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SECOND DIVISION Respondent Commissioner filed his Answer to petitioners' petition

for review in C.T.A. Case No. 2511 on July 31, 1973, while his Answer
G.R. No. 48532 August 31, 1992 in C.T.A. Case No. 2594 was filed on August 7, 1974.

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, Upon joint motion of the parties on the ground that these two cases
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. involve common question of law and facts, that respondent Court of
MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME Tax Appeals heard the cases jointly. In its decision dated September
A. SOQUES, petitioners, 26, 1977, the respondent Court of Tax Appeals held that the proper
vs. conversion rate for the purpose of reporting and paying the
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF Philippine income tax on the dollar earnings of petitioners are the
INTERNAL REVENUE, respondents. rates prescribed under Revenue Memorandum Circulars Nos. 7-71
and 41-71. Accordingly, the claim for refund and/or tax credit of
G.R. No. 48533 August 31, 1992 petitioners in the above-entitled cases was denied and the petitions
for review dismissed, with costs against petitioners. Hence, this
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. petition for review on certiorari. 2
MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T. Petitioners claim that public respondent Court of Tax Appeals erred
EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,
vs. 1. That petitioners' dollar earnings are receipts derived from
INTERNAL REVENUE, respondents.
2. That the proper rate of conversion of petitioners' dollar
Angara, Abello, Concepcion, Regala & Cruz for petitioners. earnings for tax purposes in the prevailing free market rate of
exchange and not the par value of the peso; and

NOCON, J.: 3. That the use of the par value of the peso to convert
petitioners' dollar earnings for tax purposes into Philippine pesos is
Petitioners pray that his Court reverse the Decision of the public "unrealistic" and, therefore, the prevailing free market rate should
respondent Court of Tax Appeals, promulgated September 26, be the rate used.
19771 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income Respondent Commissioner of Internal Revenue, on the other hand,
taxes which they claim to have been erroneously or illegally paid or refutes petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two
As summarized by the Solicitor General, the facts of the cases are as cases are Philippine income tax for the calendar years 1970 (CTA
follows: Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should
be governed by the provisions of the National Internal Revenue
Petitioners are Filipino citizens and employees of Procter and Code and its implementing rules and regulations, and not by the
Gamble, Philippine Manufacturing Corporation, with offices at provisions of Central Bank Circular No. 42 dated May 21, 1953, as
Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is contended by petitioners.
a subsidiary of Procter & Gamble, a foreign corporation based in
Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners Section 21 of the National Internal Revenue Code, before its
were assigned, for certain periods, to other subsidiaries of Procter & amendment by Presidential Decrees Nos. 69 and 323 which took
Gamble, outside of the Philippines, during which petitioners were effect on January 1, 1973 and January 1, 1974, respectively, imposed
paid U.S. dollars as compensation for services in their foreign a tax upon the taxable net income received during each taxable year
assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. from all sources by a citizen of the Philippines, whether residing here
2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. or abroad.
Case No. 2511 filed their income tax returns for the year 1970, they
computed the tax due by applying the dollar-to-peso conversion on Petitioners are citizens of the Philippines temporarily residing
the basis of the floating rate ordained under B.I.R. Ruling No. 70-027 abroad by virtue of their employment. Thus, in their tax returns for
dated May 14, 1970, as follows: the period involved herein, they gave their legal residence/address
as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes
From January 1 to February 20, 1970 at the conversion rate of P3.90 "A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos.
to U.S. $1.00; 2511 and 2594).

From February 21 to December 31, 1970 at the conversion rate of Petitioners being subject to Philippine income tax, their dollar
P6.25 to U.S. $1.00 earnings should be converted into Philippine pesos in computing the
income tax due therefrom, in accordance with the provisions of
Petitioners in C.T.A. Case No. 2594 likewise used the above Revenue Memorandum Circular No. 7-71 dated February 11, 1971
conversion rate in converting their dollar income for 1971 to for 1970 income and Revenue Memorandum Circular No. 41-71
Philippine peso. However, on February 8, 1973 and October 8, 1973, dated December 21, 1971 for 1971 income, which reiterated BIR
petitioners in said cases filed with the office of the respondent Ruling No. 70-027 dated May 4, 1970, to wit:
Commissioner, amended income tax returns for the above-
mentioned years, this time using the par value of the peso as For internal revenue tax purposes, the free marker rate of
prescribed in Section 48 of Republic Act No. 265 in relation to conversion (Revenue Circulars Nos. 7-71 and 41-71) should be
Section 6 of Commonwealth Act No. 265 in relation to Section 6 of applied in order to determine the true and correct value in
Commonwealth Act No. 699 as the basis for converting their Philippine pesos of the income of petitioners. 3
respective dollar income into Philippine pesos for purposes of
computing and paying the corresponding income tax due from After a careful examination of the records, the laws involved and the
them. The aforesaid computation as shown in the amended income jurisprudence on the matter, We are inclined to agree with
tax returns resulted in the alleged overpayments, refund and/or tax respondents Court of Tax Appeals and Commissioner of Internal
credit. Accordingly, claims for refund of said over-payments were Revenue and thus vote to deny the petition.
filed with respondent Commissioner. Without awaiting the
resolution of the Commissioner of the Internal Revenue on their This basically an income tax case. For the proper resolution of these
claims, petitioners filed their petitioner for review in the above- cases income may be defined as an amount of money coming to a
mentioned cases. person or corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. 4 Income can also be Petitioners argue that since there were no remittances and
though of as flow of the fruits of one's labor. 5 acceptances of their salaries and wages in US dollars into the
Philippines, they are exempt from the coverage of such circulars.
Petitioners are correct as to their claim that their dollar earnings are Petitioners forget that they are citizens of the Philippines, and their
not receipts derived from foreign exchange transactions. For a income, within or without, and in these cases wholly without, are
foreign exchange transaction is simply that a transaction in subject to income tax. Sec. 21, NIRC, as amended, does not brook
foreign exchange, foreign exchange being "the conversion of an any exemption.
amount of money or currency of one country into an equivalent
amount of money or currency of another." 6 When petitioners were Since petitioners have already paid their 1970 and 1971 income
assigned to the foreign subsidiaries of Procter & Gamble, they were taxes under the uniform rate of exchange prescribed under the
earning in their assigned nation's currency and were ALSO spending aforestated Revenue Memorandum Circulars, there is no reason for
in said currency. There was no conversion, therefore, from one respondent Commissioner to refund any taxes to petitioner as said
currency to another. Revenue Memorandum Circulars, being of long standing and not
contrary to law, are valid. 13
Public respondent Court of Tax Appeals did err when it concluded
that the dollar incomes of petitioner fell under Section 2(f)(g) and Although it has become a worn-out cliche, the fact still remains that
(m) of C.B. Circular No. 42. 7 "taxes are the lifeblood of the government" and one of the duties of
a Filipino citizen is to pay his income tax.
The issue now is, what exchange rate should be used to determine
the peso equivalent of the foreign earnings of petitioners for income WHEREFORE, the petitioners are denied for lack of merit. The
tax purposes. Petitioners claim that since the dollar earnings do not dismissal by the respondent Court of Tax Appeals of petitioners'
fall within the classification of foreign exchange transactions, there claims for tax refunds for the income tax period for 1970 and 1971 is
occurred no actual inward remittances, and, therefore, they are not AFFIRMED. Costs against petitioners.
included in the coverage of Central Bank Circular No. 289 which
provides for the specific instances when the par value of the peso SO ORDERED.
shall not be the conversion rate used. They conclude that their
earnings should be converted for income tax purposes using the par EN BANC
value of the Philippine peso.
G.R. No. L-12287 August 7, 1918
Respondent Commissioner argues that CB Circular No. 289 speaks of
receipts for export products, receipts of sale of foreign exchange or VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-
foreign borrowings and investments but not income tax. He also appellants,
claims that he had to use the prevailing free market rate of vs.
exchange in these cases because of the need to ascertain the true JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
and correct amount of income in Philippine peso of dollar earners CONCEPCION, Deputy Collector of Internal Revenue, defendants-
for Philippine income tax purposes. appellees.

A careful reading of said CB Circular No. 289 8 shows that the Gregorio Araneta for appellants.
subject matters involved therein are export products, invisibles, Assistant Attorney Round for appellees.
receipts of foreign exchange, foreign exchange payments, new
foreign borrowing and MALCOLM, J.:
investments nothing by way of income tax payments. Thus,
petitioners are in error by concluding that since C.B. Circular No. 289 This appeal calls for consideration of the Income Tax Law, a law of
does not apply to them, the par value of the peso should be the American origin, with reference to the Civil Code, a law of Spanish
guiding rate used for income tax purposes. origin.

The dollar earnings of petitioners are the fruits of their labors in the STATEMENT OF THE CASE.
foreign subsidiaries of Procter & Gamble. It was a definite amount of
money which came to them within a specified period of time of two Vicente Madrigal and Susana Paterno were legally married prior to
yeas as payment for their services. January 1, 1914. The marriage was contracted under the provisions
of law concerning conjugal partnerships (sociedad de gananciales).
Section 21 of the National Internal Revenue Code, amended up to On February 25, 1915, Vicente Madrigal filed sworn declaration on
August 4, 1969, states as follows: the prescribed form with the Collector of Internal Revenue, showing,
as his total net income for the year 1914, the sum of P296,302.73.
Sec. 21. Rates of tax on citizens or residents. A tax is hereby Subsequently Madrigal submitted the claim that the said
imposed upon the taxable net income received during each taxable P296,302.73 did not represent his income for the year 1914, but was
year from all sources by every individual, whether a citizen of the in fact the income of the conjugal partnership existing between
Philippines residing therein or abroad or an alien residing in the himself and his wife Susana Paterno, and that in computing and
Philippines, determined in accordance with the following schedule: assessing the additional income tax provided by the Act of Congress
of October 3, 1913, the income declared by Vicente Madrigal should
xxx xxx xxx be divided into two equal parts, one-half to be considered the
income of Vicente Madrigal and the other half of Susana Paterno.
And in the implementation for the proper enforcement of the The general question had in the meantime been submitted to the
National Internal Revenue Code, Section 338 thereof empowers the Attorney-General of the Philippine Islands who in an opinion dated
Secretary of Finance to "promulgate all needful rules and March 17, 1915, held with the petitioner Madrigal. The revenue
regulations" to effectively enforce its provisions. 9 officers being still unsatisfied, the correspondence together with this
opinion was forwarded to Washington for a decision by the United
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 States Treasury Department. The United States Commissioner of
10 and 41-71 11 were issued to prescribed a uniform rate of Internal Revenue reversed the opinion of the Attorney-General, and
exchange from US dollars to Philippine pesos for INTERNAL thus decided against the claim of Madrigal.
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively.
Said revenue circulars were a valid exercise of the authority given to After payment under protest, and after the protest of Madrigal had
the Secretary of Finance by the Legislature which enacted the been decided adversely by the Collector of Internal Revenue, action
Internal Revenue Code. And these are presumed to be a valid was begun by Vicente Madrigal and his wife Susana Paterno in the
interpretation of said code until revoked by the Secretary of Finance Court of First Instance of the city of Manila against Collector of
himself. 12 Internal Revenue and the Deputy Collector of Internal Revenue for
the recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally collected by the defendants from the
plaintiff, Vicente Madrigal, under the provisions of the Act of figurative language: "The fact is that property is a tree, income is the
Congress known as the Income Tax Law. The burden of the fruit; labor is a tree, income the fruit; capital is a tree, income the
complaint was that if the income tax for the year 1914 had been fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
correctly and lawfully computed there would have been due payable income is not a tax on property. "Income," as here used, can be
by each of the plaintiffs the sum of P2,921.09, which taken together defined as "profits or gains." (London County Council vs. Attorney-
amounts of a total of P5,842.18 instead of P9,668.21, erroneously General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49
and unlawfully collected from the plaintiff Vicente Madrigal, with Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax,
the result that plaintiff Madrigal has paid as income tax for the year second edition [1915], Chapter IV; Black on Income Taxes, second
1914, P3,786.08, in excess of the sum lawfully due and payable. edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S.,
549; and Towne vs. Eisner, decided by the United States Supreme
The answer of the defendants, together with an analysis of the tax Court, January 7, 1918.)
declaration, the pleadings, and the stipulation, sets forth the basis of
defendants' stand in the following way: The income of Vicente A regulation of the United States Treasury Department relative to
Madrigal and his wife Susana Paterno of the year 1914 was made up returns by the husband and wife not living apart, contains the
of three items: (1) P362,407.67, the profits made by Vicente following:
Madrigal in his coal and shipping business; (2) P4,086.50, the profits
made by Susana Paterno in her embroidery business; (3) P16,687.80, The husband, as the head and legal representative of the household
the profits made by Vicente Madrigal in a pawnshop company. The and general custodian of its income, should make and render the
sum of these three items is P383,181.97, the gross income of return of the aggregate income of himself and wife, and for the
Vicente Madrigal and Susana Paterno for the year 1914. General purpose of levying the income tax it is assumed that he can ascertain
deductions were claimed and allowed in the sum of P86,879.24. The the total amount of said income. If a wife has a separate estate
resulting net income was P296,302.73. For the purpose of assessing managed by herself as her own separate property, and receives an
the normal tax of one per cent on the net income there were income of more than $3,000, she may make return of her own
allowed as specific deductions the following: (1) P16,687.80, the tax income, and if the husband has other net income, making the
upon which was to be paid at source, and (2) P8,000, the specific aggregate of both incomes more than $4,000, the wife's return
exemption granted to Vicente Madrigal and Susana Paterno, should be attached to the return of her husband, or his income
husband and wife. The remainder, P271,614.93 was the sum upon should be included in her return, in order that a deduction of $4,000
which the normal tax of one per cent was assessed. The normal tax may be made from the aggregate of both incomes. The tax in such
thus arrived at was P2,716.15. case, however, will be imposed only upon so much of the aggregate
income of both shall exceed $4,000. If either husband or wife
The dispute between the plaintiffs and the defendants concerned separately has an income equal to or in excess of $3,000, a return of
the additional tax provided for in the Income Tax Law. The trial court annual net income is required under the law, and such return must
in an exhausted decision found in favor of defendants, without include the income of both, and in such case the return must be
costs. made even though the combined income of both be less than
$4,000. If the aggregate net income of both exceeds $4,000, an
ISSUES. annual return of their combined incomes must be made in the
manner stated, although neither one separately has an income of
The contentions of plaintiffs and appellants having to do solely with $3,000 per annum. They are jointly and separately liable for such
the additional income tax, is that is should be divided into two equal return and for the payment of the tax. The single or married status
parts, because of the conjugal partnership existing between them. of the person claiming the specific exemption shall be determined as
The learned argument of counsel is mostly based upon the one of the time of claiming such exemption which return is made,
provisions of the Civil Code establishing the sociedad de gananciales. otherwise the status at the close of the year."
The counter contentions of appellees are that the taxes imposed by
the Income Tax Law are as the name implies taxes upon income tax With these general observations relative to the Income Tax Law in
and not upon capital and property; that the fact that Madrigal was a force in the Philippine Islands, we turn for a moment to consider the
married man, and his marriage contracted under the provisions provisions of the Civil Code dealing with the conjugal partnership.
governing the conjugal partnership, has no bearing on income Recently in two elaborate decisions in which a long line of Spanish
considered as income, and that the distinction must be drawn authorities were cited, this court in speaking of the conjugal
between the ordinary form of commercial partnership and the partnership, decided that "prior to the liquidation the interest of the
conjugal partnership of spouses resulting from the relation of wife and in case of her death, of her heirs, is an interest inchoate, a
marriage. mere expectancy, which constitutes neither a legal nor an equitable
estate, and does not ripen into title until there appears that there
DECISION. are assets in the community as a result of the liquidation and
settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871;
From the point of view of test of faculty in taxation, no less than five Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
answers have been given the course of history. The final stage has
been the selection of income as the norm of taxation. (See Seligman, Susana Paterno, wife of Vicente Madrigal, has an inchoate right in
"The Income Tax," Introduction.) The Income Tax Law of the United the property of her husband Vicente Madrigal during the life of the
States, extended to the Philippine Islands, is the result of an effect conjugal partnership. She has an interest in the ultimate property
on the part of the legislators to put into statutory form this canon of rights and in the ultimate ownership of property acquired as income
taxation and of social reform. The aim has been to mitigate the evils after such income has become capital. Susana Paterno has no
arising from inequalities of wealth by a progressive scheme of absolute right to one-half the income of the conjugal partnership.
taxation, which places the burden on those best able to pay. To Not being seized of a separate estate, Susana Paterno cannot make
carry out this idea, public considerations have demanded an a separate return in order to receive the benefit of the exemption
exemption roughly equivalent to the minimum of subsistence. With which would arise by reason of the additional tax. As she has no
these exceptions, the income tax is supposed to reach the earnings estate and income, actually and legally vested in her and entirely
of the entire non-governmental property of the country. Such is the distinct from her husband's property, the income cannot properly be
background of the Income Tax Law. considered the separate income of the wife for the purposes of the
additional tax. Moreover, the Income Tax Law does not look on the
Income as contrasted with capital or property is to be the test. The spouses as individual partners in an ordinary partnership. The
essential difference between capital and income is that capital is a husband and wife are only entitled to the exemption of P8,000
fund; income is a flow. A fund of property existing at an instant of specifically granted by the law. The higher schedules of the
time is called capital. A flow of services rendered by that capital by additional tax directed at the incomes of the wealthy may not be
the payment of money from it or any other benefit rendered by a partially defeated by reliance on provisions in our Civil Code dealing
fund of capital in relation to such fund through a period of time is with the conjugal partnership and having no application to the
called an income. Capital is wealth, while income is the service of Income Tax Law. The aims and purposes of the Income Tax Law must
wealth. (See Fisher, "The Nature of Capital and Income.") The be given effect.
Supreme Court of Georgia expresses the thought in the following
The point we are discussing has heretofore been considered by the separate estates or not, is taken as a whole for the purpose of the
Attorney-General of the Philippine Islands and the United States normal tax. Where the wife has income from a separate estate
Treasury Department. The decision of the latter overruling the makes return made by her husband, while the incomes are added
opinion of the Attorney-General is as follows: together for the purpose of the normal tax they are taken separately
for the purpose of the additional tax. In this case, however, the wife
TREASURY DEPARTMENT, Washington. has no separate income within the contemplation of the Income Tax
Income Tax.
Chief, Bureau of Insular Affairs, War Department, DAVID A. GATES.
Washington, D. C. Acting Commissioner.

SIR: This office is in receipt of your letter of June 22, 1915, In connection with the decision above quoted, it is well to recall a
transmitting copy of correspondence "from the Philippine few basic ideas. The Income Tax Law was drafted by the Congress of
authorities relative to the method of submission of income tax the United States and has been by the Congress extended to the
returns by marred person." Philippine Islands. Being thus a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the
You advise that "The Governor-General, in forwarding the papers to official who is charged with enforcing it has peculiar force for the
the Bureau, advises that the Insular Auditor has been authorized to Philippines. It has come to be a well-settled rule that great weight
suspend action on the warrants in question until an authoritative should be given to the construction placed upon a revenue law,
decision on the points raised can be secured from the Treasury whose meaning is doubtful, by the department charged with its
Department." execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338;
In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands
From the correspondence it appears that Gregorio Araneta, married vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva
and living with his wife, had an income of an amount sufficient to Segovia [1915], 32 Phil., 634.) We conclude that the judgment
require the imposition of the net income was properly computed should be as it is hereby affirmed with costs against appellants. So
and then both income and deductions and the specific exemption ordered.
were divided in half and two returns made, one return for each half
in the names respectively of the husband and wife, so that under the EN BANC
returns as filed there would be an escape from the additional tax;
that Araneta claims the returns are correct on the ground under the G.R. No. L-59431 July 25, 1984
Philippine law his wife is entitled to half of his earnings; that Araneta
has dominion over the income and under the Philippine law, the ANTERO M. SISON, JR., petitioner,
right to determine its use and disposition; that in this case the wife vs.
has no "separate estate" within the contemplation of the Act of RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal
October 3, 1913, levying an income tax. Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of
Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau
It appears further from the correspondence that upon the foregoing of Internal Revenue; MANUEL ALBA, Minister of Budget,
explanation, tax was assessed against the entire net income against FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
Gregorio Araneta; that the tax was paid and an application for CESAR E. A. VIRATA, Minister of Finance, respondents.
refund made, and that the application for refund was rejected,
whereupon the matter was submitted to the Attorney-General of Antero Sison for petitioner and for his own behalf.
the Islands who holds that the returns were correctly rendered, and
that the refund should be allowed; and thereupon the question at The Solicitor General for respondents.
issue is submitted through the Governor-General of the Islands and
Bureau of Insular Affairs for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the
Philippine Islands, to be administered as in the United States but by The success of the challenge posed in this suit for declaratory relief
the appropriate internal-revenue officers of the Philippine or prohibition proceeding 1 on the validity of Section I of Batas
Government. You are therefore advised that upon the facts as Pambansa Blg. 135 depends upon a showing of its constitutional
stated, this office holds that for the Federal Income Tax (Act of infirmity. The assailed provision further amends Section 21 of the
October 3, 1913), the entire net income in this case was taxable to National Internal Revenue Code of 1977, which provides for rates of
Gregorio Araneta, both for the normal and additional tax, and that tax on citizens or residents on (a) taxable compensation income, (b)
the application for refund was properly rejected. taxable net income, (c) royalties, prizes, and other winnings, (d)
interest from bank deposits and yield or any other monetary benefit
The separate estate of a married woman within the contemplation from deposit substitutes and from trust fund and similar
of the Income Tax Law is that which belongs to her solely and arrangements, (e) dividends and share of individual partner in the
separate and apart from her husband, and over which her husband net profits of taxable partnership, (f) adjusted gross income. 2
has no right in equity. It may consist of lands or chattels. Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be
unduly discriminated against by the imposition of higher rates of tax
The statute and the regulations promulgated in accordance upon his income arising from the exercise of his profession vis-a-vis
therewith provide that each person of lawful age (not excused from those which are imposed upon fixed income or salaried individual
so doing) having a net income of $3,000 or over for the taxable year taxpayers. 4 He characterizes the above sction as arbitrary
shall make a return showing the facts; that from the net income so amounting to class legislation, oppressive and capricious in
shown there shall be deducted $3,000 where the person making the character 5 For petitioner, therefore, there is a transgression of both
return is a single person, or married and not living with consort, and the equal protection and due process clauses 6 of the Constitution
$1,000 additional where the person making the return is married as well as of the rule requiring uniformity in taxation. 7
and living with consort; but that where the husband and wife both
make returns (they living together), the amount of deduction from The Court, in a resolution of January 26, 1982, required respondents
the aggregate of their several incomes shall not exceed $4,000. to file an answer within 10 days from notice. Such an answer, after
two extensions were granted the Office of the Solicitor General, was
The only occasion for a wife making a return is where she has filed on May 28, 1982. 8 The facts as alleged were admitted but not
income from a sole and separate estate in excess of $3,000, but the allegations which to their mind are "mere arguments, opinions
together they have an income in excess of $4,000, in which the or conclusions on the part of the petitioner, the truth [for them]
latter event either the husband or wife may make the return but not being those stated [in their] Special and Affirmative Defenses." 9 The
both. In all instances the income of husband and wife whether from answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise
of the State's power to tax. The authorities and cases cited while whether the assailed act is in the exercise of the lice power or the
correctly quoted or paraghraph do not support petitioner's stand." power of eminent domain is to demonstrated that the governmental
10 The prayer is for the dismissal of the petition for lack of merit. act assailed, far from being inspired by the attainment of the
common weal was prompted by the spirit of hostility, or at the very
This Court finds such a plea more than justified. The petition must least, discrimination that finds no support in reason. It suffices then
be dismissed. that the laws operate equally and uniformly on all persons under
similar circumstances or that all persons must be treated in the
1. It is manifest that the field of state activity has assumed a same manner, the conditions not being different, both in the
much wider scope, The reason was so clearly set forth by retired privileges conferred and the liabilities imposed. Favoritism and
Chief Justice Makalintal thus: "The areas which used to be left to undue preference cannot be allowed. For the principle is that equal
private enterprise and initiative and which the government was protection and security shall be given to every person under
called upon to enter optionally, and only 'because it was better circumtances which if not Identical are analogous. If law be looked
equipped to administer for the public welfare than is any private upon in terms of burden or charges, those that fall within a class
individual or group of individuals,' continue to lose their well- should be treated in the same fashion, whatever restrictions cast on
defined boundaries and to be absorbed within activities that the some in the group equally binding on the rest." 20 That same
government must undertake in its sovereign capacity if it is to meet formulation applies as well to taxation measures. The equal
the increasing social challenges of the times." 11 Hence the need for protection clause is, of course, inspired by the noble concept of
more revenues. The power to tax, an inherent prerogative, has to be approximating the Ideal of the laws benefits being available to all
availed of to assure the performance of vital state functions. It is the and the affairs of men being governed by that serene and impartial
source of the bulk of public funds. To praphrase a recent decision, uniformity, which is of the very essence of the Idea of law. There is,
taxes being the lifeblood of the government, their prompt and however, wisdom, as well as realism in these words of Justice
certain availability is of the essence. 12 Frankfurter: "The equality at which the 'equal protection' clause
aims is not a disembodied equality. The Fourteenth Amendment
2. The power to tax moreover, to borrow from Justice enjoins 'the equal protection of the laws,' and laws are not abstract
Malcolm, "is an attribute of sovereignty. It is the strongest of all the propositions. They do not relate to abstract units A, B and C, but are
powers of of government." 13 It is, of course, to be admitted that for expressions of policy arising out of specific difficulties, address to
all its plenitude 'the power to tax is not unconfined. There are the attainment of specific ends by the use of specific remedies. The
restrictions. The Constitution sets forth such limits . Adversely Constitution does not require things which are different in fact or
affecting as it does properly rights, both the due process and equal opinion to be treated in law as though they were the same." 21
protection clauses inay properly be invoked, all petitioner does, to Hence the constant reiteration of the view that classification if
invalidate in appropriate cases a revenue measure. if it were rational in character is allowable. As a matter of fact, in a leading
otherwise, there would -be truth to the 1803 dictum of Chief Justice case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes,
Marshall that "the power to tax involves the power to destroy." 14 went so far as to hold "at any rate, it is inherent in the power to tax
In a separate opinion in Graves v. New York, 15 Justice Frankfurter, that a state be free to select the subjects of taxation, and it has been
after referring to it as an 1, unfortunate remark characterized it as "a repeatedly held that 'inequalities which result from a singling out of
flourish of rhetoric [attributable to] the intellectual fashion of the one particular class for taxation, or exemption infringe no
times following] a free use of absolutes." 16 This is merely to constitutional limitation.'" 23
emphasize that it is riot and there cannot be such a constitutional
mandate. Justice Frankfurter could rightfully conclude: "The web of 7. Petitioner likewise invoked the kindred concept of
unreality spun from Marshall's famous dictum was brushed away by uniformity. According to the Constitution: "The rule of taxation shag
one stroke of Mr. Justice Holmess pen: 'The power to tax is not the be uniform and equitable." 24 This requirement is met according to
power to destroy while this Court sits." 17 So it is in the Philippines. Justice Laurel in Philippine Trust Company v. Yatco,25 decided in
1940, when the tax "operates with the same force and effect in
3. This Court then is left with no choice. The Constitution as every place where the subject may be found. " 26 He likewise
the fundamental law overrides any legislative or executive, act that added: "The rule of uniformity does not call for perfect uniformity or
runs counter to it. In any case therefore where it can be perfect equality, because this is hardly attainable." 27 The problem
demonstrated that the challenged statutory provision as of classification did not present itself in that case. It did not arise
petitioner here alleges fails to abide by its command, then this until nine years later, when the Supreme Court held: "Equality and
Court must so declare and adjudge it null. The injury thus is centered uniformity in taxation means that all taxable articles or kinds of
on the question of whether the imposition of a higher tax rate on property of the same class shall be taxed at the same rate. The
taxable net income derived from business or profession than on taxing power has the authority to make reasonable and natural
compensation is constitutionally infirm. classifications for purposes of taxation, ... . 28 As clarified by Justice
Tuason, where "the differentiation" complained of "conforms to the
4, The difficulty confronting petitioner is thus apparent. He practical dictates of justice and equity" it "is not discriminatory
alleges arbitrariness. A mere allegation, as here. does not suffice. within the meaning of this clause and is therefore uniform." 29
There must be a factual foundation of such unconstitutional taint. There is quite a similarity then to the standard of equal protection
Considering that petitioner here would condemn such a provision as for all that is required is that the tax "applies equally to all persons,
void or its face, he has not made out a case. This is merely to adhere firms and corporations placed in similar situation."30
to the authoritative doctrine that were the due process and equal
protection clauses are invoked, considering that they arc not fixed 8. Further on this point. Apparently, what misled petitioner is
rules but rather broad standards, there is a need for of such his failure to take into consideration the distinction between a tax
persuasive character as would lead to such a conclusion. Absent rate and a tax base. There is no legal objection to a broader tax base
such a showing, the presumption of validity must prevail. 18 or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate. Taxpayers may be
5. It is undoubted that the due process clause may be classified into different categories. To repeat, it. is enough that the
invoked where a taxing statute is so arbitrary that it finds no support classification must rest upon substantial distinctions that make real
in the Constitution. An obvious example is where it can be shown to differences. In the case of the gross income taxation embodied in
amount to the confiscation of property. That would be a clear abuse Batas Pambansa Blg. 135, the, discernible basis of classification is
of power. It then becomes the duty of this Court to say that such an the susceptibility of the income to the application of generalized
arbitrary act amounted to the exercise of an authority not rules removing all deductible items for all taxpayers within the class
conferred. That properly calls for the application of the Holmes and fixing a set of reduced tax rates to be applied to all of them.
dictum. It has also been held that where the assailed tax measure is Taxpayers who are recipients of compensation income are set apart
beyond the jurisdiction of the state, or is not for a public purpose, as a class. As there is practically no overhead expense, these
or, in case of a retroactive statute is so harsh and unreasonable, it is taxpayers are e not entitled to make deductions for income tax
subject to attack on due process grounds. 19 purposes because they are in the same situation more or less. On
the other hand, in the case of professionals in the practice of their
6. Now for equal protection. The applicable standard to avoid calling and businessmen, there is no uniformity in the costs or
the charge that there is a denial of this constitutional mandate expenses necessary to produce their income. It would not be just
then to disregard the disparities by giving all of them zero deduction Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the 20% int. p.a. fr. 7-15-85 to
Batasang Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
taxation as regards professional and business income.
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40
9. Nothing can be clearer, therefore, than that the petition is
without merit, considering the (1) lack of factual foundation to show II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and FY ended March 31, 1985
uniformity in taxation and (3) the reasonableness of the distinction
between compensation and taxable net income of professionals and Undeclared net income from
businessman certainly not a suspect classification,
Philphos and NDC construction projects . . . . . P 483,634,905.57
WHEREFORE, the petition is dismissed. Costs against petitioner.
Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
[G.R. No. 137377. December 18, 2001]
Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57
CORPORATION, respondent. Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00
PUNO, J.: Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50

In this petition for review, the Commissioner of Internal Revenue 20% int. p.a. fr. 4-26-85
assails the decision dated January 15, 1999 of the Court of Appeals
in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66
1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court
ordered the Commissioner of Internal Revenue to desist from TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 83,036,965.16
collecting the 1985 deficiency income, branch profit remittance and
contractors taxes from Marubeni Corporation after finding the latter III. DEFICIENCY CONTRACTORS TAX
to have properly availed of the tax amnesty under Executive Orders
Nos. 41 and 64, as amended. FY ended March 31, 1985

Respondent Marubeni Corporation is a foreign corporation Undeclared gross receipts/ gross income from
organized and existing under the laws of Japan. It is engaged in
general import and export trading, financing and the construction Philphos and NDC construction projects . . . . P 967,269,811.14
business. It is duly registered to engage in such business in the
Philippines and maintains a branch office in Manila. Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00

Sometime in November 1985, petitioner Commissioner of Internal Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00
Revenue issued a letter of authority to examine the books of
accounts of the Manila branch office of respondent corporation for 25% surcharge for late payment . . . . . . . . . 9,672,698.00
the fiscal year ending March 1985. In the course of the examination,
petitioner found respondent to have undeclared income from two Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00
(2) contracts in the Philippines, both of which were completed in
1984. One of the contracts was with the National Development Add: 20% int. p.a. fr. 4-21-85 to
Company (NDC) in connection with the construction and installation
of a wharf/port complex at the Leyte Industrial Development Estate to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
in the municipality of Isabel, province of Leyte. The other contract
was with the Philippine Phosphate Fertilizer Corporation (Philphos) TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 85,563,625.46
for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate. IV. DEFICIENCY COMMERCIAL BROKERS TAX

On March 1, 1986, petitioners revenue examiners recommended an FY ended March 31, 1985
assessment for deficiency income, branch profit remittance,
contractors and commercial brokers taxes. Respondent questioned Undeclared share from commission income
this assessment in a letter dated June 5, 1986.
(denominated as subsidy from Home
On August 27, 1986, respondent corporation received a letter dated
August 15, 1986 from petitioner assessing respondent several Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
deficiency taxes. The assessed deficiency internal revenue taxes,
inclusive of surcharge and interest, were as follows: Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00

I. DEFICIENCY INCOME TAX Add: 50% surcharge for non-declaration. . . . . . . 814,284.50

FY ended March 31, 1985 25% surcharge for late payment . . . . . . . . . 407,142.25

Undeclared gross income (Philphos and Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75

and NDC construction projects). . . . . . . . . . . . P 967,269,811.14 Add: 20% int. p.a. fr. 4-21-85

Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57 to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98

Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57 TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68

Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00 The 50% surcharge was imposed for your clients failure to report for
tax purposes the aforesaid taxable revenues while the 25%
surcharge was imposed because of your clients failure to pay on taxes subject of said case as deemed cancelled and withdrawn. The
time the above deficiency percentage taxes. Court of Tax Appeals disposed of as follows:

x x x x x x x x x. [1] WHEREFORE, the respondent Commissioner of Internal Revenue is

hereby ORDERED to DESIST from collecting the 1985 deficiency taxes
Petitioner found that the NDC and Philphos contracts were made on it had assessed against petitioner and the same are deemed
a turn-key basis and that the gross income from the two projects considered [sic] CANCELLED and WITHDRAWN by reason of the
amounted to P967,269,811.14. Each contract was for a piece of proper availment by petitioner of the amnesty under Executive
work and since the projects called for the construction and Order No. 41, as amended.[4]
installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources, hence, Petitioner challenged the decision of the tax court by filing CA-G.R.
subject to internal revenue taxes. The assessment letter further SP No. 42518 with the Court of Appeals.
stated that the same was petitioners final decision and that if
respondent disagreed with it, respondent may file an appeal with On January 15, 1999, the Court of Appeals dismissed the petition
the Court of Tax Appeals within thirty (30) days from receipt of the and affirmed the decision of the Court of Tax Appeals. Hence, this
assessment. recourse.

On September 26, 1986, respondent filed two (2) petitions for Before us, petitioner raises the following issues:
review with the Court of Tax Appeals. The first petition, CTA Case
No. 4109, questioned the deficiency income, branch profit (1) Whether or not the Court of Appeals erred in affirming the
remittance and contractors tax assessments in petitioners Decision of the Court of Tax Appeals which ruled that herein
assessment letter. The second, CTA Case No. 4110, questioned the respondents deficiency tax liabilities were extinguished upon
deficiency commercial brokers assessment in the same letter. respondents availment of tax amnesty under Executive Orders Nos.
41 and 64.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring
a one-time amnesty covering unpaid income taxes for the years (2) Whether or not respondent is liable to pay the income, branch
1981 to 1985 was issued. Under this E.O., a taxpayer who wished to profit remittance, and contractors taxes assessed by petitioner.[5]
avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of The main controversy in this case lies in the interpretation of the
December 31, 1985; (b) file a certified true copy of his statement exception to the amnesty coverage of E.O. Nos. 41 and 64. There are
declaring his net worth as of December 31, 1980 on record with the three (3) types of taxes involved herein income tax, branch profit
Bureau of Internal Revenue (BIR), or if no such record exists, file a remittance tax and contractors tax. These taxes are covered by the
statement of said net worth subject to verification by the BIR; and amnesties granted by E.O. Nos. 41 and 64. Petitioner claims,
(c) file a return and pay a tax equivalent to ten per cent (10%) of the however, that respondent is disqualified from availing of the said
increase in net worth from December 31, 1980 to December 31, amnesties because the latter falls under the exception in Section 4
1985. (b) of E.O. No. 41.

In accordance with the terms of E.O. No. 41, respondent filed its tax Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of
amnesty return dated October 30, 1986 and attached thereto its the amnesty granted thereunder, viz:
sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on Sec. 4. Exceptions.The following taxpayers may not avail themselves
November 3, 1986 and respondent paid the amount of of the amnesty herein granted:
P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986. a) Those falling under the provisions of Executive Order Nos. 1, 2
and 14;
The period of the amnesty in E.O. No. 41 was later extended from
October 31, 1986 to December 5, 1986 by E.O. No. 54 dated b) Those with income tax cases already filed in Court as of the
November 4, 1986. effectivity hereof;

On November 17, 1986, the scope and coverage of E.O. No. 41 was c) Those with criminal cases involving violations of the income tax
expanded by Executive Order (E.O.) No. 64. In addition to the law already filed in court as of the effectivity hereof;
income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64[3] included estate and donors taxes under Title III d) Those that have withholding tax liabilities under the National
and the tax on business under Chapter II, Title V of the National Internal Revenue Code, as amended, insofar as the said liabilities are
Internal Revenue Code, also covering the years 1981 to 1985. E.O. concerned;
No. 64 further provided that the immunities and privileges under
E.O. No. 41 were extended to the foregoing tax liabilities, and the e) Those with tax cases pending investigation by the Bureau of
period within which the taxpayer could avail of the amnesty was Internal Revenue as of the effectivity hereof as a result of
extended to December 15, 1986. Those taxpayers who already filed information furnished under Section 316 of the National Internal
their amnesty return under E.O. No. 41, as amended, could avail Revenue Code, as amended;
themselves of the benefits, immunities and privileges under the new
E.O. by filing an amended return and paying an additional 5% on the f) Those with pending cases involving unexplained or unlawfully
increase in net worth to cover business, estate and donors tax acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal
The period of amnesty under E.O. No. 64 was extended to January Exactions and Transactions) and Chapter Four (Malversation of
31, 1987 by E.O No. 95 dated December 17, 1986. Public Funds and Property) of the Revised Penal Code, as amended.

On December 15, 1986, respondent filed a supplemental tax Petitioner argues that at the time respondent filed for income tax
amnesty return under the benefit of E.O. No. 64 and paid a further amnesty on October 30, 1986, CTA Case No. 4109 had already been
amount of P1,445,637.00 to the BIR equivalent to five percent (5%) filed and was pending before the Court of Tax Appeals. Respondent
of the increase of its net worth between 1981 and 1986. therefore fell under the exception in Section 4 (b) of E.O. No. 41.

On July 29, 1996, almost ten (10) years after filing of the case, the Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is
Court of Tax Appeals rendered a decision in CTA Case No. 4109. The very clear and unambiguous. It excepts from income tax amnesty
tax court found that respondent had properly availed of the tax those taxpayers with income tax cases already filed in court as of the
amnesty under E.O. Nos. 41 and 64 and declared the deficiency effectivity hereof. The point of reference is the date of effectivity of
E.O. No. 41. The filing of income tax cases in court must have been
made before and as of the date of effectivity of E.O. No. 41. Thus, Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
for a taxpayer not to be disqualified under Section 4 (b) there must amnesty is a general pardon or intentional overlooking by the State
have been no income tax cases filed in court against him when E.O. of its authority to impose penalties on persons otherwise guilty of
No. 41 took effect. This is regardless of when the taxpayer filed for evasion or violation of a revenue or tax law.[15] It partakes of an
income tax amnesty, provided of course he files it on or before the absolute forgiveness or waiver by the government of its right to
deadline for filing. collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate.[16] A tax amnesty, much like a tax
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 exemption, is never favored nor presumed in law.[17] If granted, the
questioning the 1985 deficiency income, branch profit remittance terms of the amnesty, like that of a tax exemption, must be
and contractors tax assessments was filed by respondent with the construed strictly against the taxpayer and liberally in favor of the
Court of Tax Appeals on September 26, 1986. When E.O. No. 41 taxing authority.[18] For the right of taxation is inherent in
became effective on August 22, 1986, CTA Case No. 4109 had not government. The State cannot strip itself of the most essential
yet been filed in court. Respondent corporation did not fall under power of taxation by doubtful words. He who claims an exemption
the said exception in Section 4 (b), hence, respondent was not (or an amnesty) from the common burden must justify his claim by
disqualified from availing of the amnesty for income tax under E.O. the clearest grant of organic or state law. It cannot be allowed to
No. 41. exist upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the state.[19]
The same ruling also applies to the deficiency branch profit
remittance tax assessment. A branch profit remittance tax is defined In the instant case, the vagueness in Section 4 (b) brought about by
and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the E.O. No. 64 should therefore be construed strictly against the
National Internal Revenue Code.[6] In the tax code, this tax falls taxpayer. The term income tax cases should be read as to refer to
under Title II on Income Tax. It is a tax on income. Respondent estate and donors taxes and taxes on business while the word
therefore did not fall under the exception in Section 4 (b) when it hereof, to E.O. No. 64. Since Executive Order No. 64 took effect on
filed for amnesty of its deficiency branch profit remittance tax November 17, 1986, consequently, insofar as the taxes in E.O. No.
assessment. 64 are concerned, the date of effectivity referred to in Section 4 (b)
of E.O. No. 41 should be November 17, 1986.
The difficulty herein is with respect to the contractors tax
assessment and respondents availment of the amnesty under E.O. Respondent filed CTA Case No. 4109 on September 26, 1986. When
No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109
including estate and donors taxes and tax on business. Estate and was already filed and pending in court. By the time respondent filed
donors taxes fall under Title III of the Tax Code while business taxes its supplementary tax amnesty return on December 15, 1986,
fall under Chapter II, Title V of the same. The contractors tax is respondent already fell under the exception in Section 4 (b) of E.O.
provided in Section 205, Chapter II, Title V of the Tax Code; it is Nos. 41 and 64 and was disqualified from availing of the business tax
defined and imposed under the title on business taxes, and is amnesty granted therein.
therefore a tax on business.[7]
It is respondents other argument that assuming it did not validly
When E.O. No. 64 took effect on November 17, 1986, it did not avail of the amnesty under the two Executive Orders, it is still not
provide for exceptions to the coverage of the amnesty for business, liable for the deficiency contractors tax because the income from
estate and donors taxes. Instead, Section 8 of E.O. No. 64 provided the projects came from the Offshore Portion of the contracts. The
that: two contracts were divided into two parts, i.e., the Onshore Portion
and the Offshore Portion. All materials and equipment in the
Section 8. The provisions of Executive Orders Nos. 41 and 54 which contract under the Offshore Portion were manufactured and
are not contrary to or inconsistent with this amendatory Executive completed in Japan, not in the Philippines, and are therefore not
Order shall remain in full force and effect. subject to Philippine taxes.

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 Before going into respondents arguments, it is necessary to discuss
not contrary to or inconsistent with the amendatory act were the background of the two contracts, examine their pertinent
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the provisions and implementation.
exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax The NDC and Philphos are two government corporations. In 1980,
amnesty coverage a taxpayer who has income tax cases already filed the NDC, as the corporate investment arm of the Philippine
in court as of the effectivity hereof. As to what Executive Order the Government, established the Philphos to engage in the large-scale
exception refers to, respondent argues that because of the words manufacture of phosphatic fertilizer for the local and foreign
income and hereof, they refer to Executive Order No. 41.[8] markets.[20] The Philphos plant complex which was envisioned to
be the largest phosphatic fertilizer operation in Asia, and among the
In view of the amendment introduced by E.O. No. 64, Section 4 (b) largest in the world, covered an area of 180 hectares within the 435-
cannot be construed to refer to E.O. No. 41 and its date of hectare Leyte Industrial Development Estate in the municipality of
effectivity. The general rule is that an amendatory act operates Isabel, province of Leyte.
prospectively.[9] While an amendment is generally construed as
becoming a part of the original act as if it had always been contained In 1982, the NDC opened for public bidding a project to construct
therein,[10] it may not be given a retroactive effect unless it is so and install a modern, reliable, efficient and integrated wharf/port
provided expressly or by necessary implication and no vested right complex at the Leyte Industrial Development Estate. The wharf/ port
or obligations of contract are thereby impaired.[11] complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was
There is nothing in E.O. No. 64 that provides that it should retroact to be specifically adapted to the site for the handling of phosphate
to the date of effectivity of E.O. No. 41, the original issuance. rock, bagged or bulk fertilizer products, liquid materials and other
Neither is it necessarily implied from E.O. No. 64 that it or any of its products of Philphos, the Philippine Associated Smelting and
provisions should apply retroactively. Executive Order No. 64 is a Refining Corporation (Pasar),[21] and other industrial plants within
substantive amendment of E.O. No. 41. It does not merely change the Estate. The bidding was participated in by Marubeni Head Office
provisions in E.O. No. 41. It supplements the original act by adding in Japan.
other taxes not covered in the first.[12] It has been held that where
a statute amending a tax law is silent as to whether it operates Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and
retroactively, the amendment will not be given a retroactive effect respondent entered into an agreement entitled Turn-Key Contract
so as to subject to tax past transactions not subject to tax under the for Leyte Industrial Estate Port Development Project Between
original act.[13] In an amendatory act, every case of doubt must be National Development Company and Marubeni Corporation.[22] The
resolved against its retroactive effect.[14] Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems,
fuel oil depot, utilities systems, storage and service buildings, offsite
facilities, harbor service vessels, navigational aid system, fire-fighting of this Contract, whether or not expressly referred to in the
system, area lighting, mobile equipment, spare parts and other abovementioned Annex I.[35]
related facilities.[23] The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the The contract price for the project was Y3,255,751,000.00 and
transfer of technology and know-how,[24] and: P17,406,000.00. Like the NDC contract, the price was divided into
three portions. The price in Japanese currency was broken down
into the Japanese Yen Portion I and Japanese Yen Portion II while the
x x x the design and engineering, supply and delivery, construction, price in Philippine currency was classified as the Philippine Pesos
erection and installation, supervision, direction and control of Portion. Both Japanese Yen Portions I and II were financed by
testing and commissioning of the Wharf-Port Complex as set forth in suppliers credit from the Export-Import Bank of Japan. The price
Annex I of this Contract, as well as the coordination of tie-ins at stated in the three portions were further broken down into the
boundaries and schedule of the use of a part or the whole of the corresponding materials, equipment and services required for the
Wharf/Port Complex through the Owner, with the design and project and their individual prices. Like the NDC contract, the
construction of other facilities around the site. The scope of works breakdown in the Philphos contract is contained in a list attached to
shall also include any activity, work and supply necessary for, the latter as Annex III.[36]
incidental to or appropriate under present international industrial
port practice, for the timely and successful implementation of the The division of the price into Japanese Yen Portions I and II and the
object of this Contract, whether or not expressly referred to in the Philippine Pesos Portion under the two contracts corresponds to the
abovementioned Annex I.[25] two parts into which the contracts were classifiedthe Foreign
Offshore Portion and the Philippine Onshore Portion. In both
The contract price for the wharf/ port complex was contracts, the Japanese Yen Portion I corresponds to the Foreign
Y12,790,389,000.00 and P44,327,940.00. In the contract, the price in Offshore Portion.[37] Japanese Yen Portion II and the Philippine
Japanese currency was broken down into two portions: (1) the Pesos Portion correspond to the Philippine Onshore Portion.[38]
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Pesos Under the Philippine Onshore Portion, respondent does not deny its
Portion. The Japanese Yen Portions I and II were financed in two (2) liability for the contractors tax on the income from the two projects.
ways: (a) by yen credit loan provided by the Overseas Economic In fact respondent claims, which petitioner has not denied, that the
Cooperation Fund (OECF); and (b) by suppliers credit in favor of income it derived from the Onshore Portion of the two projects had
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund been declared for tax purposes and the taxes thereon already paid
under the Ministry of Finance of Japan extended by the Japanese to the Philippine government.[39] It is with regard to the gross
government as assistance to foreign governments to promote receipts from the Foreign Offshore Portion of the two contracts that
economic development.[26] The OECF extended to the Philippine the liabilities involved in the assessments subject of this case arose.
Government a loan of Y7,560,000,000.00 for the Leyte Industrial Petitioner argues that since the two agreements are turn-key,[40]
Estate Port Development Project and authorized the NDC to they call for the supply of both materials and services to the client,
implement the same.[27] The other type of financing is an indirect they are contracts for a piece of work and are indivisible. The situs of
type where the supplier, i.e., Marubeni, obtained a loan from the the two projects is in the Philippines, and the materials provided and
Export-Import Bank of Japan to advance payment to its sub- services rendered were all done and completed within the territorial
contractors.[28] jurisdiction of the Philippines.[41] Accordingly, respondents entire
receipts from the contracts, including its receipts from the Offshore
Under the financing schemes, the Japanese Yen Portions I and II and Portion, constitute income from Philippine sources. The total gross
the Philippine Pesos Portion were further broken down and receipts covering both labor and materials should be subjected to
subdivided according to the materials, equipment and services contractors tax in accordance with the ruling in Commissioner of
rendered on the project. The price breakdown and the Internal Revenue v. Engineering Equipment & Supply Co.[42]
corresponding materials, equipment and services were contained in
a list attached as Annex III to the contract.[29] A contractors tax is imposed in the National Internal Revenue Code
(NIRC) as follows:
A few months after execution of the NDC contract, Philphos opened
for public bidding a project to construct and install two ammonia Sec. 205. Contractors, proprietors or operators of dockyards, and
storage tanks in Isabel. Like the NDC contract, it was Marubeni Head others.A contractors tax of four percent of the gross receipts is
Office in Japan that participated in and won the bidding. Thus, on hereby imposed on proprietors or operators of the following
May 2, 1982, Philphos and respondent corporation entered into an business establishments and/or persons engaged in the business of
agreement entitled Turn-Key Contract for Ammonia Storage selling or rendering the following services for a fee or compensation:
Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation.[30] The object of the contract was to (a) General engineering, general building and specialty contractors,
establish and place in operating condition a modern, reliable, as defined in Republic Act No. 4566;
efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia[31]and xxxxxxxxx
for the delivery of ammonia to an integrated fertilizer plant adjacent
to the storage complex and to vessels at the dock.[32] The storage (q) Other independent contractors. The term independent
complex was to consist of ammonia storage tanks, refrigeration contractors includes persons (juridical or natural) not enumerated
system, ship unloading system, transfer pumps, ammonia heating above (but not including individuals subject to the occupation tax
system, fire-fighting system, area lighting, spare parts, and other under the Local Tax Code) whose activity consists essentially of the
related facilities.[33] The scope of the works required for the sale of all kinds of services for a fee regardless of whether or not the
completion of the ammonia storage complex covered the supply, performance of the service calls for the exercise or use of the
including grants of licenses and transfer of technology and know- physical or mental faculties of such contractors or their employees.
how,[34] and: It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien
x x x the design and engineering, supply and delivery, construction, executives, and which headquarters do not earn or derive income
erection and installation, supervision, direction and control of from the Philippines and which act as supervisory, communications
testing and commissioning of the Ammonia Storage Complex as set and coordinating centers for their affiliates, subsidiaries or branches
forth in Annex I of this Contract, as well as the coordination of tie-ins in the Asia-Pacific Region.
at boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and x x x x x x x x x.[43]
construction of other facilities at and around the Site. The scope of
works shall also include any activity, work and supply necessary for, Under the afore-quoted provision, an independent contractor is a
incidental to or appropriate under present international industrial person whose activity consists essentially of the sale of all kinds of
practice, for the timely and successful implementation of the object services for a fee, regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word Like the ship unloader and loader, the three tugboats and a line boat
contractor refers to a person who, in the pursuit of independent were completely manufactured in Japan. The boats sailed to Isabel
business, undertakes to do a specific job or piece of work for other on their own power. The mobile equipment, consisting of three to
persons, using his own means and methods without submitting four sets of tractors, cranes and dozers, trailers and forklifts, were
himself to control as to the petty details.[44] also manufactured and completed in Japan. They were loaded on to
a shipping vessel and unloaded at the Isabel Port. These pieces of
A contractors tax is a tax imposed upon the privilege of engaging in equipment were all on wheels and self-propelled. Once unloaded at
business.[45] It is generally in the nature of an excise tax on the the port, they were ready to be driven and perform what they were
exercise of a privilege of selling services or labor rather than a sale designed to do.[62]
on products;[46] and is directly collectible from the person
exercising the privilege.[47] Being an excise tax, it can be levied by In addition to the foregoing, there are other items listed in Japanese
the taxing authority only when the acts, privileges or business are Yen Portion I in Annex III to the NDC contract. These other items
done or performed within the jurisdiction of said authority.[48] Like consist of supplies and materials for five (5) berths, two (2) roads, a
property taxes, it cannot be imposed on an occupation or privilege causeway, a warehouse, a transit shed, an administration building
outside the taxing district.[49] and a security building. Most of the materials consist of steel sheets,
steel pipes, channels and beams and other steel structures,
In the case at bar, it is undisputed that respondent was an navigational and communication as well as electrical equipment.
independent contractor under the terms of the two subject [63]
contracts. Respondent, however, argues that the work therein were
not all performed in the Philippines because some of them were In connection with the Philphos contract, the major pieces of
completed in Japan in accordance with the provisions of the equipment supplied by respondent were the ammonia storage tanks
contracts. and refrigeration units.[64] The steel plates for the tank were
manufactured and cut in Japan according to drawings and
An examination of Annex III to the two contracts reveals that the specifications and then shipped to Isabel. Once there, respondents
materials and equipment to be made and the works and services to employees put the steel plates together to form the storage tank. As
be performed by respondent are indeed classified into two. The first to the refrigeration units, they were completed and assembled in
part, entitled Breakdown of Japanese Yen Portion I provides: Japan and thereafter shipped to Isabel. The units were simply
installed there.[65] Annex III to the Philphos contract lists down
Japanese Yen Portion I of the Contract Price has been subdivided under the Japanese Yen Portion I the materials for the ammonia
according to discrete portions of materials and equipment which will storage tank, incidental equipment, piping facilities, electrical and
be shipped to Leyte as units and lots. This subdivision of price is to instrumental apparatus, foundation material and spare parts.
be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese All the materials and equipment transported to the Philippines were
Yen Portion I is as follows: inspected and tested in Japan prior to shipment in accordance with
the terms of the contracts.[66] The inspection was made by
x x x x x x x x x. [50] representatives of respondent corporation, of NDC and Philphos.
NDC, in fact, contracted the services of a private consultancy firm to
The subdivision of Japanese Yen Portion I covers materials and verify the correctness of the tests on the machines and
equipment while Japanese Yen Portion II and the Philippine Pesos equipment[67]while Philphos sent a representative to Japan to
Portion enumerate other materials and equipment and the inspect the storage equipment.[68]
construction and installation work on the project. In other words,
the supplies for the project are listed under Portion I while labor and The sub-contractors of the materials and equipment under Japanese
other supplies are listed under Portion II and the Philippine Pesos Yen Portion I were all paid by respondent in Japan. In his deposition
Portion. Mr. Takeshi Hojo, then General Manager of the Industrial upon oral examination, Kenjiro Yamakawa, formerly the Assistant
Plant Section II of the Industrial Plant Department of Marubeni General Manager and Manager of the Steel Plant Marketing
Corporation in Japan who supervised the implementation of the two Department, Engineering & Construction Division, Kawasaki Steel
projects, testified that all the machines and equipment listed under Corporation, testified that the equipment and supplies for the two
Japanese Yen Portion I in Annex III were manufactured in Japan.[51] projects provided by Kawasaki under Japanese Yen Portion I were
The machines and equipment were designed, engineered and paid by Marubeni in Japan. Receipts for such payments were duly
fabricated by Japanese firms sub-contracted by Marubeni from the issued by Kawasaki in Japanese and English.[69] Yashima & Co. Ltd.
list of sub-contractors in the technical appendices to each and B.S. Japan were likewise paid by Marubeni in Japan.[70]
contract.[52] Marubeni sub-contracted a majority of the equipment
and supplies to Kawasaki Steel Corporation which did the design, Between Marubeni and the two Philippine corporations, payments
fabrication, engineering and manufacture thereof;[53] Yashima & for all materials and equipment under Japanese Yen Portion I were
Co. Ltd. which manufactured the mobile equipment; Bridgestone made to Marubeni by NDC and Philphos also in Japan. The NDC,
which provided the rubber fenders of the mobile equipment;[54] through the Philippine National Bank, established letters of credit in
and B.S. Japan for the supply of radio equipment.[55] The favor of respondent through the Bank of Tokyo. The letters of credit
engineering and design works made by Kawasaki Steel Corporation were financed by letters of commitment issued by the OECF with the
included the lay-out of the plant facility and calculation of the design Bank of Tokyo. The Bank of Tokyo, upon respondents submission of
in accordance with the specifications given by respondent.[56] All pertinent documents, released the amount in the letters of credit in
sub-contractors and manufacturers are Japanese corporations and favor of respondent and credited the amount therein to
are based in Japan and all engineering and design works were respondents account within the same bank.[71]
performed in that country.[57]
Clearly, the service of design and engineering, supply and delivery,
The materials and equipment under Portion I of the NDC Port construction, erection and installation, supervision, direction and
Project is primarily composed of two (2) sets of ship unloader and control of testing and commissioning, coordination[72]of the two
loader; several boats and mobile equipment.[58] The ship unloader projects involved two taxing jurisdictions. These acts occurred in two
unloads bags or bulk products from the ship to the port while the countries Japan and the Philippines. While the construction and
ship loader loads products from the port to the ship. The unloader installation work were completed within the Philippines, the
and loader are big steel structures on top of each is a large crane evidence is clear that some pieces of equipment and supplies were
and a compartment for operation of the crane. Two sets of these completely designed and engineered in Japan. The two sets of ship
equipment were completely manufactured in Japan according to the unloader and loader, the boats and mobile equipment for the NDC
specifications of the project. After manufacture, they were rolled on project and the ammonia storage tanks and refrigeration units were
to a barge and transported to Isabel, Leyte.[59] Upon reaching made and completed in Japan. They were already finished products
Isabel, the unloader and loader were rolled off the barge and pulled when shipped to the Philippines. The other construction supplies
to the pier to the spot where they were installed.[60] Their listed under the Offshore Portion such as the steel sheets, pipes and
installation simply consisted of bolting them onto the pier.[61] structures, electrical and instrumental apparatus, these were not
finished products when shipped to the Philippines. They, however,
were likewise fabricated and manufactured by the sub-contractors SEC. 37. Income from sources within the Philippines. (a) Gross
in Japan. All services for the design, fabrication, engineering and income from sources within the Philippines. The following items
manufacture of the materials and equipment under Japanese Yen of gross income shall be treated as gross income from sources within
Portion I were made and completed in Japan. These services were the Philippines:
rendered outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractors tax. (1) Interest. Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-bearing
Contrary to petitioners claim, the case of Commissioner of Internal obligations of residents, corporate or otherwise;
Revenue v. Engineering Equipment & Supply Co[73]is not in point. In
that case, the Court found that Engineering Equipment, although an xxx xxx xxx
independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment The petitioner argues that the Japanese shipbuilders were not
designed, supplied and installed centralized air-conditioning systems subject to tax under the above provision because all the related
for clients who contracted its services. Engineering, however, did activities the signing of the contract, the construction of the
not manufacture all the materials for the air-conditioning system. It vessels, the payment of the stipulated price, and their delivery to
imported some items for the system it designed and installed.[74] the NDC were done in Tokyo. 8 The law, however, does not speak
The issues in that case dealt with services performed within the local of activity but of "source," which in this case is the NDC. This is a
taxing jurisdiction. There was no foreign element involved in the domestic and resident corporation with principal offices in Manila.
supply of materials and services.
As the Tax Court put it:
With the foregoing discussion, it is unnecessary to discuss the other
issues raised by the parties. It is quite apparent, under the terms of the law, that the
Government's right to levy and collect income tax on interest
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP received by foreign corporations not engaged in trade or business
No. 42518 is affirmed. within the Philippines is not planted upon the condition that 'the
activity or labor and the sale from which the (interest) income
SO ORDERED. flowed had its situs' in the Philippines. The law specifies: 'Interest
derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate
EN BANC or otherwise.' Nothing there speaks of the 'act or activity' of non-
resident corporations in the Philippines, or place where the contract
June 30, 1987 is signed. The residence of the obligor who pays the interest rather
than the physical location of the securities, bonds or notes or the
G.R. No. L-53961 place of payment, is the determining factor of the source of interest
income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128,
NATIONAL DEVELOPMENT COMPANY, petitioner, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA
vs. 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co.,
COMMISSIONER OF INTERNAL REVENUE, respondent. Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the
obligor is a resident of the Philippines the interest payment paid by
CRUZ, J.: him can have no other source than within the Philippines. The
interest is paid not by the bond, note or other interest-bearing
We are asked to reverse the decision of the Court of Tax Appeals on obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
the ground that it is erroneous. We have carefully studied it and find
it is not; on the contrary, it is supported by law and doctrine. So Here in the case at bar, petitioner National Development Company,
finding, we affirm. a corporation duly organized and existing under the laws of the
Republic of the Philippines, with address and principal office at Calle
Reduced to simplest terms, the background facts are as follows. Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in fourteen (14) promissory
The national Development Company entered into contracts in Tokyo notes for each vessel, the balance of the contract price of the twelve
with several Japanese shipbuilding companies for the construction (12) ocean-going vessels purchased and acquired by it from the
of twelve ocean-going vessels. 1 The purchase price was to come Japanese corporations, including the interest on the principal sum at
from the proceeds of bonds issued by the Central Bank. 2 Initial the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-
payments were made in cash and through irrevocable letters of 13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.)
credit. 3 Fourteen promissory notes were signed for the balance by And pursuant to the terms and conditions of these promisory notes,
the NDC and, as required by the shipbuilders, guaranteed by the which are duly signed by its Vice Chairman and General Manager,
Republic of the Philippines. 4 Pursuant thereto, the remaining petitioner remitted to the Japanese shipbuilders in Japan during the
payments and the interests thereon were remitted in due time by years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52
the NDC to Tokyo. The vessels were eventually completed and and $1,541.031.00, respectively, as interest on the unpaid balance
delivered to the NDC in Tokyo. 5 of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15,
Partial Stipulation of Facts.)
The NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase price. The law is clear. Our plain duty is to apply it as written. The
No tax was withheld. The Commissioner then held the NDC liable on residence of the obligor which paid the interest under consideration,
such tax in the total sum of P5,115,234.74. Negotiations followed petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and
but failed. The BIR thereupon served on the NDC a warrant of as a corporation duly organized and existing under the laws of the
distraint and levy to enforce collection of the claimed amount. 6 The Philippines, it is a domestic corporation, resident of the Philippines.
NDC went to the Court of Tax Appeals. (Sec. 84(c), National Internal Revenue Code.) The interest paid by
petitioner, which is admittedly a resident of the Philippines, is on the
The BIR was sustained by the CTA except for a slight reduction of the promissory notes issued by it. Clearly, therefore, the interest
tax deficiency in the sum of P900.00, representing the compromise remitted to the Japanese shipbuilders in Japan in 1960, 1961 and
penalty. 7 The NDC then came to this Court in a petition for 1962 on the unpaid balance of the purchase price of the vessels
certiorari. acquired by petitioner is interest derived from sources within the
Philippines subject to income tax under the then Section 24(b)(1) of
The petition must fail for the following reasons. the National Internal Revenue Code. 9

The Japanese shipbuilders were liable to tax on the interest remitted There is no basis for saying that the interest payments were
to them under Section 37 of the Tax Code, thus: obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities exempt
from taxation under Section 29(b)[4] of the Tax Code, reading as In suggesting that the NDC is merely an administrator of the funds of
follows: the Republic of the Philippines, the petitioner closes its eyes to the
nature of this entity as a corporation. As such, it is governed in its
SEC. 29. Gross Income. xxxx xxx xxx xxx proprietary activities not only by its charter but also by the
Corporation Code and other pertinent laws.
(b) Exclusion from gross income. The following items shall
not be included in gross income and shall be exempt from taxation The petitioner also forgets that it is not the NDC that is being taxed.
under this Title: The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the
xxx xxx xxx Republic of the Philippines that was subject to the tax the NDC did
not withhold.
(4) Interest on Government Securities. Interest upon the
obligations of the Government of the Republic of the Philippines or In effect, therefore, the imposition of the deficiency taxes on the
any political subdivision thereof, but in the case of such obligations NDC is a penalty for its failure to withhold the same from the
issued after approval of this Code, only to the extent provided in the Japanese shipbuilders. Such liability is imposed by Section 53(c) of
act authorizing the issue thereof. (As amended by Section 6, R.A. No. the Tax Code, thus:
82; emphasis supplied)
Section 53(c). Return and Payment. Every person required
The law invoked by the petitioner as authorizing the issuance of to deduct and withhold any tax under this section shall make return
securities is R.A. No. 1407, which in fact is silent on this matter. C.A. thereof, in duplicate, on or before the fifteenth day of April of each
No. 182 as amended by C.A. No. 311 does carry such authorization year, and, on or before the time fixed by law for the payment of the
but, like R.A. No. 1407, does not exempt from taxes the interests on tax, shall pay the amount withheld to the officer of the Government
such securities. of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims
It is also incorrect to suggest that the Republic of the Philippines and demands of any person for the amount of any payments made
could not collect taxes on the interest remitted because of the in accordance with the provisions of this section. (As amended by
undertaking signed by the Secretary of Finance in each of the Section 9, R.A. No. 2343.)
promissory notes that:
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue
Upon authority of the President of the Republic of the Philippines, and the Court of Tax Appeals, 13 the Court quoted with approval the
the undersigned, for value received, hereby absolutely and following regulation of the BIR on the responsibilities of withholding
unconditionally guarantee (sic), on behalf of the Republic of the agents:
Philippines, the due and punctual payment of both principal and
interest of the above note.10 In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be
There is nothing in the above undertaking exempting the interests addressed to the Commissioner of Internal Revenue for the
from taxes. Petitioner has not established a clear waiver therein of determination whether or not the income paid to an individual is not
the right to tax interests. Tax exemptions cannot be merely implied subject to withholding. In case the Commissioner of Internal
but must be categorically and unmistakably expressed. 11 Any doubt Revenue decides that the income paid to an individual is not subject
concerning this question must be resolved in favor of the taxing to withholding, the withholding agent may thereupon remit the
power. 12 amount of a tax withheld. (2nd par., Sec. 200, Income Tax
Nowhere in the said undertaking do we find any inhibition against
the collection of the disputed taxes. In fact, such undertaking was "Strict observance of said steps is required of a withholding agent
made by the government in consonance with and certainly not before he could be released from liability," so said Justice Jose P.
against the following provisions of the Tax Code: Bengson, who wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be
Sec. 53(b). Nonresident aliens. All persons, corporations construed strictissimi juris." 14
and general co-partnership (companies colectivas), in whatever
capacity acting, including lessees or mortgagors of real or personal The petitioner was remiss in the discharge of its obligation as the
capacity, executors, administrators, receivers, conservators, withholding agent of the government an so should be held liable for
fiduciaries, employers, and all officers and employees of the its omission.
Government of the Philippines having control, receipt, custody;
disposal or payment of interest, dividends, rents, salaries, wages, WHEREFORE, the appealed decision is AFFIRMED, without any
premiums, annuities, compensations, remunerations, emoluments, pronouncement as to costs. It is so ordered.
or other fixed or determinable annual or categorical gains, profits
and income of any nonresident alien individual, not engaged in trade
or business within the Philippines and not having any office or place
of business therein, shall (except in the cases provided for in
subsection (a) of this section) deduct and withhold from such annual
or periodical gains, profits and income a tax to twenty (now 30%)
per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. In the case

of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having
any office or place of business therein, there shall be deducted and
withheld at the source in the same manner and upon the same
items as is provided in section fifty-three a tax equal to thirty (now
35%) per centum thereof, and such tax shall be returned and paid in
the same manner and subject to the same conditions as provided in
that section:....

Manifestly, the said undertaking of the Republic of the Philippines

merely guaranteed the obligations of the NDC but without
diminution of its taxing power under existing laws.