I.

GENERAL PRINCIPLES

C. PURPOSE OF TAXATION

3.

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court questioning the authority of the
1

Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization
Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for recovery of
financing charges from the Fund and reimbursement of underrecovery arising from sales to the National Power
Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining
Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances against its
reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the Office
of Energy Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, any decision, order or ruling of the Constitutional Commissions may be
2 3

brought to this Court on certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof.
The certiorari referred to is the special civil action for certiorari under Rule 65 of the Rules of Court.
4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings
of the administrator of the fund itself and in disallowing a claim which is still pending resolution at the OEA level,
and (b) "grave abuse of discretion and completely without jurisdiction" in declaring that petitioner cannot avail
5

of the right to offset any amount that it may be required under the law to remit to the OPSF against any amount
that it may receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the
Rules of Court, and, considering further the importance of the issues raised, the error in the designation of the
remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as
amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of
Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or changes in world
market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund
may be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
 exchange rate adjustment, as may be determined by the Minister of Finance
in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions
of government corporations, as may be determined by the Minister of
Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment

the resources of the Fund through an appropriate Order that may be issued
by the Board of Energy requiring payment by persons or companies
engaged in the business of importing, manufacturing and/or marketing
petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by
oil companies in the importation of crude oil and petroleum products is less
than the peso costs computed using the reference foreign exchange rate as
fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate adjustment and/or
increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred

as a result of the reduction of domestic prices of petroleum products. The
magnitude of the underrecovery, if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed
cost of oil inventories in the possession of the oil companies
at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of

foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of

Finance to result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner,
directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986 and 1988, of
the additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of
31 December 1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all of its
claims for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA
showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down as
follows:
 1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the
letter; advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF;
and directing it to desist from further offsetting the taxes collected against outstanding claims in 1989 and
subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates
from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in
support thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national
government agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF
and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit
action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of
the collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA
as a prerequisite for the processing of said claims against the OPSF will cause a very serious impairment of its
cash position. The proposal reads:
10

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of

payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in
cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to

preclude further accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the
above-stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for the
current and ensuing years. Decision No. 921 reads:
11

This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines)
Inc., for reconsideration of this Commission's adverse action embodied in its letters dated
February 2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil
Price Stabilization Fund of collections made by the firms pursuant to P.D. 1956, as amended
by E.O. No. 137, S. 1987, and the latter reiterating the same directive but further advising the
firms to desist from offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for reimbursement from the
OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board,
the aforenamed oil companies were allowed to offset the amounts due to the Oil Price
Stabilization Fund against their outstanding claims from the said Fund for the calendar years
 1987 and 1988, pending with the then Ministry of Energy, the government entity charged with
administering the OPSF. This Commission, however, expressing serious doubts as to the
propriety of the offsetting of all types of reimbursements from the OPSF against all categories
of remittances, advised these oil companies that such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly
manifest their intent to make arrangements for the remittance to the Office of Energy Affairs of
the amount of collections equivalent to what has been previously offset, provided that this
Commission authorizes the Office of Energy Affairs to prepare the corresponding checks
representing reimbursement from the OPSF. It is alleged that the implementation of such an
arrangement, whereby the remittance of collections due to the OPSF and the reimbursement
of claims from the Fund shall be made within a period of not more than one week from each
other, will benefit the Fund and not unduly jeopardize the continuing daily cash requirements
of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission

perceives no further objectionable feature in the proposed arrangement, provided that 15% of
whatever amount is due from the Fund is retained by the Office of Energy Affairs, the same to
be answerable for suspensions or disallowances, errors or discrepancies which may be noted
in the course of audit and surcharges for late remittances without prejudice to similar future
retentions to answer for any deficiency in such surcharges, and provided further that no
offsetting of remittances and reimbursements for the current and ensuing years shall be
allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our
initial verification of documents submitted to us by your Office in support of Caltex
(Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding
claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to
inform your Office that Caltex (Philippines), Inc. shall be required to remit to OPSF an amount
of P1,505,668,906, representing remittances to the OPSF which were offset against its claims
reimbursements (net of unsubmitted claims). In addition, the Commission hereby authorize
(sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex,
representing claims initially allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535, which

included P130,420,235 representing those claims disallowed by OEA, details of which is (sic)
shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

P257,263,300

Disallowances of OEA 130,420,235

Total P387,683,535
 The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that
recovery of financing charges by oil companies is not among the items for which the OPSF
may be utilized. Therefore, it is our view that recovery of financing charges has no legal basis.
The mechanism for such claims is provided in DOF Circular 1-87.

b. Product Sales Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-
095 indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should
pay OPSF impost on export sales of petroleum products. Effective February 7, 1987 sales to
international vessels/airlines should not be included as part of its domestic sales. Changing
the effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by
subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to
include in their domestic sales volumes to international vessels/airlines and claim the
corresponding reimbursements from OPSF during the period. It is our opinion that the
effectivity of the said resolution should be February 7, 1987.

c. Inventory losses Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related
BLA agreement, as they affect the claims for reimbursements of ad valorem taxes. We
observed that oil companies immediately settle ad valorem taxes for BLA transaction (sic).
Loan balances therefore are not tax paid inventories of Caltex subject to reimbursements but
those of the borrower. Hence, we recommend reduction of the claim for July, August, and
November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due
and payable by the copper mining companies in distress to the national and local
governments." It is our opinion that LOI 1416 which implements the exemption from payment
of OPSF imposts as effected by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as
herein authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and
applicable auditing rules and regulations. With regard to the disallowances, it is further
informed that the aggrieved party has 30 days within which to appeal the decision of the
Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on
the following grounds:
13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,

RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE
ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF

EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY
 BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED
NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY

THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez
dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of financing
charges, inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of product sales
or those arising from export sales. Decision No. 1171 reads as follows:
15

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to
recover financing charges from the OPSF on the basis of Department of Finance (DOF)
Circular 1-87, dated February 18, 1987, which allowed oil companies to "recover cost of
financing working capital associated with crude oil shipments," and provided a schedule of
reimbursement in terms of peso per barrel. It appears that on November 6, 1989, the DOF
issued a memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies

(were authorized) to refinance their imports of crude oil and petroleum
products from the normal trade credit of 30 days up to 360 days from date of
loading . . . Conformably . . ., the oil companies deferred their foreign
exchange remittances for purchases by refinancing their import bills from the
normal 30-day payment term up to the desired 360 days. This refinancing of
importations carried additional costs (financing charges) which then became,
due to government mandate, an inherent part of the cost of the purchases of
our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil
costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support
alleged increase (sic) were not validated in our independent inquiry. As manifested in Exhibit
2, using the same formula which the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies
are actually gaining rather than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities which have much higher rates
than those they incur due to the extension. The Data we used were obtained from CPI
(CALTEX) Management and can easily be verified from our records.

With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim refund from
the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the considered
view of this Commission that the OPSF is not liable to refund such surtax on inventory losses
because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek
refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to
claim recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these
 copper mining companies did not pay CPI (CALTEX) and OPSF imposts which were added to
the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost because
LOI 1416 dated July 17, 1984, which exempts distressed mining companies from "all taxes,
duties, import fees and other charges" was issued when OPSF was not yet in existence and
could not have contemplated OPSF imposts at the time of its formulation. Moreover, it is
evident that OPSF was not created to aid distressed mining companies but rather to help the
domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the
COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING

CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO
17

NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS

LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-
VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL

PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10)
days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of
the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their
respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6
September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second
purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if
any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the
following:

i. Reduction in oil company take as directed by the Board of Energy without

the corresponding reduction in the landed cost of oil inventories in the
possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may
include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude
oil incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the President of the
Department of Finance; they "directly translate to cost underrecovery in cases where the money market
placement rates decline and at the same time the tax on interest income increases. The relationship is such
that the presence of underrecovery or overrecovery is directly dependent on the amount and extent of financing
charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of
Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude
oil shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund
pertaining to the payment of the foregoing (sic) exchange risk premium and recovery of
financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of

one (1) percent for the first (6) months and 1/32 of one percent per month
thereafter up to a maximum period of one year, to be applied on crude oil'
shipments from January 1, 1987. Shipments with outstanding financing as of
January 1, 1987 shall be charged on the basis of the fee applicable to the
remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall
be allowed to recover financing charges directly from the OPSF per barrel of
crude oil based on the following schedule:

F
i
n
a
n
c
i
n
 g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
e
n
t

R
a
t
e

P
e
s
o
s

p
e
r

B
a
r
r
e
l

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of
Energy Affairs as follows:
 HON. VICENTE T. PATERNO
Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987
and subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization
Fund (OPSF). Such a reduction would allow the industry to recover partly associated
financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall
be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per month
thereafter up to a maximum period of one year, effective January 1, 1987. In addition, since
the prevailing company take would still leave unrecovered financing charges, reimbursement
may be secured from the OPSF in accordance with the provisions of the attached Department
of Finance circular.23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the
computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from

the OPSF for both crude and product shipments loaded after January 1,
1987 based on the following rates:

F
i
n
a
n
c
i
n
g

P
e
r
i
o
d

R
e
i
m
b
u
r
s
e
m
 e
n
t

R
a
t
e

(
P
B
b
l
.
)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines
on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated
February 18, 1987 which allowed the recovery of financing charges directly from the Oil Price
Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the
claim on peso cost differential for a particular shipment and duly certified
supporting documents providedfor under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate

(Annex A) to be issued by the Office of Energy Affairs. The said certificate
may be used to offset against amounts payable to the OPSF. The oil
companies may also redeem said certificates in cash if not utilized, subject to
availability of funds.
25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the
determination of executive agencies. The determination by the Department of Finance and the OEA that
financing charges are recoverable from the OPSF is entitled to great weight and consideration. The function
27

of the COA, particularly in the matter of allowing or disallowing certain expenditures, is limited to the
promulgation of accounting and auditing rules for, among others, the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner
is gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by expert
analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the
COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the
OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second
purpose of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the
same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise
allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner
that such does not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or use of government funds and properties, but only to the promulgation of
accounting and auditing rules for, among others, such disallowance to be untenable in the light of the
provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any
of its subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy
or equity, directly or indirectly, from or through the government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or equity. However,
where the internal control system of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-audit, as are necessary and
appropriate to correct the deficiencies. It shall keep the general accounts, of the Government
and, for such period as may be provided by law, preserve the vouchers and other supporting
papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, are broader and more
30

extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:
 Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to
the revenues, and receipts of, and expenditures or uses of funds and property, owned or held
in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities including government-owned or controlled corporations, keep the general
accounts of the Government and, for such period as may be provided by law, preserve the
vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations
including those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General
Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI
thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the
revenues and receipts from whatever source, including trust funds derived from bond issues;
and audit, in accordance with law and administrative regulations, all expenditures of funds or
property pertaining to or held in trust by the Government or the provinces or municipalities
thereof. He shall keep the general accounts of the Government and the preserve the vouchers
pertaining thereto. It shall be the duty of the Auditor General to bring to the attention of the
proper administrative officer expenditures of funds or property which, in his opinion, are
irregular, unnecessary, excessive, or extravagant. He shall also perform such other functions
as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of
funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to
prevent the same. His was merely to bring that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez and Ramos
32

vs.Aquino, are no longer controlling as the two (2) were decided in the light of the 1935 Constitution.
33

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and
the Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds
or uses of funds and property. Our present Constitution retains that same power and authority, further
strengthened by the definition of the COA's general jurisdiction in Section 26 of the Government Auditing Code
of the Philippines and Administrative Code of 1987. Pursuant to its power to promulgate accounting and
34 35

auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the
36

COA is responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As observed by one
of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution
the Auditor General could not correct "irregular, unnecessary, excessive or extravagant"
expenditures of public funds but could only "bring [the matter] to the attention of the proper
administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the
Commission on Audit can "promulgate accounting and auditing rules and regulations including
those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant,
or unconscionable expenditures or uses of government funds and properties." Hence, since
the Commission on Audit must ultimately be responsible for the enforcement of these rules
and regulations, the failure to comply with these regulations can be a ground for disapproving
the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and
invested it with broader and more extensive powers, they did not intend merely to make the COA a toothless
tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87,
Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to
Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may
result in cost underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not
included in "cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8
of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It
merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the oil
companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

These "other factors" can include only those which are of the same class or nature as the two specifically
enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of
government mandated price reductions. Hence, any other factor which seeks to be a part of the enumeration,
or which could qualify as a cost underrecovery, must be of the same class or nature as those specifically
enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and
unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by
words of a particular and specific meaning, such general words are not to be construed in their widest extent,
but are held to be as applying only to persons or things of the same kind or class as those specifically
mentioned. A reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
38

characteristic. The first relates to price reduction as directed by the Board of Energy while the second refers to
reduction in internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in
these subparagraphs. What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost underrecovery
only if such were incurred as a result of the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that
such were incurred as a result of the inability to fully offset financing expenses from yields in money market
placements, they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended, because
the same did not result from the reduction of the domestic price of petroleum products. Until paragraph (2),
Section 8 of the decree, as amended, is further amended by Congress, this Court can do nothing. The duty of
this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to emphasize
that as the facts in this case have shown, it was at the behest of the Government that petitioner refinanced its
oil import payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct
in its assertion that owing to the extended period for payment, the financial institution which refinanced said
payments charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It would
appear then that equity considerations dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because it accommodated the request of the
Government. Although under Section 29 of the National Internal Revenue Code such losses may be deducted
from gross income, the effect of that loss would be merely to reduce its taxable income, but not to actually wipe
out such losses. The Government then may consider some positive measures to help petitioner and others
similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly
appearing that the subject provision does not provide any standard for the exercise of the authority. It is a
fundamental rule that delegation of legislative power may be sustained only upon the ground that some
standard for its exercise is provided and that the legislature, in making the delegation, has prescribed the
manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of
the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it
had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a loss.
Such being the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The
respondents themselves admit in their Comment that underrecovery arising from sales to NPC are
reimbursable because NPC was granted full exemption from the payment of taxes; to prove this, respondents
trace the laws providing for such exemption. The last law cited is the Fiscal Incentives Regulatory Board's
40

Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the
National Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum
products . . . are restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office
of the President, NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is
evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support
the OPSF. The pertinent part of Section 2, Republic Act No. 6952 provides:
41

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost
increases of imported crude oil and finished petroleum products resulting
from foreign exchange rate adjustments and/or increases in world market
prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil
sales to the National Power Corporation (NPC); and (c) other cost
underrecoveries incurred as may be finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power
Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on Letter
of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes, duties,
fees and other charges, whether direct or indirect, due and payable by the copper mining companies in distress
to the national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued
Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation and
Marcopper Mining Corporation are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to
Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the
exemption from payment of OPSF imposts as effected by OEA has no legal basis;" in its Decision No. 1171, it
42

ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost
because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation." It is further stated that: "Moreover, it is
43
evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil
industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt
said distressed mining companies from the payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating
the OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was
issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended,
was issued for the purpose of minimizing frequent price changes brought about by exchange
rate adjustments and/or changes in world market prices of crude oil and imported petroleum
product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges,
whether direct or indirect, due and payable by the copper mining companies in distress to the
Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by (sic)
distressed copper companies but by oil companies. It is to be noted that the copper mining
companies do not pay OPSF dues. Rather, such imposts are built in or already incorporated in
the prices of oil products.44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI
1416 was never published in the Official Gazette as required by Article 2 of the Civil Code, which reads:
45

Laws shall take effect after fifteen days following the completion of their publication in the
Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published
they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29
December 1986, ruled:
47

We hold therefore that all statutes, including those of local application and private laws, shall
be published as a condition for their effectivity, which shall begin fifteen days after publication
unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the
President in the exercise of legislative powers whenever the same are validly delegated by
the legislature or, at present, directly conferred by the Constitution. Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing laws
pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon
their approval, or as soon thereafter as possible, be published in full in the Official Gazette, to
 become effective only after fifteen days from their publication, or on another date specified by
the legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its
issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987.
As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in
the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive
Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax
exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing
authority. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the
48

exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the exempting
law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and
MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the
payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the
payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of
Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to disallow
it. By doing so, the latter acted beyond its jurisdiction. Respondents, on the other hand, contend that said
49

amount was already disallowed by the OEA for failure to substantiate it. In fact, when OEA submitted the
50

claims of petitioner for pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its contention
that the amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no
reason to doubt the submission of respondents that said amount has already been passed upon by the OEA.
Hence, the ruling of respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may
be offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to
offset its claims from the OPSF against its contributions to the fund as this has been allowed in the past,
particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation
and Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money for
Satisfaction of Indebtedness to Government." Petitioner also mentions communications from the Board of
52

Energy and the Department of Finance that supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, contend that there can be no
53

offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do not arise
from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that
petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because
"while this provision empowers the COA to withhold payment of a government indebtedness to a person who is
also indebted to the government and apply the government indebtedness to the satisfaction of the obligation of
the person to the government, like authority or right to make compensation is not given to the private
person." The reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., is that money
54 55
due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative
Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of
taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special fund
. . .," and that the OPSF contributions do not go to the general fund of the state and are not used for public
56

purpose, i.e., not for the support of the government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence,
the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said
law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to
pay any oil company which has an outstanding obligation to the Government
without said obligation being offset first, subject to the requirements of
compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because
they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to
be within the police power of the state. There can be no doubt that the oil industry is greatly imbued with
57

public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives
of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in
terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities.
The stabilization then of oil prices is of prime concern which the state, via its police power, may properly
address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No
amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and taxpayer are not
58

mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act
as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-users
the consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation
to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be considered merely as a debtor. In respect,
therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise
legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors
of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under Article
1279 of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
 (2) both debts consist in a sum of :money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal
basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF
contributions. Instead, it prohibits the government from paying any amount from the Petroleum Price Standby
Fund to oil companies which have outstanding obligations with the government, without said obligation being
offset first subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of
the Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of
underrecovery arising from sales to the National Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.
LOCAL GOVERNMENT CODE

"Section 155. Toll Fees or Charges. -- The sanggunian concerned may prescribe the terms and conditions and
fix the rates for the imposition of toll fees or charges for the use of any public road, pier or wharf, waterway,
bridge, ferry or telecommunication system funded and constructed by the local government unit concerned:
Provided, That no such toll fees or charges shall be collected from officers and enlisted men of the Armed
Forces of the Philippines and members of the Philippine National Police on mission, post office personnel
delivering mail, physically-handicapped, and disabled citizens who are sixty-five (65) years or older.
1a\^/phi1.net

"When public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the
tolls, and thereafter the said facility shall be free and open for public use."

By express language of Sections 153 and 155 of RA No. 7160, local government units, through their
Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any
public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal
roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 prohibits the imposition, in the
guise of wharfage, of fees -- as well as all other taxes or charges in any form whatsoever -- on goods or
merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods,
because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is
clearly prohibited by Section 133(e).

Section 155. Toll Fees or Charges. -- The Sanggunian concerned may prescribe the terms and conditions and
fix the rates for the imposition of toll fees or charges for the use of any public road, pier or wharf, waterway,
bridge, ferry or telecommunication system funded and constructed by the local government unit concerned:
Provided, That no such toll fees or charges shall be collected from officers and enlisted men of the Armed
Forces of the Philippines and members of the Philippine National Police on mission, post office personnel
delivering mail, physically-handicapped, and disabled citizens who are sixty-five (65) years or older.

When public safety and welfare so requires, the Sanggunian concerned may discontinue the collection of the
tolls, and thereafter the said facility shall be free and open for public use. x x x
 August 16, 2016

G.R. No. 198756

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, Petitioners
vs.
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-
Intervenors

x-----------------------x

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intevenor,

vs.
REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER, AND
BUREAU OF TREASURY, Respondents.

RESOLUTION

LEONEN, J.:

This resolves separate motions for reconsideration and clarification filed by the Office of the Solicitor
General and petitioners-intervenors Rizal Commercial Banking Corporation and RCBC Capital Corporation of
1 2

our Decision dated January 13, 2015, which: (1) granted the Petition and Petitions-in-Intervention and nullified
Bureau of Internal Revenue (BIR) Ruling Nos. 370-2011 and DA 378-2011; and (2) reprimanded the Bureau of
Treasury for its continued retention of the amount corresponding to the 20% final withholding tax that it withheld
on October 18, 2011, and ordered it to release the withheld amount to the bondholders.

In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering of Treasury
Bonds (Public Offering) dated October 9, 2001, the Bureau of Treasury announced that "P30.0 [billion] worth of
3

10- year Zero[-]Coupon Bonds [would] be auctioned on October 16, 2001[.]" It stated that "the issue being
4

limited to 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]."
5

On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-Coupon
Bond. The memo stated in part that the formula, in determining the purchase price and settlement amount, "is
6

only applicable to the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender limit." 7

On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury issued the Auction
Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001 (Auction
Guidelines). The Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to 20%
8

withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR
Revenue Regulation No. 020 2001 )." 9

At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC) participated on behalf
of Caucus of Development NGO Networks (CODE-NGO) and won the bid. Accordingly, on October 18, 2001,
10

the Bureau of Treasury issued P35 billion worth of Bonds at yield-tomaturity of 12.75% to RCBC for
approximately P10.17 billion, resulting in a discount of approximately P24.83 billion.
11

Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement with CODE-NGO,
12

where 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 P3 5
13 14

billion Bonds at the price of Pll,995,513,716.51. In Section 7(r) of the underwriting agreement, CODE-NGO
15
represented that "[a]ll 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 [the] Bureau of Internal Revenue . . .
letter rulings dated 31 May 2001 and 16 August 2001, respectively." 16

RCBC Capital sold and distributed the Government Bonds for an issue price of Pll,995,513,716.51. 17
Banco de
Oro, et al. purchased the PEACe Bonds on different dates. 18

On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the Commissioner of Internal
Revenue issued BIR Ruling No. 370- 2011 declaring that the PEACe Bonds, being deposit substitutes, were
19

subject to 20% final withholding tax. Under this ruling, the Secretary of Finance directed the Bureau of
20

Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011. 21

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue
issued BIR Ruling No. DA 378-2011 clarifying that the final withholding tax due on the discount or interest
22

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. "' 23

On October 17, 2011, petitioners filed before this Court a Petition for Certiorari, Prohibition, and/or Mandamus
(with urgent application for a temporary restraining order and/or writ of preliminary injunction).
24

On October 18, 2011, this Court issued a temporary restraining order "enjoining the implementation of BIR
25

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."
26

RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to intervene and to admit
the Petition-in-Intervention. The Motions were granted by this Court. 27

Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TR0. 28

On November 15, 2011, this Court directed respondents to: "(1) show cause why they failed to comply with the
October 18, 2011 resolution; and (2) comply with the Court's resolution in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition. " 29

On December 6, 2011, this Court noted respondents' compliance. 30

On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion [To Direct
Respondents to Comply with the Temporary Restraining Order]. 31

On December 4, 2012, this Court noted petitioners' Manifestation with Urgent Reiterative Motion and required
respondents to comment. Respondents filed their Comment, to which petitioners filed their Reply.
32 33 34

On January 13, 2015, this Court promulgated the Decision granting the Petition and the Petitions-in-
35

Intervention. Applying Section 22(Y) of the National Internal Revenue Code, we held that the number of
lenders/investors at every transaction is determinative of whether a debt instrument is a deposit substitute
subject to 20% final withholding tax. When at any transaction, 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. We further declared void BIR Rulings Nos. 370-2011 and DA 378-
2011 for having disregarded the 20-lender rule provided in Section 22(Y). The Decision disposed as follows:

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 court's 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. 36

On March 13, 2015, respondents filed by registered mail their Motion for Reconsideration and Clarification. 37

On March 16, 2015, petitioners-intervenors RCBC and RCBC Capital moved for clarification and/or partial
reconsideration.38

On July 6, 2015, petitioners Banco de Oro, et al. filed their

Consolidated Comment on respondents' Motion for Reconsideration and Clarification and petitioners-
39

intervenors RCBC and RCBC Capital Corporation's Motion for Clarification and/or Partial Reconsideration.

On October 29, 2015, petitioners Banco de Oro, et al. filed their Urgent Reiterative Motion [to Direct
Respondents to Comply with the Temporary Restraining Order]. 40

The issues raised in the motions revolve around the following:

First, the proper interpretation and application of the 20-lender rule under Section 22(Y) of the National Internal
Revenue Code, particularly in relation to issuances of government debt instruments;

Second, whether the seller in the secondary market can be the proper withholding agent of the final withholding
tax due on the yield or interest income derived from government debt instruments considered as deposit
substitutes;

Third, assuming the PEACe Bonds are considered "deposit substitutes," whether 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. Further:

(a) Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?

(b) Will it constitute a deprivation of property without due process of law?

Lastly, whether the respondent Bureau of Treasury is liable to pay 6% legal interest.

Before going into the substance of the motions for reconsideration, we find it necessary to clarify on the
procedural aspects of this case. This is with special emphasis on the jurisdiction of the Court of Tax Appeals in
view of the previous conflicting rulings of this Court.

Earlier, respondents questioned the propriety of petitioners' direct resort to this Court. They argued that
petitioners should have challenged first the 2011 Bureau of Internal Revenue rulings before the Secretary of
Finance, consistent with the doctrine on exhaustion of administrative remedies.

In the assailed Decision, we agreed that interpretative rulings of the Bureau of Internal Revenue are reviewable
by the Secretary of Finance under Section 4 of the National Internal Revenue Code. However, we held that
41

because of the special circumstances availing in this case-namely: the question involved is purely legal; the
urgency of judicial intervention given the impending maturity of the PEA Ce Bonds; and the futility of an appeal
to the Secretary of Finance as the latter appeared to have adopted the challenged Bureau of Internal Revenue
rulings-there was no need for petitioners to exhaust all administrative remedies before seeking judicial relief.

We also stated that:

[T]he 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.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No.
9282, such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:

SEC. 7. Jurisdiction. -The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision,
ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of
Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after
the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the
National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be
maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court emphasized the
jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed
that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax
Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops.

....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which
states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. - The Secretary of
Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of
sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice to
the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including ruling on the classification of articles of
sales and similar purposes."

....

The Court, in Rodriguez etc. vs. Blaquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an
attempt to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that,
accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of
taxes and license fees to adhere strictly to the interpretation given by the defendant to the statutory provisions
above mentioned, as set forth in the Circular. The same incorporates, therefore, a decision of the Collector of
Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute,
the administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the
purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals 'shall exercise
exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . .
matters arising under the National Internal Revenue Code or other law or part of the law administered by the
Bureau of Internal Revenue. "[['42]]

In Commissioner of Internal Revenue v. Leal, the Commissioner issued Revenue Memorandum Order (RMO)
43

No. 15-91 imposing 5% lending investors tax on pawnshops, and Revenue Memorandum Circular (RMC) No.
43-91 subjecting the pawn ticket to documentary stamp tax. Leal, a pawnshop owner and operator, asked for
44

reconsideration of the revenue orders, but it was denied by the Commissioner in BIR Ruling No. 221-91. Thus,45

Leal filed before the Regional Trial Court a petition for prohibition seeking to prohibit the Commissioner from
implementing the revenue orders. This Court held that Leal should have filed her petition for prohibition before
46

the Court of Tax Appeals, not the Regional Trial Court, because "the questioned RMO No. 15-91 and RMC No.
43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops." This Court held that such rulings in connection with the implementation of internal revenue laws
47

are appealable to the Court of Tax Appeals under Republic Act No. 1125, as amended. 48

Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno, Jr., this Court upheld the jurisdiction of the
49

Court of Tax Appeals over the Regional Trial Courts, on the issue of the validity of revenue memorandum
circulars. It explained that "the assailed revenue regulations and revenue memorandum circulars [were]
50

actually rulings or opinions of the [Commissioner of Internal Revenue] on the tax treatment of motor vehicles
sold at public auction within the [Subic Special Economic Zone] to implement Section 12 of [Republic Act] No.
7227." This Court further held that the taxpayers' invocation of this Court's intervention was premature for its
failure to first ask the Commissioner of Internal Revenue for reconsideration of the assailed revenue regulations
and revenue memorandum circulars.

However, a few months after the promulgation of Asia International Auctioneers, British American Tobacco v.
Camacho pointed out that although Section 7 of Republic Act No. 1125, as amended, confers on the Court of
51

Tax Appeals jurisdiction to resolve tax disputes in general, this does not include cases where the
constitutionality of a law or rule is challenged. Thus:

The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by Republic Act
No. 9282. Section 7 thereof states, in pertinent part:
....

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include
cases where the constitutionality of a law or rule is challenged. Where what is assailed is the validity or
constitutionality of a law, or a rule or regulation issued by the administrative agency in the performance of its
quasi-legislative function, the regular courts have jurisdiction to pass upon the same. The determination of
whether a specific rule or set of rules issued by an administrative agency contravenes the law or the
constitution is within the jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of
judicial power, which includes the authority of the courts to determine in an appropriate action the validity of the
acts of the political departments. Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to determin whether or not
there has been a grave abuse of dicretion amounting to lack or execss of jurisdiction on the part of any branch
or instrumentality of the Government.

In Drilon v. Lim, it was held:

We stress at the outset that the lower court had jurisdiction to consider the constitutionality of Section 187, this
authority being embraced in the general definition of the judicial power to determine what are the valid and
binding laws by the criterion of their conformity to the fundamental law. Specifically, B.P. 129 vests in the
regional trial courts jurisdiction over all civil cases in which the subject of the litigation is incapable of pecuniary
estimation, even as the accused in a criminal action has the right to question in his defense the constitutionality
of a law he is charged with violating and of the proceedings taken against him, particularly as they contravene
the Bill of Rights. Moreover, Article X, Section 5(2), of the Constitution vests in the Supreme Court appellate
jurisdiction over final judgments and orders of lower courts in all cases in which the constitutionality or validity
of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question.

The petition for injunction filed by petitioner before the RTC is a direct attack on the constitutionality of Section
145(C) of the NIRC, as amended, and the validity of its implementing rules and regulations. In fact, the RTC
limited the resolution of the subject case to the issue of the constitutionality of the assailed provisions. The
determination of whether the assailed law and its implementing rules and regulations contravene the
Constitution is within the jurisdiction of regular courts. The Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial courts. Petitioner, therefore, properly filed the
subject case before the RTC. (Citations omitted)
52

British American Tobacco involved the validity of: (1) Section 145 of Republic Act No. 8424; (2) Republic Act
No. 9334, which further amended Section 145 of the National Internal Revenue Code on January 1, 2005; (3)
Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4) RMO No. 6- 2003. 53

A similar ruling was made in Commissioner of Customs v. Hypermix Feeds Corporation. Central to the case
54

was Customs Memorandum Order (CMO) No. 27-2003 issued by the Commissioner of Customs. This issuance
provided for the classification of wheat for tariff purposes. In anticipation of the implementation of the CMO,
Hypermix filed a Petition for Declaratory Relief before the Regional Trial Court. Hypermix claimed that said
CMO was issued without observing the provisions of the Revised Administrative Code; was confiscatory; and
violated the equal protection clause of the 1987 Constitution. The Commissioner of Customs moved to
55

dismiss on the ground of lack of jurisdiction. On the issue regarding declaratory relief, this Court ruled that the
56

petition filed by Hypermix had complied with all the requisites for an action of declaratory relief to prosper.
Moreover:

Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts. This is within the scope of judicial power, which includes the authority of the courts to
determine in an appropriate action the validity of the acts of the political departments. 57
We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc.The Court of Tax
Appeals has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations,
and other administrative issuances of the Commissioner of Internal Revenue.

Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial power:

ARTICLE VIII
JUDICIAL DEPARTMENT

Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law.

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been a grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government. (Emphasis supplied)

Based on this constitutional provision, this Court recognized, for the first time, in The City of Manila v. Hon.
Grecia-Cuerdo, the Court of Tax Appeals' jurisdiction over petitions for certiorari assailing interlocutory orders
58

issued by the Regional Trial Court in a local tax case. Thus:

[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987
Constitution provides, nonetheless, that judicial power shall be vested in one Supreme Court and in such lower
courts as may be established by law and that judicial power includes the duty of the courts of justice to settle
actual controversies involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA
includes that of determining whether or not there has been grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It, thus, fo1lows that the CTA, by constitutional mandate, is
vested with jurisdiction to issue writs of certiorari in these cases. (Emphasis in the original)
59

This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is inherent in the
exercise of its appellate jurisdiction.

A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it effectively,
to make all orders that will preserve the subject of the action, and to give effect to the final determination of the
appeal. It carries with it the power to protect that jurisdiction and to make the decisions of the court thereunder
effective. The court, in aid of its appellate jurisdiction, has authority to control all auxiliary and incidental matters
necessary to the efficient and proper exercise of that jurisdiction. For this purpose, it may, when necessary,
prohibit or restrain the performance of any act which might interfere with the proper exercise of its rightful
jurisdiction in cases pending before it.

Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction should have
powers which are necessary to enable it to act effectively within such jurisdiction. These should be regarded as
powers which are inherent in its jurisdiction and the court must possess them in order to enforce its rules of
practice and to suppress any abuses of its process and to defeat any attempted thwarting of such process.

In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall possess
all the inherent powers of a court of justice.

Indeed, courts possess certain inherent powers which may be said to be implied from a general grant of
jurisdiction, in addition to those expressly conferred on them. These inherent powers are such powers as are
necessary for the ordinary and efficient exercise of jurisdiction; or are essential to the existence, dignity and
functions of the courts, as well as to the due administration of justice; or are directly appropriate, convenient
and suitable to the execution of their granted powers; and include the power to maintain the court's jurisdiction
and render it effective in behalf of the litigants.

Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary to
effectuate its jurisdiction, a grant of jurisdiction, in the absence of prohibitive legislation, implies the necessary
and usual incidental powers essential to effectuate it, and, subject to existing laws and constitutional provisions,
every regularly constituted court has power to do all things that are reasonably necessary for the administration
of justice within the scope of its jurisdiction and for the enforcement of its judgments and mandates." Hence,
demands, matters or questions ancillary or incidental to, or growing out of, the main action, and coming within
the above principles, may be taken cognizance of by the court and determined, since such jurisdiction is in aid
of its authority over the principal matter, even though the court may thus be called on to consider and decide
matters which, as original causes of action, would not be within its cognizance. (Citations omitted)
60

Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a law or
regulation in the first instance. This is contemplated in the Constitution when it speaks of appellate review of
61

final judgments of inferior courts in cases where such constitutionality is in issue. 62

On, June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as another superior
administrative agency as was its predecessor-the former Board of Tax Appeals-but as a part of the judicial
system with exclusive jurisdiction to act on appeals from:
63

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the
National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue;

(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other
money charges; seizure, detention or release of property affected fines, forfeitures or other penalties imposed
in relation thereto; or other matters arising under the Customs Law or other law or part of law administered by
the Bureau of Customs; and

(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the assessment and
taxation of real property or other matters arising under the Assessment Law, including rules and regulations
relative thereto.

Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters involving
assessments that were previously cognizable by the Regional Trial Courts (then courts of first instance). 64

In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax Appeals and
elevated its rank to the level of a collegiate court with special jurisdiction. Section 1 specifically provides that
the Court of Tax Appeals is of the same level as the Court of Appeals and possesses "all the inherent powers of
a Court of Justice."65

Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all tax-related
issues:

Section 7. Jurisdiction - The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;
2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial;

3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved
by them in the exercise of their original or appellate jurisdiction;

4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other
money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs;

5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property originally decided by the provincial or city board of
assessment appeals;

6) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the
Tariff and Customs Code;

7) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article,
and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and
countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose
said duties.

The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or
regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a
refund. It is only in the lawful exercise of its power to pass upon all matters brought before it, as sanctioned by
Section 7 of Republic Act No. 1125, as amended.

This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases directly
challenging the constitutionality or validity of a tax law or regulation or administrative issuance (revenue orders,
revenue memorandum circulars, rulings).

Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the
decisions of quasi-judicial agencies (Commissioner of Internal Revenue, Commissioner of Customs, Secretary
66

of Finance, Central Board of Assessment Appeals, Secretary of Trade and Industry) on tax-related problems
must be brought exclusively to the Court of Tax Appeals.

In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction
to resolve all tax problems. Petitions for writs of certiorari against the acts and omissions of the said quasi-
judicial agencies should, thus, be filed before the Court of Tax Appeals. 67

Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 provides an exception to the
68

original jurisdiction of the Regional Trial Courts over actions questioning the constitutionality or validity of tax
laws or regulations. Except for local tax cases, actions directly challenging the constitutionality or validity of a
tax law or regulation or administrative issuance may be filed directly before the Court of Tax Appeals.

Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum circulars, or
rulings), these are issued by the Commissioner under its power to make rulings or opinions in connection

with the implementation of the provisions of internal revenue laws. Tax rulings, on the other hand, are official
positions of the Bureau on inquiries of taxpayers who request clarification on certain provisions of the National
Internal Revenue Code, other tax laws, or their implementing regulations. Hence, the determination of the
69
validity of these issuances clearly falls within the exclusive appellate jurisdiction of the Court of Tax Appeals
under Section 7(1) of Republic Act No. 1125, as amended, subject to prior review by the Secretary of Finance,
as required under Republic Act No. 8424. 70

We now proceed to the substantive aspects.

II

Respondents contend that the 20-lender rule should not strictly apply to issuances of government debt
instruments, which by nature, are borrowings from the public. Applying the rule otherwise leads to an absurd
71

result. They point out that in BIR Ruling No. 007-04 dated July 16, 2004 (the precursor of BIR Ruling Nos.
72 73

370-2011 and DA 378-2011), the Bureau of Treasury's admitted intent to make the government securities freely
tradable to an unlimited number of lenders/investors in the secondary market was considered in place of an
actual head count of lenders/investors due to the limitations brought about by the absolute confidentiality of
investments in government bonds under Section 2 of Republic Act No. 1405, otherwise known as the Bank
Secrecy Law. 74

Considering that the PEACe Bonds were intended to be freely tradable in the secondary market to 20 or more
lenders/investors, respondents contend. that they, like other similarly situated government securities-awarded
to 19 or less GSEDs in the primary market but freely tradable to 20 or more lenders/investors in the secondary
market-should be treated as deposit substitutes subject to the 20% final withholding tax. 75

Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that Section 22(Y) of the National
Internal Revenue Code applies to all types of securities, including those issued by government. They add that
under this provision, it is the actual number of lenders at any one time that is material in determining whether
an issuance is to be considered a deposit substitute and not the intended distribution plan of the issuer.

Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue that the real intent behind the
issuance of the PEACe Bonds, as reflected by the representations and assurances of government in various
issuances and rulings, was to limit the issuance to 19 lenders and below. Hence, they contend that government
cannot now take an inconsistent position.

We find respondents' proposition to consider the intended public distribution of government securities-in this
case, the PEACe Bonds-in place of an actual head count to be untenable.

The general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be extended by implication. 76

The definition of deposit substitutes in Section 22(Y) specifically defined "public" to mean "twenty (20) or more
individual or corporate lenders at any one time." The qualifying phrase for public introduced by the National
77 78

Internal Revenue Code shows that a change in the meaning of the provision was intended, and this Court
should construe the provision as to give effect to the amendment. Hence, in light of Section 22(Y), the
79

reckoning of whether there are 20 or more individuals or corporate lenders is crucial in determining the tax
treatment of the yield from the debt instrument. In other words, if there are 20 or more lenders, the debt
instrument is considered a deposit substitute and subject to 20% final withholding tax.

II.A

The definition of deposit substitutes under the National Internal Revenue Code was lifted from Section 95 of
Republic Act No. 7653, otherwise known as the New Central Bank Act:

SEC. 95. Definition of Deposit Substitutes. The term "deposit substitutes" is defined as 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 ofrelending or purchasing of receivables and other
obligations.These instruments may include, but need not be limited to, bankers' acceptances, promissory
notes, participations, certificates of assignment and similar instruments with recourse, and repurchase
agreements. The Monetary Board shall determine what specific instruments shall be considered as deposit
substitutes for the purposes of Section 94 of this Act: Provided, however, That deposit substitutes of
commercial, industrial and other nonfinancial companies issued for the limited purpose of financing their own
needs or the needs of their agents or dealers shall not be covered by the provisions of Section 94 of this Act.
(Emphasis supplied)

Banks are entities engaged in the lending of funds obtained from the public in the form of deposits. Deposits of
80

money in banks and similar institutions are considered simple loans. Hence, the relationship between a
81

depositor and a bank is that of creditor and debtor. The ownership of the amount deposited is transmitted to the
bank upon the perfection of the contract and it can make use of the amount deposited for its own transactions
and other banking operations. Although the bank has the obligation to return the amount deposited, it has no
obligation to return or deliver the same money that was deposited. 82

The definition of deposit substitutes in the banking laws was brought about by an observation that banks and
non-bank financial intermediaries have increasingly resorted to issuing a variety of debt instruments, other than
bank deposits, to obtain funds from the public. The definition also laid down the groundwork for the supervision
by the Central Bank of quasi-banking functions. 83

As defined in the banking sector, the term "public" refers to 20 or more lenders. "What controls is the actual
84

number of persons or entities to whom the products or instruments are issued. If there are at least twenty (20)
lenders or creditors, then the funds are considered obtained from the public."85

If a bank or non-bank financial intermediary sells debt instruments to 20 or more lenders/placers at any one
time, irrespective of outstanding amounts, for the purpose of releI].ding or purchasing of receivables or
obligations, it is considered to be performing a quasi-banking function and consequently subject to the
appropriate regulations of the Bangko Sentral ng Pilipinas (BSP).

11.B

Under the National Internal Revenue Code, however, deposit substitutes include not only the issuances and
sales of banks and quasi-banks for relending or purchasing receivables and other similar obligations, but also
debt instruments issued by commercial, industrial, and other nonfinancial companies to finance their own
needs or the needs of their agents or dealers. This can be deduced from a reading together of Section 22(X)
and (Y):

Section 22. Definitions - When used in this Title:

....

(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate
lenders at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind
other than deposits for the borrower's own account, or through the issuance of certificates of assignment or
similar instruments, with recourse, or of repurchase agreements for purposes of re-lending or purchasing
receivables and other similar obligations: Provided, however, That commerciali industrial and other non-
financial companies, which borrow funds through any of these means for the limited purpose of financing their
own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking
functions.

(Y) 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 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. (Emphasis
supplied)
For internal re.venue tax purposes, therefore, even debt instruments issued and sold to 20 or more
lenders/investors by commercial or industrial companies to finance their own needs are considered deposit
substitutes, taxable as such.

11.C

The interest income on bank deposits was subjected for the first time to the withholding tax system under
Presidential Decree No. 1156, which was promulgated in 1977. The whereas clauses spell the reasons for the
86

law:

[I]nterest on bank deposit is one of the items includible in gross income .... [M]any bank depositors fail to
declare interest income in their income tax returns. . . . [I]n order to maximize the collection of the income tax
on interest on bank deposits, it is necessary to apply the withholdings system on this type of fixed or
determinable income.

In the same year, Presidential Decree No. 1154 was also promulgated. It imposed a 35% transaction tax (final
87

tax) on interest income from every commercial paper issued in the primary market, regardless of whether they
are issued to the public or not. Commercial paper was defined as "an instrument evidencing indebtedness of
88

any person or entity, including banks and non-banks performing quasi-banking functions, which is issued,
endorsed, sold, transferred or in any manner conveyed to another person or entity, either with or without
recourse and irrespective of maturity." The imposition of a final tax on commercial papers was "aimed primarily
to improve the administrative provisions of the National Internal Revenue Code to ensure the collection on the
tax on interest on commercial papers used as principal instruments issued in the primary market." It was
89

reported that "the [Bureau of Internal Revenue had] no means of enforcing strictly the taxation on interest
income earned in the money market transactions. " 90

These presidential decrees, as well as other new internal revenue laws and various laws and decrees that have
so far amended the provisions of the 1939 National Internal Revenue Code were consolidated and codified into
the 1977 National Internal Revenue Code. 91

In 1980, Presidential Decree No. 1739 was promulgated, which further amended certain provisions of the
92

1977 National Internal Revenue Code and repealed Section 210 (the provision embodying the percentage tax
on commercial paper transactions). The Decree imposed a final tax of 20% on interests from yields on deposit
substitutes issued to the public. The tax was required to be withheld by banks and non-bank financial
93

intermediaries and paid to the Bureau of Internal Revenue in accordance with Section 54 of the 1977 National
Internal Revenue Code. Presidential Decree No. 1739, as amended by Presidential Decree No. 1959 in 1984
(which added the definition of deposit substitutes) was subsequently incorporated in the National Internal
Revenue Code.

These developments in the National Internal Revenue Code reflect the rationale for the application of the
withholding system to yield from deposit substitutes, which is essentially to maximize and expedite the
collection of income taxes by requiring its payment at the source, as with the case of the interest on bank
94

deposits. When banks sell deposit substitutes to the public, the final withholding tax is imposed on the interest
income because it would be difficult to collect from the public. Thus, the incipient scheme in the final
withholding tax is to achieve an effective administration in capturing the interest-income windfall from deposit
substitutes as a source of revenue.

It must be emphasized, however, that withholding tax is merely a method of collecting income tax in advance.
The perceived tax is collected at the source of income payment to ensure collection. Consequently, those
subjected to the final withholding tax are no longer subject to the regular income tax.

III

Respondents maintain that the phrase "at any one time" must be given its ordinary meaning, i.e. "at any given
time" or "during any particular point or moment in the day." They submit that the correct interpretation of
95

Section 22(Y) does .not look at any specific transaction concerning the security; instead, it considers the
existing number of lenders/investors of such security at any moment in time, whether in the primary or
secondary market. Hence, when during the lifetime of the security, there was any one instance where twenty
96

or more individual or corporate lenders held the security, the borrowing becomes "public" in character and is
ipso facto subject to 20% final withholding tax.97

Respondents further submit that Section 10.1(k) of the Securities Regulation Code and its Implementing Rules
and Regulations may be applied by analogy, such that if at any time, (a) the lenders/investors number 20 or
more; or (b) should the issuer merely offer the securities publicly or to 20 or more lenders/investors, these
securities should be deemed deposit substitutes. 98

On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the phrase "at any one time"
only refers to transactions made in the primary market. According to them, the PEACe Bonds are not deposit
1wphi1

substitutes since CODE-NGO, through petitioner-intervenor RCBC, is the sole lender in the primary market,
and all subsequent transactions in the secondary market merely pertain to a sale and/or assignment of credit
and not borrowings from the public. 99

Similarly, petitioners contend that for a government security, such as the PEACe Bonds, to be considered as
deposit substitutes, it is an indispensable requirement that there is "borrowing" between the issuer and the
lender/investor in the primary market and between the transferee and the transferor in the secondary market.
Petitioners submit that in the secondary market, the transferee/buyer must have recourse to the selling investor
as required by Section 22(Y) of the National Internal Revenue Code so that a borrowing "for the borrower's
(transferor's) own account" is created between the buyer and the seller. Should the transferees in the
secondary market who have recourse to the transferor reach 20 or more, the transaction will be subjected to a-
final withholding tax. 100

Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that respondents' proposed
application of Section 10.l(k) of the Securities Regulation Code and its Implementing Rules is misplaced
because: (1) the National Internal Revenue Code clearly provides the conditions when a security issuance
should qualify as a deposit substitute subject to the 20% final withholding tax; and (2) the two laws govern
different matters.

III.A

Generally, a corporation may obtain funds for capital expenditures by floating either shares of stock (equity) or
bonds (debt) in the capital market. Shares of stock or equity securities represent ownership, interest, or
participation in the issuer-corporation. On the other hand, bonds or debt securities are evidences of
indebtedness of the issuer-corporation.

New securities are issued and sold to the investing public for the first time in the primary market. Transactions
in the primary market involve an actual transfer of funds from the investor to the issuer of the new security. The
transfer of funds is evidenced by a security, which becomes a financial asset in the hands of the buyer/investor.

New issues are usually sold through a registered underwriter, which may be an investment house or bank
registered as an underwriter of securities. An underwriter helps the issuer find buyers for its securities. In
101

some cases, the underwriter buys the whole issue from the issuer and resells this to other security dealers and
the public. When a group of underwriters pool together their resources to underwrite an issue, they are called
102

the "underwriting syndicate." 103

On the other hand, secondary markets refer to the trading of outstanding or already-issued securities. In any
secondary market trade, the cash proceeds normal_ly go to the selling investor rather than to the issuer.

To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A bonds. The proceeds of the
sale go to A, the issuer. The sale between A and Xis a primary market transaction.

Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's indebtedness. The cash paid for
the bonds no longer go to A, but remains with X, the s_elling investor/holder. The transfer of A bonds from X to
Y is considered a secondary market transaction. Any difference between the purchase price of the assets (A
bonds) and the sale price is a trading gain subject to a different tax treatment, as will be explained later.

When Y trades its A bonds to Z, the sale is still considered a secondary market transaction. In other words, the
trades from X to Y, Y to Z, and Z to subsequent holders/investors are considered secondary market
transactions. If Z holds on to the bonds and the bonds mature, Z will receive from A the face value of the bonds.

A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and the issuer pays
interest on the invested amount. However, unlike bank deposits, bonds are marketable securities. The market
mechanism provides quick mobility of money and securities. Thus, bondholders can sell their bonds before
104

they mature to other investors, in tum converting their financial assets to cash. In contrast, deposits, in the
form of savings accounts for instance, can only be redeemed by the issuing bank.

111.B

An investor in bonds may derive two (2) types of income:

First, the interest or the amount paid by the borrower to the lender/investor for the use of the lenders
money. For interest-bearing bonds, interest is normally earned at the coupon date. In zero-coupon bonds, the
105

discount is an interest amortized up to maturity.

Second, the gain, if any, that is earned when the bonds are traded before maturity date or when redeemed at
maturity.

The 20% final withholding tax imposed on interest income or yield from deposit substitute does not apply to the
gains derived from trading, retirement, or redemption of the instrument.

It must be stressed that interest income, derived by individuals from long-term deposits or placements made
with banks in the form of deposit substitutes, is exempt from income tax. Consequently, it is likewise exempt
from the final withholding tax under Sections 24(B)(l) and 25(A)(2) of the National Internal Revenue Code.
However, when it is pre-terminated by the individual investor, graduated rates of 5%, 12%, or 20%, depending
on the remaining maturity of the instrument, will apply on the entire income, to be deducted and withheld by the
depository bank.

With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of the National Internal
Revenue Code provides:

Sec. 32. Gross Income.

....

(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be
exempt from taxation under this title:

....

(7) Miscellaneous Items. -

....

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the
sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more
than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a maturity of more than
five years) in the secondary market, are exempt from income tax. These "gains" refer to 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. For discounted instruments such as the zero-coupon bonds, the trading gain is 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. 106

Section 32(B)(7)(g) also includes gains 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 the last holder acquired the bonds.

On the other hand, gains realized from the trading of short-term bonds (i.e., those with a maturity of less than
five years) in the secondary market are subject to regular income tax rates (ranging from 5% to 32% for
individuals, and 30% for corporations) under Section 32 of the National Internal Revenue Code.
107

111.C

The Secretary of Finance, through the Bureau of Treasury, is authorized under Section 1 of Republic Act No.
108

245, as amended, to issue evidences of indebtedness such as treasury bills and bonds to meet public
expenditures or to provide for the purchase, redemption, or refunding of any obligations.

These treasury bills and bonds are issued and sold by the Bureau of Treasury to lenders/investors through a
network of licensed dealers (called Government Securities Eligible Dealers or GSEDs ). GSEDs are classified
109

into primary and ordinary dealers. A primary dealer enjoys certain privileges such as eligibility to participate in
110

the competitive bidding of regular issues, eligibility to participate in the issuance of special issues such as zero-
coupon treasury bonds, and access to tap facility window. On the other hand, ordinary dealers are only
111

allowed to participate in the noncompetitive bidding. Moreover, primary dealers are required to meet the
112

following obligations:

a. Must submit at least one competitive bid in each scheduled auction.

b. Must have total awards of at least 2% of the total amount of bills or bonds awarded within a particular
quarter. This requirement does not cover special issues.

c. Must be active in the trading of GS [government securities] in the secondary market. 113

A primary dealer who fails to comply with its obligations will be dropped from the roster of primary dealers and
classified as an ordinary dealer.

The auction method is the main channel used for originating government securities. Under this method, the
114

Bureau of Treasury issues a public notice offering treasury bills and bonds for sale and inviting tenders. The
115

GSEDs tender their bids electronically; after the cut-off time, the Auction Committee deliberates on the bids
116

and decide on the award. 117

The Auction Committee then downloads the awarded securities to the winning bidders' Principal Securities
Account in the Registry of Scrip less Securities (RoSS). The RoSS, an electronic book-entry system
established by the Bureau of Treasury, is the official Registry of ownership of or interest in government
securities. All government securities floated/originated by the National Government under its scripless policy,
118

as well as subsequent transfers of the same in the secondary market, are recorded in the RoSS in the Principal
Securities Account of the GSED. 119

A GSED is required to open and maintain Client Securities Accounts in the name of its respective clients for
segregating government securities acquired by such clients from the GSED' s own securities holdings. A GSED
may also lump all government securities sold to clients in one account, provided that the GSED maintains
complete records of ownership/other titles of its clients in the GSED's own books. 120
Thus, primary issues of treasury bills and bonds are supposed to be issued only to GSEDs. By participating in
auctions, the GSED acts as a channel between the Bureau of Treasury and investors in the primary market.
The winning GSED bidder acquires the privilege to on-sell government securities to other financial institutions
or final investors who need not be GSEDs. Further, nothing in the law or the rules of the Bureau of Treasury
121

prevents the GSED from entering into contract with another entity to further distribute government securities.

In effecting a sale or distribution of government securities, a GSED acts in a certain sense as the "agent" of the
Bureau of Treasury. In Doles v. Angeles, the basis of an agency is representation. The question of whether
122 123

an agency has been created may be established by direct or circumstantial evidence. For an agency to arise,
124

it is not necessary that the princi~al personally encounter the third person with whom the agent interacts. The
125

law contemplates impersonal dealings where the principal need not personally know or meet the third person
with whom the agent transacts: precisely, the purpose of agency is to extend the personality of the principal
through the facility of the agent. It was also stressed that the manner in which the parties designate the
126

relationship is not controlling. If an act done by one person on behalf of another is in its essential nature one
127

of agency, the former is the agent of the latter, notwithstanding he or she is not caled. 128

Through the use of GSEDs, particularly primary dealers, government is able to ensure the absorption of newly
issued securities and promote activity in the government securities market. The primary dealer system allows
government to access potential investors in the market by taking advantage of the GSEDs' distribution capacity.
The sale transactions executed by the GSED are indirectly for the benefit of the issuer. An investor who
purchases bonds from the GSED becomes an indirect lender to government. The financial asset in the hand of
the investor represents a claim to future cash, which the borrower-government must pay at maturity date. 129

Accordingly, the existence of 20 or more lenders should be reckoned at the time when the successful GSED-
bidder distributes (either by itself or through an underwriter) the government securities to final holders. When
the GSED sells the government securities to 20 or more investors, the government securities are deemed to
be in the nature of a deposit substitute, taxable as such.

On the other hand, trading of bonds between two (2) investors in the secondary market involves a purchase or
sale transaction. The transferee of the bonds becomes the new owner, who is entitled to recover the face value
of the bonds from the issuer at maturity date. Any profit realized from the purchase or sale transaction is in the
nature of a trading gain subject to a different tax treatment, as explained above.

Respondents contend that the literal application of the "20 or more lenders at any one time" to government
securities would lead to: (1) impossibility of tax enforcement due to limitations imposed by the Bank Secrecy
Law; (2) possible uncertainties ; and (3) loopholes. These concerns, however, are not sufficient justification for
130 131

us to deviate from the text of the law. Determining the wisdom, policy, or expediency of a statute is outside the
132

realm of judicial power. These are matters that should be addressed to the legislature. Any other interpretation
133

looking into the purported effects of the law would be tantamount to judicial legislation.

IV

Section 57 prescribes the withholding tax on interest or yield on deposit substitutes, among others, and the
person obligated to withhold the same. Section 57 reads:

Section 57. Withholding of Tax at Source. -

(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations, the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by Sections 24(B)(l), 24(B)(2), 24(C), 24(D)(l);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(l), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)
(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(l), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c), 33
and 282 of the Code on specified items of income shall be withheld by payor-corporation and/or person and
paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.
Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National Internal Revenue Code
relative to the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax)
states that the liability for payment of the tax rests primarily on the payor as a withholding agent. Section 2.57
reads:

Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -

(A) Final Withholding Tax - Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from the payee of said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
his failure to withhold the tax or in case of under withhp;ding the deficiency tax shall be collected from the
payor/witholding agent[.] (Emphasis supplied)

From these provisions, it is the payor-borrower who primarily has the duty to withhold and remit the 20% final
tax on interest income or yield from deposit substitutes.

This does not mean, however, that only the payor-borrower can be constituted as withholding agent. Under
Section 59 of the National Internal Revenue Code, any person who has control, receipt, custody, or disposal of
the income may be constituted as withholding agent:

SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under this Title upon
gains, profits, and income not falling under the foregoing and not returned and paid by virtue of the foregoing or
as otherwise provided by law shall be assessed by personal return under rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner. The intent and purpose of the Title is
that all gains, profits and income of a taxable class, as defined in this Title, shall be charged and assessed with
the corresponding tax prescribed by this Title, and said tax shall be paid by the owners of such gains, profits
and income, or the proper person having the receipt, custody, control or disposal of the same. For purposes of
this Title, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the
year for which a return is required to be rendered. (Emphasis supplied)

The intent and purpose of the National Internal Revenue Code provisions on withholding taxes is also explicitly
stated, i.e., that all gains, profits, and income "re charged and assessed with the corresponding tax" and said
134

tax paid by "the owners of such gains, profits and income, or the proper person having the receipt, custody,
control or disposal of the same." 135

The obligation to deduct and withhold tax at source arises at the time an income subject to withholding is paid
or payable, whichever comes first. In interest-bearing bonds, the interest is taxed at every instance that
136

interest is paid (and income is earned) on the bond. However, in a zerocoupon bond, it is expected that no
periodic interest payments will be made. Rather, the investor will be paid the principal and interest (discount)
together when the bond reaches maturity.

As explained by respondents, "the discount is the imputed interest earned on the security, and since paymnet is
made at maturity, there is an accreted interest that causes the price of a zero coupon instrument to accordingly
increase with time, all things being constant."137

In a 10-year zero-coupon bond, for instance, the discount (or interest) is not earned in the first period, i.e., the
value of the instrument does not equal par at the end of the first period. The total discount is earned over the
life of the instrument. Nonetheless, the total discount is considered earned on the year of sale based on current
value.138

In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary responsibility
to withhold the 20% final withholding tax on the interest valued at present value, when its sale and distribution
of the government securities constitutes a deposit substitute transaction. The 20% final tax is deducted by the
buyer from the discount of the bonds and included in the remittance of the purchase price.
The final tax withheld by the withholding agent is considered as a "full and final payment of the income tax due
from the payee on the said income [and the] payee is not required to file an income tax return for the particular
income." Section 10 of Department of Finance Department Order No. 020-10 in relation to the National
139 140

Internal Revenue Code also provides that no other tax shall be collected on subsequent trading of the
securities that have been subjected to the final tax.

In this case, the PEACe Bonds were awarded to petitionersintervenors RCBC/CODE-NGO as the winning
bidder in the primary auction. At the same time, CODE-NGO got RCBC Capital as underwriter, to distribute and
sell the bonds to the public.

The Underwriting Agreement and RCBC Term Sheet for the sale of the PEACe bonds show that the
141 142

settlement dates for the issuance by the Bureau of Treasury of the Bonds to petitioners-intervenors
RCBC/CODENGO and the distribution by petitioner-intervenor RCBC Capital of the PEA Ce Bonds to various
investors fall on the same day, October 18, 2001.

This implies that petitioner-intervenor RCBC Capital was authorized to perform a book-building process, 143
a
customary method of initial distribution of securities by underwriters, where it could collate orders for the
securities ahead of the auction or before the securities were actually issued. Through this activity, the
underwriter obtains information about market conditions and preferences ahead of the auction of the
government securities.

The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-intervenor RCBC
Capital sold the PEACe bonds to investors. Should the number of investors to whom petitioner-intervenor
RCBC Capital distributed the PEACe bonds, therefore, be found to be 20 or more, the PEACe Bonds are
considered deposit substitutes subject to the 20% final withholding tax. Petitioner-intervenors RCBC/CODE-
NGO and RCBC Capital, as well as the final bondholders who have recourse to government upon maturity, are
liable to pay the 20% final withholding tax.

We note that although the originally intended negotiated sale of the bonds by government to CODE-NGO did
not materialize, CODE-NGO, a private entity-still through the participation of petitioners-intervenors RCBC and
RCBC Capital-ended up as the winning bidder for the government securities and was able to use for its
projects the profit earned from the sale of the government securities to final investors.

Giving unwarranted benefits, advantage, or preference to a party and causing undue injury to government
expose the perpetrators or responsible parties to liability under Section 3(e) of Republic Act No. 3019.
Nonetheless, this is not the proper venue to determine and settle any such liability.

VI

Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for the 20% final
withholding should have been made, their obligation was not clear since BIR Ruling Nos. 370-2011 and DA
378-2011 stated that the 20% final withholding tax does not apply to PEACe Bonds. Second, to punish them
144

under the circumstances (i.e., when they secured the PEACe Bonds from the Bureau of Treasury and sold the
Bonds to the lenders/investors, they had no obligation to remit the 20% final withholding tax) would violate due
process of law and the constitutional proscription on ex facto law. 145

Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for the 20% final withholding tax
even as a taxpayer because it never earned interest income from the PEACe Bonds, and any income earned is
deemed in the nature of an underwriting fee. Petitionersintervenors RCBC and RCBC Capital instead argue
146

that the liability falls on the Bureau of Treasury and CODE-NGO, as withholding agent and taxpayer,
respectively, considering their explicit representation that the PEACe Bonds are exempt from the final
withholding tax. 147
Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal Revenue is barred from
assessing and collecting the 20% final withholding tax, assuming it was due, on the ground of
prescription. They contend that the three (3)-year prescriptive period under Section 203, rather than the 10-
148

year assessment period under Section 222, is applicable because they were compliant with the requirement of
filing monthly returns that reflect the final withholding taxes due or remitted for the relevant period. No false or
fraudulent return was made because they relied on the 2001 BIR Rulings and on the representations made by
the Bureau of Treasury and CODE-NGO that the PEACe Bonds were not subject to the 20% final withholding
tax.149

Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's interpretation of the phrase "at
any one time" cannot be applied to the PEACe Bonds and should be given prospective application only
because it would cause prejudice to them, among others. They cite Section 246 of the National Internal
Revenue Code on non-retroactivity of rulings, as well as Commissioner of Internal Revenue v. San Roque
Power Corporation, which held that taxpayers may rely upon a rule or ruling issued by the Commissioner
150

from the time it was issued up to its reversal by the Commissioner or the court. According to them, the
retroactive application of the court's decision would impair their vested rights, violate the constitutional
prohibition on non-impairment of contracts, and constitute a substantial breach of obligation on the part of
govemment. In addition, the imposition of the 20% final withholding tax on the PEA Ce Bonds would allegedly
151

have pernicious effects on the integrity of existing securities that is I contrary to the state policies of stabilizing
the financial system and of developing the capital markets. 152

CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings confirming that the
PEA Ce Bonds were not subject to the 20% final withholding tax. Therefore, it should not be prejudiced if the
153

BIR Rulings are found to be erroneous and reversed by the Commissioner or this court. CODE-NGO argues 154

that this Court's Decision construing the phrase "at any one time" to determine the phrase "20 or more lenders"
to include both the primary and secondary market should be applied prospectively. 155

Assuming it is liable for the 20% final withholding tax, CODE-NGO argues that the collection of the final tax was
barred by prescription. CODE-NGO points out that under Section 203 of the National Internal Revenue Code,
156

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. It further argues that Section 222(a) on exceptions to the
157

prescribed period. for tax assessment and collection does not apply. It claims that there is no fraud or intent
158

to evade taxes as it relied in good faith on the assurances of the Bureau of Internal Revenue and Bureau of
Treasury the PEACe Bonds are not subject to the 20% final withholding tax. We find merit on the claim of
159

petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for prospective application of our Decision.

The phrase "at any one time" is ambiguous in the context of the financial market. Hence, petitioner-intervenor
RCBC and the rest of the investors relied on the opinions of the Bureau of Internal Revenue in BIR Ruling Nos.
020-2001, 035-2001 dated August 16, 2001, and DA-175- 01 dated September 29, 2001 to vested their
160 161

rights in the exemption from the final withholding tax. In sum, these rulings pronounced that to determine
whether the financial assets, i.e., debt instruments and securities, are deposit substitutes, the "20 or more
individual or corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one time" to
determine the "20 or more lenders" is to be determined at the time of the original issuance. This being the case,
the PEACe Bonds were not to be treated as deposit substitutes.

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, the Commissioner demanded from petitioner
162

deficiency withholding income tax on film rentals remitted to foreign corporations for the years 1965 to 1968.
The assessment was made under Revised Memo Circular No. 4-71 issued in 1971, which used gross income
as tax basis for the required withholding tax, instead of one-half of the film rentals as provided under General
Circular No. V-334. In setting aside the assessment, this Court ruled that in the interest of justice and fair play,
rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application
where applying them would prove prejudicial to taxpayers who relied in good faith on previous issuances of the
Commissioner. This Court further held that Section 24(b) of then National Internal Revenue Code sought to be
implemented by General Circular No. V-334 was neither too plain nor simple to understand and was capable of
different interpretations. Thus:
The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha[ d] been
determined that the tax is still imposed on income derived from capital, or labor, or both combined, in
accordance with the basic principle of income taxation ... and that a mere return of capital or investment is not
income .... " "A part of the receipts of a non-resident foreign film distributor derived from said film represents,
therefore, a return of investment." The circular thus fixed the return of capital at 50% to simplify the
administrative chore of determining the portion of the rentals covering the return of capital.

Were the "gross income" base clear from Sec. 24(b), perhaps, the ratiocination of the Tax Court could
be upheld. It should be noted, however, that said Section was not too plain and simple to understand.
The fact that the issuance of the General Circular in question was rendered necessary leads to no
other conclusion than that it was not easy of comprehension and could be subjected to different
interpretations.

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334,
was just one in a series of enactments regarding Sec. 24(b) of the Tax Code. Republic Act No. 3825 came next
on June 22, 1963 without changing the basis but merely adding a proviso (in bold letters).

(b) Tax on foreign corporation. - (1) Non-resident corporations. - There shall be levied, collected, and paid for
each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains, profits and income, a tax equal to thirty
per centum of such amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE
REINSURANCE PREMIUMS." (double emphasis ours)

Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some
words (also in bold letters).

"(b) Tax on foreign corporations. - (1) Nonresident corporations. - There shall be levied, collected and paid for
each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical OR CASUAL gains, profits and income, AND
CAP IT AL GAINS, a tax equal to thirty per centum of such amount."

The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case.
It provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption
by Congress of a prior executive construction." Note should be taken of the fact that this case involves not a
mere opinion of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all
internal revenue officials" by the then Commissioner of Internal Revenue.

It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue
Memorandum Circular No. 4-71, that Sec. 24(b2 was amended to refer specifically to 35% of the "gross
income." (Emphasis supplied)
163

San Roque has held that the 120-day and the 30-day periods under Section 112 of the National Internal
Revenue Code are mandatory and jurisdictional. Nevertheless, San Roque provided an exception to the rule,
such that judicial claims filed by taxpayers who relied on BIR Ruling No. DA-489-03-from its issuance on
December 10, 2003 until its reversal by this Court in Commissioner of Internal Revenue v. Aichi Forging
Company of Asia, Inc. on October 6, 2010-are shielded from the vice of prematurity. The BIR Ruling declared
164

that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief
with the C[ourt] [of] T[ax] A[ppeals] by way of Petition for Review." The Court reasoned that:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a

difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning
of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of
the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax
refund or credit they received or could have received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court
of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under
Section 246, should also apply prospectively ....

....

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all
taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a
particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the
One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This government
agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the Commissioner what to do in cases like the tax claim of
Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling
No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6
October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional. (Emphasis 165

supplied)

The previous interpretations given to an ambiguous law by the Commissioner of Internal Revenue, who is
charged to carry out its provisions, are entitled to great weight, and taxpayers who relied on the same should
not be prejudiced in their rights. Hence, this Court's construction should be prospective; otherwise, there will
166

be a violation of due process for failure to accord persons, especially the parties affected by it, fair notice of the
special burdens imposed on them.

VII

Urgent Reiterative Motion [to Direct Respondents to Comply with the

Temporary Restraining Order]

Petitioners Banco de Oro, et al. allege that the temporary restraining order issued by this Court on October 18,
2011 continues to be effective under Rule 58, Section 5 of the Rules of Court and the Decision dated January
13, 2015. Thus, considering respondents' refusal to comply with their obligation under the temporary restraining
order, petitioners ask this Court to issue a resolution directing respondents, particularly the Bureau of Treasury,
"to comply with its order by immediately releasing to the petitioners during the pendency of the case the 20%
final withholding tax" so that the monies may be placed in escrow pending resolution of the case. 167

We recall that in its previous pleadings, respondents remain firm in its stance that the October 18, 2011
temporary restraining order could no longer be implemented because the acts sought to be enjoined were
already fait accompli. They allege that the amount withheld was already remitted by the Bureau of Treasury
168

to the Bureau of Internal Revenue. Hence, it became part of the General Fund, which required legislative
appropriation before it could validly be disbursed. Moreover, they argue that since the amount in question
169

pertains to taxes alleged to be erroneously withheld and collected by government, the proper recourse was for
the taxpayers to file an application for tax refund before the Commissioner of Internal Revenue under Section
204 of the National Internal Revenue Code. 170

In our January 13, 2015 Decision, we rejected respondents' defense of fait accompli. We held that the amount
withheld were yet to be remitted to the Bureau of Internal Revenue, and the evidence Gournal entry voucher)
submitted by respondents was insufficient to prove the fact of remittance. Thus:
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 tax when they 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. The act enjoined by the temporary restraining order had not yet
been fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which prescribes to national government
agencies such as the Bureau of Treasury the procedure for the remittance of all taxes they 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 1 oth day of the following
month after the said taxes had been withheld. The Bureau of Internal Revenue shall transmit an original copy of
the TRA to the Bureau of Treasury, which shall be the basis in recording the remittance of the tax collection.
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. 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 oflnternal Revenue on October 18, 2011.

Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10- 10395 dated October 18, 2011 submitted
to this court shows:

Account Debit Amount Credit

Code Amount

Bonds Payable-UT, Dom- 35,000,000,000.00

Zero 442-360

Coupon I/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.171

Respondents did not submit any withholding tax return or tax remittance advice 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, and consequently became part of the general fund of the government. The corresponding journal
entry in the books of both the Bureau of Treasury and Bureau of Internal Revenue showing the transfer of the
withheld funds to the Bureau of Internal Revenue was likewise not submitted to this Court. The burden of proof
lies on them to show their claim of remittance. Until now, respondents have failed to submit sufficient
supporting evidence to prove their claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, this Court
172

upheld the right of a withholding agent to file a claim for refund of the withheld taxes of its foreign parent
company. This Court, citing Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, ruled 173

that inasmuch as it is an agent of government for the withholding of the proper amount of tax, it is also an agent
of its foreign parent company with respect to the filing of the necessary income tax return and with respect to
actual payment of the tax to the government. Thus:

The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on
Tax on Income]." It thus becomes important to note that under Section 53(c) of the NIRC, the withholding agent
who is "required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is
indemnified against any claims and demands which the stockholder might wish to make in

questioning the amount of payments effected by the withholding agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax
that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable
for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to
be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer."
The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very
difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from
him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a
withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding
agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel
the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection
of the tax as well as the payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of
the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer.
The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he
is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies
are not made liable by law.

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the
tax to the government, such authority may reasonably be held to include the authority to file a claim for refund
and to bring an action for recovery of such claim. This implied authority is especially warranted where, as in the
instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at
all times, under the effective control of such parent-stockholder. In the circumstances of this case, it seems
particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for
such refund.

....

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a
"taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and
the suit to recover such claim. (Emphasis supplied, citations omitted)
174
In Commissioner of Internal Revenue v. Smart Communication, Inc.; 175

[W]hile the withholding agent has the right to recover the taxes erroneously or illegally collected, he
nevertheless has the obligation to remit the same to the principal taxpayer. As an agent of the taxpayer, it is his
duty to return what he has recovered; otherwise, he would be unjustly enriching himself at the expense of the
principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right to file a claim
for refund.176

Since respondents have not sufficiently shown the actual remittance of the 20% final withholding taxes withheld
from the proceeds of the PEACe bonds to the Bureau of Internal Revenue, there was no legal impediment for
the Bureau of Treasury (as agent of petitioners) to release the monies to petitioners to be placed in escrow,
pending resolution of the motions for reconsideration filed in this case by respondents and petitioners-
intervenors RCBC and RCBC Capital.

Moreover, Sections 204 and 229 of the National Internal Revenue Code are not applicable since the Bureau of
Treasury's act of withholding the 20% final withholding tax was done after the Petition was filed.

Petitioners also urge us to hold respondents liable for 6% legal interest reckoned from October 19, 2011 until
177

they fully pay the amount corresponding to the 20% final withholding tax. This Court has previously granted
interest in cases where patent arbitrariness on the part of the revenue authorities has been shown, or where
the collection of tax was illegal.
178

In Philex Mining Corp. v. Commissioner of Internal Revenue: 179

[T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the collection of the
tax was attended by arbitrariness. An action is not arbitrary when exercised honestly and upon due
consideration where there is room for two opinions, however much it may be believed that an erroneous
conclusion was reached. Arbitrariness presupposes inexcusable or obstinate disregard of legal
provisions. (Emphasis supplied, citations omitted)
180

Here, the Bureau of Treasury made no effort to release the amount of 4,966,207,796.41, corresponding to the
20% final withholding tax, when it could have done so.

In the Court's temporary restraining order dated October 18, 2011, which respondent received on October 19,
181

2011, we "enjoin[ed] 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 there.from shall be withheld by the petitioner
banks and placed in escrow pending resolution of [the} petition." 182

Subsequently, in our November 15, 2011 Resolution, we directed respondents to "show cause why they failed
to comply with the [temporary restraining order]; and [to] comply with the [temporary restraining order] in order
that petitioners may place the corresponding funds in escrow pending resolution of the petition." 183

Respondent did not heed our orders.

In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury for its continued retention of
the amount corresponding to the 20% final withholding tax, in wanton disregard of the orders of this Court.

We further ordered the Bureau of Treasury to immediately release and pay the bondholders the amount
corresponding to the 20% final withholding tax that it withheld on October 18, 2011.

However, respondent remained obstinate in its refusal to release the monies and exhibited.utter disregard and
defiance of this Court.

As early as October 19, 2011, petitioners could have deposited the amount of 4,966,207, 796.41 in escrow
and earned interest, had respondent Bureau of Treasury complied with the temporary restraining order and
released the funds. It was inequitable for the Bureau of Treasury to have withheld the potential earnings of the
funds in escrow from petitioners.

Due to the Bureau of Treasury's unjustified refusal to release the funds to be deposited in escrow, in utter
disregard of the orders of the Court, it is held liable to pay legal interest of 6% per annum 184 on the amount of
4,966,207, 796.41 representing the 20% final withholding tax on the PEACe Bonds.

WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and petitioners-
intervenors RCBC and RCBC Capital Corporation's Motion for Clarification and/or Partial Reconsideration
is PARTLY GRANTED.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the bondholders the
amount of P4,966,207, 796.41, representing the 20% final withholding tax on the PEACe Bonds, with legal
interest of 6% per annum from October 19, 2011 until full payment.

SO ORDERED.

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

FERNAN, C.J.:

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing under
the laws of Japan and duly licensed to engage in business under Philippine laws with branch office at the 4th
Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax
Appeals dated February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40
1

representing alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and
Pacific Co. of Manila (AG&P).

The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of Manila.
For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the
amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third
quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and
withheld the corresponding 10% final dividend tax thereon. 2

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the
10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the
withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding
tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation
of Japan, the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid
thereon, is shown below:

1981 FIRST THIRD TOTAL OF

QUARTER QUARTER FIRST and
(three (three THIRD
months months quarters
ended ended
3.31.81) (In 9.30.81)
Pesos)

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00

Withheld

Cash Dividend net of 764,748.00 764,748.00 1,529,496.00

10% Dividend Tax
Withheld

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Remittance Tax
Withheld

Net Amount Remitted 650,035.80 650,035.80 1,300,071.60

to Petitioner

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first
quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central Bank
Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax
of P114,712 for the third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4,
1981 under Central Bank Confirmation Receipt No. 7905930. 4

Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit remittance on
cash dividends declared and remitted to petitioner at its head office in Tokyo in the total amount of P229,424.40
on April 20 and August 4, 1981. 5

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company,
sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch
profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a
branch office to its head office which are effectively connected with its trade or business in the
Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not
necessary that the income be derived from the actual operation of taxpayer-corporation's
trade or business; it is sufficient that the income arises from the business activity in which the
corporation is engaged. For example, if a resident foreign corporation is engaged in the
buying and selling of machineries in the Philippines and invests in some shares of stock on
which dividends are subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue Memorandum
Circular No. 55-80).

In the instant case, the dividends received by Marubeni from AG&P are not income arising
from the business activity in which Marubeni is engaged. Accordingly, said dividends if
remitted abroad are not considered branch profits for purposes of the 15% profit remittance
tax imposed by Section 24 (b) (2) of the Tax Code, as amended . . . 6

Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on
September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing
profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific Co. of Manila
(AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7

On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of
P229,424.40 on the following grounds:

While it is true that said dividends remitted were not subject to the 15% profit remittance tax
as the same were not income earned by a Philippine Branch of Marubeni Corporation of
Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of the
dividends, being a non-resident stockholder, nevertheless, said dividend income is subject to
the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between
the Philippines and Japan.

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject
to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as
profit remittance tax totals (sic) 25 %, the amount refundable offsets the liability, hence,
nothing is left to be refunded.8

Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of
Internal Revenue in its assailed judgment of February 12, 1986. 9

In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
 Whatever the dialectics employed, no amount of sophistry can ignore the fact that the
dividends in question are income taxable to the Marubeni Corporation of Tokyo, Japan. The
said dividends were distributions made by the Atlantic, Gulf and Pacific Company of Manila to
its shareholder out of its profits on the investments of the Marubeni Corporation of Japan, a
non-resident foreign corporation. The investments in the Atlantic Gulf & Pacific Company of
the Marubeni Corporation of Japan were directly made by it and the dividends on the
investments were likewise directly remitted to and received by the Marubeni Corporation of
Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention,
directly or indirectly, in the investments and in the receipt of the dividends. And it appears that
the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds
infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch.
As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni
Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company
based on the supporting documents submitted to it.

Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned
it. Admittedly, the dividends under consideration were earned by the Marubeni Corporation of
Japan, and hence, taxable to the said corporation. While it is true that the Marubeni
Corporation Philippine Branch is duly licensed to engage in business under Philippine laws,
such dividends are not the income of the Philippine Branch and are not taxable to the said
Philippine branch. We see no significance thereto in the identity concept or principal-agent
relationship theory of petitioner because such dividends are the income of and taxable to the
Japanese corporation in Japan and not to the Philippine branch. 10

Hence, the instant petition for review.

It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan
is likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received
from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977 which states:

Dividends received by a domestic or resident foreign corporation liable to tax under this Code
(1) Shall be subject to a final tax of 10% on the total amount thereof, which shall be
collected and paid as provided in Sections 53 and 54 of this Code ....

Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign
corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned from
Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code which
reads:

(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of
the gross income received during each taxable year from all sources within the Philippines
as ... dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980
concluded between the Philippines and Japan. Thus:
11

Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a

resident of the other Contracting State may be taxed in that other Contracting State.

(2) However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident, and according to the laws of that Contracting State, but if
the recipient is the beneficial owner of the dividends the tax so charged shall not exceed;

(a) . . .
 (b) 25 per cent of the gross amount of the dividends in all other cases.

Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is therefore
the determination of whether it is a resident or a non-resident foreign corporation under Philippine laws.

Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the
Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through its
Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the
Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in
AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and a non-resident
corporation depending on the nature of the particular transaction involved. Accordingly, whether the dividends
are paid directly to the head office or coursed through its local branch is of no moment for after all, the head
office and the office branch constitute but one corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the
Philippines.

The Solicitor General has adequately refuted petitioner's arguments in this wise:

The general rule that a foreign corporation is the same juridical entity as its branch office in
the Philippines cannot apply here. This rule is based on the premise that the business of the
foreign corporation is conducted through its branch office, following the principal agent
relationship theory. It is understood that the branch becomes its agent here. So that when the
foreign corporation transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the latter
becomes the taxpayer, and not the foreign corporation. 12

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head
office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can
be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares
including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of
Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made
this independent investment attributable only to the head office, cannot now claim the increments as ordinary
consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 %
profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder,
they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld
totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax
has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base
upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." 13

Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax
Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the
maximum rates as reflected in the phrase "shall not exceed." This means that any tax imposable by the
contracting state concerned should not exceed the 25 % limitation and that said rate would apply only if the tax
imposed by our laws exceeds the same. In other words, by reason of our bilateral negotiations with Japan, we
have agreed to have our right to tax limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable
provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said
section provides:

(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) 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 Section 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 the 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 corporations and the tax (15 %) on dividends as
provided in this Section; ....

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation,
as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation
(AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on
non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on
dividends received from a domestic corporation.

Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:

Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------

Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25
% of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring under
the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the
Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was not perfected in
accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal from final orders,
resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen (15) days counted from
the notice of the final order, resolution, award, judgment or decision appealed from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been
created by virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of
the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling,
or decision shall become final.

Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund
on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on November 17, 1986, and notice of which was
received by petitioner on November 26, 1986. Two days later, or on November 28, 1986, petitioner
simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for review with the Supreme
Court. From the foregoing, it is evident that the instant appeal was perfected well within the 30-day period
14

provided under R.A. No. 1125, the whole 30-day period to appeal having begun to run again from notice of the
denial of petitioner's motion for reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which
affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim
for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax
credit in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends
received. No costs.

So ordered.

G.R. No. L-68375 April 15, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Felicisimo R. Quiogue and Cirilo P. Noel for respondents.

BIDIN, J.:

This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled
Wander Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of
15% withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign
corporation.

Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation organized
under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation
not engaged in trade or business in the Philippines.

On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and
remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35% withholding tax
thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal Revenue.

Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on
the dividends it remitted to Glaro amounting to P355,200.00, on wich 35% tax in the amount of P124,320.00
was withheld and paid to the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax
credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax in accordance with
Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778, and not on the basis
of 35% which was withheld and paid to and collected by the government.

Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a
petition with respondent Court of Tax Appeals.

On October 6, 1977, petitioner file his Answer.

On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which
reads:

WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner
in the amount of P115,440.00 representing overpaid withholding tax on dividends remitted by
it to the Glaro S.A. Ltd. of Switzerland during the second quarter of the years 1975 and 1976.

On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated
August 13, 1984. Hence, the instant petition.

Petitioner raised two (2) assignment of errors, to wit:

I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX
APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS
ENTITLED TO THE SAID REFUND.

II

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF
GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT WANDER PHILIPPINES,
INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS INCOME TAX LIABILITY A TAX CREDIT
EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND
TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION
24 (b) (1) OF THE PHILIPPINE TAX CODE.

The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate of
15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.

From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to claim
the refund; and (2) Whether or not Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on
such dividends.

Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the
dividend income and a mere withholding agent for and in behalf of the Philippine Government, which should be
legally entitled to receive the refund if any.

It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this Court.
It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a litigant to assume a
different posture when he comes before the court and challenge the position he had accepted at the
administrative level, would be to sanction a procedure whereby the Courtwhich is supposed to review
administrative determinationswould not review, but determine and decide for the first time, a question not
raised at the administrative forum. Thus, it is well settled that under the same underlying principle of prior
exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot be
raised for the first time on appeal (Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue, 112
SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA
597; Matialonzo vs. Servidad, 107 SCRA 726,

In any event, the submission of petitioner that Wander is but a withholding agent of the government and
therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be recalled, that said
corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a withholding
agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code,
cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother
company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held that "the obligation
imposed thereunder upon the withholding agent is compulsory." It is a device to insure the collection by the
Philippine Government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside
the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21
SCRA 944). In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting
of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper
entity who should for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.

Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign
country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it, equivalent to 20%, or the
difference between the regular 35% rate of the preferential 15% rate. The dispute in this issue lies on the fact
that Switzerland does not impose any income tax on dividends received by Swiss corporation from corporations
domiciled in foreign countries.

Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
 Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue
Code, as amended, is hereby 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 the 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 foreign loans which shall be subject to 15% tax),
dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual,
periodical or casual gains, profits, and income, and capital gains: ...
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 Section 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 the 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 corporations and the tax (15%) dividends as provided in
this section: ...

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 equivalent to 20% which represents the difference between the
regular tax (35%) on corporations and the tax (15%) dividends.

In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly,
Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner, on the other hand,
avers the tax sparing credit is applicable only if the country of the parent corporation allows a foreign tax credit
not only for the 15 percentage-point portion actually paid but also for the equivalent twenty percentage point
portion spared, waived or otherwise deemed as if paid in the Philippines; that private respondent does not cite
anywhere a Swiss law to the effect that in case where a foreign tax, such as the Philippine 35% dividend tax, is
spared waived or otherwise considered as if paid in whole or in part by the foreign country, a Swiss foreign-tax
credit would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or waived
or considered as if paid by the foreign country.

While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that
Switzerland did not impose any tax or the dividends received by Glaro from the Philippines should be
considered as a full satisfaction of the given condition. For, as aptly stated by respondent Court, to deny private
respondent the privilege to withhold only 15% tax provided for under Presidential Decree 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 from investing capital in our country.

Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the
May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends
to be received by the said parent corporation in the Philippines, the condition imposed under the above-
mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."

Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as
the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject unless there has
been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA
198, which is not present in the instant case.

WHEREFORE, the petition filed is DISMISSED for lack of merit.

SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends
payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"),
amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five
percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a
claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to
Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), as amended by Presidential Decree No.
1

369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not
thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition
for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31
January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in
the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and
held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax
credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against
the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to
twenty percent (20%) which represents the difference between the regular tax of thirty-five percent
(35%) on corporations and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the
dividends received by its non-resident parent company in the US (P&G-USA) may be subject to the
preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim
for refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in
the proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue.
The question was not raised by the Commissioner on the administrative level, and neither was it raised by him
before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid
claim for refund by raising this question of alleged incapacity for the first time on appeal before this Court. This
is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for
refund, is likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to its
parent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the
contrary, the government must follow the same rules of procedure which bind private parties. It is, for instance,
clear that the government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly
the same way that private litigants are held to such compliance, save only in respect of the matter of filing fees
from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed
to raise for the first time on appeal questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level,
demanded that P&G-Phil. produce an express authorization from its parent corporation to bring the claim for
refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing
the action in the instant case. The action here was commenced just before expiration of the two (2)-year
prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well
which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue
is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or
collected:

Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
 been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal
Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The Commissioner
may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under
Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to
taximposed by the Title [on Tax on Income]." It thus becomes important to note that under Section 53 (c) of the
2

NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable for
such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to
make in questioning the amount of payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the correct 3

amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is
4

very difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax"
as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or
as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected
from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a 5

withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding
agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility
for the collection of the tax as well as the payment thereof is concentrated upon the person over whom
the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return and the payment of the
tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for the tax he is
duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law. 6 (Emphasis

supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with
respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim.
This implied authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an
action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the
refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax
credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any
deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very
beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file
the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following
portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.

(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during
its taxable year from all sources within the Philippines, as . . . dividends . . . 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, which shall be collected and paid as provided in Section 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 the 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 corporations and the tax (15%) on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) 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. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-
USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines"
must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the
preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in
making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty
(20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty
(20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be
credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and
960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax
imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the
additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or
against the personal holding company tax imposed by section 541.

(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and
excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
 xxx xxx xxx

Sec. 902. Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a
foreign corporation from which itreceives dividends in any taxable year shall

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such
foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits,
which the amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the
income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess
profits taxes imposed on or with respect to suchprofits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends
paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise),
and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7

shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the
dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate

part of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-
Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues
earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of
the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning
profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very
real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate
income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24
(b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to
P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine
Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA

x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USA

x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US
tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 Dividends remittable to P&G-USA

- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.

to the BIR
 Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section
902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the
requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US Tax
Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court,
the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we
find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the
Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the
corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S. government will allow a credit to the U.S.
corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend.
Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in
accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at
15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend
can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250

P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is
clearly more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to
P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to
its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a
foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo,
Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.
 4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit
found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes
to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .

(c) Taxes. . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by
this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess
profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US governmente.g., for taxes collected
by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-
profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such
dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have been
paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the
amount of the entire net income of the domestic corporation in which such dividends are included. The term"accumulated profits" when used in this subsection
reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or
with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or
years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or
years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits,
or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of
less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the
US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the
US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a
Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom
taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen
percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section
24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been
answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%)
rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the
applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from
thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the
actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1),
NIRC, 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.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and

It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the
collected. 11

tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu Hongkong, Denmark, etc.) comply with 12 13 14

the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once
such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing
implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify
to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities
to P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do
change, such implementing regulations could also provide that failure of P&G-Phil. to submit such certification
within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20)
percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the
state of US law at a given time. We should leave details relating to administrative implementation where they
properly belong with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason
alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are
designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge
fiscal and economic objectives. The task of our Court is to give effect to the legislative design and objectives as
they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that
process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five
percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369
which amended Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing

economyforemost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need
be imposed on dividends received by non-resident foreign corporations in the same manner as the tax
imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)
More simply put, Section 24 (b) (1), 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 (i.e., second-tier taxation) (the home
country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the
investor additional tax credits which would be applicable against the tax payable to such home country.
Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the investor corporation
a "deemed paid" tax credit at least equal in amount to the twenty (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.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901
tax credit.

P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

- 0 - US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US
corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-
USA would after US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA
net of Philippine taxes. In the calculation of the Philippine Government, this should encourage additional
investment or re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income," the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of
15

twenty percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within
that Contracting State by a resident of the other Contracting State shall not exceed

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the
part of the paying corporation's taxable year which precedes the date of payment of the dividend and
during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the
voting stock of the paying corporation was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, 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] . This is, of
16

course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax
rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5)
percentage points which compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC,
makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated
on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in
CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.

Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this country
by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least
equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on
their profits to their home state. In effect, both the Philippines and the home state of the foreign investors
reduce their respective tax "take" of those profits and the investors wind up with more left in their pockets.
Under this arrangement, the total taxes to be paid by the foreign investors may be confined to the 35%
corporate income tax and 15% dividend tax only, both payable to the Philippines, with the US tax liability being
offset wholly or substantially by the US "deemed paid" tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35%
corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or
more on the same amount of dividends. In this circumstance, it is not likely that many such foreign investors,
given the onerous burden of the two-tier system, i.e., local state plus home state, will be encouraged to do
business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial
viewer. But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our
country and contribute to our economic development. The benefit to us may not be immediately available in
instant revenues but it will be realized later, and in greater measure, in terms of a more stable and robust
economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add
some observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v.
Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically
opposite to that sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner
Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real
party in interest in claiming a refund cannot prejudice the government, as such failure is merely a procedural
defect; and that moreover, the government can never be in estoppel, especially in matters involving taxes. In a
word, the dissenting opinion insists that errors of its agents should not jeopardize the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose any
litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also one of
fairness: whether the government should be subject to the same stringent conditions applicable to an ordinary
litigant. As the Court had declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court and challenge the
position he had accepted at the administrative level, would be to sanction a procedure whereby the
Court which is supposed to review administrative determinations would not review, but determine
and decide for the first time, a question not raised at the administrative forum. . . . (160 SCRA at 566-
577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless
have been able to show proof of such authority. By any account, it would be rank injustice not at this stage to
require petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the
actual amount credited by the US government against the income tax due from P & G USA on the dividends
received from private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends
were received; and (3) to submit any duly authenticated document showing that the US government credited
the 20% tax deemed paid in the Philippines.

I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid"
credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P &
G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends have actually been remitted to the
US (which presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the
US tax authorities cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To
require private respondent to show documentary proof of its parent corporation having actually received the
"deemed paid" tax credit from the proper tax authorities, would be like putting the cart before the horse. The
only way of cutting through this (what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they
have been doing) to the effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the
requirements in our tax code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can
be required to submit, within a reasonable period, proof of the amount of "deemed paid" tax credit actually
granted by the foreign tax authority. Imposing such a resolutory condition should resolve the knotty problem of
circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax
exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and that
refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain
and give effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax
statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning
and applied without interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that
the basic purpose of Pres. Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of
the National Internal Revenue Code, was "to decrease the tax liability" of the foreign capital investor and
thereby to promote more inward foreign investment. The same dissenting opinion hastens to add, however, that
the granting of a reduced dividend tax rate "is premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find
reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC.
Upon the other hand, where the law-making authority intended to impose a requirement of reciprocity as a
condition for grant of a privilege, the legislature does so expressly and clearly. For example, the gross estate of
non-citizens and non-residents of the Philippines normally includes intangible personal property situated in the
Philippines, for purposes of application of the estate tax and donor's tax. However, under Section 98 of the
NIRC (as amended by P.D. 1457), no taxes will be collected by the Philippines in respect of such intangible
personal property if the law or the foreign country of which the decedent was a citizen and resident at the time
of his death allows a similar exemption from transfer or death taxes in respect of intangible personal property
located in such foreign country and owned by Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax
rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the
basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the
effort to promote the inflow of foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a
requirement that the U.S. grant a similar reduction of U.S. dividend taxes on remittances by the U.S.
subsidiaries of Philippine corporations, would assume a desire on the part of the U.S. and of the Philippines to
attract the flow of Philippine capital into the U.S.. But the Philippines precisely is a capital importing, and not a
capital exporting country. If the Philippines had surplus capital to export, it would not need to import foreign
capital into the Philippines. In other words, to require dividend tax reciprocity from a foreign jurisdiction would
be to actively encourage Philippine corporations to invest outside the Philippines, which would be inconsistent
with the notion of attracting foreign capital into the Philippines in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
 Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates that
the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has been
a change of mind on the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of
Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987,
recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling
has been issued by the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter
& Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April 15, 1988 is
sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble
Philippines (PMC-Phils., for brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;

(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against
the U.S. tax due from PMC-U.S.A. of taxes deemed to have been paid in the Phils. equivalent to 20%
which represents the difference between the regular tax of 35% on corporations and the tax of 15% on
dividends;

(c) private respondent failed to meet certain conditions necessary in order that the dividends received
by the non-resident parent company in the U.S. may be subject to the preferential 15% tax instead of
35%. (pp. 200-201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this Court in
the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals,"
G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but
held an apparent contrary view. Private respondent advances the theory that since the Wander decision had
already become final and executory it should be a precedent in deciding similar issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of
the petitioner therein to file its motion for reconsideration in due time. Petitioner received the notice of judgment
on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already
become final and executory on May 9, 1988. Considering that entry of final judgment had already been made
on May 9, 1988, the Third Division resolved to note without action the said Motion. Apparently therefore, the
merits of the motion for reconsideration were not passed upon by the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in
Division may be modified or reversed by the court en banc. The case is now before this Court en banc and the
decision that will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the
Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company). However, such
fact does not necessarily connote that private respondent is the real party in interest to claim reimbursement of
the tax alleged to have been overpaid. Payment of tax is an obligation physically passed off by law on the
withholding agent, if any, but the act of claiming tax refund is a right that, in a strict sense, belongs to the
taxpayer which is private respondent's parent company. The role or function of PMC-Phils., as the remitter or
payor of the dividend income, is merely to insure the collection of the dividend income taxes due to the
Philippine government from the taxpayer, "PMC-U.S.A.," the non-resident foreign corporation not engaged in
trade or business in the Philippines, as "PMC-U.S.A." is subject to tax equivalent to thirty five percent (35%) of
the gross income received from "PMC-Phils." in the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax
Code). Being a mere withholding agent of the government and the real party in interest being the parent
company in the United States, private respondent cannot claim refund of the alleged overpaid taxes. Such right
properly belongs to PMC-U.S.A. It is therefore clear that as held by the Supreme Court in a series of cases, the
action in the Court of Tax Appeals as well as in this Court should have been brought in the name of the parent
company as petitioner and not in the name of the withholding agent. This is because the action should be
brought under the name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125;
Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30,
1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485,
January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real
party in interest. All persons having an interest in the subject of the action and in obtaining the relief
demanded shall be joined as plaintiffs. All persons who claim an interest in the controversy or the
subject thereof adverse to the plaintiff, or who are necessary to a complete determination or settlement
of the questions involved therein shall be joined as defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax
is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of
an overpayment(or claim for refund) the agent must be given the right to sue the Commissioner by itself (that
is, the agent here is also a real party in interest). He further claims that to deny this right would be unfair. This
is not so. While payment of the tax due is an OBLIGATION of the agent the obtaining of a refund is a RIGHT.
While every obligation has a corresponding right (and vice-versa), the obligation to pay the complete tax has
the corresponding right of the government to demand the deficiency; and the right of the agent to demand a
refund corresponds to the government's duty to refund. Certainly, the obligation of the withholding agent to pay
in full does not correspond to its right to claim for the refund. It is evident therefore that the real party in interest
in this claim for reimbursement is the principal (the mother corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals
the issue relating to the real party in interest to claim the refund cannot, and should not, prejudice the
government. Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel,
particularly in matters involving taxes. Thus, for example, the payment by the tax-payer of income taxes,
pursuant to a BIR assessment does not preclude the government from making further assessments. The errors
or omissions of certain administrative officers should never be allowed to jeopardize the government's financial
position. (See: Phil. Long Distance Tel. Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253,
Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v.
Perez, L-14874, Sept, 30, 1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-
26522, Feb. 27, 1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax
Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise deemed waived by the
government, We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in
Section 902 of the U.S. Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return
of the disputed 15% to the private respondent. This is because the amount of tax credit purportedly being
allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is within
the limits set forth in the law. While the mathematical computations in Justice Feliciano's separate
opinion appear to be correct, the computations suffer from a basic defect, that is we have no way of knowing or
checking the figure used as premises. In view of the ambiguity of Sec. 902 itself, we can conclude that no real
tax credit was really intended. In the interpretation of tax statutes, it is axiomatic that as between the interest of
multinational corporations and the interest of our own government, it would be far better, in the absence of
definitive guidelines, to favor the national interest. As correctly pointed out by the Solicitor General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid
by the foreign taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of
PMC-U.S.A. would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home
country, the United States, not only would allow against PMC-U.SA.'s U.S. income tax liability a foreign
tax credit for the fifteen (15%) percentage-point portion of the thirty five (35%) percent Phil. dividend
tax actually paid or accrued but also would allow a foreign tax "sparing" credit for the twenty (20%)'
percentage-point portion spared, waived, forgiven or otherwise deemed as if paid by the Phil. govt. by
virtue of the "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply Brief, pp. 23-24; Rollo,
pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate
taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S.
government recognize much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S.
foreign-tax credit mechanism under Sections 901-905 of the U.S. Intemal Revenue Code does not apply to
phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered "as if" paid by
any foreign taxing authority, including that of the Philippine government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government
against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present
the income tax return of its parent company for 1975 when the dividends were received; and (3) to submit any
duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the
Philippines.

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign
authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden
of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law . . . and cannot be permitted to exist upon vague implications. (Asiatic
Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304;
Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA
617; Davao Light and Power Co. Inc. v. Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is
claimed, it must be shown indubitably to exist, for every presumption is against it, and a well founded doubt is
fatal to the claim (Farrington v. Tennessee & Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-
29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the
Philippines was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of which was to
"encourage more capital investment for large projects." And its ultimate purpose is to decrease the tax liability
of the corporation concerned. But this granting of a preferential right is premised on reciprocity, without which
there is clearly a derogation of our country's financial sovereignty. No such reciprocity has been proved, nor
does it actually exist. At this juncture, it would be useful to bear in mind the following observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous pressures on the
tax system to strengthen its competence and capability to deal effectively with issues arising from the foregoing
phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it is,
international taxation deals with the tax treatment of goods and services transferred on a global basis,
multinational corporations and foreign investments.
Since the guiding philosophy behind international trade is free flow of goods and services, it goes without
saying that the principal objective of international taxation is to see through this ideal by way of feasible taxation
arrangements which recognize each country's sovereignty in the matter of taxation, the need for revenue and
the attainment of certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax
subjects are obviously more complicated than their domestic counter-parts. Hence, the devise of taxation
arrangements to deal with such complications requires a welter of information and data build-up which
generally are not readily obtainable and available. Also, caution must be exercised so that whatever taxation
arrangements are set up, the same do not get in the way of free flow of goods and services, exchange of
technology, movement of capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of
double taxation (i.e., taxing an item more than once) arises because of global movement of goods and
services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable
items by the country of source or location (source or situs rule) and the taxation of the same items by the
country of residence or nationality of the taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in another
country because the recipient is a resident or citizen of that country. If the taxes in both countries are
substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement to the
activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty is a bilateral convention (but may 1

be made multilateral) entered into between sovereign states for purposes of eliminating double taxation on
income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and
equitable tax treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments. For instance, if
the usual tax rate is 35 percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing provision may be stipulated. With tax
sparing, taxes exempted or reduced are considered as having been fully paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
 Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was promulgated, and while
Wander has attained finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for Reconsideration was theoretically never
taken into account by said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall be right." We
hereby cite settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really "adherence to
precedents," states that once a case has been decided one way, then another case, involving exactly the same point at issue, should be decided in the same manner.

Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a doctrine
may be, and no matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare decisis does not and should
not apply when there is a conflict between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else is that the court
shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations between the
Philippines and the United States, a country with which we had no tax treaty, at the time the taxes herein were collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge
35% indicates that the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of the tax credit under
P.D. No. 369 would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax credit claimed, we
find ourselves unable to compute the proper amount thereof.

7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.
G.R. No. 175410 November 12, 2014

SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine whether
there are taxes that should have been paid in lieu of the taxes paid. Determining the proper category of tax that
should have been paid is not an assessment. It is incidental to determining whether there should be a refund.

A Philippine Economic Zone Authority (PEZA)-registered corporation that has never commenced operations
may not avail the tax incentives and preferential rates given to PEZA-registered enterprises. Such corporation
is subject to ordinary tax rates under the National Internal Revenue Code of 1997.

This is a petition for review on certiorari of the November 3, 2006 Court of Tax Appeals En Banc decision. It
1 2

affirmed the Court of Tax Appeals Second Divisions decision and resolution denying petitioner SMI-Ed
3 4

Philippines Technology, Inc.s (SMI-Ed Philippines) claim for tax refund.

5

SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of manufacturing
ultra high-density microprocessor unit package."6

After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings and purchased machineries
and equipment. As of December 31, 1999, the total cost of the properties amounted to 3,150,925,917.00.
7 8

SMI-Ed Philippines "failed to commence operations." Its factory was temporarily closed, effective October 15,
9

1999. On August 1, 2000, it sold its buildings and some of its installed machineries and equipment to Ibiden
Philippines, Inc., another PEZA-registered enterprise, for 2,100,000,000.00 (893,550,000.00). SMI-Ed
Philippines was dissolved on November 30, 2000. 10

In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales of
itsproperties to 5% final tax on PEZA registered corporations. SMI-Ed Philippines paid taxes amounting to
44,677,500.00. 11
On February 2, 2001, after requesting the cancellation of its PEZA registration and amending its articles of
incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative claim for the refund of
44,677,500.00 with the Bureauof Internal Revenue (BIR). SMIEd Philippines alleged that the amountwas
erroneously paid. It also indicated the refundable amount in its final income tax return filed on March 1, 2001. It
also alleged that it incurred a net loss of 2,233,464,538.00. 12

The BIR did not act on SMI-Ed Philippines claim, which prompted the latter to file a petition for reviewbefore
the Court of Tax Appeals on September 9, 2002. 13

The Court of Tax Appeals Second Division denied SMI-Ed Philippines claim for refund in the decision dated
December 29, 2004. 14

The Court of Tax Appeals Second Division found that SMI-Ed Philippines administrative claim for refund and
the petition for review with the Court of Tax Appeals were filed within the two-year prescriptive
period. However, fiscal incentives given to PEZA-registered enterprises may be availed only by PEZA-
15

registered enterprises that had already commenced operations. Since SMI-Ed Philippines had not
16

commenced operations, it was not entitled to the incentives of either the income tax holiday or the 5%
preferential tax rate. Payment of the 5% preferential tax amounting to 44,677,500.00 was erroneous.
17 18

After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39(A)(1) of the
National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division subjected the sale of
SMIEd Philippines assets to 6% capital gains tax under Section 27(D)(5) of the same Code and Section 2 of
Revenue Regulations No. 8-98. It was found liable for capital gains tax amounting to
19

53,613,000.00. Therefore, SMIEd Philippines must still pay the balance of 8,935,500.00 as deficiency
20

tax, "which respondent should perhaps look into." The dispositive portion of the Court of Tax Appeals Second
21 22

Divisions decision reads:

WHEREFORE, premises considered, the instant petition is hereby DENIED.

SO ORDERED. 23

The Court of Tax Appeals denied SMI-Ed Philippines motion for reconsideration in its June 15, 2005
resolution. 24

On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of Tax Appeals En Banc. It 25

argued that the Court of Tax Appeals Second Division erroneously assessed the 6% capital gains tax on the
sale of SMI-Ed Philippines equipment, machineries, and buildings. It also argued that the Court of Tax
26

Appeals Second Division cannot make an assessment at the first instance. Even if the Court of Tax Appeals
27

Second Division has such power, the period to make an assessment had already prescribed. 28

In the decision promulgated on November 3, 2006, the Court of Tax Appeals En Banc dismissed SMI-Ed
Philippines petition and affirmed the Court of Tax Appeals Second Divisions decision and resolution. The
29

dispositive portion of the Court of Tax Appeals En Bancs decision reads:

WHEREFORE, finding no reversible error to reverse the assailed Decision promulgated on December 29, 2004
and the Resolution dated June 15, 2005, the instant petition for review is hereby DISMISSED. Accordingly, the
assailed Decision and Resolution are hereby AFFIRMED. SO ORDERED. 30

SMI-Ed Philippines filed a petition for review before this court on December 27, 2006, praying for the grant of
31

its claim for refund and the reversal of the Court of Tax Appeals En Bancs decision. 32

SMI-Ed Philippines assigned the following errors:

A. The honorable CTA En Banc grievously erred and acted beyond its jurisdiction when it assessed for
deficiency tax in the first instance.
 B. Even assuming that the honorable CTA En Banc has the right to make an assessment against the
petitioner-appellant, it grievously erred in finding that the machineries and equipment sold by the
petitioner-appellant is subject to the six percent (6%) capital gains tax under Section 27(D)(5) of the
Tax Code. 33

Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an assessment since its jurisdiction,
with respect to the decisions of respondent, is merely appellate. Moreover, the power to make assessment
34

had already prescribed under Section 203 of the National Internal Revenue Code of 1997 since the return for
the erroneous payment was filed on September 13, 2000. This is more than three (3) years from the last day
prescribed by law for the filing of the return. 35

Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected petitioners machineries to
6% capital gains tax. Section 27(D)(5) of the National Internal Revenue Code of 1997 is clear that the 6%
36

capital gains tax on domestic corporations applies only on the sale of lands and buildings and not
tomachineries and equipment. Since 1,700,000,000.00 of the 2,100,000,000.00 constituted the
37

consideration for the sale of petitioners machineries, only 400,000,000.00 or 170,200,000.00 should be
subjected to the 6% capital gains tax. Petitioner should be liable only for 10,212,000.00. It should be entitled
38 39

to a refund of 34,464,500.00 after deducting 10,212,000.00 from the erroneously paid final tax of
44,677,500.00. 40

In its comment, respondent argued that the Court of Tax Appeals determination of petitioners liability for capital
gains tax was not an assessment. Such determination was necessary to settle the question regarding the tax
consequence of the sale of the properties. This is clearly within the Court of Tax Appeals jurisdiction under
41

Section 7 of Republic Act No. 9282. Respondent also argued that "petitioner failed to justify its claim for
42

refund."43

The petition is meritorious.

Jurisdiction of the Court of Tax Appeals

The term "assessment" refers to the determination of amounts due from a person obligated to make payments.
In the context of national internal revenue collection, it refers the determination of the taxes due from a
taxpayer under the National Internal Revenue Code of 1997.

The power and duty to assess national internal revenue taxes are lodged with the BIR. Section 2 of the
44

National Internal Revenue Code of 1997 provides:

SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall be
under the supervision and control of the Department of Finance and its powers and duties shall comprehend
the assessment and collection ofall national internal revenue taxes, fees, and charges, and the enforcement of
all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases
decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred to it by this Code or other laws. (Emphasis supplied)
The BIR is not mandated to make an assessment relative to every return filed with it. Tax returns filed with the
BIR enjoy the presumption that these are in accordance with the law. Tax returns are also presumed correct
45

since these are filed under the penalty of perjury. Generally, however, the BIR assesses taxes when it appears,
46

after a return had been filed, that the taxes paid were incorrect, false, or fraudulent. The BIR also assesses
47 48 49

taxes when taxes are due but no return is filed. Thus: 50

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax
Administration and Enforcement.

(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as required under the
provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination
of any taxpayer and the assessment of the correct amount of tax: Provided, however; That failure to file a
return shall not prevent the Commissioner from authorizing the examination of any taxpayer.The tax or any
deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly
authorized representative.

....

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a preceeding in court for the collection of such tax may be filed without assessment, at any time
within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment
which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof. (Emphasis supplied)

The Court of Tax Appeals has no powerto make an assessment at the first instance. On matters such as tax
collection, tax refund, and others related to the national internal revenue taxes, the Court of Tax Appeals
jurisdiction is appellate in nature.

Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125, as amended by Republic Act No. 9282, provide
51 52

that the Court of Tax Appeals reviews decisions and inactions of the Commissioner of Internal Revenue in
disputed assessments and claims for tax refunds. Thus: SEC. 7. Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue or other laws administered by the Bureau of Internal
Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising
under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code provides a specific period of action, in which
case the inaction shall be deemed a denial[.] (Emphasis supplied) Based on these provisions, the
following must be present for the Court of Tax Appeals to have jurisdiction over a case involving the
BIRs decisions or inactions:

a) A case involving any of the following:

i. Disputed assessments;

ii. Refunds of internal revenue taxes, fees, or other charges, penalties in relation
thereto; and

iii. Other matters arising under the National Internal Revenue Code of 1997.

b) Commissioner of Internal Revenues decision or inaction in a case submitted to him or her

Thus, the BIR first has to make an assessment of the taxpayers liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIR issues a decision
that is unfavorable to the taxpayer or if the BIR fails to act on a dispute brought by the taxpayer, the BIRs
decision or inaction may be brought on appeal to the Court of Tax Appeals. The Court of Tax Appeals then
acquires jurisdiction over the case.
When the BIRs unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of Tax
Appeals reviews the correctness of the BIRs assessment and decision. In reviewing the BIRs assessment and
decision, the Court of Tax Appeals had to make its own determination of the taxpayers tax liabilities. The Court
of Tax Appeals may not make such determination before the BIR makes its assessment and before a dispute
involving such assessment is brought to the Court of Tax Appeals on appeal.

The Court of Tax Appeals jurisdiction is not limited to cases when the BIR makes an assessment or a decision
unfavorable to the taxpayer. Because Republic Act No. 1125 also vests the Court of Tax Appeals with
53

jurisdiction over the BIRs inaction on a taxpayers refund claim, there may be instances when the Court of Tax
Appeals has to take cognizance of cases that have nothing to do with the BIRs assessments or decisions.
When the BIR fails to act on a claim for refund of voluntarily but mistakenly paid taxes, for example, there is no
decision or assessment involved.

Taxes are generally self-assessed. They are initially computed and voluntarily paid by the taxpayer. The
government does not have to demand it. If the tax payments are correct, the BIR need not make an
assessment.

The self-assessing and voluntarily paying taxpayer, however, may later find that he or she has erroneously paid
taxes. Erroneously paid taxes may come in the form of amounts thatshould not have been paid. Thus, a
taxpayer may find that he or she has paid more than the amount that should have been paid under the law.
Erroneously paid taxes may also come in the form of tax payments for the wrong category of tax. Thus, a
taxpayer may find that he or she has paid a certain kindof tax that he or she is not subject to.

In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request for refund, the
taxpayer may bring the matter to the Court of Tax Appeals.

From the taxpayers self-assessment and tax payment up to his or her request for refund and the BIRs
inaction,the BIRs participation is limited to the receipt of the taxpayers payment. The BIR does not make an
assessment; the BIR issues no decision; and there is no dispute yet involved. Since there is no BIR
assessment yet, the Court of Tax Appeals may not determine the amount of taxes due from the taxpayer. There
is also no decision yet to review. However, there was inaction on the part of the BIR. That inaction is within the
Court of Tax Appeals jurisdiction.

In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they do not involve BIR
assessments or decisions.

In this case, the Court of Tax Appeals jurisdiction was acquired because petitioner brought the case on appeal
before the Court of Tax Appeals after the BIR had failed to act on petitioners claim for refund of erroneously
paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result of a disputed assessment of a BIR
decision.

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or other
taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioners
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in view of its
claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-registered
enterprises.

The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund. 54

The issue of petitioners claim for tax refund is intertwined with the issue of the proper taxes that are due from
petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the tax return
55

filed was not proper, the correctness of the amount paid and, therefore, the claim for refund become
questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid taxes is
more properly liable for taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of its
56

erroneously paid 2% taxes on its gross Philippine billings. This court did not immediately grant South
Africans claim for refund. This is because although this court found that South African Airways was not subject
to the 2% tax on its gross Philippine billings, this court also found that it was subject to 32% tax on its taxable
income. 57

In this case, petitioners claim that it erroneously paid the 5% final tax is an admission that the quarterly tax
return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being claimed,
the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable for the 5% final tax and,
instead, liable for taxes other than the 5% final tax. As in South African Airways, petitioners request for refund
can neither be granted nor denied outright without such determination. 58

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayers liability should be computed and deducted from the refundable amount.

Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the
issue of the taxpayers entitlement to refund. The question of tax deficiencyis distinct and unrelated to the
question of petitioners entitlement to refund. Tax deficiencies should be subject to assessment procedures and
the rules of prescription. The court cannot be expected to perform the BIRs duties whenever it fails to do so
either through neglect or oversight. Neither can court processes be used as a tool to circumvent laws protecting
the rights of taxpayers.

II

Petitioners entitlement to benefits given to PEZA-registered enterprises

Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5% preferential tax rate
under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This is because it never began its
operation.

Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage investments and
business activities that will generate employment. Giving fiscal incentives to businesses is one of the means
59

devised to achieve this purpose. It comes with the expectation that persons who will avail these incentives will
contribute to the purposes achievement. Hence, to avail the fiscal incentives under Republic Act No. 7916, the
law did not say that mere PEZA registration is sufficient.

Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:

SEC. 23. Fiscal Incentives. Business establishments operating within the ECOZONES shall be entitled to the
fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone
Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus
Investment Code of 1987.

Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same benefits provided for
in the Export Development Act of 1994.

SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. Any provision of existing laws,
rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross
income earned by all businesses and enterprises within the ECOZONE shall be remitted tothe national
government. This five percent (5%) shall be shared and distributed as follows:
 a. Three percent (3%) to the national government;

b. One percent (1%) to the localgovernment units affected by the declaration of the ECOZONE
inproportion to their population, land area, and equal sharing factors; and

c. One percent (1%) for the establishment of a development fund to be utilized for the development of
municipalities outside and contiguous to each ECOZONE: Provided, however, That the respective
share of the affected local government units shall be determined on the basis of the following formula:

1. Population - fifty percent (50%);

2. Land area - twenty-five percent (25%); and

3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)

Based on these provisions, the fiscal incentives and the 5% preferential tax rate are available only to
businesses operating within the Ecozone. A business is considered in operation when it starts entering into
60

commercial transactions that are not merely incidental to but are related to the purposes of the business. It is
similar to the definition of "doing business," as applied in actions involvingthe right of foreign corporations to
maintain court actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al., this court said that the terms
61

"doing" or "engaging in" or "transacting" business":

. . . impl[y] a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in progressive
prosecution of, the purpose and object of its organization. Petitioner never started its operations since its
62

registration on June 29, 1998 because of the Asian financial crisis. Petitioner admitted this. Therefore, it
63 64 65

cannot avail the incentives provided under Republic Act No. 7916. It is not entitled to the preferential tax rate of
5% on gross income in lieu of all taxes. Because petitioner is not entitled to a preferential rate, it is subject to
ordinary tax rates under the National Internal Revenue Code of 1997.

III

Imposition of capital gains tax

The Court of Tax Appeals found that petitioners sale of its properties is subject to capital gains tax.

For petitioners properties to be subjected to capital gains tax, the properties must form part ofpetitioners
capital assets.

Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital assets":

SEC. 39. Capital Gains and Losses. -

(A) Definitions.- As used in this Title -

(1) Capital Assets.- the term capital assets means property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course of his trade orbusiness, or
property used in the trade or business, of a character which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. (Emphasis
supplied) Thus, "capital assets" refers to taxpayers property that is NOT any of the following:

1. Stock in trade;
 2. Property that should be included inthe taxpayers inventory at the close of the taxable year;

3. Property held for sale in the ordinary course of the taxpayers business;

4. Depreciable property used in the trade or business; and

5. Real property used in the trade or business.

The properties involved in this case include petitioners buildings, equipment, and machineries. They are not
among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue Code of 1997. None of
the properties were used in petitioners trade or ordinary course of business because petitioner never
commenced operations. They were not part of the inventory. None of themwere stocks in trade. Based on the
definition of capital assets under Section 39 of the National Internal Revenue Code of 1997, they are capital
assets.

Respondent insists that since petitioners machineries and equipment are classified as capital assets, their
sales should be subject to capital gains tax. Respondent is mistaken.

In Commissioner of Internal Revenue v. Fortune Tobacco Corporation, this court said:

66

The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens are
not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens,
taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. (Citations omitted)
67

Capital gains of individuals and corporations from the sale of real properties are taxed differently. Individuals
are taxed on capital gains from sale of all real properties located in the Philippines and classified as capital
assets. Thus:

SEC. 24. Income Tax Rates.

....

(D) Capital Gains from Sale of Real Property.

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as capital assets, including
pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any
of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined
either under Section 24 (A) or under this Subsection, at the option of the taxpayer. (Emphasis supplied)
68

For corporations, the National Internal Revenue Code of 1997 treats the sale of land and buildings, and the
sale of machineries and equipment, differently. Domestic corporations are imposed a 6% capital gains tax only
on the presumed gain realized from the sale of lands and/or buildings. The National Internal Revenue Code of
1997 does not impose the 6% capital gains tax on the gains realized from the sale of machineries and
equipment. Section 27(D)(5) of the National Internal Revenue Code of 1997 provides:

SEC. 27. Rates of Income tax on Domestic Corporations. -

 ....

(D) Rates of Tax on Certain Passive Incomes. -

....

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six
percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or
disposition of lands and/or buildings which are not actually used in the business of a corporation and are
treated as capital assets, based on the gross selling price of fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings. (Emphasis supplied)

Therefore, only the presumed gain from the sale of petitioners land and/or building may be subjected to the 6%
capital gains tax. The income from the sale of petitioners machineries and equipment is subject to the
provisions on normal corporate income tax.

To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax for the sold land and/or
building of petitioner and the amount of corporate income tax for the sale of petitioners machineries and
equipment should be deducted from the total final tax paid. Petitioner indicated, however, in its March 1, 2001
income tax return for the 11-month period ending on November 30, 2000 that it suffered a net loss of
2,233,464,538.00. This declaration was made under the pain of perjury. Section 267 of the National Internal
69

Revenue Code of 1997 provides:

SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other statement required under
this Code, shall, in lieu of an oath, contain a written statement that they are made under the penalties of
perjury. Any person who willfully files a declaration, return or statement containing information which is not true
and correct as to every material matter shall, upon conviction, be subject to the penalties prescribed for perjury
under the Revised Penal Code. Moreover, Rule 131, Section 3(ff) of the Rules of Court provides for the
presumption that the law has been obeyed unless contradicted or overcome by other evidence, thus:

SEC. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted, but may be
contradicted and overcome by other evidence:

....

(ff) That the law has been obeyed;

The BIR did not make a deficiency assessment for this declaration. Neither did the BIR dispute this statement
in its pleadings filed before this court. There is, therefore, no reason todoubt the truth that petitioner indeed
suffered a net loss in 2000.

Since petitioner had not started its operations, it was also not subject to the minimum corporate income tax of
2% on gross income. Therefore, petitioner is not liable for any income tax.
70

IV

Prescription

Section 203 of the National Internal Revenue Code of 1997 provides that as a general rule, the BIR has three
(3) years from the last day prescribed by law for the filing of a return to make an assessment. If the return is
filed beyond the last day prescribed by law for filing, the three-year period shall run from the actual date of
filing. Thus:

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the
return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law,
the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a
return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last
day.

This court said that the prescriptive period to make an assessment of internal revenue taxes is provided
"primarily to safeguard the interests of taxpayers from unreasonable investigation." This court explained in
71

Commissioner of Internal Revenue v. FMF Development Corporation the reason behind the provisions on
72

prescriptive periods for tax assessments: Accordingly, the government must assess internal revenue taxes on
time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it
will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.
73

Rules derogating taxpayers right against prolonged and unscrupulous investigations are strictly construed
against the government. 74

[T]he law on prescription should beinterpreted in a way conducive to bringing about the beneficent purpose of
affording protection to the taxpayer within the contemplation of the Commission which recommended the
approval of the law. To the Government, its tax officers are obliged to act promptlyin the making of assessment
so that taxpayers, after the lapse of the period of prescription, would have a feeling of security against
unscrupulous tax agents who will always try to find an excuse to inspect the books of taxpayers, not to
determine the latters real liability, but to take advantage of a possible opportunity to harass even law-abiding
businessmen. Without such legal defense, taxpayers would be open season to harassment by unscrupulous
tax agents.75

Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.: 76

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment,
our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a
remedial measure, should be liberally construed in order to afford such protection. As a corollary, the
exceptions to the law on prescription should perforce be strictly construed[.]

....

. . . . Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering
that the prescriptive period was precisely intended to give them peace of mind. (Citation omitted)
77

The BIR had three years from the filing of petitioners final tax return in 2000 to assess petitioners taxes.
Nothing stopped the BIR from making the correct assessment. The elevation of the refund claim with the Court
of Tax Appeals was not a bar against the BIRs exercise of its assessment powers.

The BIR, however, did not initiate any assessment for deficiency capital gains tax. Since more than a decade
78

have lapsed from the filing of petitioner's return, the BIR can no longer assess petitioner for deficiency capital
gains taxes, if petitioner is later found to have capital gains tax liabilities in excess of the amount claimed for
refund.

The Court of Tax Appeals should not be expected to perform the BIR's duties of assessing and collecting taxes
whenever the BIR, through neglect or oversight, fails to do so within the prescriptive period allowed by law.

WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE. The Bureau of Internal
Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the amount of 5% final tax paid to
the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines Technology, Inc. 's land and
building. In view of the lapse of the prescriptive period for assessment, any capital gains tax accrued from the
sale of its land and building that is in excess of the 5% final tax paid to the Bureau of Internal Revenue may no
longer be recovered from petitioner SMI-Ed Philippines Technology, Inc.
SO ORDERED.

August 15, 2008

REVENUE MEMORANDUM CIRCULAR NO. 058-08

SUBJECT : Clarifying the Time within which to Reckon the Redemption Period on the
Foreclosed Asset and the Period within which to Pay Capital Gains Tax or Creditable Withholding Tax and
Documentary Stamp Tax on the Foreclosure of Real Estate Mortgage by those Governed by the General
Banking Law of 2000 (Republic Act No. 8791), as Well as the Venue for the Payment of These Taxes

TO : All Internal Revenue Officers and Others Concerned

Republic Act No. 8791 (R.A. 8791), otherwise known as "The General Banking Law of 2000", has
provided for the following with respect to the foreclosure of real estate mortgages by banks, those
engaged in quasi-banking activities, and trust companies: ECaAHS

"SEC. 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially or
extrajudicially, of any mortgage on real estate which is security for any loan or other credit
accommodation granted, the mortgagor or debtor whose real property has been sold for the full or
partial payment of his obligation shall have the right within one year after the sale of the real estate, to
redeem the property by paying the amount due under the mortgage deed, with interest thereon at the
rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from
the sale and custody of said property less the income derived therefrom. However, the purchaser at the
auction sale concerned, whether in a judicial or extrajudicial foreclosure, shall have the right to enter
upon and take possession of such property immediately after the date of the confirmation of the auction
sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the
conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only
upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay
all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure
proceeding.

"Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this provision until, but not
after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in
no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property
that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption
rights until their expiration. . . ." (emphasis supplied) SacDIE

For purposes of reckoning the one-year redemption period, in the case of individual mortgagors, or the
three-month redemption period for juridical persons/mortgagors, the same shall be reckoned from the
date of the confirmation of the auction sale which is the date when the certificate of sale is issued.

In case of non-redemption, the capital gains tax on the foreclosed capital asset of the mortgagor shall
become due within thirty (30) days following the expiration of the redemption period referred to in the
preceding paragraph. Nonetheless, if the property is an ordinary asset of the mortgagor, the creditable
expanded withholding tax shall be due and paid within ten (10) days following the end of the month in
which the redemption period expires. If the property foreclosed is under the circumstances which
warrant the imposition of the Value-added Tax (VAT) under Section 106 of the Tax Code, as implemented
by Revenue Regulations No. 4-2007, the VAT must be paid by the mortgagor on or before the 20th day
or 25th day, whichever is applicable, of the month following the month when the right of redemption
prescribes. Moreover, the payment of the documentary stamp tax and the filing of the return thereof
shall have to be made within five (5) days from the end of the month when the redemption period
expires. The taxes due on the foreclosure sale must be based on the bid price of the highest bidder
pursuant to Revenue Regulations No. 4-99. IcTCHD

The classification of the asset as either ordinary asset or capital asset depends upon the nature of the
asset in the hands of the mortgagor.

Under the foregoing circumstances, the mortgagee banks, quasi-banks, and trust companies, are
considered the statutory sellers in the foreclosure sales of these foreclosed real properties, and are thus,
expected to have paid the aforesaid taxes, within the period provided therefor, once the redemption
period thereon has expired, hence, without need to further wait for another or subsequent buyer before
taxes on said foreclosed property shall be paid. Generally, the venue for the filing of the returns and
payment of taxes on foreclosure sales, except the VAT, shall be at the place where the real property
foreclosed is located. The VAT, if applicable, must in all cases involving foreclosure sale of real property,
be paid by the VAT-registered mortgagor through the filing of the required return in the Revenue District
Office (RDO) where the said mortgagor is registered.

The foregoing rule on venue to the contrary notwithstanding, if the statutory seller (mortgagee-
bank/quasi-bank/trust company) is classified as a Large Taxpayer, the venue for the payment of capital
gains tax/creditable withholding tax, and documentary stamp tax on the foreclosure sale of real
properties mortgaged with them shall be with the concerned office of the Large Taxpayers Service
pursuant to the provisions of Revenue Regulations No. 4-2008. caTIDE

Upon submission of proof that the taxes required to be paid by the statutory seller mentioned herein
had been actually paid, the Certificate Authorizing Registration (CAR) must be issued without waiting for
the VAT compliance of the mortgagor in all cases where the property is subject to VAT. The BIR Office
having jurisdiction over the statutory seller is, nonetheless, required to notify the RDO where the
mortgagor is registered to collect the VAT on the said transaction.

All internal revenue officers and others concerned are hereby enjoined to give this Circular as wide a
publicity as possible. cCAIDS

(SGD.) LILIAN B. HEFTI

Commissioner of Internal Revenue

July 26, 1999

REVENUE REGULATIONS NO. 13-99

SUBJECT : Exemption of Certain Individuals from the Capital GainsTax on the Sale, Exchange or Disposition of a Principal
Residence under Certain Conditions

TO: All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 244, in relation to Section 24(D)(2) of the National Internal Revenue Code of 1997 ,
these Regulations are hereby promulgated to govern the exemption of a citizen or a resident alien individual from capital gains tax
on the sale, exchange or disposition of his principal residence.

SECTION 2. Definition of Terms. For purposes of these Regulations, the following items shall have the following meaning:

(1) Natural person shall refer to a citizen or resident alien individual taxable under Sec. 24 of the Code. It does not include an
estate or a trust, the provision of Sec. 60 of the Code to the contrary notwithstanding.

(2) Principal Residence shall refer to the dwelling house, including the land on which it is situated, where the husband and wife
or an unmarried individual, whether or not qualified as head of family, and members of his family reside. Actual occupancy of such
principal residence shall not be considered interrupted or abandoned by reason of the individuals temporary absence therefrom due
to travel or studies or work abroad or such other similar circumstances. Such principal residence must be characterized by
permanency in that it must be the dwelling house to which, whenever absent, the said individual intends to return.
(3) Fully Utilized shall mean that the taxpayer has actually commenced with the construction of his new principal residence or
has actually entered into a contract for the purchase of his new principal residence within eighteen (18) calendar months from the
date of sale, exchange or disposition thereof, with the intention of using the entire proceeds of sale for the acquisition or
construction of his new principal residence. Provided, that any expense paid for by the seller in effecting the sale, i.e., documentary
stamp tax, transfer fees, brokers commission, if any, shall be considered as part of the amount utilized.

SECTION 3. Conditions of Exemption. The general provisions of the Code to the contrary notwithstanding, capital gains
presumed to have been realized from the sale, exchange or disposition by a natural person of his principal residence shall not be
imposed with income tax, including the six percent (6%) capital gains tax, subject to the following conditions:

(1) Sworn Declaration Requirement. He shall submit a Sworn Declaration (ANNEX A hereof) of his intent to avail of the tax
exemption herein provided which shall be filed with the aforementioned Revenue District Office (RDO) having jurisdiction over the
location of the principal residence within thirty (30) days from the date of its sale, exchange or disposition, inclusive of the following:

(a) Duly Accomplished Capital Gains Tax Return (BIR Form No. 1706);

(b) Proof of payment of documentary stamp tax on conveyance of real property;

(c) A sworn statement from the Barangay Chairman that his principal residence is located within the jurisdiction of that Barangay
and has been his residence as of the date of sale, exchange or disposition thereof;

(d) A duplicate original copy of the Deed of Conveyance of his Principal Residence;

(e) Photocopy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT), in case of a condominium unit
(covering the principal residence sold, exchanged or disposed); and

(f) Latest Tax Declaration of the said principal residence (land and improvement).

(2) Post Reporting Requirement. The proceeds from the sale, exchange or disposition of his principal residence must be fully
utilized in acquiring or constructing his new principal residence within eighteen (18) calendar months from date of its sale, exchange
or disposition. In order to show proof that positive action was undertaken to utilize the proceeds for the acquisition or construction of
his new principal residence within the 18-month reglementary period, he shall submit to the RDO concerned, within thirty (30) days
from the lapse of the said period, the following documents:

(a) A sworn statement that the total proceeds from the sale of his old principal residence has been actually utilized in the acquisition
or construction of his new principal residence or, if the construction of his new principal residence is still in progress, a sworn
statement that such amount shall be fully utilized to procure the necessary materials and pay for the cost of labor and other
expenses for the construction thereof;

(b) A certified statement from his architect or engineer, or both, showing the cost of materials and labor for the construction of his
new principal residence;

(c) A certified copy of the Building Permit issued by the Office of the Building Official of the City or Municipality where his new
principal residence shall be constructed, as well as photocopies of documents (e.g. building specification plan, construction plans,
construction cost estimates) submitted with his application for said permit;

(d) In case his new principal residence is acquired by purchase, a duplicate original copy of the Deed of Absolute Sale covering the
purchase of his new principal residence.

(3) The tax exemption herein granted may be availed of only once every ten (10) years;

(4) The historical cost or adjusted basis of his old principal residence sold, exchanged or disposed shall be carried over to the cost
basis of his new principal residence; and

(5) If there is no full utilization of the proceeds of sale, exchange or disposition of his old principal residence for the acquisition or
construction of his new principal residence, he shall be liable for deficiency capital gains tax which shall be computed in accordance
with Sec. (4) hereof . Accordingly, only a fractional part (which the utilized amount bears to the gross selling price) of the historical
cost of the old principal residence sold shall be carried over to the cost basis of the new principal residence.

SECTION 4. Determination of Capital Gains Tax Due if the Proceeds of Sale, Exchange or Disposition of his Principal Residence
has not Been Fully Utilized. In a case where the entire proceeds of sale is not utilized for the purchase or construction of a new
principal residence, the capital gains tax shall attach. In computing the capital gains tax due on the sale of the principal residence,
we follow the following steps:
(1) Determine the percentage (%) of non-utilization applying the formula:

Unutilized Portion of GSP

________________________________ = Percentage (%) of Non-Utilization

GSP

(2) Multiply the % of non-utilization by the GSP or FMV, whichever is higher.

(3) Multiply the product in item (2) above by the rate of six percent (6%).

If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-month reglementary period, his right of
exemption from the capital gains tax did not arise to the extent of the unutilized amount, in which event, the tax due thereon shall
immediately become due and demandable on the 31st day after the date of the sale, exchange or disposition of principal residence.
As such, he shall file his capital gains tax return covering the sale, exchange or disposition of his principal residence and pay the
deficiency capital gains tax inclusive of the twenty five percent (25%) surcharge for late payment of the tax plus twenty percent
(20%) delinquency interest per annum incident to such late payment computed on the basis of the basic tax assessed. The interest
shall be imposed from the thirty-first (31st) day after the date of the sale of principal residence until the date of payment, provided,
that the date of sale shall mean the date of notarization of the document of sale, exchange, or disposition of principal residence.

Illustrations:

(1) In case the proceeds from the sale, exchange or disposition of his principal residence has been fully utilized to acquire his new
principal residence.

Assume that Mr. Arnold Buendia acquired his principal residence in 1986 at a cost of P1,000,000.00. He sold the said property
on January 1, 1998, with a fair market value of P5,000,000.00, for a consideration of P4,000,000.00. Within the 18-month
reglementary period, he purchased his new principal residence at a cost of P7,000,000.00.

Computations:

Historical cost of old principal residence P1,000,000.00

Gross selling price (GSP) P4,000,000.00
Fair market value (FMV) of old principal residence at the time of sale P5,000,000.00
Cost to acquire new principal residence P7,000,000.00
(a) To compute for the capital gains tax due. In this case, Mr. Buendia shall be exempt from the capital gains tax otherwise due
from him since the entire proceeds of the sale has been fully utilized to acquire his new principal residence.

(b) To compute for the basis of the new principal residence. The historical cost or adjusted cost basis
of his old principal residence shall be carried over to the cost basis of his new principal residence,
computed as follows:

Historical cost of old principal residence P1,000,000.00

Add: Additional cost to acquire new principal residence

Cost to acquire his new principal residence P7,000,000.00

Less: GSP of his old principal residence (P4,000,000.00) P3,000,000.00

Adjusted Cost Basis of New Principal Residence P4,000,000.00

(2) In case the fair market value of the old principal residence is equal to the cost to acquire the new principal residence. Using
the above illustration, if for example, instead of P7,000,000.00, Mr. Buendia was able to acquire his new principal residence at a
cost of P4,000,000.00, which is equal to the gross selling price of his old principal residence.

(a) To compute for the capital gains tax due. In this case, Mr. Buendia is still exempt from the payment of the capital gains tax
otherwise due from him because there has been full utilization of the proceeds from the sale of his old principal residence within the
18-month reglementary period.
(b) To compute for the basis of his new principal residence. Since the fair market value of his old
principal residence is equal to the cost to acquire his new principal residence, the historical cost of his
old principal residence shall be the basis of his new principal residence, computed as follows:

Historical cost of old principal residence P1,000,000.00

Add: Additional cost to acquire new principal residence

Cost to acquire his new principal residence P4,000,000.00

Less: GSP of old principal residence (P4,000,000.00)

Adjusted Cost Basis of New Principal Residence P1,000,000.00

(3) In case the proceeds from the sale of his old principal residence has not been fully utilized to acquire his new principal
residence. If Mr. Buendia acquired his new principal residence within the 18-month reglementary period but did not, however,
utilize the entire proceeds of the sale in acquiring his new principal residence because he only used P3,000,000 thereof in acquiring
his new principal residence, that portion of the gross selling price not utilized in the acquisition or construction of his new principal
residence shall be subject to capital gains tax.

Computations:

Historical cost of old principal residence P1,000,000.00

Gross selling price (GSP) P4,000,000.00
Fair market value (FMV) of old principal residence P5,000,000.00
Cost to acquire new principal residence P3,000,000.00
(a) To compute for the capital gains tax due. To compute for the capital gains tax due, the following formula shall be used in
determining capital gains tax due on the taxable portion pertaining to the unutilized amount of the proceeds of sale:

Unutilized Portion of
GSP of Old Principal
Residence

__________________ x x Capital gains tax rate

_ GSP or FMV of Old Principal
Residence, whichever is higher
GSP of Old Principal
Residence

(P4,000,000 P3,000,000)

= _________________________ x P5,000,000 x 6%

P4,000,000

= 25% x P5,000,000 x 6%

= P75,000.00

The capital gains tax due from Mr. Buendia for the said unutilized portion shall be P75,000 out of the
total of P300,000 capital gains tax otherwise due from the sale of his old principal residence (i.e.,
P5,000,000 x 6% = P300,000). However, he shall be exempt from capital gains tax to the extent allocable
to that portion which he actually utilized to acquire his new principal residence (i.e., capital gains tax
portion of P225,000), as shown below:

Fair market value of the principal residence sold P5,000,000.00

Capital gains tax otherwise due thereon (6%) P 300,000 P300,000.00

Capital gains tax allocable to the unutilized portion 75,000 P75,000.00

Amount of exempt capital gains tax allocable to the utilized portion of proceeds from sale P225,000.00
(P3,000,000/P4,000,000 = 75% times P300,000)
(b) To compute for the basis of the new principal residence. In this case, since the entire proceeds was
not utilized to acquire the new principal residence, the cost basis to be carried over to his new principal
residence shall be equivalent to the proportion of the utilized amount over the GSP applied on the
historical cost, computed as follows:

Historical cost of old principal residence P1,000,000.00

Less: Portion of historical cost pertaining to the tax paid unutilized amount (25%) (250,000.00)

Adjusted Cost Basis of New Principal Residence P750,000.00

or another way for computing the adjusted cost basis of the new principal residence is by using this formula:

Utilized Amount of GSP

__________________ Amount to be Carried Over to the

Historical Cost of Old Principal
_ x = Cost Basis of New Principal
Residence
Residence
GSP of Old Principal
Residence

applied as follows:

(P4,000,000
P1,000,000)

x P1,000,000 = P750,000
_________________

P4,000,000

SECTION 5. Disposition of the Principal Residence in Exchange for Property Other than Cash. (1) If the individual taxpayers
principal residence is disposed in exchange for a condominium unit, the disposition of the taxpayers principal residence shall not be
subjected to the capital gains tax herein prescribed, provided that the said condominium unit received in the exchange shall be used
by the taxpayer-transferor as his new principal residence. In this particular case, the exempt provision of Sec. 24(D)(2) of the 1997
Tax Code shall only apply to the transferor of the principal residence and not to the transferee who shall be subject to the capital
gains tax in case his/its condominium unit is treated as capital asset or to the income tax which shall be withheld in accordance with
Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as amended, in case the condominium unit is treated as an ordinary asset.
However, if the condominium unit is similarly treated by an individual owner as his principal residence, then the same shall also be
covered by the exempt provision under Sec. 24(D)(2) of the same Code.

Example: Mr. Buendia assigned and conveyed his principal residence to ABC Realty Corporation in exchange for a condominium
unit which Mr. Buendia will use as his new principal residence. Thus, Mr. Buendia is exempt the from imposition of capital gains tax
on the exchange of his new principal residence while ABC Realty Corporation, on the other hand, shall be subject to income tax, on
its exchange of the condominium unit.

(2) If the said taxpayers principal residence is disposed of in exchange for a parcel of land and such land received in the exchange
shall be used for the construction of his new principal residence, no income tax or capital gains tax shall be imposed upon the
owner of the principal residence. However, the owner of the land shall be subject to capital gains tax or to income tax, as the case
may be.

(3) If in the acquisition of his new principal residence, the taxpayer exchanged his old principal residence plus cash or other
property, the unutilized portion subject to capital gains tax shall be determined by the difference between the total consideration
made on the conveyance of old principal residence transferred (FMV of old principal residence + cash or FMV of other property) and
the total consideration received (FMV of new principal residence) for such exchange.

Example: Mr. Buendia assigned and conveyed his principal residence with fair market value of P4,000,000 and in addition paid
P2,000,000 to acquire as new principal residence the principal residence of Mr. Yabut. Mr. Yabut, on the other hand, conveyed his
principal residence to Mr. Buendia with fair market value of P5,000,000, with the intention of making the property received from Mr.
Buendia as his new principal residence. The historical cost of the old principal residence of Mr. Buendia is P1,000,000 while the
historical cost of the old principal residence of Mr. Yabut is P500,000.

(a) Computation of capital gains tax due on the exchange of property by Mr. Buendia No capital gains tax is due from Mr.
Buendia for the reason that there has been full utilization of the value of his old principal residence exchanged where in addition to
fair market value of his old principal residence of P4,000,000, he still paid cash of P2,000,000 to acquire as his new principal
residence the old principal residence of Mr. Yabut valued at P5,000,000.

(b) Computation of cost basis of the new principal residence of Mr. Buendia

Historical cost of old principal residence P1,000,000.00

Add: Additional cost to acquire new principal residence

Cost to acquire his new principal residence P6,000,000.00

Less: FMV of old principal residence at the time of exchange (P4,000,000.00) 2,000,000.00

Adjusted Cost Basis of New Principal Residence P3,000,000.00

(c) Computation of capital gains tax due from Mr. Yabut Mr. Yabut shall be liable to capital gains tax to the extent of the unutilized
portion of the total value of consideration received in the exchange which is computed as follows:

(P6,000,000 P5,000,000)

= ____________________________ x P6,000,000 x 6%

P6,000,000

P1,000,000

= ____________________________ x P6,000,000 x 6%

P6,000,000

= P60,000.00

(d) Computation of the adjusted cost basis of the new principal residence of Mr. Yabut In computing for the adjusted cost basis of
the new principal residence of Mr. Yabut, only that portion of historical cost corresponding to the unutilized portion of the value
received shall be considered. In this case, the adjusted cost basis of the new principal residence is computed as follows:

P5,000,000

= ________________________ x P500,000

P6,000,000

= P416,667

In order to avail of the tax exemption from capital gains tax with respect to such exchanges, the aforesaid taxpayer is nevertheless
required to acquire his new principal residence within the eighteen (18) month reglementary period, otherwise, he shall be liable to
pay the capital gains tax on the disposition of his principal residence.

In all cases of exchange of principal residence for another real property, the liability of documentary stamp tax provided under Sec.
196 of the 1997 Code shall accrue to both parties involved in the exchange.

SECTION 6. Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL). The taxpayers filing of
the Sworn Declaration of Intent to avail of the capital gains tax exemption in the manner prescribed under Sec. (3) hereof shall be a
sufficient basis of the RDO to approve and issue the CAR or TCL of the principal residence sold, exchanged or disposed by the
aforesaid taxpayer. Said CAR or TCL shall state that on the sale, exchange or disposition of the taxpayers principal residence is
exempt from capital gains tax pursuant to Sec. 24(D)(2) of the Code.
SECTION 7. Repealing Clause. All existing rules and regulations or parts thereof which are inconsistent with the provisions of
these Regulations are hereby amended, modified or repealed accordingly.

SECTION 8. Effectivity. The provisions of these Regulations shall take effect fifteen (15) days after publication in the Official
Gazette or in any newspaper of general circulation without prejudice, however, to those persons who have availed of the capital
gains tax exemption on account of such sale or disposition during the period from January 1, 1998 to the date of effectivity of these
Regulations: Provided, however, that such persons shall be required to comply with the documentary requirements herein
prescribed within thirty (30) days from date of effectivity hereof.

(SGD.) EDGARDO B. ESPIRITU

Secretary of Finance

Recommending Approval:

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue

Annex A

Republic of the Philippines

Department of Finance

BUREAU OF INTERNAL REVENUE

Revenue District Office No. ___

SWORN DECLARATION OF INTENT

I, ___________________________________________ (Name of Affiant), ____________________ (Nationality of Affiant), of legal

age, married/single, and with residence or forwarding address at ____________________, hereby voluntarily depose and say:

THAT, I am the registered owner of a certain parcel of land and improvements thereon, described under Transfer Certificate of Title
(TCT) No. _________________ of the Register Deeds of _____________, Tax Declaration No. (Land) ____________, and Tax
Declaration No. (Improvement) _____________ of the City/Municipality of __________________;

THAT, the aforesaid property is my principal residence;

THAT, I sold the said property to _____________________ (Buyers name) with address at _______________ under a Deed of
Absolute Sale executed on _____________ for a consideration of ________________ Pesos;

THAT, pursuant to the provisions of Section 24(D)(2) of the National Internal Revenue Code of 1997, and its implementing
Regulations, I shall utilize the proceeds of sale thereof in the acquisition or construction of my new principal residence within the
eighteen (18) month reglementary period; and

THAT, in the event that the proceeds of sale of the said principal residence be not fully utilized for the acquisition or construction of
my new principal residence, in the manner as prescribed by law and its implementing regulation, I hereby undertake to pay the
corresponding capital gains tax on such unutilized amount of the proceeds of sale within thirty (30) days after the lapse of the said
18-month reglementary period.

I HEREBY DECLARE UNDER THE PENALTIES OF PERJURY THAT THE FOREGOING ATTESTATIONS ARE TRUE AND
CORRECT TO THE BEST OF MY KNOWLEDGE.

Name and Signature of Affiant/Taxpayer

TIN ___________________________

Address ________________________
 November 20, 2000

REVENUE REGULATIONS NO. 14-00

SUBJECT : Amending Sections 2(2), 3 and 6 of Revenue Regulations No. 13-99 vis-a-vis Sale,
Exchange or Disposition, by a Natural Person, of His Principal Residence

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Section 24 (D) (2) of
the National Internal Revenue Code of 1997, these regulations are hereby promulgated in order to
streamline and make more efficient the collection of the capital gains tax, if any, presumed to have
been realized from the sale, exchange or disposition, by a natural person, of his Principal
Residence.

SECTION 2. Amendments.

2.1. Section 2 (2) of Revenue Regulations No. 13-99 is hereby amended, to read as follows:

(2) Principal Residence. (a) The term Principal Residence shall refer to the dwelling house,
including the land on which it is situated, where the husband and wife or an unmarried individual,
whether or not qualified as head of family, and members of his family reside. Actual occupancy of
such principal residence shall not be considered interrupted or abandoned by reason of the
individuals temporary absence therefrom due to travel or studies or work abroad or such other
similar circumstances. Such principal residence must be characterized by permanency in that it must
be the dwelling house in which, whenever absent, the said individual intends to return.
(b) Where ownership of the land and the dwelling house thereon belongs to different persons, e.g.,
where the land is leased to the dwelling house owner, only the dwelling house shall be treated as
Principal Residence of the dwelling house owner. Thus, if the said land and the dwelling house
thereon be jointly sold or disposed by the said owners, only the-sale or disposition of the dwelling
house shall be entitled to the benefit of exemption from the capital gains tax herein prescribed:
Provided, however, that where both the owner of the land and owner of the dwelling house actually
reside in the said dwelling house, then both the said land and dwelling house shall be treated as
their Principal Residence (e.g., owner of the land is the parent while owner of the house is his child,
or vice versa).

(c) Where the land and the dwelling house thereon be owned by several co-owners, e.g., inherited
by two or more heirs through hereditary succession, and where the said property is actually used as
Principal Residence by one or more of the said co-owners, including the members of his/their family,
the said property shall be treated as the Principal Residence of the co-owner/s actually occupying
and using the same as his/their Principal Residence but to the extent of his/their proportionate share
in the value of the principal residence. Conversely, the capital gains tax exemption benefit herein
prescribed shall not apply in respect of the other co-owners who do not actually use and occupy the
same as their Principal Residence.

(d) The residential address shown in the latest income tax return filed by the vendor/transferor
immediately preceding the date of sale of the said real property shall be treated, for purposes of
these Regulations, as a conclusive presumption about his true residential address, the certification
of the Barangay Chairman, or Building Administrator (in case of a condominium unit), to the contrary
notwithstanding, in accordance with the doctrine of admission against interest or the principle of
estoppel (e.g., if the property was sold on May 1, 2000, the vendors annual income tax return for
the year 1999, which he filed on or before April 15, 2000, showing his residential address, shall be
treated as a conclusive presumption that his true residential address is that which is shown in his
aforesaid income tax return). If the vendor is exempt from filing any tax return, in which case, he has
no tax record immediately prior to the sale of his property, then the aforementioned certification from
the Barangay Chairman or Building Administrator, as the case may be, shall suffice.

2.2. Section 3 of Revenue Regulations No. 13-99 is hereby amended, to read as follows:

.SEC. 3. Conditions for Exemption. The general provisions of the Code to the contrary
notwithstanding, capital gains presumed to have been realized from the sale, exchange or
disposition by a natural person of his Principal Residence shall not be imposed with six percent (6%)
capital gains tax, subject to compliance with the following:

(1) Escrow Agreement. The six percent (6%) capital gains tax otherwise due on the presumed
capital gains derived from the sale, exchange or disposition of his Principal Residence shall be
deposited in cash or managers check in interest-bearing account with an Authorized Agent Bank
(AAB) under an Escrow Agreement (ANNEX A hereof) between the concerned Revenue District
Officer, the Seller/Transferor and the AAB to the effect that the amount so deposited, including its
interest yield, shall only be released to such Seller/Transferor upon certification by the said RDO that
the proceeds of sale or disposition thereof has, in fact, been utilized in the acquisition or construction
of the Seller/Transferors new Principal Residence within eighteen (18) calendar months from date of
the said sale or disposition. The date of sale or disposition of a property refers to the date of
notarization of the document evidencing the transfer of said property. In general, the term Escrow
means A scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a
third person, to be held by the latter until the happening of a contingency or performance of a
condition, and then by him delivered to the grantee, promisee or obligee.
(2) Capital Gains Tax Return. The Seller/Transferor shall file, in duplicate, his Capital Gains Tax
Return (BIR FORM No. 1706) covering the sale or disposition of his Principal Residence with the
concerned Revenue District Office within thirty (30) days from date of its sale or disposition:

Provided, however, that the Seller/Transferor shall not be required to pay any capital gains tax
during the 18-month period on the sale of his principal residence duly established as such. Provided,
further, that for purposes of the capital gains tax otherwise due on the sale, exchange or disposition
of the said Principal Residence, the execution of the Escrow Agreement referred to in the
immediately preceding Section 3 (1) hereof shall be considered sufficient.

The following shall be submitted with the Capital Gains Tax Return herein required to be filed:

(a) Proof of payment of the documentary stamp tax imposed under Sec. 196 of the Tax Code of
1997 on the deed of sale or conveyance of the said Principal Residence

(b) A sworn statement from the Barangay Chairman that the taxpayers Principal Residence is
located within the jurisdiction of that Barangay and that the same has been his residence
immediately prior to the date of its sale or disposition: Provided, however, that if the taxpayers
Principal Residence sold or disposed is a condominium unit, in lieu of the said Barangay Chairman,
the certification shall be issued by the Building Administrator of the Condominium building.

(c) A duplicate original copy of the Deed of Conveyance of his Principal Residence;

(d) A certified xerox copy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title
(CCT), in case of a condominium unit, covering the Principal Residence sold or disposed;

(e) A certified xerox copy of the latest Tax Declaration covering the said Principal Residence (land
and improvement); and

(f) If the building or improvement thereon has been constructed on or after the year 1990, the
Building Permit or Occupancy Permit issued by the concerned city or municipality, showing the
amount of the construction cost thereof.

(3) Post Reporting Requirement. The proceeds from the sale, exchange or disposition of his old
Principal Residence must be fully utilized in acquiring or constructing his new Principal Residence
within eighteen (18) calendar months from date of its sale, exchange or disposition. In order to show
proof that positive action was undertaken to utilize the proceeds for the acquisition or construction of
his new Principal Residence within the 18-month reglementary period, he shall submit to the RDO
concerned, within thirty (30) days from the lapse of the said period, the following documents:

(a) A sworn statement that the total proceeds from the sale or disposition of his old Principal
Residence has been actually utilized in the acquisition or construction of his new Principal
Residence or, if the construction of his new Principal Residence is still in progress, a sworn
statement that such amount shall be fully utilized to procure the necessary materials and pay for the
cost of labor and other expenses for the construction thereof;

(b) A certified statement from his architect or engineer, or both, showing the cost of materials and
labor for the construction of his new Principal Residence;
(c) A certified copy of the Building Permit issued by the Office of the Building Official of the City or
Municipality where his new Principal Residence shall be constructed as well as xerox copies of
documents (e.g., building specification plan, construction plans, or construction cost estimates)
submitted with his application for the said Building Permit on which computation of the amount of the
building license fee has been based;

(d) In case his new Principal Residence is acquired by purchase, a duplicate original copy of the
Deed of Absolute Sale covering the purchase of his new Principal Residence.

(4) Release from the Escrow Agreement. Upon a showing, based on the foregoing documents,
that the proceeds of sale, exchange or disposition of his old Principal Residence have already been
fully utilized in the acquisition or construction of his new Principal Residence, the concerned
Revenue District Officer shall, within fifteen (15) days from date of submission by the
Seller/Transferor of the foregoing documents, release the Escrow on the aforesaid bank deposit in
favor of the Seller/Transferor (ANNEX B hereof).

(5) Limitation on Tax Exemption Privilege. The tax exemption herein granted may be availed of
only once every ten (10) years;

(6) Cost Basis of the New Principal Residence. The historical cost or adjusted cost basis of his
old Principal Residence sold, exchanged or disposed shall be carried over to the cost basis of his
new Principal Residence; and

(7) Assessment for Deficiency Capital Gains Tax; Application of the Escrowed Bank Deposit Against
the Deficiency Tax. If the Seller/Transferor fails to submit documentary evidence within thirty (30)
days after the lapse of the aforesaid 18-month period, showing that he has utilized the proceeds of
sale, exchange or disposition of his old Principal Residence to acquire or construct his new Principal
Residence, it shall be presumed that he did not, in fact, utilize the aforesaid proceeds of sale for the
construction or acquisition of his new Principal Residence, in which case, he shall be treated
deficient in the payment of his capital gains tax from the sale or disposition of his aforesaid Principal
Residence, and shall be accordingly be assessed for deficiency capital gains tax, inclusive of the
20% interest per annum, pursuant to the provisions of Section 228 of the Code, as implemented by
Revenue Regulations No. 12-99 , in relation to Section 249 of the said Code.

Pursuant to the provisions of Revenue Regulations No. 12-99, the taxpayer shall be issued with the
required Post Reporting Notice informing him, in writing, of the aforementioned facts, in order that he
may present his side of the case through informal conference, and the required Preliminary
Assessment Notice, before issuance of the Formal Assessment Notice. If, at this point in time, the
escrowed tax money is still in the custody of the Depository Bank, the full amount thereof, including
its interest earnings, shall be applied in computing for the taxpayers deficiency capital gains tax.
Upon the time that the said deficiency tax assessment has become final and executory, the deposit
in escrow, inclusive of its interest earnings, shall be forfeited and applied against the taxpayers
deficiency capital gains tax liability. The depository Bank shall forthwith be informed of this action,
and shall, upon demand in writing, by the Commissioner or his duly authorized representative
(ANNEX C hereof), turn over the money for application in payment of the taxpayers deficiency tax
liability. If the same is insufficient to cover the entire amount assessed, the seller/transferor shall
remain liable for the remaining balance of the assessment. On the other hand, the excess of the
deposit in escrow, if any, shall forthwith be returned to the Seller/Transferor, by the Bank, upon
written authorization from the Commissioner or his duly authorized representative.
(8) Partial Utilization of the Proceeds of Sales Exchange or Disposition. If there is no full
utilization of the proceeds of sale, exchange or disposition of his old Principal Residence for the
acquisition or construction of his new Principal Residence, he shall be liable for deficiency capital
gains tax, inclusive of 20% interest per annum, computed from the 31st day after the date of sale or
disposition of the said old Principal Residence.

2.3. Section 6 of Revenue Regulations No. 13-99 is hereby amended, to read as follows:

SEC 6. Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCL).
The seller/transferors compliance with the preliminary conditions for exemption under Sec. 3(1)
and (2) of these Regulations shall be sufficient basis for the RDO to approve and issue the CAR or
TCL of the principal residence sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or
TCL shall state that the said sale; exchange or disposition of the taxpayers principal residence is
exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the Code but subject to compliance with
the post-reporting requirements imposed under Sec. 3(3) of these Regulations.

SECTION 3. Penalty Clause. (1) Any Barangay Chairman, or Building Administrator, as the case
may be, who shall falsely certify that the property sold or disposed is the vendor/transferors
Principal Residence when, in truth and in fact, it is not, shall be punished under the penalty of
perjury, at the discretion of the Court.

(2) Any other violation of the provisions of these Regulations shall, upon conviction for each act or
omission, be punishable under Section 275 of the Code by a fine of not more than One Thousand
Pesos (P1,000.00) or imprisonment of not more than six (6) months, or both, at the discretion of the
Court.

SECTION 4. Repealing Clause. Any revenue issuance, if inconsistent herewith, shall be

considered revoked, amended, or modified accordingly.

SECTION 5. Effectivity Clause. These Regulations shall take effect fifteen (15) days after its
publication in any newspaper of general circulation.

(SGD.) JOSE T. PARDO

Secretary of Finance

Recommending Approval:

(SGD.) DAKILA B. FONACIER

Commissioner of Internal Revenue

ANNEX A

Republic of the Philippines

Department of Finance
 BUREAU OF INTERNAL REVENUE

Revenue Region No. _____

RDO No. _______

ESCROW AGREEMENT

The Bureau of Internal Revenue, herein represented by _____________, Revenue District Officer,
RDO No. _____, ______; the Seller/Transferor _______________ with postal address at
_________________; and the Authorized Agent Bank (AAB), _________________ with office
address at _____________________ herein represented by _____________________, in his
capacity as _______________, hereby agree:

That, the sum of _____________ (P______), representing six percent (6%) of the selling price or
fair market value, whichever is higher, of the Seller/Transferors Principal Residence, which he
sold/disposed on _____________, shall be deposited with the above-mentioned AAB on or before ,
200_;

That, the said amount shall be placed in an interest bearing bank deposit account under the account
name of the taxpayer in trust for the Bureau of Internal Revenue:

Provided, however, that this account may be readily withdrawn at any time, upon presentation of
Release from Escrow Agreement signed by the CIR or his authorized representative or the
concerned Revenue District Office (RDO) when the proceeds of sale/disposition has been utilized in
the acquisition or construction of a new principal residence within 18 months from the date of sale or
disposition of the old principal residence: Provided, further, that the AAB shall, at any time, upon
written request of theRDO, furnish the latter with information on the amount of interests earned by
the said bank deposit in escrow;

That, no part of the said bank deposit may be withdrawn, delivered and paid to any person except
upon express and written order from the said Revenue District Office.

DONE THIS ________ DAY OF _________, IN THE YEAR OF OUR LORD, 200___.

The Parties have signed this Agreement subject to the penalties of Perjury.

Commissioner of Internal Revenue

By:

_____________________________

Name and Signature of the Revenue

 District Officer, RDO NO. ________

_______________________________

Name and Signature of Seller/Transferor

_____________________________

Name of the AAB, Name and Signature of the AABs Duly Authorized Representative

ANNEX B

Revenue District No. ____

Revenue Region No. 7

Quezon City

RELEASE FROM ESCROW AGREEMENT

To : (State name and address of the AAB)

Subject : ( State name of the taxpayer)

Date : __________________

This refers to the sum of ___________________ (P__________) which was deposited with your
Bank under our Escrow Agreement, representing six percent (6%) of the selling price or the fair
market value, whichever is higher, of the Principal Residence which was sold by Mr./Ms.
____________________ on _______________, 200_, a copy of which Agreement is attached
herewith for your ready reference.

In accordance with our agreement, you are now hereby directed to turn over, deliver and pay to the
aforementioned Mr./Ms. ______________, the entire amount of the aforesaid deposit in escrow,
including its interest yield, considering that all the conditions for the release of the deposit in escrow
have already been fully complied with by the said Seller/Transferor.

Very truly yours,

Commissioner of Internal Revenue

 By:

________________________

Name and signature of RDO

ANNEX C

Revenue District No. _____

Revenue Region No. 7

Quezon City

FORFEITURE OF THE BANK DEPOSIT IN ESCROW

To : (State name and address of the AAB)

Subject : ( State name of taxpayer)

Date : __________________

This refers to the sum of ___________________ (P____________) which was deposited with your
Bank under our Escrow Agreement, dated _________, 200_, representing six percent (6%) of the
selling price or the fair market value, whichever is higher, of the Principal Residence, which was
sold by Mr./Ms. _______________, on _______________, a copy of which Agreement is attached
herewith for your ready reference.

[INSTRUCTION. The RDO shall state under this paragraph (1) whether only a partial portion
thereof may be so delivered are paid to the Seller/Transferor, with the balance to be applied in
payment of the Seller/Transferors capital gains tax, due to non-utilization, in full, of the proceeds of
sale of his "Principal Residence; or (2) whether the entire escrowed deposit, including interest yield
thereof, shall be forfeited in favor of the Government and applied against the taxpayers capital gains
tax, due to non-utilization of the entire proceeds thereof in the acquisition or construction of the
taxpayers new "Principal Residence. If any portion thereof is forfeited in favor of the Government,
the RDO shall prepare Authority to Accept Payment or Payment Order, addressed to the said AAB,
directing that such amount be receipted in the name of the taxpayer in payment of his capital gains
tax. The taxpayers copy of the official receipt shall be sent to the taxpayer, by mail or personal
delivery]
Very truly yours,

Commissioner of Internal Revenue:

By:
 ___________________________

Name and signature of the RDO

August 25, 1998

REVENUE REGULATIONS NO. 09-98

CT : Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as
Amended" Relative to the Imposition of the Minimum Corporate Income Tax (MCIT) on Domestic
Corporations and Resident Foreign Corporations
TO : All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 27(E) and Section 28(A)(2), these Regulations are
hereby promulgated to govern the imposition of the minimum corporate income tax on domestic and
resident foreign corporations.

Sec. 2.27(E) MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS

(1) Imposition of the Tax A minimum corporate income tax (MCIT) of two percent (2%) of the gross income
as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period
employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year
immediately following the taxable year in which such corporation commenced its business operations.
The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever
the amount of minimum-corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998; 33% effective
January 1, 1999; and at 32% effective January 1, 2000 and thereafter.
 In the case of a domestic corporation whose operations or activities are partly covered by the
regular income tax system and partly covered under a special income tax system, the MCIT shall apply
on operations covered by the regular income tax system. For example, if a BOI-registered enterprise has
a "registered" and an "unregistered" activity, the MCIT shall apply to the unregistered activity.

(2) Carry forward of excess minimum corporate income tax Any excess of the minimum corporate income
tax (MCIT) over the normal income tax as computed under Sec. 27(A) of the Code shall be carried
forward on an annual basis and credited against the normal income tax for the three (3) immediately
succeeding taxable years.

Illustration on how to carry forward excess minimum corporate income tax

Excess of MCIT
Normal Income Over the Normal
Year Tax MCIT Income Tax

1998 P50,000 P75,000 P25,000

1998 amount of tax payable P75,000
1999 P60,000 P100,000 P40,000
1999 amount of tax payable P100,000
2000 P100,000 P60,000

Computation of Net Amount of Tax Payable in 2000:

Amount of tax payable P100,000
Less:
1998 excess MCIT (25,000)
1999 excess MCIT (40,000) P65,000
Net amount of tax payable P35,000

The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate
income tax which is imposed under Sec. 27(A) of the Code. The comparison between the normal income
tax payable by the corporation and the MCIT shall be made at the end of the taxable year. Thus, under
the example, the taxpayer will pay the MCIT of P75,000.00 since this amount is greater than the normal
income tax of P50,000.00 in 1998.

In 1999, the firm will also pay the MCIT since the MCIT of P100,000.00 is greater than the normal
income tax of P60,000.00.

In the year 2000, where the normal or regular corporate income tax of P100,000.00 is greater
than the MCIT of P60,000.00, the firm will pay the normal income tax.

The corporation can credit the excess of its MCIT over the normal income tax for 1998 (i.e.
P25,000) and 1999 (i.e. P40,000), or a total amount of P65,000 from the amount of normal income tax
which is payable by the firm in the year 2000. Thus, the amount of income tax payable by the firm is
P35,000 after deducting P65,000 from P100,000.

The excess MCIT is creditable against the normal income tax within the next three (3) years from
payment thereof. Thus, in the illustration above where the corporation had an excess MCIT of P25,000
over its normal income tax in 1998, the P25,000 can be claimed as a tax credit against the normal income
tax up to the year 2001 and only when the normal income tax is greater than the MCIT. The excess MCIT
cannot be claimed as a credit against the MCIT itself or against any other losses.

(3) Relief from the Minimum Corporate Income Tax under Certain Conditions The Secretary of Finance,
upon recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of
 proof by the applicant-corporation, duly verified by the Commissioner's authorized representative, that the
corporation sustained substantial losses on account of a prolonged labor dispute or because of "force
majeure" or because of legitimate business reverses.

(4) Definition of Terms

(a) "Gross Income" defined For purposes of the minimum corporate income tax prescribed under this
Subsection, the term "gross income" means gross sales less sales returns, discounts and allowances and
cost of goods sold. "Gross sales" shall include only sales contributory to income taxable under Sec. 27(A)
of the Code. "Cost of goods sold" shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.

Passive incomes which have been subject to a final tax at source shall not form part of gross
income for purposes of the minimum corporate income tax.

For a trading or merchandising concern, "cost of goods sold" means the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" means all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

In the case of sales of services, the term "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" means all direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (a) salaries
and employee benefits of personnel, consultants and specialists directly rendering the service, and (b)
cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used
and cost of supplies: Provided, however, that "cost of services" shall not include interest expense except
in the case of banks and other financial institutions. The term "gross receipts" as used herein means
amounts actually or constructively received during the taxable year; Provided, that for taxpayers
employing the accrual basis of accounting, the term "gross receipts" shall mean amounts earned as gross
income.

(b) The term "substantial losses from a prolonged labor dispute" means losses arising from a strike staged by
the employees which lasted for more than six (6) months within a taxable period and which has caused
the temporary shutdown of business operations.

(c) The term "force majeure" means a cause due to an irresistible force as by "Act of God" like lightning,
earthquake, storm, flood and the like. This term shall also include armed conflicts like war or insurgency.

(d) The term "legitimate business reverses" shall include substantial losses sustained due to fire, robbery,
theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.

(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT

For purposes of the MCIT, the taxable year in which business operations commenced shall be the
year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT
beginning January 1, 1998.

Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT three
calendar years thereafter (i.e. after the lapse of three calendar years from 1998). For example, a firm
which was registered in May 1998 shall be covered by the MCIT in 2002.
 The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm which
registered with the BIR on July 1, 1998 shall be subject to an MCIT on his gross income earned for the
entire fiscal year ending in the year 2002.

Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year
basis. For firms using the fiscal year basis and whose first taxable period under the minimum corporate
income tax covers month/months in 1997 (i.e. prior to the imposition of MCIT under RA 8424), the MCIT
which is due for 1998 shall be computed using an apportionment formula. The ratio to be applied is the
number of months in 1998 to twelve (12) months (i.e. the total number of months in a fiscal year).

Illustration. Firm A registered with the BIR in July 1994. It becomes subject to the MCIT in 1998.
Since it is using a fiscal year as basis of its taxable period, a part of the tax base for the MCIT was earned
by the corporation in 1997 prior to the imposition of the MCIT (i.e. gross income from July to December
1997). The MCIT which is due from the firm is computed using the gross income of the firm for 1998
(January to June) which is computed on an apportionment basis as follows:

Gross income of the firm for the entire fiscal year

Multiply: 0.50 (i.e. ratio of 6 months in 1998 to 12 months covering FY 97-98)
Equals: Tax base of the MCIT for 1998
Multiply: 2% (i.e. MCIT tax rate)
Equals: MCIT for 1998.
(6) Manner of filing and payment The minimum corporate income tax (MCIT) shall be paid on a taxable
year basis. It shall be covered by a tax return designed for the purpose which will be submitted together
with the corporation's annual final adjustment income tax return. Domestic corporations shall not be
required to pay the minimum corporate income tax on a quarterly basis, the provisions of Sec. 75 of the
Code notwithstanding.

(7) Accounting treatment of the excess minimum corporate income tax paid Any amount paid as excess
minimum corporate income tax shall be recorded in the corporation's books as an asset under account
title "deferred charges-minimum corporate income tax". This asset account shall be carried forward and
may be credited against the normal income tax due for a period not exceeding three (3) taxable years
immediately succeeding the taxable year/s in which the same has been paid. Any amount of the excess
minimum corporate income tax which has not or cannot be so credited against the normal income taxes
due for the 3-year reglementary period shall lose its creditability. Such amount shall be removed and
deducted from "deferred charges-minimum corporate income tax" account by a debit entry to "retained
earnings" account and a credit entry to "deferred charges-minimum corporate income tax" account since
this tax is not allowable as deduction from gross income it being an income tax.

Illustration on the accounting treatment of the excess minimum corporate income tax paid
Assume that ABC Corporation commenced business operations in calendar year 1991. It is already more
than four (4) years in operation as of calendar year 1998 hence, subject to the minimum corporate income
tax beginning taxable year 1998. Assume, further, that its income taxes during the years from 1998 to
year 2005 are as follows:

EXCESS OF
MCIT OVER
NORMAL INCOME NORMAL
YEAR TAX MCIT INCOME TAX

1998 P25,000 P100,000 P75,000

1999 130,000 150,000 20,000
2000 200,000 190,000 -
2001 - 300,000 300,000
2002 10,000 50,000 40,000
 2003 15,000 60,000 45,000
2004 8,000 40,000 32,000
2005 1,000 50,000 49,000

In this case, ABC Corporation shall not be allowed to carry forward and credit the 1998 excess
MCIT against the income tax liability for 1999 since the 1999 MCIT is greater than the normal income tax
for said year. However, for year 2000, where the normal income tax is greater than the computed MCIT,
ABC Corporation shall be allowed to apply the excess MCIT of 1998 and 1999 amounting to P95,000
(P75,000 plus P20,000) against the normal income tax liability of P200,000.

The excess MCIT for the year 2001 (P300,000) may only be credited against normal income tax
liabilities for the succeeding three years from 2002 to 2004. However, since the normal income tax
liabilities for these succeeding years are lesser than the respective MCITs, the excess MCIT for the year
2001 of P300,000 loses its creditability by the year 2005 hence, must be removed and deducted from
"Deferred charges-MCIT" account and charged to "Retained Earnings" account.

Illustrative accounting entries to record excess MCIT

(a) For taxable year 1998 when MCIT is greater than the normal income tax liability of the company
1998

(1) Debit: Provision for income tax P25,000

Credit: Income tax payable P25,000
To record income tax liability using the normal income tax rate

(2) Debit: Deferred Charges-MCIT P75,000

Credit: Income Tax Payable P75,000
To record excess MCIT (P100,000 - P25,000)

(3) Debit: Income Tax Payable P100,000

Credit: Cash in bank P100,000
To record payment of income tax due for 1998

(b) For taxable year 2000 when excess MCIT (1998 and 1999) is applied against normal income tax liability
2000

(1) Debit: Provision for income tax P200,000

Credit: Income Tax Payable P200,000
To record income tax liability using the normal income tax rate

(2) Debit: Income tax payable P95,000

Credit: Deferred Charges-MCIT
(P75,000 plus P20,000) P95,000
To record application of excess MCIT against normal income tax liability for taxable year 2000

(3) Debit: Income Tax Payable P105,000

Credit: Cash in Bank P105,000
To record payment of income tax due (P200,000 less P95,000)

(c) For taxable year 2005 when the expired portion of excess MCIT (P300,000) for taxable year 2001 is
closed to the retained earnings account due to its non-application.
 2005

Debit: Retained Earnings P300,000

Credit: Deferred Charges-MCIT P300,000
To record the expired portion of Deferred Charges-MCIT

(8) Exceptions The minimum corporate income tax (MCIT) shall apply only to domestic corporations
subject to the normal corporate income tax prescribed under these Regulations. Accordingly, the
minimum corporate income tax shall not be imposed upon any of the following:

(a) Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%)
on their taxable income; or

(b) Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent
(10%) on their taxable income; and

(c) Domestic corporations engaged in business as depository banks under the expanded foreign currency
deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from
foreign currency transactions with local commercial banks, including branches of foreign banks,
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit
system units and other depository banks under the foreign currency deposit system, including their
interest income from foreign currency loans granted to residents of the Philippines under the expanded
foreign currency deposit system, subject to final income tax at ten percent (10%) of such income.

(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and
7227 (the PEZA law and the Bases Conversion Development Act, respectively).

Sec. 2.28(A)(2) MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN

CORPORATION A minimum corporate income tax of two percent (2%) of the gross income from
sources within the Philippines is hereby imposed upon any resident foreign corporation, beginning on the
fourth (4th) taxable year (whether calendar or fiscal year, depending on the accounting period employed)
immediately following the taxable year in which the corporation commenced its business operations,
whenever the amount of the minimum corporate income tax is greater than the normal income tax due for
such year.

In computing for the minimum corporate income tax due from a resident foreign corporation, the
rules prescribed under Sec. 2.27(E) of these Regulations shall apply: Provided, however, that only the
gross income from sources within the Philippines shall be considered for such purposes.

Exceptions The minimum corporate income tax shall only apply to resident foreign
corporations which are subject to normal income tax. Accordingly, the minimum corporate income tax
shall not apply to the following resident foreign corporations:

(a) Resident foreign corporations engaged in business as "international carrier" subject to tax at two and one-
half percent (2 %) of their "Gross Philippine Billings";

(b) Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income
from foreign currency transactions with local commercial banks, including branches of foreign banks,
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with Offshore Banking Units
(OBUs), including interest income from foreign currency loans granted to residents of the Philippines,
subject to a final income tax at ten percent (10%) of such income; and

(c) Resident foreign corporations engaged in business as regional operating headquarters subject to tax at
ten percent (10%) of their taxable income.
(d) Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and
7227 (the PEZA law and the Bases Conversion Development Act, respectively).

EFFECTIVITY CLAUSE. These Regulations shall apply to domestic and resident foreign corporations on
their aforementioned taxable income derived beginning January 1, 1998 pursuant to the pertinent
provisions of RA 8424, provided, however, that corporations using the fiscal year accounting period and
which are subject to MCIT on income derived pertaining to any month or months of the year 1998 shall
not be imposed with penalties for late payment of the tax.

EN BANC

G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE
JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 2 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes. 3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no
realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of
CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary
assets and capital assets and second, respondent Secretary of Finance has no authority to collect CWT, much
less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary
assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net income has not
yet been determined. They contravene the equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing
sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2%
of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section
27(A).4 If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of
the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of
this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to
suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions under
which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E)
hereof, the term gross income shall mean gross sales less sales returns, discounts and allowances
and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold including
insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of
finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E). 5 The pertinent
portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year
(whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any
domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which
such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than
the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed
under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed under
Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax
for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated
RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes. 6 Under Section
2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than
capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were
subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale,
exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation, estate,
trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in
accordance with the following schedule
 Those which are exempt from a Exempt
withholding tax at source as
prescribed in Sec. 2.57.5 of
these regulations.

With a selling price of five 1.5%

hundred thousand pesos
(500,000.00) or less.

With a selling price of more than 3.0%

five hundred thousand pesos
(500,000.00) but not more than
two million pesos
(2,000,000.00).

With selling price of more than 5.0%

two million pesos
(2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange,
the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall
be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on
the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a
case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be
deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale,
exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling
price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the
Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other
than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following
schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
seller/transferor is habitually engaged in the real
estate business.
With a selling price of Five Hundred Thousand 1.5%
Pesos (500,000.00) or less.
 With a selling price of more than Five Hundred 3.0%
Thousand Pesos (500,000.00) but not more than
Two Million Pesos (2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange,
the fair market value of the property received in exchange shall be considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall
apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed
25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment
plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax
based on the gross selling price or fair market value of the property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on
the sale, transfer or exchange of real property other than capital asset has been fully paid. (Underlined
amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange
subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers
and conveyances have been reported and the taxes thereof have been duly paid: 7

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a
particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The
pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from
sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable
taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or
ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current
fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied:
(1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court
must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so; (4)
the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the
BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members
have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised
concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that
the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical data on
which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real
property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really
settle legal issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. 11 On the
other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse
effect on the individual challenging it.12

Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we
stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have
ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the
Constitution and/or the law is enough to awaken judicial duty. 14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such
question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did
not allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it
may suffer from the enforcement of [the assailed provisions]. 15

Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained
or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit Homeowners
Association, Inc. v. Defensor,17 we held that the association had legal standing because its members stood to
be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the
individual members of petitioner association are residents of the NGC. As such they are covered and stand to
be either benefited or injured by the enforcement of the IRR, particularly as regards the selection process of
beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those
provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly, petitioner
and its members have sustained direct injury arising from the enforcement of the IRR in that they have been
disqualified and eliminated from the selection process. 18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements
of an actual case, ripeness or legal standing when paramount public interest is involved. 19 The questioned
MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their overreaching significance to society make it proper for
us to take cognizance of this petition.20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system.
It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true
income of corporations.21 It was devised as a relatively simple and effective revenue-raising instrument
compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT] so
as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience.
This will go a long way in ensuring that corporations will pay their just share in supporting our public life and
our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to make a reasonable contribution to the
public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-
declaration of income or over-deduction of expenses otherwise called tax shelters. 23

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year out and
paid no tax. So, if the corporation has been losing for the past five years to ten years, then that corporation has
no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have this
provision to avoid this type of tax shelters, Your Honor. 24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and its
tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax
evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the
law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the
year in which the corporation commenced its operations. 25 This grace period allows a new business to stabilize
first and make its ventures viable before it is subjected to the MCIT. 26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which
shall be credited against the normal income tax for the three immediately succeeding years. 27

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of
Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we
do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of
gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the
different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that employed this method.
Okay, those are additional Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own
versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative and interest expenses which are equally
necessary to produce gross income, were not taken into account. 31 Thus, pegging the tax base of the MCIT to a
corporations gross income is tantamount to a confiscation of capital because gross income, unlike net income,
is not "realized gain."32

We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The
exercise of taxing power derives its source from the very existence of the State whose social contract with its
citizens obliges it to promote public interest and the common good.33

Taxation is an inherent attribute of sovereignty. 34 It is a power that is purely legislative. 35 Essentially, this means
that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature
wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be
imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no
limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature
(which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is circumscribed by constitutional
limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty
or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when it amounts to a
confiscation of property.40 But in the same case, we also explained that we will not strike down a revenue
measure as unconstitutional (for being violative of the due process clause) on the mere allegation of
arbitrariness by the taxpayer.41 There must be a factual foundation to such an unconstitutional taint. 42 This
merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is
not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character. 43

Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which flows into
the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in
time while income denotes a flow of wealth during a definite period of time. 45 Income is gain derived and
severed from capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the
sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not
being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax,
and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income
tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the
corporations gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items
and at the same time reducing the applicable tax rate. 49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many
jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless
it interferes with interstate commerce or violates the requirement as to uniformity of taxation. 50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a
lower tax rate but a broader tax base.51 Since our income tax laws are of American origin, interpretations by
American courts of our parallel tax laws have persuasive effect on the interpretation of these laws. 52 Although
our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation
are comparable. On the question of the AMTs constitutionality, the United States Court of Appeals for the Ninth
Circuit stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing
from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means
of obtaining a broad-based tax, and therefore is constitutional. 54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation. 55

American courts have also emphasized that Congress has the power to condition, limit or deny deductions from
gross income in order to arrive at the net that it chooses to tax. 56 This is because deductions are a matter of
legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the
MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor
does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their
property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes. 58 Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights. 59 The party alleging the
laws unconstitutionality has the burden to demonstrate the supposed violations in understandable terms. 60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss
in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of
2% of its gross income. This is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the
net income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected. 61 Under
Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on
the collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that
Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with
grave abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of law" 62 because they
ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations
use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income
tax for the sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on
a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for
the payment of the net income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of
taxes on income from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary
rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the
limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the
law they seek to apply and implement.64 It is well-settled that an administrative agency cannot amend an act of
Congress.65

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax
which is sanctioned by our tax laws.66 The withholding tax system 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. 67 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.68

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any
person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424
which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on
the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real
Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income
tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible
tax obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year. 70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to
be deducted from the net income tax payable by the taxpayer at the end of the taxable year. 71 Precisely,
Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived
from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be subject to
applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as
determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be,
based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to theordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then
the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality
and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know,
nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year.
Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which he
is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably
known or knowable by him in connection with the performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as
ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the
gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also
withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets
are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished
as follows:

FWT CWT

a) The amount of income tax a) Taxes withheld on certain income

withheld by the withholding agent is payments are intended to equal or at
constituted as a full and final least approximate the tax due of the
payment of the income tax due from payee on said income.
the payee on the said income.

b)The liability for payment of the tax b) Payee of income is required to

rests primarily on the payor as a
withholding agent.
report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.

c) The payee is not required to file c) The income recipient is still

an income tax return for the required to file an income tax return,
particular income.73 as prescribed in Sec. 51 and Sec. 52
of the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the
sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the
provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax
involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way
as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The
withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from
the income payable is the essence of the withholding tax method of tax collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable.
According to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The
enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on
CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary]
may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by
certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)
(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),
28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld
by payor-corporation and/or person and paid in the same manner and subject to the same conditions
as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate
of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these
as passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary purposes, the
same is not passive income76

It is income generated by the taxpayers assets. These assets can be in the form of real properties that return
rental income, shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural
or juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If
that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT.
The former covers the kinds of passive income enumerated therein and the latter encompasses any income
other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in
the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section
57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that,
where a statute does not require any particular procedure to be followed by an administrative agency, the
agency may adopt any reasonable method to carry out its functions. 77 Similarly, considering that the law uses
the general term "income," the Secretary and CIR may specify the kinds of income the rules will apply to based
on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and
respect by the courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives
its members of their property without due process of law because, in their line of business, gain is never
assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not
yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of
the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld.
Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee
of due process. More importantly, the due process requirement applies to the power to tax. 79 The CWT does not
impose new taxes nor does it increase taxes.80 It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have
to wait years and may even resort to litigation before they are granted a refund. 81 This argument is misleading.
The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the
CWT as a method of collecting the tax. 1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor
wages, materials, cost of money and other expenses which can then save the entity from having to obtain
loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which
add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and
prohibitive "up-front" regulatory fees from at least 20 government agencies. 82

Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints
are essentially matters of policy best addressed to the executive and legislative branches of the government.
Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales
on installment are taxed on a per-installment basis.83 Petitioners desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is
being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises
are not similarly imposed a CWT on their sales, even if their manner of doing business is not much different
from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a
continuous process of production and it incurs costs and expenditures on a regular basis. The only difference is
that "goods" produced by the real estate business are house and lot units. 84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived
of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."85 Stated differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose
of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class. 86

The taxing power has the authority to make reasonable classifications for purposes of taxation. 87 Inequalities
which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional
limitation.88 The real estate industry is, by itself, a class and can be validly treated differently from other
business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize
that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is bigger and its frequency of transaction
limited, making it less cumbersome for the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat
the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not
similarly subjected to the CWT.89As already discussed, the Secretary may adopt any reasonable method to
carry out its functions.90 Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales
of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject
to CWT for their transactions with said 5,000 corporations. 91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect
the regisration of any document transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses
almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall
be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified
that such transfer has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269
of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand
is the income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend
not only with Einsteins observation but also with the vast and well-established jurisprudence in support of the
plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of
convincing the Court that the imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

 SECOND DIVISION

G.R. No. 168118 August 28, 2006

THE MANILA BANKING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us is a Petition for Review on Certiorari 1 assailing the Decision 2 of the Court of Appeals dated May 11,
2005 in CA-G.R. SP No. 77177, entitled "The Manila Banking Corporation, petitioner, versus Commissioner of
Internal Revenue, respondent."

The Manila Banking Corporation, petitioner, was incorporated in 1961 and since then had engaged in the
commercial banking industry until 1987. On May 22, 1987, the Monetary Board of the Bangko Sentral ng
Pilipinas(BSP) issued Resolution No. 505, pursuant to Section 29 of Republic Act (R.A.) No. 265 (the Central
Bank Act), 3prohibiting petitioner from engaging in business by reason of insolvency. Thus, petitioner ceased
operations that year and its assets and liabilities were placed under the charge of a government-appointed
receiver.

Meanwhile, R.A. No. 8424, 4 otherwise known as the Comprehensive Tax Reform Act of 1997, became effective
on January 1, 1998. One of the changes introduced by this law is the imposition of the minimum corporate
income tax on domestic and resident foreign corporations. Implementing this law is Revenue Regulations No.
9-98 stating that the law allows a four (4) year period from the time the corporations were registered with the
Bureau of Internal Revenue (BIR) during which the minimum corporate income tax should not be imposed.

On June 23, 1999, after 12 years since petitioner stopped its business operations, the BSP authorized it to
operate as a thrift bank. The following year, specifically on April 7, 2000, it filed with the BIR its annual
corporate income tax return and paid P33,816,164.00 for taxable year 1999.

Prior to the filing of its income tax return, or on December 28, 1999, petitioner sent a letter to the BIR
requesting a ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In other
words, petitioners position is that since it resumed operations in 1999, it will pay its minimum corporate income
tax only after four (4) years thereafter.

On February 22, 2001, the BIR issued BIR Ruling No. 007-2001 5 stating that petitioner is entitled to the four
(4)-year grace period. Since it reopened in 1999, the minimum corporate income tax may be imposed "not
earlier than 2002, i.e. the fourth taxable year beginning 1999." The relevant portions of the BIR Ruling state:

In reply, we hereby confirm that the law and regulations allow new corporations as well as existing corporations
a leeway or adjustment period of four years counted from the year of commencement of business operations
(reckoned at the time of registration by the corporation with the BIR) during which the MCIT (minimum
corporate income tax) does not apply. If new corporations, as well as existing corporations such as those
registered with the BIR in 1994 or earlier, are granted a 4-year grace period, we see no reason why TMBC, a
corporation that has ceased business activities due to involuntary closure for more than a decade and is now
only starting again to place its business back in order, may not be given the same opportunity. It should be
stressed that although TMBC had been registered with the BIR before 1994, yet it did not have any business
from 1987 to June 1999 due to its involuntary closure. This Office is therefore of an opinion, that for purposes
of justice, equity and consistent with the intent of the law, TMBC's reopening last July 1999 is akin to the
commencement of business operations of a new corporation, in consideration of which the law allows a 4-year
period during which MCIT is not to be applied. Hence, MCIT may be imposed upon TMBC not earlier than
2002, i.e., the fourth taxable year beginning 1999 which is the year when TMBC reopened.
Likewise, we find merit in your position that for having just come out of receivership proceedings, which not
only resulted in substantial losses but actually brought about a complete cessation of all businesses, TMBC
may be qualified to ask for suspension of the MCIT. The law provides that the Secretary of Finance, upon the
recommendation of the Commissioner, may suspend the imposition of the MCIT on any corporation which
suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses. [NIRC, Sec. 27(E)(3)] Revenue Regulations 9-98 defines the term "legitimate business
reverses" to include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other
economic reasons as determined by the Secretary of Finance. Cessation of business activities as a result of
being placed under involuntary receivership may be one such economic reason. But to be a basis for the
recognition of the suspension of MCIT, such a situation should be properly defined and included in the
regulations, which this Office intends to do. Pending such inclusion, the same cannot yet be invoked.
Nevertheless, it is the position of this Office that the counting of the fourth taxable year, insofar as TMBC is
concerned, begins in the year 1999 when TMBC reopened such that it will be only subject to MCIT beginning
the year 2002.

Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum of P33,816,164.00
erroneously paid as minimum corporate income tax for taxable year 1999.

Due to the inaction of the BIR on its claim, petitioner filed with the Court of Tax Appeals (CTA) a petition for
review.

On April 21, 2003, the CTA denied the petition, finding that petitioners payment of the amount
of P33,816,164.00 corresponding to its minimum corporate income tax for taxable year 1999 is in order. The
CTA held that petitioner is not entitled to the four (4)-year grace period because it is not a new corporation. It
has continued to be the same corporation, registered with the Securities and Exchange Commission (SEC) and
the BIR, despite being placed under receivership, thus:

Moreover, it must be emphasized that when herein petitioner was placed under receivership, there was merely
an interruption of its business operations. However, its corporate existence was never affected. The general
rule is that the appointment of the receiver does not terminate the charter or work a dissolution of the
corporation, even though the receivership is a permanent one. In other words, the corporation continues to
exist as a legal entity, clothed with its franchises (65 Am. Jur. 2d, pp. 973-974). Petitioner, for all intents and
purposes, remained to be the same corporation, registered with the SEC and with the BIR. While it may
continue to perform its corporate functions, all its properties and assets were under the control and custody of a
receiver, and its dealings with the public is somehow limited, if not momentarily suspended. x x x

On June 11, 2003, petitioner filed with the Court of Appeals a petition for review. On May 11, 2005, the
appellate court rendered a Decision affirming the assailed judgment of the CTA.

Thus, this petition for review on certiorari.

The main issue for our resolution is whether petitioner is entitled to a refund of its minimum corporate income
tax paid to the BIR for taxable year 1999.

Petitioner contends that the Court of Tax Appeals erred in holding that it is not entitled to the four (4)-year grace
period provided by law suspending the payment of its minimum corporate income tax since it is not a newly
created corporation, having been registered as early as 1961.

For his part, the Commissioner of Internal Revenue (CIR), respondent, maintains that pursuant to R.A. No.
8424, petitioner should pay its minimum corporate income tax beginning January 1, 1998 as it did not close its
business operations in 1987 but merely suspended the same. Even if placed under receivership, its corporate
existence was never affected. Thus, it falls under the category of an existing corporation recommencing its
banking business operations.

Section 27(E) of the Tax Code provides:

Sec. 27. Rates of Income Tax on Domestic Corporations. x x x

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income as of the end
of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on
the fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum corporate income tax is greater than the tax computed under Subsection (A) of
this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the
normal income tax for the three (3) immediately succeeding taxable years.

xxx

Upon the other hand, Revenue Regulation No. 9-98 specifies the period when a corporation becomes subject
to the minimum corporate income tax, thus:

(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT (minimum
corporate income tax) -

For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which
the domestic corporation registered with the Bureau of Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning
January 1, 1998.

xxx

The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension of
tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize
their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many
companies reported losses in their initial years of operations. The following are excerpts from the Senate
deliberations:

Senator Romulo: x x x Let me go now to the minimum corporate income tax, which is on page 45 of the
Journal, which is to minimize tax evasion on those corporations which have been declaring losses year in and
year out. Here, the tax rate is three-fourths, three quarter of a percent or .75% applied to corporations that do
not report any taxable income on the fourth year of their business operation. Therefore, those that do not report
income on the first, second and third year are not included here.

Senator Enrile: We assume that this is the period of stabilization of new company that is starting in business.

Senator Romulo: That is right.

Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the
lawmaking body saw the need to provide a grace period of four years from their registration before they pay
their minimum corporate income tax.

Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known as the "Thrift Banks Act
of 1995." It took effect on March 18, 1995. This law provides for the regulation of the organization and
operations of thrift banks. Under Section 3, thrift banks include savings and mortgage banks, private
development banks, and stock savings and loans associations organized under existing laws.
On June 15, 1999, the BIR issued Revenue Regulation No. 4-95 implementing certain provisions of the said
R.A. No. 7906. Section 6 provides:

Sec. 6. Period of exemption. All thrift banks created and organized under the provisions of the Act shall be
exempt from the payment of all taxes, fees, and charges of whatever nature and description, except the
corporate income tax imposed under Title II of the NIRC and as specified in Section 2(A) of these regulations,
for a period of five (5) years from the date of commencement of operations; while for thrift banks which are
already existing and operating as of the date of effectivity of the Act (March 18, 1995), the tax exemption shall
be for a period of five (5) years reckoned from the date of such effectivity.

For purposes of these regulations, "date of commencement of operations" shall be understood to mean the
date when the thrift bank was registered with the Securities and Exchange Commission or the date when the
Certificate of Authority to Operate was issued by the Monetary Board of the Bangko Sentral ng Pilipinas,
whichever comes later.

xxx

As mentioned earlier, petitioner bank was registered with the BIR in 1961. However, in 1987, it was found
insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve (12) years, or on
June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or on January
21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of Incorporation which was approved
on June 22, 1999.

It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date of commencement
of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of
Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum
corporate income tax on corporations, provides that for purposes of this tax, the date when business operations
commence is the year in which the domestic corporation registered with the BIR. However, under Revenue
Regulations No. 4-95, the date of commencement of operations of thrift banks, such as herein petitioner, is
the date the particular thrift bank was registered with the SEC or the date when the Certificate of Authority to
Operate was issued to it by the Monetary Board of the BSP, whichever comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner, being
a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999 when it
was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its minimum corporate
income tax after four (4) years from 1999.

WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals in CA-G.R. SP No.
77177 is hereby REVERSED. Respondent Commissioner of Internal Revenue is directed to refund to petitioner
bank the sum of P33,816,164.00 prematurely paid as minimum corporate income tax.

SECOND DIVISION
 [G.R. No. 108067. January 20, 2000]

CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS,

THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

DECISION

QUISUMBING, J.:

Petitioner disputes the decision of the Court of Appeals which affirmed the decision of the
[1] [2]

Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue
the amount of three million, seven hundred seventy-four thousand, eight hundred sixty seven
pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper accumulation of profits for
1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987,
under Sec. 25 of the National Internal Revenue Code.

The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a

wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods,
and an importer/indentor.

On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment
of deficiency income tax of one hundred nineteen thousand eight hundred seventeen
(P119,817.00) pesos for taxable year 1981, as follows:

"Net income disclosed by

the return as audited 14,575,210.00

Add: Discrepancies:

Professional
fees/yr.
per 262,877.00
investigation 17018 110,399.37

Total Adjustment 152,477.00

Net income per Investigation 14,727,687.00

Less: Personal and additional exemptions ___________

Amount subject to tax 14,727,687.00

Income tax due thereon .25% Surtax 2,385,231.50 3,237,495.00

 Less: Amount already assessed . 5,161,788.00

BALANCE . 75,709.00

_______ monthly interest from ..1,389,636.00 44,108.00

_________ ____________

Compromise penalties ... ___________

TOTAL AMOUNT DUE ..3,774,867.50 119,817.00" [3]

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and
1981 Deficiency Percentage Assessment of P8,846.72. Petitioner, through its external
[4]

accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for the undue
accumulation of earnings was not proper because the said profits were retained to increase
petitioners working capital and it would be used for reasonable business needs of the company.
Petitioner contended that it availed of the tax amnesty under Executive Order No. 41, hence
enjoyed amnesty from civil and criminal prosecution granted by the law.

On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the
cancellation of the assessment notices and rendered its resolution, as follows:

"It appears that your client availed of Executive Order No. 41 under File No.
32A-F-000455-41B as certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.

In reply thereto, I have the honor to inform you that the availment of the tax
amnesty under Executive Order No. 41, as amended is sufficient basis, in
appropriate cases, for the cancellation of the assessment issued after August 21,
1986. (Revenue Memorandum Order No. 4-87) Said availment does not,
therefore, result in cancellation of assessments issued before August 21, 1986, as
in the instant case. In other words, the assessments in this case issued on January
30, 1985 despite your clients availment of the tax amnesty under Executive Order
No. 41, as amended still subsist.

Such being the case, you are therefore, requested to urge your client to pay this
Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30)
days from receipt hereof, otherwise this office will be constrained to enforce
collection thereof thru summary remedies prescribed by law.

This constitutes the final decision of this Office on this matter." [5]
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both
parties agreed to compromise the 1981 deficiency income tax assessment of P119,817.00.
Petitioner paid a reduced amount --twenty-six thousand, five hundred seventy-seven pesos
(P26,577.00) -- as compromise settlement. However, the surtax on improperly accumulated
profits remained unresolved.

Petitioner claimed that CIRs assessment representing the 25% surtax on its accumulated earnings
for the year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its
earnings and profits for reasonable business requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid
Company, a corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange. This being
the case, no individual shareholder of petitioner could have evaded or prevented the imposition
of individual income taxes by petitioners accumulation of earnings and profits, instead of
distribution of the same.

In denying the petition, the Court of Tax Appeals made the following pronouncements:

"Petitioner contends that it did not declare dividends for the year 1981 in order to
use the accumulated earnings as working capital reserve to meet its "reasonable
business needs". The law permits a stock corporation to set aside a portion of its
retained earnings for specified purposes (citing Section 43, paragraph 2 of the
Corporation Code of the Philippines). In the case at bar, however, petitioners
purpose for accumulating its earnings does not fall within the ambit of any of
these specified purposes.

More compelling is the finding that there was no need for petitioner to set aside a
portion of its retained earnings as working capital reserve as it claims since it had
considerable liquid funds. A thorough review of petitioners financial statement
(particularly the Balance Sheet, p. 127, BIR Records) reveals that the corporation had
considerable liquid funds consisting of cash accounts receivable, inventory and even its
sales for the period is adequate to meet the normal needs of the business. This can be
determined by computing the current asset to liability ratio of the company:

current
ratio = current assets / current liabilities

= P 47,052,535.00 / P21,275,544.00

= 2.21: 1

The significance of this ratio is to serve as a primary test of a companys solvency

to meet current obligations from current assets as a going concern or a measure of
adequacy of working capital.
 xxx

We further reject petitioners argument that "the accumulated earnings tax does not
apply to a publicly-held corporation" citing American jurisprudence to support its
position. The reference finds no application in the case at bar because under
Section 25 of the NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated
September 17, 1980), the exceptions to the accumulated earnings tax are
expressly enumerated, to wit: Bank, non-bank financial intermediaries,
corporations organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance companies, or personal
holding companies, whether domestic or foreign. The law on the matter is clear
and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the
provision of Section 25 of the NIRC should apply to petitioner.

Equally clear and specific are the provisions of E.O. 41 particularly with respect
to its effectivity and coverage...

... Said availment does not result in cancellation of assessments issued before
August 21, 1986 as petitioner seeks to do in the case at bar. Therefore, the
assessments in this case, issued on January 30, 1985 despite petitioners availment
of the tax amnesty under E.O. 41 as amended, still subsist."

xxx

WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay

respondent Commissioner of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987." [6]

Petitioner appealed the Court of Tax Appeals decision to the Court of Appeals. Affirming the
CTA decision, the appellate court said:

"In reviewing the instant petition and the arguments raised herein, We find no
compelling reason to reverse the findings of the respondent Court. The respondent
Courts decision is supported by evidence, such as petitioner corporations financial
statement and balance sheets (p. 127, BIR Records). On the other hand the
petitioner corporation could only come up with an alternative formula lifted from
a decision rendered by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24
T.C.M. [CCH] 1030). Applying said formula to its particular financial position,
the petitioner corporation attempts to justify its accumulated surplus earnings. To
Our mind, the petitioner corporations alternative formula cannot overturn the
persuasive findings and conclusion of the respondent Court based, as it is, on the
applicable laws and jurisprudence, as well as standards in the computation of
taxes and penalties practiced in this jurisdiction.
 WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED and the decision of the Court of Tax Appeals dated August 6, 1992
in C.T.A. Case No. 4250 is AFFIRMED in toto." [7]

Hence, petitioner now comes before us and assigns as sole issue:

WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE

PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR
THE YEAR 1981. [8]

Section 25 of the old National Internal Revenue Code of 1977 states:

[9]

"Sec. 25. Additional tax on corporation improperly accumulating profits or

surplus -

"(a) Imposition of tax. -- If any corporation is formed or availed of for the purpose
of preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of
permitting its gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such corporation, for each taxable
year, a tax equal to twenty-five per-centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same
manner and subject to the same provisions of law, including penalties, as that tax.

"(b) Prima facie evidence. -- The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned, directly or indirectly,
by one person.

"(c) Evidence determinative of purpose. -- The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.

"(d) Exception -- The provisions of this sections shall not apply to banks, non-
bank financial intermediaries, corporation organized primarily, and authorized by
the Central Bank of the Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.

The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.

Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated
earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a publicly owned
company. Specifically, petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
[10]

whereby the U.S. Ninth Circuit Court of Appeals had taken the position that the accumulated
earnings tax could only apply to a closely held corporation.

A review of American taxation history on accumulated earnings tax will show that the
application of the accumulated earnings tax to publicly held corporations has been problematic.
Initially, the Tax Court and the Court of Claims held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled in Golconda that the
accumulated earnings tax could only apply to closely held corporations. Despite Golconda, the
Internal Revenue Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of shareholders. The Service
indicated it would not follow the Ninth Circuit regarding publicly held corporations. In 1984,
[11]

American legislation nullified the Ninth Circuits Golconda ruling and made it clear that the
accumulated earnings tax is not limited to closely held corporations. Clearly, Golconda is no
[12]

longer a reliable precedent.

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner
does not fall among those exempt classes. Besides, the rule on enumeration is that the express
mention of one person, thing, act, or consequence is construed to exclude all others. Laws[13]

granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of
[14] [15]

proof rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed, a burden which petitioner here has failed to discharge.
[16]

Another point raised by the petitioner in objecting to the assessment, is that increase of working
capital by a corporation justifies accumulating income. Petitioner asserts that respondent court
erred in concluding that Cyanamid need not infuse additional working capital reserve because it
had considerable liquid funds based on the 2.21:1 ratio of current assets to current liabilities.
Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as working capital
reserve, sufficient amounts of liquid assets to carry the company through one operating cycle.
The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an
[17]

examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities
and any extraordinary expenses reasonably anticipated, plus enough to operate the business
during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw
materials, raw materials into inventory, and inventory into sales, including the time it takes to
collect payment for the sales. [18]
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as
working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts
that Cyanamid had a working capital deficit of P7,986,633.00. Therefore, the P9,540,926.00
[19]

accumulated income as of 1981 may be validly accumulated to increase the petitioners working
capital for the succeeding year.

We note, however, that the companies where the "Bardahl" formula was applied, had operating
cycles much shorter than that of petitioner. In Atlas Tool Co., Inc. vs. CIR, the companys
[20]

operating cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi
vs. United States, the corporations operating cycle was only 56.87 days, or 15.58% of the year.
[21]

In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reflecting
that petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover the
operating costs of the business. There are variations in the application of the "Bardahl" formula,
such as average operating cycle or peak operating cycle. In times when there is no recurrence of
a business cycle, the working capital needs cannot be predicted with accuracy. As stressed by
American authorities, although the "Bardahl" formula is well-established and routinely applied
by the courts, it is not a precise rule. It is used only for administrative convenience. Petitioners
[22]

application of the "Bardahl" formula merely creates a false illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption
of the industry standard. The ratio of current assets to current liabilities is used to determine the
[23]

sufficiency of working capital. Ideally, the working capital should equal the current liabilities and
there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to
1" rule.
[24]

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said
working capital was expected to increase further when more funds were generated from the
succeeding years sales. Available income covered expenses or indebtedness for that year, and
there appeared no reason to expect an impending working capital deficit which could have
necessitated an increase in working capital, as rationalized by petitioner.

In Basilan Estates, Inc. vs. Commissioner of Internal Revenue, we held that:

[25]

"...[T]here is no need to have such a large amount at the beginning of the

following year because during the year, current assets are converted into cash and
with the income realized from the business as the year goes, these expenses may
well be taken care of. [citation omitted]. Thus, it is erroneous to say that the
taxpayer is entitled to retain enough liquid net assets in amounts approximately
equal to current operating needs for the year to cover cost of goods sold and
operating expenses: for it excludes proper consideration of funds generated by the
collection of notes receivable as trade accounts during the course of the year." [26]

If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of
proving the determination wrong, together with the corresponding burden of first going forward
with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable accumulation of earnings or profits. [27]

In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which
are mere afterthoughts. Furthermore, the accumulated profits must be used within a reasonable
[28]

time after the close of the taxable year. In the instant case, petitioner did not establish, by clear
and convincing evidence, that such accumulation of profit was for the immediate needs of the
business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, we ruled:

[29]

"To determine the reasonable needs of the business in order to justify an

accumulation of earnings, the Courts of the United States have invented the so-
called Immediacy Test which construed the words reasonable needs of the
business to mean the immediate needs of the business, and it was generally held
that if the corporation did not prove an immediate need for the accumulation of
the earnings and profits, the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. (Mertens, Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 103). [30]

In the present case, the Tax Court opted to determine the working capital sufficiency by using the
ratio between current assets to current liabilities. The working capital needs of a business depend
upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover,
the amount of accounts receivable, the collection rate, the availability of credit to the business,
and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax
court with the required definiteness envisioned by the statute. We agree with the tax court that
the burden of proof to establish that the profits accumulated were not beyond the reasonable
needs of the company, remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very nature of its function, is
dedicated exclusively to the consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority.
Unless rebutted, all presumptions generally are indulged in favor of the correctness of the
[31]

CIRs assessment against the taxpayer. With petitioners failure to prove the CIR incorrect, clearly
and conclusively, this Court is constrained to uphold the correctness of tax courts ruling as
affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals,
sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.2/22/00 9:50 AM