held in San Roque: 47

Section 112(C)48 also expressly grants the taxpayer a 30-day period to appeal to
the CTA the decision or inaction of the Commissioner. This law is clear, plain, and
unequivocal. Following the well-settled verba legis doctrine, this law should be
applied exactly as worded since it is clear, plain, and unequivocal. As this law
states, the taxpayer may, if he wishes, appeal the decision of the Commissioner
to the CTA within 30 days from receipt of the Commissioner's decision, or if the
Commissioner does not act on the taxpayer's claim within the 120-day period, the
taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day
period. (Emphasis supplied)

The San Roque pronouncement is clear. The taxpayer can file the appeal in one of
two ways: (1) file the judicial claim within thirty days after the Commissioner
denies the claim within the 120-day period, or (2) file the judicial claim within
thirty days from the expiration of the 120-day period if the Commissioner does not
act within the 120-day period.

B. The Judicial Claim Was Belatedly Filed

Mindanao II, however, filed a Petition for Review only on 21 July 2006, 138 days
after the lapse of the 30-day period on 5 March 2006. The judicial claim was
therefore filed late. (See timeline below.)

C. The 30-Day Period to Appeal is Mandatory and Jurisdictional

However, what is up for debate is the nature of the 30-day time requirement. The
CIR posits that it is mandatory. Mindanao II contends that the requirement of
judicial recourse within 30 days is only directory and permissive, as indicated by
the use of the word "may" in Section 112(D).49

The answer is found in San Roque. There, we declared that the 30-day period to
appeal is both mandatory and jurisdictional: x x x x

When Section 112(C) states that "the taxpayer affected may, within thirty (30)
days from receipt of the decision denying the claim or after the expiration of the
one hundred twenty-day period, appeal the decision or the unacted claim with the
Court of Tax Appeals," the law does not make the 120+30 day periods optional
just because the law uses the word " may." The word "may" simply means that the
taxpayer may or may not appeal the decision of the Commissioner within 30 days
from receipt of the decision, or within 30 days from the expiration of the 120-day
period. x x x.50

D. Exception to the mandatory and jurisdictional nature of the 120+30


day period not applicable

Nevertheless, San Roque provides an exception to the mandatory and


jurisdictional nature of the 120+30 day period BIR Ruling No. DA-489-03 dated
10 December 2003. The BIR ruling declares that the "taxpayer-claimant need not
wait for the lapse of the 120-day period before it could seek judicial relief with the
CTA by way of Petition for Review."

Thus, in San Roque, the Court applied this exception to Taganito Mining
Corporation (Taganito), one of the taxpayers in San Roque. Taganito filed its
judicial claim on 14 February 2007, after the BIR ruling took effect on 10
December 2003 and before the promulgation of Mirant. The Court stated:

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after
the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito
can claim that in filing its judicial claim prematurely without waiting for the 120-
day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito
can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its
judicial claim from the vice of prematurity. 52

We sum up the rules established by San Roque on the mandatory and


jurisdictional nature of the 30-day period to appeal through the following timeline:

Bearing in mind the foregoing rules for the timely filing of a judicial claim for
refund or credit of unutilized input VAT, we rule on the present case of Mindanao II
as follows:

As mentioned above, Mindanao II filed its judicial claim with the CTA on 21 July
2006. This was after the issuance of BIR Ruling No. DA-489-03 on 10 December
2003, but before its reversal on 5 October 2010. However, while the BIR ruling
was in effect when Mindanao II filed its judicial claim, the rule cannot be properly
invoked. The BIR ruling, as discussed earlier, contemplates premature filing. The
situation of Mindanao II is one of late filing. To repeat, its judicial claim was filed
on 21 July 2006 long after 5 March 2006, the last day of the 30-day period for
appeal. In fact, it filed its judicial claim 138 days after the lapse of the 30-day
period. (See timeline below)
E. Undersigned dissented in San Roque to the retroactive application of
the mandatory and jurisdictional nature of the 120+30 day period.

It is worthy to note that in San Roque, this ponente registered her dissent to the
retroactive application of the mandatory and jurisdictional nature of the 120+30
day period provided under Section 112(D) of the Tax Code which, in her view, is
unfair to taxpayers. It has been the view of this ponente that the mandatory
nature of 120+30 day period must be completely applied prospectively or, at the
earliest, only upon the finality of Aichi in order to create stability and consistency
in our tax laws. Nevertheless, this ponente is mindful of the fact that judicial
precedents cannot be ignored. Hence, the majority view expressed in San Roque
must be applied.

SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND


OR CREDIT OF INPUT VAT

The lessons of this case may be summed up as follows:

A. Two-Year Prescriptive Period

1. It is only the administrative claim that must be filed within the two-year
prescriptive period. (Aichi) 2. The proper reckoning date for the two-year
prescriptive period is the close of the taxable quarter when the relevant
sales were made. (San Roque)

3. The only other rule is the Atlas ruling, which applied only from 8 June
2007 to 12 September 2008. Atlas states that the two-year prescriptive
period for filing a claim for tax refund or credit of unutilized input VAT
payments should be counted from the date of filing of the VAT return and
payment of the tax. (San Roque)

B. 120+30 Day Period

1. The taxpayer can file an appeal in one of two ways: (1) file the judicial
claim within thirty days after the Commissioner denies the claim within the
120-day period, or (2) file the judicial claim within thirty days from the
expiration of the 120-day period if the Commissioner does not act within
the 120-day period.

2. The 30-day period always applies, whether there is a denial or inaction


on the part of the CIR.

3. As a general rule, the 3 0-day period to appeal is both mandatory and


jurisdictional. (Aichi and San Roque)

4. As an exception to the general rule, premature filing is allowed only if


filed between 10 December 2003 and 5 October 2010, when BIR Ruling No.
DA-489-03 was still in force. (San Roque)

5. Late filing is absolutely prohibited, even during the time when BIR Ruling
No. DA-489-03 was in force. (San Roque)

SUMMARY AND CONCLUSION

In sum, our finding is that the three administrative claims for the refund or credit
of unutilized input VAT were all timely filed, while the corresponding judicial claims
were belatedly filed.
The foregoing considered, the CT A lost jurisdiction over Mindanao Ils claims for
refund or credit.1wphi1 The CTA EB erred in granting these claims.

WHEREFORE, we GRANT the Petition. A new ruling is entered DENYING


respondent s claim for a tax refund or credit ofP6,791,845.24.

CIR vs. PRIMETOWN PROPERTY, G.R. No. 162155, Case Digest

On March 11, 1999, Primetown Property Group, Inc., through its vice chair, applied
for the refund or credit of income tax respondent paid in 1997 due to the
slowdown of the real estate industry where respondent suffered losses. With this,
it contended that it was not liable for income taxes. Nevertheless, respondent
paid its quarterly corporate income tax and remitted creditable withholding tax
from real estate sales to the BIR therefore, respondent was entitled to tax refund
or tax credit.

On May 13, 1999, revenue officer required respondent to submit additional


documents to support its claim. Respondent complied but its claim was not acted
upon. Thus, on April 14, 2000, it filed a petition for review in the Court of Tax
Appeals (CTA).

On December 15, 2000, the CTA dismissed the petition as it was filed beyond the
two-year prescriptive period for filing a judicial claim for tax refund or tax credit as
it found that respondent filed its final adjusted return on April 14, 1998. Thus, its
right to claim a refund or credit commenced on that date.

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the
Administrative Code of 1987 deal with the same subject matter the computation
of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it
be a regular year or a leap year. Under the Administrative Code of 1987, however,
a year is composed of 12 calendar months. Needless to state, under the
Administrative Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of computing


legal periods under the Civil Code and the Administrative Code of 1987. For this
reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of
1987, being the more recent law, governs the computation of legal periods.

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on
the last day of the 24th calendar month from the day respondent filed its final
adjusted return. Hence, it was filed within the reglementary period.
COMMISSIONER OF INTERNAL
REVENUE vs. METRO STAR
SUPERAMA, INC.- Pre-Assessment
Notice
FACT:
Metro Star Superama was audited for taxable year 1999 and received a Preliminary
15-day Letter on November 15, 2001. On April 11, 2002, it received a Formal Letter
of Demand dated April 3, 2002. Denying that it received a Pre-Assessment Notice and
thus not accorded due process, Metro Star Superama filed a Petition with the CTA.

ISSUE:
Was the Petitioner accorded the required due process?

HELD:
NO. Since the Petitioner denied receipt of the Pre-Assessment Notice, the burden of
proving the same shifts to the BIR. To raise the presumption of receipt, it must be
shown that (a) the letter was properly addressed with postage prepaid and (b) that it
was mailed. If receipt is denied, the BIR must then show actual receipt through
presentation of the registry receipt or, if the same cannot be located, at least a
certification from the Bureau of Posts.

The Court likewise added that the issuance of a Pre-Assessment Notice is a


mandatory requirement save only on specified instances. The old rule laid down in
CIR vs. Menguito that only the FAN is mandatory no longer applies since the same
was ruled upon based on the old provision.
LASCONA LAND CO. INC. V. COMMISSIONER OF INTERNAL REVENUE, G.R.
NO. 171251, 05 MARCH 2012

FACTS

The Commissioner of Internal Revenue (CIR) issued an assessment against


Lascona Land Co., Inc. (Lascona) informing the latter of its alleged deficiency
income tax for the year 1993 in the amount of P753,266.56. Consequently, on
April 20, 1998, Lascona filed a letter protest, but was denied by Norberto R.
Odulio, Officer-in-Charge (OIC), Regional Director, Bureau of Internal Revenue,
Revenue Region No. 8, Makati City. On April 12, 1999, Lascona appealed the
decision before the CTA. Lascona alleged that the Regional Director erred in ruling
that the failure to appeal to the CTA within thirty (30) days from the lapse of the
180-day period rendered the assessment final and executory. The CIR, however,
maintained that Lasconas failure to timely file an appeal with the CTA after the
lapse of the 180-day reglementary period provided under Section 228 of the
National Internal Revenue Code (NIRC) resulted to the finality of the assessment.
ISSUE

Whether the subject assessment has become final, executory and demandable
due to the failure of petitioner to file an appeal before the CTA within thirty (30)
days from the lapse of the One Hundred Eighty (180)-day period pursuant to
Section 228 of the NIRC.

HELD

NO.

[T]he Court has held that in case the Commissioner failed to act on the disputed
assessment within the 180-day period from date of submission of documents, a
taxpayer can either: (1) file a petition for review with the Court of Tax Appeals
within 30 days after the expiration of the 180-day period; or (2) await the final
decision of the Commissioner on the disputed assessments and appeal such final
decision to the Court of Tax Appeals within 30 days after receipt of a copy of such
decision. These options are mutually exclusive and resort to one bars the
application of the other.
Therefore, as in Section 228, when the law provided for the remedy to appeal the
inaction of the CIR, it did not intend to limit it to a single remedy of filing of an
appeal after the lapse of the 180-day prescribed period. Precisely, when a
taxpayer protested an assessment, he naturally expects the CIR to decide either
positively or negatively. A taxpayer cannot be prejudiced if he chooses to wait for
the final decision of the CIR on the protested assessment. More so, because the
law and jurisprudence have always contemplated a scenario where the CIR will
decide on the protested assessment.

ALLIED BANKING CORPORATION VS


COMMISSIONER OF INTERNAL
REVENUE
In April 2004, the Bureau of Internal Revenue (BIR) issued a preliminary assessment
notice (PAN) to Allied Banking Corporation (ABC) demanding payment of P50
million in taxes. ABC then filed a protest in May 2004. In July 2004, the BIR issued a
formal assessment notice (FAN). The FAN included a formal demand as well as this
phrase:
xxx
This is our final decision based on investigation. If you disagree, you may appeal this
final decision within thirty (30) days from receipt hereof, otherwise said deficiency tax
assessment shall become final, executory and demandable.
ABC then appealed the FAN with the Court of Tax Appeals (CTA). The
Commissioner of Internal Revenue (CIR) then filed a motion to dismiss on the ground
that ABC did not exhaust all administrative remedies for failing to file a protest
against the FAN.
ISSUE:
Whether or not the CIR is correct.
HELD:
No. It is true that a FAN is not appealable with the CTA. However, this case holds an
exception. The wordings of the FAN issued by the CIR made it appear that the FAN is
actually the CIRs final decision. It even advised ABC to file an appeal instead of
filing a protest. ABC cannot therefore be faulted for filing an appeal with the CTA
instead of filing a protest with the CIR. The CIR as well as his duly authorized
representative must indicate clearly and unequivocally to the taxpayer whether an
action constitutes a final determination on a disputed assessment. Words must be
carefully chosen in order to avoid any confusion that could adversely affect the rights
and interest of the taxpayer.
PHILIPPINE JOURNALISTS, INC. V. COMMISSIONER OF INTERNAL
REVENUE, G.R. NO. 162852, 16 DECEMBER 2004
24NOV

FACTS

The Revenue District Office of the Bureau of Internal Revenue (BIR) issued Letter
of Authority for Revenue Officer Federico de Vera, Jr. and Group Supervisor
Vivencio Gapasin to examine petitioners books of account and other accounting
records for internal revenue taxes. Revenue District Officer Jaime Concepcion
invited petitioner to send a representative to an informal conference for an
opportunity to object and present documentary evidence relative to the proposed
assessment. Petitioners Comptroller, LorenzaTolentino, executed a Waiver of the
Statute of Limitation Under the National Internal Revenue Code (NIRC). Records
show that, it did not bear the date of acceptance, that petitioner was not
furnished a copy of the waiver, and the waiver was signed only by the Revenue
District Officer. The tax liability exceeds One Million Pesos (P1,000,000.00).

ISSUE

Whether the waiver is in accordance with RMO No. 20-90 to validly extend the
three-year prescriptive period under the NIRC.

HELD

NO.

The waiver document is incomplete and defective and thus the three-year
prescriptive period was not tolled or extended and continued to run.
Consequently, the Assessment/Demand was invalid because it was issued beyond
the three (3) year period. In the same manner, Warrant of Distraint and/or Levy
which petitioner received thereafter is also null and void for having been issued
pursuant to an invalid assessment.

The NIRC, under Sections 203 and 222, provides for a statute of limitations on the
assessment and collection of internal revenue taxes in order to safeguard the
interest of the taxpayer against unreasonable investigation. Unreasonable
investigation contemplates cases where the period for assessment extends
indefinitely because this deprives the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time.

A waiver of the statute of limitations under the NIRC, to a certain extent, is a


derogation of the taxpayers right to security against prolonged and unscrupulous
investigations and must therefore be carefully and strictly construed. xxx Thus,
the law on prescription, being a remedial measure, should be liberally construed
in order to afford such protection.

The waiver is also defective from the government side because it was signed only
by a revenue district officer, not the Commissioner, as mandated by the NIRC and
RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but
is a bilateral agreement between two parties to extend the period to a date
certain. The conformity of the BIR must be made by either the Commissioner or
the Revenue District Officer. This case involves taxes amounting to more than One
Million Pesos (P1,000,000.00) and executed almost seven months before the
expiration of the three-year prescription period. For this, RMO No. 20-90 requires
the Commissioner of Internal Revenue to sign for the BIR.

COMMISSIONER OF INTERNAL
REVENUE vs. KUDOS METAL
CORPORATION- Waiver of the
Statute of Limitations
FACTS:
CIR assessed Kudos Metal Corporation for taxable year 1998. A Waiver of the Statute
of Limitations was executed on December 2001. The CTA issued a Resolution
canceling the assessment notices issued against Petitioner for having been issued
beyond the prescriptive period as the waiver purportedly failed to (a) have the valid
officer execute the same (i.e., only the Assistant Commissioner signed it and not the
CIR); (b) the date of acceptance was not indicated; (c) the fact of receipt by the
taxpayer was not indicated in the original copy.

ISSUE:
Has the CIRs right to assess prescribed?

HELD:
YES. The requirements for a valid waiver as laid down in RMO 20-90 and RDAO
No. 5-01 are mandatory to give effect to Section 222 of the Tax Code. Specifically,
the flaws in the waiver executed by Kudos Metal were as follows: (a) there was no
notarized written authority in favor of the signatory for the company; (b) there is no
stated date of acceptance by the Commissioner or his representative; and (c) the fact
of the receipt of the copy was not indicated in the original waivers.

Neither can it be said that by merely executing the waiver the taxpayer is already
estopped from disputing an action by the CIR beyond the statutory 3-year period since
the exception under the Suyoc case (i.e., when the delays were due to taxpayers acts)
does not apply.

Note: Requisites of a valid waiver: (i) acceptance date; (ii) expiry date; (iii) signed by
authorized officer of taxpayer and BIR; (iv) notarized; (v) fact of receipt must be
indicated in the copies

COMMISSIONER OF INTERNAL
REVENUE VS PHILIPPINE GLOBAL
COMMUNICATION, INC.
FACTS:
In April 1991, Philippine Global Communication, Inc. (PGCI) filed its annual income
tax return (ITR) for the taxable year 1990. A tax audit was subsequently conducted by
the Bureau of Internal Revenue (BIR) and eventually a final assessment notice (FAN)
was timely issued in April 1994. The FAN demanded PGCI to pay P118 million in
deficiency taxes inclusive of surcharge and interest. PGCI was able to file a protest
within the reglementary period. PGCI however refused to produce additional
evidence. In October 2002, eight years after the FAN was issued, the Commissioner
of Internal Revenue (CIR) issued a final decision denying the protest filed by PGCI.
PGCI then filed a petition for review with the Court of Tax Appeals (CTA). The CIR
filed its answer in January 2003. The CTA ruled that the CIR can no longer collect
because it is already barred by prescription. The CIR argued that the prescriptive
period has been extended because PGCI asked for a reinvestigation.
ISSUE: Whether or not the CIR is barred by prescription.
HELD: Yes. Under the law, the CIR has 3 years from the issuance of the FAN to
make its collection. The FAN was issued in April 1994 and so the CIR has until April
1997 to make a collection. Within that period, the CIR never issued a warrant of
distraint/levy. Its earliest collection effort was only when it filed an answer to the
appeal filed by PGCI. CIRs answer was filed in January 2003 which was way beyond
the three year prescriptive period to collect the assessed taxes.
The CIR cannot invoke that the protest filed by PGCI is in effect a request for
reinvestigation. Under the law, a request for reinvestigation shall toll the running of
the prescriptive period to collect. However in the case at bar, the protest filed by PGCI
is not a request for reinvestigation but rather it was a request for reconsideration. And
in such case, it did not suspend the prescriptive period. The protest is a request for
reconsideration because PGCI did not adduce additional evidence or documents.
PGCI merely sought the CIR to review the existing records on file.

SILKAIR (SINGAPORE) PTE, LTD.


v. COMMISSIONER OF INTERNAL
REVENUE. G.R. No. 173594.
February 6, 2008
FACTS:

Petitioner is a corporation organized under the laws of Singapore which has a


Philippine representative office, is an online international air carrier.

Silkair filed with the Bureau of Internal Revenue (BIR) for the refund of excise
taxes for their purchase of jet fuel.

The CIR, in their reply, said that petitioner failed to prove that the sale of the fuel
was directly made from a domestic oil company to them. The excise tax on
petroleum products is the direct liability of the manufacturer/producer, and when
added to the cost of the goods sold to the buyer, it is no longer a tax but part of
the price which the buyer has to pay to obtain the article.

The CTA denying Silkairs petition stated that as the excise tax was imposed
manufacturer of petroleum products, any claim for refund should be filed by the
latter; and where the burden of tax is shifted to the purchaser, the amount passed
on to it is no longer a tax but becomes an added cost of the goods purchased.
ISSUE:

Whether Silkair PTE. Ltd. can claim for tax credit.

RULING:

No.

The proper party to question, or seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another. Thus, Petron Corporation, not
Silkair, is the statutory taxpayer which is entitled to claim a refund based on
Section 135 of the NIRC of 1997.

Even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the price
which Silkair had to pay as a purchaser.

ISSUE:

he core issue presented is the legal personality of the petitioner to file an


administrative claim for refund of excise taxes alleged to have been erroneously
paid to its supplier of aviation fuel here in the Philippines

RULING:

Excise taxes, which apply to articles manufactured or produced in the Philippines


for domestic sale or consumption or for any other disposition and to things
imported into the Philippines, is basically an indirect tax. While the tax is directly
levied upon the manufacturer or importer upon removal of the taxable goods from
its place of production or from the customs custody, the tax, in reality, is actually
passed on to the end consumer as part of the transfer value or selling price of the
goods, sold, bartered or exchanged.

Except for its bare allegation of being "placed in a very complicated situation"
because Petron "for fear of being assessed by Respondent, will not allow the
withdrawal and delivery of the petroleum products without Petitioner's pre-
payment of the excise taxes," petitioner has not demonstrated that it dutifully
complied with its contractual undertaking to timely submit to Petron a valid
certificate of exemption so that Petron may subsequently file a claim for excise
tax credit/refund pursuant to Revenue Regulations No. 3-2008 (RR 3-2208). It was
indeed premature for petitioner to assert that the denial of its claim for tax refund
nullifies the tax exemption granted to it under Section 135(b) of the 1997 Tax
Code and Article 4 of the Air Transport Agreement.

PHILIPPINE AIRLINES, INC. v.


COMMISSIONER OF INTERNAL
REVENUE, G.R. No. 198759, July
1, 2013
Taxation; Proper party to claim refund. [T]he propriety of a tax refund claim is
hinged on the kind of exemption which forms its basis. If the law confers an
exemption from both direct or indirect taxes, a claimant is entitled to a tax refund
even if it only bears the economic burden of the applicable tax. On the other hand, if
the exemption conferred only applies to direct taxes, then the statutory taxpayer is
regarded as the proper party to file the refund claim.

In this case, PALs franchise grants it an exemption from both direct and indirect taxes
on its purchase of petroleum products.

Withdrawal of PALs tax exemption privileges refers only to excise taxes imposed on
locally manufactured petroleum products. [T]he Court observes that the phrase
purchase of domestic petroleum products for use in its domestic operations which
characterizes the tax privilege LOI 1483 withdrew refers only to PALs tax
exemptions on passed on excise tax costs due from the seller, manufacturer/producer
of locally manufactured/ produced goods for privileges concerning imported goods,
and does not, in any way, pertain to any of PALs tax privileges concerning imported
goods.
PAL v. CIR (GR 198759) JULY 1, 2013

CASE:

Caltex import jet fuel and sells the same to PAL. Caltex charged PAL for the gas as
well as the corresponding excise tax. PAL attempted to get a tax refund for the
excise tax from the BIR but the CIR refused to do so saying that the only person
who is qualified to request for a tax refund is the statutory tax payer or the one
who is legally required by law to pay the taxes directly to the government. Since
Caltex is the recognised statutory taxpayer and only shifted the economic burden
of tax to PAL, it is only Caltex who may ask for a tax refund. The CTA sided with
the BIR.
The SC held that while it is true that only the statutory taxpayer can ask for a tax
refund, the rule does not apply when the law clearly grants the party to which the
economic burden of the tax is shifted an exemption from both direct and indirect
taxes. In which case, the latter must be allowed to claim a tax refund even if it is
not the statutory taxpayer. Since PALs charter allows it to be exempted from both
direct and indirect taxes, PAL has the legal personality to claim the refund.

DOCTRINE:
Even if the purchaser effectively pays the value of the tax, the owner or importer
is still regarded as the statutory taxpayers under the law. The statutory taxpayer
who is entitled to claim a tax refund based thereon and not the party who merely
bears its economic burden. HOWEVER, the rule does not apply to instances where
the law clearly grants the party to which the economic burden of the tax is shifted
an exemption from both direct and indirect taxes. In which case, the latter must
be allowed to claim a tax refund even if it is not the statutory taxpayer.

FACTS:

July 24 28, 2004 Caltex sold imported Jet A-1 fuel to PAL for the latters
domestic operations.
July 26 29, 2004 Caltex electronically filed with the BIR its Excise Tax Returns
for Petroleum Products.
August 3, 2004 PAL received from Caltex an Aviation Billing Invoice for the
purchased aviation fuel in the amount of US$313,949, reflecting the amount of
US$52,669 as the related excise taxes on the transaction. This was confirmed by
Caltex in a Certification stating:
It paid excise taxes on the imported petroleum products
It passed on the excise tax payment was passed to PAL
It did not file with BIR a claim for the refund of the said excise tax.
October 29, 2004 PAL sent a letter to the CIR, seeking to refund the excise
taxes passed on by Caltex. It claimed a refund based on its operating franchise,
PD 1590, which conferred to it certain tax exemption privileges on its purchase
and/or importation of aviation gas, fuel and oil, including those which are passed
on to it by the seller and/or importer thereof. Further, PAL asserted that it had the
legal personality to file the aforesaid tax refund claim.
The CTA Second Division denied PALs claim stating that only the statutory
taxpayer (Caltex) may seek a refund of the excise tax paid EVEN IF the tax burden
was shifted to PAL, who still is not deemed the statutory taxpayer. The CTA En
Banc affirmed the Second Divisions Ruling.

HELD:

Whether or not PAL has the legal personality to file a claim for refund of
the passed on excise taxes YES. PAL is endowed with the legal standing to
file the subject tax refund claim.
Section 129 of the NIRC imposes excise taxes on 2 things: a) goods
manufactured or produced in the Philippines for domestic sales or consumption or
for any other disposition; and b) things imported. Section 131 states that on
things imported, the owner or importer is obligated to file the return and pay the
excise taxes due thereon UNLESS the articles are exempt from excise taxes and
the person found to be in possession of the same is other than those legally
entitled to such tax exemption. While the owner or importer is required to pay the
excise taxes directly to the government, they can shift the economic burden to
someone else (indirect tax).

Even if the purchaser effectively pays the value of the tax, the owner or importer
is still regarded as the statutory taxpayers under the law. Section 204(c) states
that it is the statutory taxpayer which has the legal personality to file a claim for
refund. Under Section 135, it is the statutory taxpayer who is entitled to claim a
tax refund based thereon and not the party who merely bears its economic
burden.

HOWEVER, the abovementioned rule does not apply to instances where the law
clearly grants the party to which the economic burden of the tax is shifted an
exemption from both direct and indirect taxes. In which case, the latter must be
allowed to claim a tax refund even if it is not the statutory taxpayer.

MACEDA v. MACARAIG, JR.: Because the NPC has been exempted from both direct
and indirect taxation, the NPC must be held exempted from absorbing the
economic burden of indirect taxation. NPC is entitled to be reimbursed by the BIR
for that part of the buying price of NPC which verifiably represents the tax already
paid by the oil company-vendor to the BIR. An exemption from "all taxes" excludes
indirect taxes, unless the exempting statute, like NPCs charter, is so couched as
to include indirect tax from the exemption.

If the law confers an exemption from both direct or indirect taxes, a claimant is
entitled to a tax refund even if it only bears the economic burden of the applicable
tax.

PALs franchise grants it an exemption from both direct and indirect taxes
on its purchase of petroleum products. Section 13 states The tax paid by
the grantee under either of the above alternatives shall be in lieu of all
other taxes including but not limited to: xxx All taxes.. directly due from
or imposable upon the purchaser or the seller of said petroleum products
but are billed or passed on the grantee either as part of the price or cost
thereof or by mutual agreement or other arrangement.
PALs payment of either the basic corporate income tax or franchise tax,
whichever is lower, shall be in lieu of all other taxes, except only real
property tax.

(MINOR ISSUE) Whether or not the sale of imported aviation fuel by
Caltex to PAL is covered by LOI 1483 which withdrew the tax exemption
privileges of PAL on its purchases of domestic petroleum products for
use in its domestic operations NO.

LOI 1483 withdrew PALs tax exemption privilege on its purchase of domestic
petroleum products for use in its domestic operations. The tax privilege LOI 1483
withdrew refers only to PALs tax exemptions on passed on excise tax costs due
from the seller, manufacturer/producer of locally manufactured/ produced goods
for domestic sale and does not, in any way, pertain to any of PALs tax privileges
concerning imported goods.

CIR VS PROCTER AND GAMBLE


PHILIPPINE MANUFACTURING
CORPORATION (204 SCRA 377)
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit for
taxes deemed paid in the Philippines, applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. However, such tax credit
for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount
equivalent to 20 percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and
sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid
a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It
subsequently filed a claim with the Commissioner of Internal Revenue for a refund or
tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue
Code, as amended by Presidential Decree No. 369, the applicable rate of withholding
tax on the dividends remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF he country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit for
taxes deemed paid in the Philippines, applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. However, such tax credit
for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount
equivalent to 20 percentage points which represents the difference between the regular
35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA shall
allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable
against the US taxes of P&G USA, and such tax credit must reach at least 20
percentage points. Requirements were met.

NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic
corporation (owning 10% of remitting foreign corporation) shall be deemed to have
paid a proportionate extent of taxes paid by such foreign corporation upon its
remittance of dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)


P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00
- 35.00
65. 00 -- available for remittance

P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax

P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable


- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA

Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned

P35 is the income tax paid.


P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income
tax deemed paid by the parent company. Since P29.75 is much higher than P13, Sec
902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not
understand why these were divided and multiplied. Point is, requirements were met)

Reason behind the law:


Since the US Congress desires to avoid or reduce double taxation of the same income
stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld,
and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G
Philippines but deemed paid by P&G USA.

Moreover, under the Philippines-United States Convention With Respect to Taxes on


Income, the Philippines, by treaty commitment, reduced the regular rate of dividend
tax to a maximum of 20% of he gross amount of dividends paid to US parent
corporations, and established a treaty obligation on the part of the United States that it
shall allow to a US parent corporation receiving dividends from its Philippine
subsidiary a [tax] credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine [subsidiary].

Note:
The NIRC does not require that the US tax law deem the parent corporation to have
paid the 20 percentage points of dividend tax waived by the Philippines. It only
requires that the US shall allow P&G-USA a deemed paid tax credit in an amount
equivalent to the 20 percentage points waived by the Philippines. Section 24(b)(1)
does not create a tax exemption nor does it provide a tax credit; it is a provision which
specifies when a particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity
investment in the Philippines by reducing the tax cost of earning profits here and
thereby increasing the net dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the Philippine dividend tax rate
unless its home country gives it some relief from double taxation by allowing the
investor additional tax credits which would be applicable against the tax payable to
such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or
domiciliary country to give the investor corporation a deemed paid tax credit at
least equal in amount to the 20 percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect would thereby be felt by
the investor.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER


VS
WANDER PHILIPPINES, INC., AND THE COURT OF TAX APPEALS,
RESPONDENTS

FACTS:

Private respondents Wander Philippines, Inc. (wander) is a domestic corporation


organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A.
Ltd. (Glaro), a Swiss corporation not engaged in trade for business in the
Philippines.

Wander filed it's witholding tax return for 1975 and 1976 and remitted to its
parent company Glaro dividends from which 35% withholding tax was withheld
and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim
for reimbursement, contending that it is liable only to 15% withholding tax in
accordance with sec. 24 (b) (1) of the Tax code, as amended by PD nos. 369 and
778, and not on the basis of 35% which was withheld ad paid to and collected by
the government. petitioner failed to act on the said claim for refund, hence
Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a
refund and/or tax credit. CIR's petition for reconsideration was denied hence the
instant petition to the Supreme Court.

ISSUE:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax
on dividends declared and to remitted to its parent corporation.

HELD:

Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law
involved in this case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended
is hreby further amended to read as follows:

(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign


corporation not engaged in trade or business in the Philippines, including a foreign
life insurance company not engaged in life insurance business in the Philippines,
shall pay a tax equal to 35% of the gross income received during its taxable year
from all sources within the Philippines, as interest (except interest on a foreign
loans which shall be subject to 15% tax), dividends, premiums, annuities,
compensation, remuneration for technical services or otherwise emolument, or
other fixed determinable annual, periodical ot casual gains, profits and income,
and capital gains: xxx Provided, still further that on dividends received from a
domestic corporation liable to tax under this chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as provided in sec 53 (d) of
this code, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%)
on corporation and the tax (15%) dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic


corporation liable to tax, the tax shall be 15% of the dividends received, subject to
the condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivakent to 20%
which represents the difference betqween the regular tax (35%) on corpoorations
and the tax (15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant,
nevertheless, the fact that Switzerland did not impose any tax on the dividends
received by Glaro from the Philippines should be considered as a full satisfaction
if the given condition. For, as aptly stated by respondent Court, to deny private
respondent the privilege to withhold only 15% tax provided for under PD No. 369
amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit
and intent of said law and definitely will adversely affect foreign corporations
interest here and discourage them for investing capital in our country.

UNGAB vs. CUSI


97 SCRA 877
GR No. L-41919-24 May 30, 1980

"An assessment of a deficiency is not necessary to a criminal prosecution for wilful


attempt to defeat and evade the income tax."

FACTS:

he BIR filed six criminal charges against Quirico Ungab, a banana saplings
producer, for allegedly evading payment of taxes and other violations of the NIRC.
Ungab, subsequently filed a motion to quash on the ground that (1) the
information are null and void for want of authority on the part of the State
Prosecutor to initiate and prosecute the said cases; and (2)that the trial court has
no jurisdiction to take cognizance of the case in view of his pending protest
against the assessment made by the BIR examiner. The trial court denied the
motion prompting the petitioner to file a petition for certiorari and prohibition with
preliminary injunction and restraining order to annul and set aside the information
filed.

ISSUE:

Is the contention that the criminal prosecution is premature since the CIR has not
yet resolved the protest against the tax assessment tenable?

HELD:

No. The contention is without merit. What is involved here is not the collection of
taxes where the assessment of the Commissioner of Internal Revenue may be
reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of
the National Internal Revenue Code which is within the cognizance of courts of
first instance. While there can be no civil action to enforce collection before the
assessment procedures provided in the Code have been followed, there is no
requirement for the precise computation and assessment of the tax before there
can be a criminal prosecution under the Code.

An assessment of a deficiency is not necessary to a criminal prosecution for wilful


attempt to defeat and evade the income tax. A crime is complete when the
violator has knowingly and wilfully filed a fraudulent return with intent to evade
and defeat the tax. The perpetration of the crime is grounded upon knowledge on
the part of the taxpayer that he has made an inaccurate return, and the
government's failure to discover the error and promptly to assess has no
connections with the commission of the crime.

QUIRICO UNGAB VS VICENTE CUSI,


JR.
FACTS:
In July 1974, Quirico Ungab filed his income tax return. He was subjected to a tax
audit and the tax examiner was convinced that Ungab filed a fraudulent return. He
was issued an assessment demanding payment of P104k in taxes. At the same time,
the tax examiner recommended the filing of criminal cases of tax evasion against
Ungab. Meanwhile, Ungab filed a protest with the Commissioner of Internal Revenue
(CIR).
Acting on the recommendation of the tax examiner, a state prosecutor filed 6
informations against Ungab for various violations of the National Internal Revenue
Code. The informations were filed with Court of First Instance of Davao presided by
Judge Vicente Cusi, Jr. Ungab filed a motion to quash the informations on the ground
that his pending protest with the CIR has not yet been acted upon hence the
assessment is not yet final and executory and therefore the trial court has no
jurisdiction yet over the criminal cases.
ISSUE:
Whether or not Ungab is correct.
HELD:
No. What is involved here is not the collection of taxes where the assessment of the
Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but
a criminal prosecution for violations of the National Internal Revenue Code (NIRC)
which is within the cognizance of courts of first instance (regional trial courts). While
there can be no civil action to enforce collection before the assessment procedures
provided in the NIRC have been followed, there is no requirement for the precise
computation and assessment of the tax before there can be a criminal prosecution
under the Code. In fact, there is not even a requirement that an assessment first be
issued before a criminal case for violation of the NIRC be filed.
CIR vs. PASCOR
309 SCRA 402
GR No. 128315 June 29, 1999

"An assessment is not necessary before a criminal charge can be filed."

FACTS:

The BIR examined the books of account of Pascor Realty and Devt Corp for years
1986, 1987 and 1988, from which a tax liability of 10.5 Million Pesos was found.
Based on the recommendations of the examiners, the CIR filed an information
with the DOJ for tax evasion against the officers of Pascor. Upon receipt of the
subpoena, the latter filed an urgent request for reconsideration/reinvestigation
with the CIR, which was immediately denied upon the ground that no formal
assessment has yet been issued by the Commisioner. Pascor elevated the CIR's
decision to the CTA on a petition for review. The CIR filed a Motion to Dismiss on
the ground of lack of jurisdiction of CTA as there was no formal assessment made
against the respondents. The CTA dismissed the motion, hence this petition.

ISSUE:

Is a formal assessment necessary in the filing of a criminal complaint?

HELD:
No. Section 222 of the NIRC states that an assessment is not necessary before a
criminal charge can be filed. This is the general rule. Private respondents failed to
show that they are entitled to an exception. Moreover, the criminal charge need
only be supported by a prima facie showing of failure to file a required return. This
fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a


complaint. Before an assessment is issued, there is, by practice, a pre-assessment
notice sent to the taxpayer. The taxpayer is then given a chance to submit
position papers and documents to prove that the assessment is unwarranted. If
the commissioner is unsatisfied, an assessment signed by him or her is then sent
to the taxpayer informing the latter specifically and clearly that an assessment
has been made against him or her. In contrast, the criminal charge need not go
through all these. The criminal charge is filed directly with the DOJ. Thereafter, the
taxpayer is notified that a criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be stressed that a criminal
complaint is instituted not to demand payment, but to penalize the taxpayer for
violation of the Tax Code.

LUCAS ADAMSON vs. COURT OF


APPEALS- Deficiency Tax
Assessment
FACTS:
A deficiency tax assessment was issued against Petitioners relating to their payment of
capital gains tax and VAT on their sale of shares of stock and parcels of land.
Subsequent to the preliminary conference, the CIR filed with the Department of
Justice her Affidavit of Complaint against Petitioners. The Court of Appeals
ultimately ruled that, in a criminal prosecution for tax evasion, assessment of tax
deficiency is not required because the offense of tax evasion is complete or
consummated when the offender has knowingly and willfully filed a fraudulent return
with intent to evade the tax.

ISSUES:
(1) Dis the CIR issue an assessment?
(2) Must a criminal prosecution for tax evasion be preceded by a deficiency tax
assessment?
(3) Does the CTA have jurisdiction on the case?

HELD:
(1) NO. The recommendation letter of the Commissioner cannot be considered a
formal assessment as (a) it was not addressed to the taxpayers; (b) there was no
demand made on the taxpayers to pay the tax liability, nor a period for payment set
therein; (c) the letter was never mailed or sent to the taxpayers by the Commissioner.
It was only an affidavit of the computation of the alleged liabilities and thus merely
served as prima facie basis for filing criminal informations.
(2) YES. When fraudulent tax returns are involved as in the cases at bar, a proceeding
in court after the collection of such tax may be begun without assessment considering
that upon investigation of the examiners of the BIR, there was a preliminary finding
of gross discrepancy in the computation of the capital gains taxes due from the
transactions. The Tax Code is clear that the remedies may proceed simultaneously.

(3) NO. While the laws governing the CTA have expanded the jurisdiction of the
Court, they did not change the jurisdiction of the CTA to entertain an appeal only
from a final decision of the Commissioner, or in cases of inaction within the
prescribed period. Since in the cases at bar, the Commissioner has not issued an
assessment of the tax liability of the Petitioners, the CTA has no jurisdiction.

COMMISSIONER OF INTERNAL REVENUE, vs. HON. RAUL M. GONZALEZ,


G.R. No. 177279 October 13, 2010

FACTS:

Pursuant to Letter of Authority (LA) dated August 25, 2000, conducted a fraud
investigation for all internal revenue taxes to ascertain/determine the tax
liabilities of respondent L. M. Camus Engineering Corporation (LMCEC) for the
taxable years 1997, 1998 and 1999.
The audit and investigation against LMCEC was precipitated by the information
provided by an "informer" that LMCEC had substantial underdeclared income for
the said period.

For failure to comply with the subpoena duces tecum issued in connection with
the tax fraud investigation, a criminal complaint was instituted by the Bureau of
Internal Revenue (BIR) against LMCEC on January 19, 2001 for violation of Section
266 of the NIRC. Based on data obtained from an "informer" and various clients of
LMCEC, it was discovered that LMCEC filed fraudulent tax returns with substantial
underdeclarations of taxable income for the years 1997, 1998 and 1999.

Petitioner thus assessed the company of total deficiency taxes amounting to


P430,958,005.90 (income tax - P318,606,380.19 and value-added tax [VAT] -
P112,351,625.71) covering the said period.
The Preliminary Assessment Notice (PAN) was received by LMCEC on February 22,
2001.

In view of the above findings, assessment notices together with a formal letter of
demand dated August 7, 2002 were sent to LMCEC through personal service on
October 1, 2002.

Since the company and its representatives refused to receive the said notices and
demand letter, the revenue officers resorted to constructive service in accordance
with Section 3, Revenue Regulations (RR) No. 12-9911.
On May 21, 2003, petitioner, referred to the Secretary of Justice for preliminary
investigation its complaint against LMCEC, Luis M. Camus and Lino D. Mendoza,
the latter two were sued in their capacities as President and Comptroller,
respectively.
The case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the
revenue officers who conducted the tax fraud investigation, it was alleged that
despite the receipt of the final assessment notice and formal demand letter on
October 1, 2002, LMCEC failed and refused to pay the deficiency tax assessment
in the total amount of P630,164,631.61, inclusive of increments, which had
become final and executory as a result of the said taxpayers failure to file a
protest thereon within the thirty (30)-day reglementary period.

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot
be held liable whatsoever for the alleged tax deficiency which had become due
and demandable. Considering that the complaint and its annexes all showed that
the suit is a simple civil action for collection and not a tax evasion case, LMCEC
further averred that it had availed of the Bureaus Tax Amnesty Programs
(Economic Recovery Assistance Payment [ERAP] Program and the Voluntary
Assessment Program [VAP]) for 1998 and 1999; for 1997, its tax liability was
terminated and closed under Letter of Termination
LMCEC argued that petitioner is now estopped from further taking any action
against it and its corporate officers concerning the taxable years 1997 to 1999.
With the grant of immunity from audit from the companys availment of ERAP and
VAP, which have a feature of a tax amnesty, the element of fraud is negated
LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued
by petitioner for having no basis in fact and law. However, until now the said
protest remains unresolved.

In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner


disagreed with the contention of LMCEC that the complaint filed is not criminal in
nature, pointing out that LMCEC and its officers Camus and Mendoza were being
charged for the criminal offenses defined and penalized under Sections 254
(Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the NIRC
.
In this case, the BIR decided to simultaneously pursue both remedies and thus
aside from this criminal action, the Bureau also initiated administrative
proceedings against LMCEC.

Petitioner stressed that LMCEC already lost its right to file a protest letter after the
lapse of the thirty (30)-day reglementary period. LMCECs protest-letter dated
December 12, 2002 to RDO Clavelina S. Nacar, RD No. 40, Cubao, Quezon City
was actually filed only on December 16, 2002, which was disregarded by the
petitioner for being filed out of time.

Petitioner further asserted that LMCECs claim that it was granted immunity from
audit when it availed of the VAP and ERAP programs is misleading. LMCEC failed
to state that its availment of ERAP under RR No. 2-99 is not a grant of absolute
immunity from audit and investigation, Petitioner also pointed out that LMCECs
assertion correlating this case with I.S. No. 00-956 is misleading because said
case involves another violation and offense due to the failure of LMCEC to submit
or present its books of accounts and other accounting records for examination
despite the issuance of subpoena duces tecum against Camus in his capacity as
President of LMCEC. The determination of probable cause in said case is confined
to the issue of whether there was already a violation of the NIRC by Camus in not
complying with the subpoena duces tecum issued by the BIR.

ISSUE:

Whether LMCEC and its corporate officers may be prosecuted for violation of
Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply
Correct and Accurate Information and Pay Tax).
HELD:

We grant the petition.

There is no dispute that prior to the filing of the complaint with the DOJ, the report
on the tax fraud investigation conducted on LMCEC disclosed that it made
substantial underdeclarations in its income tax returns for 1997, 1998 and 1999.

Pursuant to RR No. 12-99,38 a PAN was sent to and received by LMCEC on


February 22, 2001 wherein it was notified of the proposed assessment of
deficiency taxes. In response to said PAN, LMCEC sent a letter-protest to the TFD,
which denied the same on April 12, 2001 for lack of legal and factual basis and
also for having been filed beyond the 15-day reglementary period.

As mentioned in the PAN, the revenue officers were not given the opportunity to
examine LMCECs books of accounts and other accounting records because its
officers failed to comply with the subpoena duces tecum earlier issued, to verify
its alleged underdeclarations of income reported by the Bureaus informant under
Section 282 of the NIRC. Hence, a criminal complaint was filed by the Bureau
against private respondents for violation of Section 266

For the crime of tax evasion in particular, compliance by the taxpayer with such
subpoena, if any had been issued, is irrelevant. As we held in Ungab v. Cusi, Jr.,41
"[t]he crime is complete when the [taxpayer] has x x x knowingly and willfully
filed [a] fraudulent [return] with intent to evade and defeat x x x the tax."
In the Details of Discrepancies attached as Annex B of the PAN,42 private
respondents were already notified that inasmuch as the revenue officers were not
given the opportunity to examine LMCECs books of accounts, accounting records
and other documents, said revenue officers gathered information from third
parties. Such procedure is authorized under Section 5 of the NIRC,

Respondent Secretary, however, fully concurred with private respondents


contention that the assessment notices were invalid for being unnumbered and
the tax liabilities therein stated have already been settled and/or terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a


Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply
to the PAN was found to be without merit.
The Notice of Assessment shall inform the [t]axpayer of this fact, and that the
report of investigation submitted by the Revenue Officer conducting the audit
shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax
or taxes shall state the fact, the law, rules and regulations or jurisprudence on
which the assessment is based, otherwise the formal letter of demand and the
notice of assessment shall be void.

The formality of a control number in the assessment notice is not a requirement


for its validity but rather the contents thereof which should inform the taxpayer of
the declaration of deficiency tax against said taxpayer.

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed
computation of LMCECs tax deficiencies but also details of the specified
discrepancies, explaining the legal and factual bases of the assessment. It also
reiterated that in the absence of accounting records and other documents
necessary for the proper determination of the companys internal revenue tax
liabilities, the investigating revenue officers resorted to the "Best Evidence
Obtainable" as provided in Section 6(B) of the NIRC (third party information)

Economic Recovery Assistance Payment (ERAP) Program

The program named as "Economic Recovery Assistance Payment (ERAP) Program"


granted immunity from audit and investigation of income tax, VAT and percentage
tax returns for 1998.
It expressly excluded withholding tax returns (whether for income, VAT, or
percentage tax purposes).
Since such immunity from audit and investigation does not preclude the collection
of revenues generated from audit and enforcement activities, it follows that the
Bureau is likewise not barred from collecting any tax deficiency discovered as a
result of tax fraud investigations.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate.

It also gives the government a chance to collect uncollected tax from tax evaders
without having to go through the tedious process of a tax case.

Even assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax
amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never
favored nor presumed in law and if granted by statute, the terms of the amnesty
like that of a tax exemption must be construed strictly against the taxpayer and
liberally in favor of the taxing authority.

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as
amended by RR No. 10-2001, through payment supposedly made in October 29,
2001 before the said program ended on October 31, 2001, did not amount to
settlement of its assessed tax deficiencies for the period 1997 to 1999, nor
immunity from prosecution for filing fraudulent return and attempt to evade or
defeat tax.
As correctly asserted by petitioner, from the express terms of the aforesaid
revenue regulations, LMCEC is not qualified to avail of the VAP granting taxpayers
the privilege of last priority in the audit and investigation of all internal revenue
taxes for the taxable year 2000 and all prior years under certain conditions,
considering that first, it was issued a PAN on February 19, 2001, and second, it
was the subject of investigation as a result of verified information filed by a Tax
Informer under Section 282 of the NIRC duly recorded in the BIR Official Registry
as Confidential Information (CI) No. 29-200053 even prior to the issuance of the
PAN.

Moreover, private respondents cannot invoke LMCECs availment of VAP to


foreclose any subsequent audit of its account books and other accounting records
in view of the strong finding of underdeclaration in LMCECs payment of correct
income tax liability by more than 30%

LMCEC -- the alleged violation of the general rule in Section 235 of the NIRC
allowing the examination and inspection of taxpayers books of accounts and
other accounting records only once in a taxable year
likewise untenable

the discovery of substantial underdeclarations of income by LMCEC for taxable


years 1997, 1998 and 1999, as well as the necessity of obtaining information from
third parties to ascertain the correctness of the return filed or evaluation of tax
compliance in collecting taxes (as a result of the disobedience to the summons
issued by the Bureau against the private respondents), are circumstances
warranting exception from the general rule in Section 235.

Consequently, respondent Secretarys ruling that the filing of criminal complaint


for violation of Sections 254 and 255 of the NIRC cannot prosper because of lack
of prior determination of the existence of fraud, is bereft of factual basis and
contradicted by the evidence on record.

Tax assessments by tax examiners are presumed correct and made in good faith,
and all presumptions are in favor of the correctness of a tax assessment unless
proven otherwise.

We have held that a taxpayers failure to file a petition for review with the Court of
Tax Appeals within the statutory period rendered the disputed assessment final,
executory and demandable, thereby precluding it from interposing the defenses of
legality or validity of the assessment and prescription of the Governments right
to assess.

Indeed, any objection against the assessment should have been pursued following
the avenue paved in Section 229 (now Section 228) of the NIRC on protests on
assessments of internal revenue taxes.
Records bear out that the assessment notice and Formal Letter of Demand dated
August 7, 2002 were duly served on LMCEC on October 1, 2002.

Private respondents did not file a motion for reconsideration of the said
assessment notice and formal demand; neither did they appeal to the Court of Tax
Appeals.

xxxxx assessment may be protested by filing a request for reconsideration or


reinvestigation within 30 days from receipt of the assessment by the taxpayer.

No such administrative protest was filed by private respondents seeking


reconsideration of the August 7, 2002 assessment notice and formal letter of
demand.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with the
Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition for Certiorari, under the pretext of grave abuse
of discretion.

The subject tax assessments having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest.

The determination of probable cause is part of the discretion granted to the


investigating prosecutor and ultimately, the Secretary of Justice.

However, this Court and the CA possess the power to review findings of
prosecutors in preliminary investigations.

Although policy considerations call for the widest latitude of deference to the
prosecutors findings, courts should never shirk from exercising their power, when
the circumstances warrant, to determine whether the prosecutors findings are
supported by the facts, or by the law.
In so doing, courts do not act as prosecutors but as organs of the judiciary,
exercising their mandate under the Constitution, relevant statutes, and remedial
rules to settle cases and controversies.

Clearly, the power of the Secretary of Justice to review does not preclude this
Court and the CA from intervening and exercising our own powers of review with
respect to the DOJs findings, such as in the exceptional case in which grave
abuse of discretion is committed, as when a clear sufficiency or insufficiency of
evidence to support a finding of probable cause is ignored.

COMMISSIONER OF INTERNAL REVENUE VS HON. RAUL M. GONZALEZ,


SECRETARY OF JUSTICE, L.M. CAMUS ENGINEERING CORPORATION
(REPRESENTED BY LUIS M. CAMUS AND LINO D. MENDOZA), G.R. NO.
177279, OCTOBER 13, 2010.

Assessment; validity of assessment notice; lack of control number.

The formality of a control number in the assessment notice is not a requirement


for its validity; rather the contents thereof should inform the taxpayer of the
declaration of deficiency tax against the taxpayer. Both the formal letter of
demand and the notice of assessment shall be void if the former failed to state
the fact, the law, rules and regulations or jurisprudence on which the assessment
is based, which is a mandatory requirement under section 228 of the National
Internal Revenue Code.

Tax evasion; failure to comply with subpoena duces tecum not relevant to tax
evasion; forum shopping. A violation of section 266 (failure to obey summons) of
the National Internal Revenue Code (NIRC) involves a separate offense and hence
litis pendencia is not present considering that the outcome of this complaint is not
determinative of the issue as to whether probable cause exists to charge the
taxpayer with the crimes of attempt to evade or defeat tax and willful failure to
supply correct and accurate information and pay tax defined and penalized under
sections 254 and 255, respectively, of the NIRC. For the crime of tax evasion in
particular, compliance by the taxpayer with such subpoena, if any had been
issued, is irrelevant. Thus, the Secretary of Justice erred in holding that the
Commissioner of Internal Revenue committed forum shopping when it filed the
complaint for tax evasion during the pendency of its appeal from the City
Prosecutors dismissal of the complaint involving the act of disobedience to the
summons in the course of the preliminary investigation on the taxpayers correct
tax liabilities for the taxable years 1997, 1998 and 1999.

Tax evasion; lack of consent by taxpayer under investigation.Lack of consent by


the taxpayer under investigation does not imply that the Bureau of Revenue (BIR)
obtained the information from third parties illegally or that the information
received is false or malicious. Nor does the lack of consent preclude the BIR from
assessing deficiency taxes on the taxpayer based on the documents. In the same
vein, the taxpayer cannot be allowed to escape criminal prosecution under
sections 254 and 255 of the National Internal Revenue Code (NIRC) by mere
imputation of a fictitious or disqualified informant under section 282 of the NIRC
simply because other than disclosure of the official registry number of the third
party informer, the BIR insisted on maintaining the confidentiality of the identity
and personal circumstances of said informer.

Voluntary Assessment Program; Revenue Regulations No. 2-99; Economic


Recovery Assistance Payment (ERAP) Program; immunity. Revenue Regulations
No. 2-99 explained in its Policy Statement that considering the scarcity of financial
and human resources as well as the time constraints within which the Bureau of
Internal Revenue (BIR) has to clean the [BIRs] backlog of unaudited tax returns
in order to keep updated and be focused with the most current accounts in
preparation for the full implementation of a computerized tax administration, the
said revenue regulation was issued providing for last priority in audit and
investigation of tax returns to accomplish the said objective without, however,
compromising the revenue collection that would have been generated from audit
and enforcement activities. The program granted immunity from audit and
investigation of income tax, VAT and percentage tax returns for 1998. It expressly
excluded withholding tax returns. Since such immunity from audit and
investigation does not preclude the collection of revenues generated from audit
and enforcement activities, it follows that the BIR is likewise not barred from
collecting any tax deficiency discovered as a result of tax fraud investigations.

Voluntary Assessment Program; immunity. Availment by the taxpayer of the


voluntary assessment program (VAP) under Revenue Regulations No, 8-2001, as
amended, did not amount to settlement of its assessed tax deficiencies for the
period 1997 to 1999, nor immunity from prosecution for filing fraudulent return
and attempt to evade or defeat tax. From the express terms of the said revenue
regulations, taxpayer is not qualified to avail of the VAP granting taxpayers the
privilege of last priority in the audit and investigation of all internal revenue taxes
for the taxable year 2000 and all prior years under certain conditions, considering
that, first, it was issued a preliminary assessment notice (PAN) on February 19,
2001, and, second, it was the subject of investigation as a result of verified
informed filed by a tax informer under section 282 of the National Internal
Revenue Code duly recorded in the BIR official registry even prior to the issuance
of the PAN, which are excepted from coverage of the VAP under said regulations.
Moreover, the taxpayer cannot invoke the availment of VAP to foreclose any
subsequent audit of its account books and other accounting records in view of the
strong finding of underdeclaration in its payment of the correct income tax liability
by more than 30% as supported by the written report of the Tax Fraud Division.
Under the regulations, a taxpayer who has availed of the VAP shall not be audited
except upon authorization and approval of the Commissioner of Internal Revenue
when there is strong evidence or finding of understatement in the payment of its
correct tax liability by more than 30% as supported by a written report of the
appropriate office detailing the facts and the law on which such finding is based.

Voluntary Assessment Program; estoppel. Given the explicit conditions for the
grant of immunity from audit under the said revenue regulations, the Secretary of
Justice erred in declaring that the Commissioner of Internal Revenue is estopped
from assessing any tax deficiency against the taxpayer after the issuance of the
documents of immunity from audit/investigation and settlement of tax liabilities.
The State can never be in estoppel, and this is particularly true in matters
involving taxation. The errors of certain administrative officers should never be
allowed to jeopardize the governments financial position.

Voluntary Assessment Program; exception to rule that examination and inspection


should be made only once a taxable year. The discovery of substantial
underdeclarations of income by the taxpayer for taxable years 1997, 1998 and
1999 upon verified information provided by an informer under section 282 of
the National Internal Revenue Code (NIRC), as well as the necessity of obtaining
information from third parties to ascertain correctness of the return filed or
evaluation of tax compliance in collecting taxes (as a result of the disobedience to
the summons issued by the Bureau of Internal Revenue against the taxpayer) are
circumstances warranting exception from the general rule in section 235 of the
NIRC.Commissioner of Internal Revenue vs Hon. Raul M. Gonzalez, Secretary of
Justice, L.M. Camus Engineering Corporation (represented by Luis M. Camus and
Lino D. Mendoza), G.R. No. 177279, October 13, 2010.