Marubeni vs. CIR
COMMISSIONER OF INTERNAL REVENUE
Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind
Facts: Petitioner Marubeni s a foreign corporation duly organized under the existing laws of
Japan and duly licensed to engage in business under Philippine laws.
Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila.
AG&P declared and directly remitted the cash dividends to Marubenis head office in Tokyo
net of the final dividend tax and withholding profit remittance tax.
Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the
dividends it received from AG&P are effectively connected with its business in the Philippines
as to be consideredbranch profits subject to profit remittance tax.
The Acting Commissioner ruled that the dividends received by Marubeni are not income from
the business activity in which it is engaged. Thus, the dividend if remitted abroad are not
consideredbranch profits subject to profit remittance tax.
Pursuant to such ruling, petitioner filed a claim for refund for the profit
tax remittance erroneously paid on the dividends remitted by AG& P.
Respondent Commissioner denied the claim. It ruled that since Marubeni is a non resident
corporation not engaged in trade or business in the Philippines it shall be subject to tax on
income earned from Philippine sources at the rate of 35% of its gross income.
On the other hand, Marubeni contends that, following the principal-agent relationship theory,
Marubeni Japan is a resident foreign corporation subject only to final tax on dividends
received from a domestic corporation.
Issue: Whether or not Marubeni Japan is a resident foreign corporation.
Held: No. The general rule is a foreign corporation is the same juridical entity as
its branch office in the Philippines . The rule is based on the premise that the business of the
foreign corporation is conducted through its branch office, following the principal-agent
relationship theory. It is understood that the branch becomes its agent.
However, when the foreign corporation transacts business in the Philippines independently of
its branch, the principal-agent relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation.
Thus, the alleged overpaid taxes were incurred for the remittance ofdividend income to the
head office in Japan which is considered as a separate and distinct income taxpayer from
the branch in the Philippines.
MARUBENI CORPORATION V.
Facts:
Marubeni Corporation is a Japanese corporation licensed to engage in business in the
Philippines. When the profits on Marubenis investments in Atlantic Gulf and Pacific Co. of
Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit
remittance tax based on the remittable amount after the final 10% withholding tax were paid to
the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for the
amount which it has allegedly overpaid the BIR.
Issues and Ruling:
1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific
Co. are effectively connected with its conduct or business in the Philippines as to be
considered branch profits subject to 15% profit remittance tax imposed under Section 24(b)(2)
of the National Internal Revenue Code.
NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted abroad
by a branch office to its head office which are effectively connected with its trade or business
in the Philippines are subject to the 15% profit remittance tax. The dividends received by
Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the
business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if
remitted abroad are not considered branch profits for purposes of the 15% profit remittance
tax imposed by Section 24(b)(2) of the Tax Code, as amended.
2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.
Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction.
Marubeni Corporations head office in Japan is a separate and distinct income taxpayer from
the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co. was made for
purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Corporation
in Japan, but certainly not of the branch in the Philippines.
3. At what rate should Marubeni be taxed?
15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the
Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross income
from all sources within the Philippines. However, a discounted rate of 15% is given to
Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on the
condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit
of not less than 20% of the dividends received. This 15% tax rate imposed on the dividends
received under Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross
amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.
Note: Each tax has a different tax basis.
Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as
reflected in the phrase shall not exceed. This means that any tax imposable by the
contracting state concerned should not exceed the 25% limitation and said rate would apply
only if the tax imposed by our laws exceeds the same.
CIR v Wander Philippines Inc.
Facts:
Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro S.A. Ltd.,a
Swiss corporation not engaged in trade/business in the Philippines. In two instances, Wander
filed its withholding tax return and remitted to Glaro (the parent company) dividends
(P222,000 in the first instance and P355,200 in the second), on which 35% tax was withheld
and paid to the BIR.
Wander now files a claim for refund of the withheld tax contending that it is liable only to 15%
withholding tax pursuant to Section 24. B.1 of the Tax Code. The BIR did not act upon the
claim filed by Wander so the corporation filed a petition to the Court of Tax Appeals (CTA).
The CTA held that the corporation is entitled to 15% withholding tax rate on dividends remitted
to Glaro, a non-resident foreign corporation.
Issue:
Whether or not Wander is entitled to the 15% withholding tax rate.
Held:
Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from a domestic
corporation is liable to a 15% withholding tax, provided that the country in which the foreign
corporation is domiciled shall allow a tax credit (equivalent to 20% which is the difference
between the 35% tax due on regular corporations and the 15% tax due on dividends) against
the taxes due to have been paid in the Philippines.
In the case, Switzerland did not impose any tax on the dividends received by Glaro thus it
should be considered as a full satisfaction of the given condition. To deny respondent the
privilege to withhold 15% would run counter to the spirit and intent of the law and will
adversely affect the foreign corporations interest and discourage them from investing capital
in our country.
*Petition dismissed for lack of merit.
CIR vs WANDER PHILIPPINES, INC. - CASE DIGEST
G.R. NO. L-68275, April 15, 1988
Commissioner of Internal Revenue, petitioner
vs
WANDER Philippines, Inc., and the Court of Tax Appeals, respondents
FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized
under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade for business in the Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company
Glaro dividends from which 35% withholding tax was withheld and paid to the BIR.
In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for
reimbursement, contending that it is liable only to 15% withholding tax in accordance with sec.
24 (b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of 35%
which was withheld ad paid to and collected by the government. petitioner failed to act on the
said claim for refund, hence Wander filed a petition with Court of Tax Appeals who in turn
ordered to grant a refund and/or tax credit. CIR's petition for reconsideration was denied
hence the instant petition to the Supreme Court.
ISSUE:
Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.
HELD:
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this
case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby
further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not
engaged in trade or business in the Philippines, including a foreign life insurance company not
engaged in life insurance business in the Philippines, shall pay a tax equal to 35% of the
gross income received during its taxable year from all sources within the Philippines, as
interest (except interest on a foreign loans which shall be subject to 15% tax), dividends,
premiums, annuities, compensation, remuneration for technical services or otherwise
emolument, or other fixed determinable annual, periodical ot casual gains, profits and income,
and capital gains: xxx Provided, still further that on dividends received from a domestic
corporation liable to tax under this chapter, the tax shall be 15% of the dividends received,
which shall be collected and paid as provided in sec 53 (d) of this code, subject to the
condition that the country in which the non-resident foreign corporation is domiciled shall allow
a credit against tax due from the non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the difference between the regular
tax (35%) on corporation and the tax (15%) dividends as provided in this section: xxx."
From the above-quoted provision, the dividends received from a domestic corporation liable to
tax, the tax shall be 15% of the dividends received, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivakent to 20% which represents the difference betqween the regular tax (35%) on
corpoorations and the tax (15%) on dividends.
While it may be true that claims for refund construed strictly against the claimant,
nevertheless, the fact that Switzerland did not impose any tax on the dividends received by
Glaro from the Philippines should be considered as a full satisfaction if the given condition.
For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold
only 15% tax provided for under PD No. 369 amending section 24 (b) (1) of the Tax Code,
would run counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations interest here and discourage them for investing capital in our country.
CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR- Surtax
In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon the shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are
mere afterthoughts.
Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In
1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981.
Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of
earnings. It claimed that said profits were retained to increase petitioners working capital and it
would be used for reasonable business needs of the company. The CIR refused to allow the
cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal
basis for the assessment because 1) it accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and retirement of indebtedness 2) it is a
wholly owned subsidiary of American Cyanamid Company, a foreign corporation, and its shares
are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that the law
permits corporations to set aside a portion of its retained earnings for specified purposes under
Sec. 43 of the Corporation Code but that petitioners purpose did not fall within such purposes. It
found that there was no need to set aside such retained earnings as working capital as it had
considerable liquid funds. Those corporations exempted from the accumulated earnings tax are
found under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA
affirmed the CTAs decision.
Issue: Whether or not the accumulation of income was justified.
Held:
In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon the shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are
mere afterthoughts. The accumulated profits must be used within reasonable time after the close of
the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence
that such accumulated was for the immediate needs of the business.
To determine the reasonable needs of the business, the United States Courts have invented the
Immediacy Test which construed the words reasonable needs of the business to mean the
immediate needs of the business, and it is held that if the corporation did not prove an immediate
need for the accumulation of earnings and profits such was not for reasonable needs of the
business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working
capital needs of a business depend on the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the
availability of credit and other similar factors. The Tax Court opted to determine the working capital
sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the
presumption is that the assessment is correct. With the petitioners failure to prove the CIR
incorrect, clearly and conclusively, the Tax Courts ruling is upheld.
CYANAMID PHIL., INC. V CA GR No. 108067, January 20, 2000
Facts: Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co. based in
Maine, USA. It is engaged in the manufacture of pharmaceutical products and
chemicals, a wholesaler of imported finished goods, and an importer/indenter.
February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
payment of deficiency in come tax of P119,817 for taxable year 1981 which the
petitioner on March 4, 1985, protested particularly (1) 25% surtax assessment of
P3,774,867.50; (2) 1981 deficiency income tax assessment of P119,817; (3)
1981 deficiency percentage assessment of P3,346.72. CIR refused to allow the
cancellation of the assessment notices.
During the pendency of the case on appeal to the CTA, both parties agreed to
compromise the 1981 deficiency income assessment of P119,817 and reduced to
P26,577 as compromise settlement. But the surtax on improperly accumulated profits
remained unresolved. Petitioner claimed that the assessment representing the 25%
surtax had no legal basis for the following reasons: (a) petitioner accumulated its
earnings and profits for reasonable business requirements to meet working capital
needs and retirement of indebtedness, (b) petitioner is wholly owned subsidiary of
American Cyanamid Co., a corporation organized under the laws of the State of
Maine, in the USA, whose shares of stock are listed and traded in New
York Stock Exchange. This being the case, no individual shareholder of petitioner
could have evaded or prevented the imposition of individual income taxes by
petitioners accumulation of earnings and profits, instead contribution of the same.
CTA denied said petition.
Issue: Whether petitioner is liable for the accumulated earnings tax for the year
1981.
Held: The amendatory provision of Sec. 25 of the 1977 NIRC, which was PD1739,
enumerated the corporations exempt from the imposition of improperly accumulated
tax: (a) banks, (b) non-bank financialintermediaries; (c) insurance companies; and
(d) corporations organized primarily and authorized by the Central Bank to hold
shares of stocks of banks. Petitioner does not fall among those exempt classes.
Besides, the laws granting exemption form tax are construed strictissimi juris against
the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The burden of proof rests upon the party claiming the
exemption to prove that it is, in fact, covered by the exemption so claimed; a burden
which petitioner here has failed to discharge.
Unless rebutted, all presumptions generally are indulged in favor of the correctness of
the CIRs assessment against the taxpayer. With petitioners failure to prove the CIR
incorrect, clearly and conclusively, this court is constrained to uphold the correctness
of tax courts ruling as affirmed by the CA.
Republic of the Philippines Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60
SUPREME COURT Petitioner
Manila
THIRD DIVISION The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
G.R. No. 76573 September 14, 1989 P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal Revenue by
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner, AG&P on April 20, 1981 under Central Bank Receipt No. 6757880. Likewise, the 10% final
vs. dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712 for the
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4,
APPEALS, respondents. 1981 under Central Bank Confirmation Receipt No. 7905930. 4
Melquiades C. Gutierrez for petitioner. Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch
The Solicitor General for respondents. profit remittance on cash dividends declared and remitted to petitioner at its head office in
Tokyo in the total amount of P229,424.40 on April 20 and August 4, 1981. 5
FERNAN, C.J.: In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres,
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly Velayo and Company, sought a ruling from the Bureau of Internal Revenue on whether or
organized and existing under the laws of Japan and duly licensed to engage in business not the dividends petitioner received from AG&P are effectively connected with its conduct
under Philippine laws with branch office at the 4th Floor, FEEMI Building, Aduana Street, or business in the Philippines as to be considered branch profits subject to the 15% profit
Intramuros, Manila seeks the reversal of the decision of the Court of Tax Appeals 1dated remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as
February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40 amended by Presidential Decrees Nos. 1705 and 1773.
representing alleged overpayment of branch profit remittance tax withheld from dividends In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
by Atlantic Gulf and Pacific Co. of Manila (AG&P). Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad
The following facts are undisputed: Marubeni Corporation of Japan has equity investments by a branch office to its head office which are effectively connected with its trade or
in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid business in the Philippines are subject to the 15% profit remittance tax. To be effectively
cash dividends to petitioner in the amount of P849,720 and withheld the corresponding connected it is not necessary that the income be derived from the actual operation of
10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending September taxpayer-corporation's trade or business; it is sufficient that the income arises from the
30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the business activity in which the corporation is engaged. For example, if a resident foreign
corresponding 10% final dividend tax thereon. 2 corporation is engaged in the buying and selling of machineries in the Philippines and
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net invests in some shares of stock on which dividends are subsequently received, the
not only of the 10% final dividend tax in the amounts of P764,748 for the first and third dividends thus earned are not considered 'effectively connected' with its trade or business
quarters of 1981, but also of the withheld 15% profit remittance tax based on the in this country. (Revenue Memorandum Circular No. 55-80).
remittable amount after deducting the final withholding tax of 10%. A schedule of In the instant case, the dividends received by Marubeni from AG&P are not income arising
dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan, from the business activity in which Marubeni is engaged. Accordingly, said dividends if
the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid remitted abroad are not considered branch profits for purposes of the 15% profit
thereon, is shown below: remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of
1981 FIRST THIRD TOTAL OF Internal Revenue on September 24, 1981, petitioner claimed for the refund or issuance of
QUARTER QUARTER FIRST and a tax credit of P229,424.40 "representing profit tax remittance erroneously paid on the
(three months (three months THIRD dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and
ended 3.31.81) ended 9.30.81) quarters August 4, 1981 to ... head office in Tokyo. 7
(In Pesos) On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim
Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00 for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit remittance
10% Dividend Tax 84,972.00 84,972.00 169,944.00 tax as the same were not income earned by a Philippine Branch of Marubeni Corporation
Withheld of Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of
the dividends, being a non-resident stockholder, nevertheless, said dividend income is
Cash Dividend net of 764,748.00 764,748.00 1,529,496.00 subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13,
10% Dividend Tax 1980 between the Philippines and Japan.
Withheld Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is
subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend tax
15% Branch Profit 114,712.20 114,712.20 229,424.40 3
and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets the
Remittance Tax liability, hence, nothing is left to be refunded. 8
Withheld Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by
the Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the
dividends in question are income taxable to the Marubeni Corporation of Tokyo, Japan.
The said dividends were distributions made by the Atlantic, Gulf and Pacific Company of
Manila to its shareholder out of its profits on the investments of the Marubeni Corporation
of Japan, a non-resident foreign corporation. The investments in the Atlantic Gulf & Pacific
Company of the Marubeni Corporation of Japan were directly made by it and the dividends
on the investments were likewise directly remitted to and received by the Marubeni
Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no
participation or intervention, directly or indirectly, in the investments and in the receipt of
the dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific
Company did not come out of the funds infused by the Marubeni Corporation of Japan to
the Marubeni Corporation Philippine Branch. As a matter of fact, the Central Bank of the
Philippines, in authorizing the remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of Japan as a non-resident
stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents
submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person who
earned it. Admittedly, the dividends under consideration were earned by the Marubeni
Corporation of Japan, and hence, taxable to the said corporation. While it is true that the
Marubeni Corporation Philippine Branch is duly licensed to engage in business under
Philippine laws, such dividends are not the income of the Philippine Branch and are not
taxable to the said Philippine branch. We see no significance thereto in the identity
concept or principal-agent relationship theory of petitioner because such dividends are the
income of and taxable to the Japanese corporation in Japan and not to the Philippine
branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship
theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10 %
intercorporate final tax on dividends received from a domestic corporation in accordance
with Section 24(c) (1) of the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax under this
Code (1) Shall be subject to a final tax of 10% on the total amount thereof, which shall
be collected and paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-
resident foreign corporation and not engaged in trade or business in the Philippines, is
subject to tax on income earned from Philippine sources at the rate of 35 % of its gross
income under Section 24 (b) (1) of the same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation
not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per
cent of the gross income received during each taxable year from all sources within the
Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax
Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a
resident of the other Contracting State may be taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that Contracting
State, but if the recipient is the beneficial owner of the dividends the tax so charged shall
not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine
sources is therefore the determination of whether it is a resident or a non-resident foreign
corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or
business" within the Philippines. Petitioner contends that precisely because it is engaged in
business in the Philippines through its Philippine branch that it must be considered as a
resident foreign corporation. Petitioner reasons that since the Philippine branch and the
Tokyo head office are one and the same entity, whoever made the investment in AG&P,
Manila does not matter at all. A single corporate entity cannot be both a resident and a
non-resident corporation depending on the nature of the particular transaction involved.
Accordingly, whether the dividends are paid directly to the head office or coursed through
its local branch is of no moment for after all, the head office and the office branch
constitute but one corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign corporation because it is
transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch office
in the Philippines cannot apply here. This rule is based on the premise that the business of
the foreign corporation is conducted through its branch office, following the principal agent
relationship theory. It is understood that the branch becomes its agent here. So that when
the foreign corporation transacts business in the Philippines independently of its branch,
the principal-agent relationship is set aside. The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not
the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter
becomes the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct income taxpayer from
the branch in the Philippines. There can be no other logical conclusion considering the
undisputed fact that the investment (totalling 283.260 shares including that of nominee)
was made for purposes peculiarly germane to the conduct of the corporate affairs of
Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that
petitioner, having made this independent investment attributable only to the head office,
cannot now claim the increments as ordinary consequences of its trade or business in the
Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute were
neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend
tax, the recipient being a non-resident stockholder, they grossly erred in holding that no
refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25
% rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in
taxation that each tax has a different tax basis. While the tax on dividends is directly
levied on the dividends received, "the tax base upon which the 15 % branch profit
remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10
(2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that
the tax rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall
not exceed." This means that any tax imposable by the contracting state concerned should
not exceed the 25 % limitation and that said rate would apply only if the tax imposed by
our laws exceeds the same. In other words, by reason of our bilateral negotiations with
Japan, we have agreed to have our right to tax limited to a certain extent to attain the
goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order,
question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction ruling or decision of the Court of Tax Appeals is given thirty (30) days from notice to
with the Philippine-Japan Treaty of 1980. Said section provides: appeal therefrom. Otherwise, said order, ruling, or decision shall become final.
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On dividends Records show that petitioner received notice of the Court of Tax Appeals's decision
received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% denying its claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the
of the dividends received, which shall be collected and paid as provided in Section 53 (d) last day for appeal), petitioner filed a motion for reconsideration which respondent court
of this Code, subject to the condition that the country in which the non-resident foreign subsequently denied on November 17, 1986, and notice of which was received by
corporation is domiciled shall allow a credit against the tax due from the non-resident petitioner on November 26, 1986. Two days later, or on November 28, 1986, petitioner
foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20 % simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for
which represents the difference between the regular tax (35 %) on corporations and the review with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal
tax (15 %) on dividends as provided in this Section; .... was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident day period to appeal having begun to run again from notice of the denial of petitioner's
foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources motion for reconsideration.
within the Philippines. [Section 24 (b) (1)]. WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February
However, a discounted rate of 15% is given to petitioner on dividends received from a 12, 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of
domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner
favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the
represents the difference between the regular tax of 35 % on non-resident foreign amount of P144,452.40 representing overpayment of taxes on dividends received. No
corporations which petitioner would have ordinarily paid, and the 15 % special rate on costs.
dividends received from a domestic corporation. So ordered.
Consequently, petitioner is entitled to a refund on the transaction in question to be
computed as follows: Republic of the Philippines
Total cash dividend paid ................P1,699,440.00 SUPREME COURT
less 15% under Sec. 24 Manila
(b) (1) (iii ) .........................................254,916.00 THIRD DIVISION
------------------ G.R. No. L-68375 April 15, 1988
Cash dividend net of 15 % tax COMMISSIONER OF INTERNAL REVENUE, petitioner,
due petitioner ...............................P1,444.524.00 vs.
less net amount WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.
actually remitted .............................1,300,071.60 The Solicitor General for petitioner.
------------------- Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
Amount to be refunded to petitioner
representing overpayment of BIDIN, J.:
taxes on dividends remitted ..............P 144 452.40 This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of
=========== Tax Appeals * in C.T.A. Case No.2884, entitled Wander Philippines, Inc. vs. Commissioner
It is readily apparent that the 15 % tax rate imposed on the dividends received by a of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential
foreign non-resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) rate of 15% withholding tax on the dividends remitted to its foreign parent company, the
is easily within the maximum ceiling of 25 % of the gross amount of the dividends as Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
decreed in Article 10 (2) (b) of the Tax Treaty. Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic
There is one final point that must be settled. Respondent Commissioner of Internal corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro
Revenue is laboring under the impression that the Court of Tax Appeals is covered by S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the
Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of 1980. Philippines.
He alleges that the instant petition for review was not perfected in accordance with Batas On July 18, 1975, Wander filed its withholding tax return for the second quarter ending
Pambansa Blg. 129 which provides that "the period of appeal from final orders, June 30, 1975 and remitted to its parent company, Glaro dividends in the amount of
resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen (15) P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was
days counted from the notice of the final order, resolution, award, judgment or decision withheld and paid to the Bureau of Internal Revenue.
appealed from .... Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax ending June 30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on
Appeals which has been created by virtue of a special law, Republic Act No. 1125. wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of
Respondent court is not among those courts specifically mentioned in Section 2 of BP Blg. Internal Revenue.
129 as falling within its scope. On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim
for refund and/or tax credit in the amount of P115,400.00, contending that it is liable only
to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as
amended by Presidential Decree Nos. 369 and 778, and not on the basis of 35% which
was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977,
Wander filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal
portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to
petitioner in the amount of P115,440.00 representing overpaid withholding tax on
dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second quarter of
the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied
in a Resolution dated August 13, 1984. Hence, the instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I does not impose any income tax on dividends received by Swiss corporation from
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE
COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT
PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF
THE PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the
preferential rate of 15% withholding tax on dividends declared and remitted to its parent
corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the
proper party to claim the refund; and (2) Whether or not Switzerland allows as tax credit
the "deemed paid" 20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the
remitter or payor of the dividend income and a mere withholding agent for and in behalf of
the Philippine Government, which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the
first time in this Court. It was never raised at the administrative level, or at the Court of
Tax Appeals. To allow a litigant to assume a different posture when he comes before the
court and challenge the position he had accepted at the administrative level, would be to
sanction a procedure whereby the Courtwhich is supposed to review administrative
determinationswould not review, but determine and decide for the first time, a question
not raised at the administrative forum. Thus, it is well settled that under the same
underlying principle of prior exhaustion of administrative remedies, on the judicial level,
issues not raised in the lower court cannot be raised for the first time on appeal
(Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136;
Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102
SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the
government and therefore cannot claim reimbursement of the alleged overpaid taxes, is
untenable. It will be recalled, that said corporation is first and foremost a wholly owned
subsidiary of Glaro. The fact that it became a withholding agent of the government which
was not by choice but by compulsion under Section 53 (b) of the Tax Code, cannot by any
stretch of the imagination be considered as an abdication of its responsibility to its mother
company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held
that "the obligation imposed thereunder upon the withholding agent is compulsory." It is a
device to insure the collection by the Philippine Government of taxes on incomes, derived
from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this
Court (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA 944).
In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties
consisting of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine
counterpart, Wander is the proper entity who should for the refund or credit of overpaid
withholding tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not
Switzerland, the foreign country where Glaro is domiciled, grants to Glaro a tax credit
against the tax due it, equivalent to 20%, or the difference between the regular 35% rate
of the preferential 15% rate. The dispute in this issue lies on the fact that Switzerland
corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in
this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal
Revenue Code, as amended, is hereby further amended to read as follows:
(b) Tax on foreign corporations. 1) Non-resident corporation. A foreign corporation not
engaged in trade or business in the Philippines, including a foreign life insurance company
not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35%
of the gross income received during its taxable year from all sources within the Philippines,
as interest (except interest on foreign loans which shall be subject to 15% tax), dividends,
premiums, annuities, compensations, remuneration for technical services or otherwise,
emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and
income, and capital gains: ... Provided, still further That on dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as provided in Section 53 (d) of this
Code, subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and the
tax (15%) dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation
liable to tax, the tax shall be 15% of the dividends received, subject to the condition that
the country in which the non-resident foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the difference between the
regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro.
Accordingly, Wander claims that full credit is granted and not merely credit equivalent to
20%. Petitioner, on the other hand, avers the tax sparing credit is applicable only if the
country of the parent corporation allows a foreign tax credit not only for the 15
percentage-point portion actually paid but also for the equivalent twenty percentage point
portion spared, waived or otherwise deemed as if paid in the Philippines; that private
respondent does not cite anywhere a Swiss law to the effect that in case where a foreign
tax, such as the Philippine 35% dividend tax, is spared waived or otherwise considered as
if paid in whole or in part by the foreign country, a Swiss foreign-tax credit would be
allowed for the whole or for the part, as the case may be, of the foreign tax so spared or
waived or considered as if paid by the foreign country. Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a
While it may be true that claims for refund are construed strictly against the claimant, wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in
nevertheless, the fact that Switzerland did not impose any tax or the dividends received by the manufacture of pharmaceutical products and chemicals, a wholesaler of imported
Glaro from the Philippines should be considered as a full satisfaction of the given finished goods, and an importer/indentor.
condition. For, as aptly stated by respondent Court, to deny private respondent the
privilege to withhold only 15% tax provided for under Presidential Decree No. 369, On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and payment of deficiency income tax of one hundred nineteen thousand eight hundred
intent of said law and definitely will adversely affect foreign corporations" interest here seventeen (P119,817.00) pesos for taxable year 1981, as follows:jgc:chanrobles.com.ph
and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a "Net income disclosed by the return as audited 14,575,210.00
confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss Government
does not impose any tax on the dividends to be received by the said parent corporation in Add: Discrepancies:chanrob1es virtual 1aw library
the Philippines, the condition imposed under the above-mentioned section is satisfied.
Accordingly, the withholding tax rate of 15% is hereby affirmed." Professional fees/yr. 17018 262,877.00
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by
an agency such as the Court of Tax Appeals which is, by the very nature of its function, per investigation 110,399.37
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject unless there has been an abuse or improvident Total Adjustment 152,477.00
exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, which is
not present in the instant case. Net income per Investigation 14,727,687.00
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED. Less: Personal and additional exemptions
Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
Amount subject to tax 14,727,687.00

Income tax due thereon 25% Surtax 2,385,231.50 3,237,495.00

SECOND DIVISION Less: Amount already assessed 5,161,788.00

[G.R. No. 108067. January 20, 2000.] BALANCE 75,709.00

CYANAMID PHILIPPINES, INC., Petitioner, v. THE COURT OF APPEALS, THE monthly interest from 1,389,636.00 44,108.00
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, Respondents.

DECISION Compromise penalties

TOTAL AMOUNT DUE 3,774,867.50 119,817.00" 3

QUISUMBING, J.:
Petitioner disputes the decision 1 of the Court of Appeals which affirmed the decision 2 of
the Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal
Revenue the amount of three million, seven hundred seventy-four thousand, eight
hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper
accumulation of profits for 1981, plus 10% surcharge and 20% annual interest from
January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal Revenue
Code.chanrobles.com : red
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00;
and 1981 Deficiency Percentage Assessment of P8,846.72. 4 Petitioner, through its
external accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax
for the undue accumulation of earnings was not proper because the said profits were
retained to increase petitioners working capital and it would be used for reasonable
business needs of the company. Petitioner contended that it availed of the tax amnesty
under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution
granted by the law.

The Court of Tax Appeals made the following factual findings:chanrob1es virtual 1aw On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the
library cancellation of the assessment notices and rendered its resolution, as
follows:jgc:chanrobles.com.ph consisting of cash accounts receivable, inventory and even its sales for the period is
adequate to meet the normal needs of the business. This can be determined by computing
"It appears that your client availed of Executive Order No. 41 under File No. 32A-F- the current asset to liability ratio of the company:chanrobles virtual lawlibrary
000455-41B as certified and confirmed by our Tax Amnesty Implementation Office on
October 6, 1987. current ratio = current assets/current liabilities

In reply thereto, I have the honor to inform you that the availment of the tax amnesty = P47,052,535.00/P21,275,544.00
under Executive Order No. 41, as amended is sufficient basis, in appropriate cases, for the
cancellation of the assessment issued after August 21, 1986. (Revenue Memorandum = 2.21:1
Order No. 4-87) Said availment does not, therefore, result in cancellation of assessments
issued before August 21, 1986, as in the instant case. In other words, the assessments in ======
this case issued on January 30, 1985 despite your clients availment of the tax amnesty
under Executive Order No. 41, as amended still subsist. The significance of this ratio is to serve as a primary test of a companys solvency to meet
current obligations from current assets as a going concern or a measure of adequacy of
Such being the case, you are therefore, requested to urge your client to pay this Office the working capital.
aforementioned deficiency income tax and surtax on undue accumulation of surplus in the x x x
respective amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon for the
year 1981, within thirty (30) days from receipt hereof, otherwise this office will be
constrained to enforce collection thereof thru summary remedies prescribed by law. We further reject petitioners argument that "the accumulated earnings tax does not apply
to a publicly-held corporation" citing American jurisprudence to support its position. The
This constitutes the final decision of this Office on this matter." 5 reference finds no application in the case at bar because under Section 25 of the NIRC as
amended by Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, exceptions to the accumulated earnings tax are expressly enumerated, to wit: Bank, non-
however, both parties agreed to compromise the 1981 deficiency income tax assessment bank financial intermediaries, corporations organized primarily, and authorized by the
of P119,817.00. Petitioner paid a reduced amount twenty-six thousand, five hundred Central Bank of the Philippines to hold shares of stock of banks, insurance companies, or
seventy-seven pesos (P26,577.00) as compromise settlement. However, the surtax on personal holding companies, whether domestic or foreign. The law on the matter is clear
improperly accumulated profits remained unresolved. and specific. Hence, there is no need to resort to applicable cases decided by the American
Federal Courts for guidance and enlightenment as to whether the provision of Section 25
Petitioner claimed that CIRs assessment representing the 25% surtax on its accumulated of the NIRC should apply to petitioner.
earnings for the year 1981 had no legal basis for the following reasons: (a) petitioner
accumulated its earnings and profits for reasonable business requirements to meet Equally clear and specific are the provisions of E.O. 41 particularly with respect to its
working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned effectivity and coverage . . .
subsidiary of American Cyanamid Company, a corporation organized under the laws of the
State of Maine, in the United States of America, whose shares of stock are listed and . . . Said availment does not result in cancellation of assessments issued before August 21,
traded in New York Stock Exchange. This being the case, no individual shareholder of 1986 as petitioner seeks to do in the case at bar. Therefore, the assessments in this case,
petitioner could have evaded or prevented the imposition of individual income taxes by issued on January 30, 1985 despite petitioners availment of the tax amnesty under E.O.
petitioners accumulation of earnings and profits, instead of distribution of the same. 41 as amended, still subsist."cralaw virtua1aw library
x x x
In denying the petition, the Court of Tax Appeals made the following
pronouncements:jgc:chanrobles.com.ph
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent
"Petitioner contends that it did not declare dividends for the year 1981 in order to use the Commissioner of Internal Revenue the sum of P3,774,867.50 representing 25% surtax on
accumulated earnings as working capital reserve to meet its "reasonable business needs." improper accumulation of profits for 1981, plus 10% surcharge and 20% annual interest
The law permits a stock corporation to set aside a portion of its retained earnings for from January 30, 1985 to January 30, 1987." 6
specified purposes (citing Section 43, paragraph 2 of the Corporation Code of the
Philippines). In the case at bar, however, petitioners purpose for accumulating its Petitioner appealed the Court of Tax Appeals decision to the Court of Appeals. Affirming
earnings does not fall within the ambit of any of these specified purposes. the CTA decision, the appellate court said:jgc:chanrobles.com.ph

More compelling is the finding that there was no need for petitioner to set aside a portion "In reviewing the instant petition and the arguments raised herein, We find no compelling
of its retained earnings as working capital reserve as it claims since it had considerable reason to reverse the findings of the respondent Court. The respondent Courts decision is
liquid funds. A thorough review of petitioners financial statement (particularly the Balance supported by evidence, such as petitioner corporations financial statement and balance
Sheet, p. 127, BIR Records) reveals that the corporation had considerable liquid funds sheets (p. 127, BIR Records). On the other hand the petitioner corporation could only
come up with an alternative formula lifted from a decision rendered by a foreign court
(Bardahl Mfg. Corp. v. Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to its
particular financial position, the petitioner corporation attempts to justify its accumulated
surplus earnings. To Our mind, the petitioner corporations alternative formula cannot
overturn the persuasive findings and conclusion of the respondent Court based, as it is, on
the applicable laws and jurisprudence, as well as standards in the computation of taxes
and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the
decision of the Court of Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is
AFFIRMED in toto." 7 application of the accumulated earnings tax to publicly held corporations has been
Hence, petitioner now comes before us and assigns as sole issue:chanrob1es virtual 1aw
library
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS
LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE YEAR 1981. 8
Section 25 9 of the old National Internal Revenue Code of 1977
states:jgc:chanrobles.com.ph
"SECTION 25. Additional tax on corporation improperly accumulating profits or surplus.
"(a) Imposition of tax. If any corporation is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the shareholders
or members of another corporation, through the medium of permitting its gains and profits
to accumulate instead of being divided or distributed, there is levied and assessed against
such corporation, for each taxable year, a tax equal to twenty-five per-centum of the
undistributed portion of its accumulated profits or surplus which shall be in addition to the
tax imposed by section twenty-four, and shall be computed, collected and paid in the
same manner and subject to the same provisions of law, including penalties, as that tax.
"(b) Prima facie evidence. The fact that any corporation is mere holding company shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment company where at any time
during the taxable year more than fifty per centum in value of its outstanding stock is
owned, directly or indirectly, by one person.
"(c) Evidence determinative of purpose. The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by clear preponderance of evidence, shall prove the contrary.
"(d) Exception The provisions of this sections shall not apply to banks, non-bank
financial intermediaries, corporation organized primarily, and authorized by the Central
Bank of the Philippines to hold shares of stock of banks, insurance companies, whether
domestic or foreign.chanroblesvirtuallawlibrary
The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the
accumulated earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a
publicly owned company. 10 Specifically, petitioner cites Golconda Mining Corp. v.
Commissioner, 507 F .2d 594, whereby the U.S. Ninth Circuit Court of Appeals had taken
the position that the accumulated earnings tax could only apply to a closely held
corporation.
A review of American taxation history on accumulated earnings tax will show that the
problematic. Initially, the Tax Court and the Court of Claims held that the accumulated
earnings tax applies to publicly held corporations. Then, the Ninth Circuit Court of Appeals
ruled in Golconda that the accumulated earnings tax could only apply to closely held
corporations. Despite Golconda, the Internal Revenue Service asserted that the tax could
be imposed on widely held corporations including those not controlled by a few
shareholders or groups of shareholders. The Service indicated it would not follow the Ninth
Circuit regarding publicly held corporations. 11 In 1984, American legislation nullified the
Ninth Circuits Golconda ruling and made it clear that the accumulated earnings tax is not
limited to closely held corporations. 12 Clearly, Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly accumulated tax:
(a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank of the Philippines to
hold shares of stocks of banks. Petitioner does not fall among those exempt classes.
Besides, the rule on enumeration is that the express mention of one person, thing, act, or
consequence is construed to exclude all others. 13 Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
14 Taxation is the rule and exemption is the exception. 15 The burden of proof rests upon
the party claiming exemption to prove that it is, in fact, covered by the exemption so
claimed, 16 a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that increase of
working capital by a corporation justifies accumulating income. Petitioner asserts that
respondent court erred in concluding that Cyanamid need not infuse additional working
capital reserve because it had considerable liquid funds based on the 2.21:1 ratio of
current assets to current liabilities. Petitioner relies on the so-called "Bardahl" formula,
which allowed retention, as working capital reserve, sufficient amounts of liquid assets to
carry the company through one operating cycle. The "Bardahl" 17 formula was developed
to measure corporate liquidity. The formula requires an examination of whether the
taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business during one
operating cycle. Operating cycle is the period of time it takes to convert cash into raw
materials, raw materials into inventory, and inventory into sales, including the time it takes
to collect payment for the sales. 18
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos
as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner
asserts that Cyanamid had a working capital deficit of P7,986,633.00. 19 Therefore, the
P9,540,926.00 accumulated income as of 1981 may be validly accumulated to increase the
petitioners working capital for the succeeding year.

We note, however, that the companies where the "Bardahl" formula was applied, had
operating cycles much shorter than that of petitioner. In Atlas Tool Co., Inc. v. CIR, 20 the
companys operating cycle was only 3.33 months or 27.75% of the year. In Cataphote
Corp. of Mississippi v. United States, 21 the corporations operating cycle was only 56.87
days, or 15.58% of the year. In the case of Cyanamid, the operating cycle was 288.35
days, or 78.55% of a year, reflecting that petitioner will need sufficient liquid funds, of at
least three quarters of the year, to cover the operating costs of the business. There are
variations in the application of the "Bardahl" formula, such as average operating cycle or
peak operating cycle. In times when there is no recurrence of a business cycle, the
working capital needs cannot be predicted with accuracy. As stressed by American
authorities, although the "Bardahl" formula is well-established and routinely applied by the
courts, it is not a precise rule. It is used only for administrative convenience. 22
Petitioners application of the "Bardahl" formula merely creates a false illusion of
exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities and the
adoption of the industry standard. 23 The ratio of current assets to current liabilities is
used to determine the sufficiency of working capital. Ideally, the working capital should
equal the current liabilities and there must be 2 units of current assets for every unit of
current liability, hence the so-called "2 to 1" rule. 24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its
current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working
capital. Said working capital was expected to increase further when more funds were
generated from the succeeding years sales. Available income covered expenses or
indebtedness for that year, and there appeared no reason to expect an impending
working capital deficit which could have necessitated an increase in working capital, as
rationalized by petitioner.
In Basilan Estates, Inc. v. Commissioner of Internal Revenue, 25 we held
that:jgc:chanrobles.com.ph
". . . [T]here is no need to have such a large amount at the beginning of the following
year because during the year, current assets are converted into cash and with the income
realized from the business as the year goes, these expenses may well be taken care of.
[Citation omitted]. Thus, it is erroneous to say that the taxpayer is entitled to retain
enough liquid net assets in amounts approximately equal to current operating needs for
the year to cover cost of goods sold and operating expenses: for it excludes proper
consideration of funds generated by the collection of notes receivable as trade accounts
during the course of the year." 26
If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the
burden of proving the determination wrong, together with the corresponding burden of
first going forward with evidence, is on the taxpayer. This applies even if the corporation is
not a mere holding or investment company and does not have an unreasonable
accumulation of earnings or profits. 27
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of accumulation, not intentions declared
subsequently, which are mere afterthoughts. 28 Furthermore, the accumulated profits
must be used within a reasonable time after the close of the taxable year. In the instant
case, petitioner did not establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the business.chanrobles.com : law
library
In Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue, 29 we
ruled:jgc:chanrobles.com.ph
"To determine the reasonable needs of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called Immediacy Test
which construed the words reasonable needs of the business to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty tax would apply. (Mertens,
Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103). 30
In the present case, the Tax Court opted to determine the working capital sufficiency by
using the ratio between current assets to current liabilities. The working capital needs of a
business depend upon the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the collection rate,
the availability of credit to the business, and similar factors. Petitioner, by adhering to the
"Bardahl" formula, failed to impress the tax court with the required definiteness envisioned
by the statute. We agree with the tax court that the burden of proof to establish that the
profits accumulated were not beyond the reasonable needs of the company, remained on
the taxpayer. This Court will not set aside lightly the conclusion reached by the Court of
Tax Appeals which, by the very nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority. 31 Unless rebutted,
all presumptions generally are indulged in favor of the correctness of the CIRs assessment
against the taxpayer. With petitioners failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness of tax courts ruling as
affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals,
sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.chanrobles. com : virtual law l ibra ry
G.R. No. 196596, November 09, 2016 - COMMISSIONER OF INTERNAL REVENUE,
Petitioner, v. DE LA SALLE UNIVERSITY, INC., Respondent.; G.R. No. 198841 - DE LA
SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE,Respondent.; G.R. No. 198941 - COMMISSIONER OF INTERNAL REVENUE,
Petitioner, v. DE LA SALLE UNIVERSITY, INC., Respondent.
SECOND DIVISION (3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
G.R. No. 196596, November 09, 2016
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE taxes and duties. xxx.
UNIVERSITY, INC., Respondent. On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The
dispositive portion of the decision reads:
G.R. No. 198841 chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment
DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL on the loan transactions of [DLSU] in the amount of P1,1681,774.00 is
REVENUE,Respondent. hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax, VAT
and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001, 2002 and
G.R. No. 198941 2003 in the total amount of P18,421,363.53...xxx.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total
UNIVERSITY, INC., Respondent. amount due computed from September 30, 2004 until full payment thereof pursuant to
DECISION Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise
BRION, J.: penalties imposed by [the Commissioner] were excluded, there. being no compromise
Before the Court are consolidated petitions for review on certiorari:1 agreement between the parties.
G.R. No. 196596 filed by the Commissioner of Internal Revenue ( Commissioner) to
assail the December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax SO ORDERED.9ChanRoblesVirtualawlibrary
Appeals (CTA) in En Banc Case No. 622;2 Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's motion for
decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and reconsideration while it held in abeyance the resolution on DLSU's motion for
G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and reconsideration.11
October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division ( CTA On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No.
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En BancCase No. 622) arguing that DLSU's use of its revenues and assets for non-educational or
622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and commercial purposes removed these items from the exemption coverage under the
198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also challenge Constitution.12
CTA Case No. 7303.chanroblesvirtuallawlibrary
The Factual Antecedents On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
documentary evidence to prove that its rental income was used actually, directly and
Sometime in 2004, the Bureau of Internal Revenue ( BIR) issued to DLSU Letter of exclusively for educational purposes.13The Commissioner did not promptly object to the
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's books of formal offer of supplemental evidence despite notice.14
accounts and other accounting records for all internal revenue taxes for the period Fiscal
Year Ending 2003 and Unverified Prior Years .5 On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted,
reduced the amount of DLSU's tax deficiencies. The dispositive portion of the amended
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6 decision reads:
chanRoblesvirtualLawlibrary
Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY
DLSU the following deficiency taxes: (1) income tax on rental earnings from GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST
restaurants/canteens and bookstores operating within the campus; (2) value-added plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted amount
tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease of P5,506,456.71...xxx.
contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge,
interest and penalty for taxable years 2001, 2002 and 2003.7 In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on
the...basic deficiency taxes...until full payment thereof pursuant to Section 249(B) of the
DLSU protested the assessment. The Commissioner failed to act on the protest; thus, [National Internal Revenue Code]...xxx.
DLSU filed on August 3, 2005 a petition for review with the CTA Division. 8
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the
DLSU, a non-stock, non-profit educational institution, principally anchored its petition deficiency taxes, surcharge and deficiency interest which have accrued...from September
on Article XIV, Section 4 (3) of the Constitution, which reads: 30, 2004 until fully paid.15ChanRoblesVirtualawlibrary
chanRoblesvirtualLawlibrary Consequently, the Commissioner supplemented its petition with the CTA En Banc and
argued that the CTA Division erred in admitting DLSU's additional evidence. 16 CTA En Banc Case No. 671

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for The CTA En Banc partially granted DLSU's petition for review and further reduced its tax
review with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) liabilities to P2,554,825.47 inclusive of surcharge.28
the entire assessment should have been cancelled because it was based on an invalid
LOA; (2) assuming the LOA was valid, the CTA Division should still have cancelled On the validity of the Letter of Authority
the entire assessment because DLSU submitted evidence similar to those submitted by
Ateneo De Manila University (Ateneo) in a separate case where the CTA cancelled The issue of the LOA's validity was raised during trial; 29 hence, the issue was deemed
Ateneo's tax assessment;17 and (3) the CTA Division erred in finding that a portion of properly submitted for decision and reviewable on appeal.
DLSU's rental income was not proved to have been used actually, directly and exclusively
for educational purposes.18chanroblesvirtuallawlibrary Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable
The CTA En Banc Rulings period and that the practice of issuing a LOA covering audit of unverified prior years is
prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) No.
CTA En Banc Case No. 622 43-90, which provides that if the audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA.31
The CTA En Banc dismissed the Commissioner's petition for review and sustained the
findings of the CTA Division.19 In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified
Prior Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable
Tax on rental income years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid.32

Relying on the findings of the court-commissioned Independent Certified Public On the applicability of the Ateneo case
Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove that
a portion of the assessed rental income was used actually, directly and exclusively for The CTA En Banc held that the Ateneo case is not a valid precedent because it involved
educational purposes; hence, exempt from tax.20 The CTA En Banc was satisfied with different parties, factual settings, bases of assessments, sets of evidence, and defenses.33
DLSU's supporting evidence confirming that part of its rental income had indeed been
used to pay the loan it obtained to build the university's Physical Education - Sports On the CTA Division's appreciation of the evidence
Complex.21
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income while DLSU successfully proved that a portion of its rental income was transmitted and
that was not shown by supporting documents to have been actually, directly and used to pay the loan obtained to fund the construction of the Sports Complex, the rental
exclusively used for educational purposes, must be subjected to income tax and VAT. 22 income from other sources were not shown to have been actually, directly and exclusively
used for educational purposes.34
DST on loan and mortgage transactions
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on Commissioner (G.R. No. 198941) came to this Court for relief.chanroblesvirtuallawlibrary
its loan and mortgage documents.23 The CTA En Banc found that DLSU's DST payments The Consolidated Petitions
had been remitted to the BIR, evidenced by the stamp on the documents made by a DST
imprinting machine, which is allowed under Section 200 (D) of the National Internal G.R. No. 196596
Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No. 15-
2001.25cralawred The Commissioner submits the following arguments:

Admissibility of DLSU's supplemental evidence First, DLSU's rental income is taxable regardless of how such income is derived, used or
disposed of.35 DLSU's operations of canteens and bookstores within its campus even
The CTA En Banc held that the supplemental pieces of documentary evidence were though exclusively serving the university community do not negate income tax liability. 36
admissible even if DLSU formally offered them only when it moved for reconsideration of
the CTA Division's original decision. Notably, the law creating the CTA provides that The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
proceedings before it shall not be governed strictly by the technical rules of evidence. 26 harmonized with Section 30 (H) of the Tax Code, which states among others, that the
income of whatever kind and character of [a non-stock and non-profit educational
The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's institution] from any of [its] properties, real or personal, or from any of (its] activities
December 10, 2010 decision.27 Thus, she came to this court for relief through a petition conducted for profit regardless of the disposition made of such income , shall be subject to
for review on certiorari (G.R. No. 196596). tax imposed by this Code.37
The Commissioner argues that the CTA En Banc misread and misapplied the case and (2) comment on DLSU's petition docketed as G.R. No.
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that 198841.51chanroblesvirtuallawlibrary
revenues however generated are covered by the constitutional exemption, provided that, Counter-arguments
the revenues will be used for educational purposes or will be held in reserve for such
purposes.39 DLSU's Comment on G.R. No. 196596

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is First, DLSU questions the defective verification attached to the petition.52
exempt only from property tax but not from income tax on the rentals earned from
property.40 Thus, DLSU's income from the leases of its real properties is not exempt from Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all
taxation even if the income would be used for educational purposes. 41 assets and revenues of non-stock, non-profit educational institutions used actually, directly
and exclusively for educational purposes are exempt from taxes and duties.53
Second, the Commissioner insists that DLSU did not prove the fact of DST payment 42 and
that it is not qualified to use the On-Line Electronic DST Imprinting Machine, which is On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit
available only to certain classes of taxpayers under RR No. 9-2000.43 educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code- with the
evidence. The belated submission of supplemental evidence reopened the case for trial, addition of non-stock, non-profit educational institutions to the list of tax-exempt entities;
and worse, DLSU offered the supplemental evidence only after it received the unfavorable and (3) that the 1977 Tax Code was promulgated when the 1973 Constitution was
CTA Division's original decision.44 In any case, DLSU's submission of supplemental still in place.
documentary evidence was unnecessary since its rental income was taxable regardless of
its disposition.45 DLSU elaborates that the tax exemption granted to a private educational institution under
the 1973 Constitution was only for real property tax. Back then, the special tax treatment
G.R. No. 198841 on income of private educational institutions only emanates from statute, i.e., the 1977
Tax Code. Only under the 1987 Constitution that exemption from tax of all the assets and
DLSU argues as that: revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes, was expressly and categorically enshrined.55
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an DLSU thus invokes the doctrine of constitutional supremacy, which renders any
assessment issued based on such defective LOA must also be void.46 subsequent law that is contrary to the Constitution void and without any force and
effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and whatever kind and character of a nonstock and non-profit educational institution from any
Unverified Prior Years. On the basis of this defective LOA, the Commissioner assessed of its properties, real or personal, or from any of its activities conducted for
DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and profit regardless of the disposition made of such income, should be declared without force
2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable and effect in view of the constitutionally granted tax exemption on "all revenues and
year 2003. According to DLSU, when RMO No. 43-90 provides that: assets of non-stock, non-profit educational institutions used actually, directly, and
chanRoblesvirtualLawlibrary exclusively for educational purposes."57
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.ChanRoblesVirtualawlibrary DLSU further submits that it complies with the requirements enunciated in the YMCA case,
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the that for an exemption to be granted under Article XIV, Section 4 (3) of the Constitution,
LOA issued to DLSU follows this format, then any assessment arising from it must the taxpayer must prove that: (1) it falls under the classification non-stock, non-profit
be entirely voided.48 educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational purposes. 58 Unlike YMCA, which is not an
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for educational institution, DLSU is undisputedly a non-stock, non-profit educational
similarly situated parties, the same set of evidence should be appreciated and weighed in institution. It had also submitted evidence to prove that it actually, directly and exclusively
the same manner.49 The CTA En Banc erred when it did not similarly appreciate DLSU's used its income for educational purposes.59
evidence as it did to the pieces of evidence submitted by Ateneo, also a non-stock, non-
profit educational institution.50 DLSU also cites the deliberations of the 1986 Constitutional Commission where they
recognized that the tax exemption was granted "to incentivize private educational
G.R. No. 198941 institutions to share with the State the responsibility of educating the youth." 60

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition Third, DLSU highlights that both the CTA En Banc and Division found that the bank that
are exactly the same as those she raised in her: (1) petition docketed as G.R. No. 196596 handled DLSU's loan and mortgage transactions had remitted to the BIR the DST through
an imprinting machine, a method allowed under RR No. 15-2001.61 In any case, DLSU for educational purposes; and
argues that it cannot be held liable for DST owmg to the exemption granted under the DLSU proved the payment of the DST through its bank's on-line imprinting machine.
Constitution.62 I. The revenues and assets of non-stock, non-profit educational institutions
proved to have been used actually, directly, and exclusively for educational
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the purposes are exempt from duties and taxes.
formal offer of supplemental evidence. Because of the Commissioner's failure to timely
object, she became bound by the results of the submission of such supplemental DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
evidence.63 chanRoblesvirtualLawlibrary

The CIR's Comment on G.R. No. 198841 (3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
The Commissioner submits that DLSU is estopped from questioning the LOA's validity purposes shall be exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall be
because it failed to raise this issue in both the administrative and judicial
proceedings.64 That it was asked on crossexamination during the trial does not make it an disposed of in the manner provided by law. Proprietary educational
issue that the CTA could resolve.65 The Commissioner also maintains that DLSU's rental
institutions, including those cooperatively owned, may likewise be entitled
income is not tax-exempt because an educational institution is only exempt from property to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment [underscoring and
tax but not from tax on the income earned from the property. 66
emphasis supplied]
DLSU's Comment on G.R. No. 198941 Before fully discussing the merits of the case, we observe that:

DLSU puts forward the same counter-arguments discussed above.67 First, the constitutional provision refers to two kinds of educational institutions: (1) non-
stock, non-profit educational institutions and (2) proprietary educational institutions. 69
In addition, DLSU prays that the Court award attorney's fees in its favor because it was
constrained to unnecessarily retain the services of counsel in this separate Second, DLSU falls under the first category. Even the Commissioner admits the status of
petition.68chanroblesvirtuallawlibrary DLSU as a non-stock, non-profit educational institution.70
Issues
Third, while DLSU's claim for tax exemption arises from and is based on the Constitution,
Although the parties raised a number of issues, the Court shall decide only the pivotal the Constitution, in the same provision, also imposes certain conditions to avail of the
issues, which we summarize as follows: exemption. We discuss below the import of the constitutional text vis-a-vis the
Whether DLSU's income and revenues proved to have been used actually, directly and Commissioner's counter-arguments.
exclusively for educational purposes are exempt from duties and taxes;chanrobleslaw
Whether the entire assessment should be voided because of the defective Fourth, there is a marked distinction between the treatment of nonstock, non-profit
LOA;chanrobleslaw educational institutions and proprietary educational institutions. The tax exemption
Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and granted to non-stock, non-profit educational institutions is conditioned only on the actual,
Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be disturbed by direct and exclusive use of their revenues and assets for educational purposes. While tax
the Court. exemptions may also be granted to proprietary educational institutions, these exemptions
Our Ruling may be subject to limitations imposed by Congress.

As we explain in full below, we rule that: As we explain below, the marked distinction between a non-stock, non-profit and a
The income, revenues and assets of non-stock, non-profit educational institutions proved proprietary educational institution is crucial in determining the nature and extent of the
to have been used actually, directly and exclusively for educational purposes are exempt tax exemption granted to non-stock, non-profit educational institutions.
from duties and taxes.
The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H)
valid. of the Tax Code. The relevant text reads:
The CTA correctly admitted DLSU's formal offer of supplemental evidence; and chanRoblesvirtualLawlibrary
The CTA's appreciation of evidence is conclusive unless the CTA is shown to have The following organizations shall not be taxed under this Title [Tax on Income] in
manifestly overlooked certain relevant facts not disputed by the parties and which, if respect to income received by them as such:
properly considered, would justify a different conclusion. xxxx

The parties failed to convince the Court that the CTA overlooked or failed to consider (H) A non-stock and non-profit educational institution
relevant facts. We thus sustain the CTA En Banc's findings that: xxxx
DLSU proved that a portion of its rental income was used actually, directly and exclusively
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such incomeshall be subject to tax imposed under this
Code. [underscoring and emphasis supplied]ChanRoblesVirtualawlibrary
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to
non-stock, non-profit educational institutions such that the revenues and income they
derived from their assets, or from any of their activities conducted for profit, are
taxable even if these revenues and income are used for educational purposes.
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock,
non-profit educational institutions?
We answer in the negative.
While the present petition appears to be a case of first impression,71 the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article XIV,
Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements
that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property owned
by the YMCA, established as a "welfare, educational and charitable non-profit
corporation," was subject to income tax under the Tax Code and the Constitution. 72
The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is not
tax-exempt per se; "what is exempted is not the institution itself...those exempted from
real estate taxes are lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes." 74
The Court held that the exemption claimed by the YMCA is expressly disallowed by
the last paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates
that the income of exempt organizations from any of their properties, real or personal, are
subject to the same tax imposed by the Tax Code, regardless of how that income is used.
The Court ruled that the last paragraph of Section 27 unequivocally subjects to tax the
rent income of the YMCA from its property.75
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the
tax privilege granted under Article XIV, Section 4 (3) of the Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws granting tax
exemptions, refers to the school system (synonymous with formal education); it includes a
college or an educational establishment; it refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system.76
The Court then significantly laid down the requisites for availing the tax exemption under
Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-
stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly and exclusively for educational
purposes.77
We now adopt YMCA as precedent and hold that:
The last paragraph of Section 30 of the Tax Code is without force and effect with respect
to non-stock, non-profit educational institutions, provided, that the non-stock, non-profit
educational institutions prove that its assets and revenues are used actually, directly and
exclusively for educational purposes.
The tax-exemption constitutionally-granted to non-stock, non profit educational
institutions, is not subject to limitations imposed by law.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and exclusive
use of their assets, revenues and income78for educational purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-profit
cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes...," Article XIV, Section 4 (3) categorically states that
"[a]ll revenues and assets... used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from
the records of the 1986 Constitutional Commission 79 to provide broader tax privilege to
non-stock, non-profit educational institutions as recognition of their role in assisting the
State provide a public good. The tax exemption was seen as beneficial to students who
may otherwise be charged unreasonable tuition fees if not for the tax exemption extended
to all revenues and assets of non-stock, non-profit educational institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does
not require that the revenues and income must have also been sourced from educational
activities or activities related to the purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the source of revenues. Thus, so long as the
revenues and income are used actually, directly and exclusively for educational purposes,
then said revenues and income shall be exempt from taxes and duties.81
We find it helpful to discuss at this point the taxation of revenues versus the taxation
of assets.
Revenues consist of the amounts earned by a person or entity from the conduct of
business operations.82 It may refer to the sale of goods, rendition of services, or the
return of an investment. Revenue is a component of the tax base in income
tax,83 VAT,84 and local business tax (LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a person
or entity.86 It may refer to real estate, cash deposit in a bank, investment in the stocks of
a corporation, inventory of goods, or any property from which the person or entity may
derive income or use to generate the same. In Philippine taxation, the fair market value of
real property is a component of the tax base in real property tax ( RPT).87 Also, the landed
cost of imported goods is a component of the tax base in VAT on importation 88 and tariff
duties.89 That the Constitution treats non-stock, non-profit educational institutions differently from
proprietary educational institutions cannot be doubted. As discussed, the privilege granted
Thus, when a non-stock, non-profit educational institution proves that it uses to the former is conditioned only on the actual, direct and exclusive use of their revenues
its revenues actually, directly, and exclusively for educational purposes, it shall be and assets for educational purposes. In clear contrast, the tax privilege granted to the
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it latter may be subject to limitations imposed by law.
uses its assets in the form of real property for educational purposes, it shall be exempted
from RPT. We spell out below the difference in treatment if only to highlight the privileged status of
non-stock, non-profit educational institutions compared with their proprietary
To be clear, proving the actual use of the taxable item will result in an exemption, but the counterparts.
specific tax from which the entity shall be exempted from shall depend on whether the
item is an item of revenue or asset. While a non-stock, non-profit educational institution is classified as a tax-exempt entity
under Section 30 (Exemptions from Tax on Corporations ) of the Tax Code, a proprietary
To illustrate, if a university leases a portion of its school building to a bookstore or educational institution is covered by Section 27 ( Rates of Income Tax on Domestic
cafeteria, the leased portion is not actually, directly and exclusively used for educational Corporations).
purposes, even if the bookstore or canteen caters only to university students, faculty and
staff. To be specific, Section 30 provides that exempt organizations like non-stock, non-profit
educational institutions shall not be taxed on income received by them as such.
The leased portion of the building may be subject to real property tax, as held in Abra
Valley College, Inc. v. Aquino.90 We ruled in that case that the test of exemption from Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which
taxation is the use of the property for purposes mentioned in the Constitution. We also are nonprofit shall pay a tax of ten percent (10%) on their taxable income... Provided, that
held that the exemption extends to facilities which are incidental to and reasonably if the gross income from unrelated trade, business or other activity exceeds fifty percent
necessary for the accomplishment of the main purposes. (50%) of the total gross income derived by such educational institutions...[the regular
corporate income tax of 30%] shall be imposed on the entire taxable income... 92
In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the By the Tax Code's clear terms, a proprietary educational institution is entitled only to the
Constitution.91 There is no exemption because the asset is not used actually, directly and reduced rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the
exclusively for educational purposes. The commercial use of the property is also not proprietary educational institution is non profit and (2) its gross income from unrelated
incidental to and reasonably necessary for the accomplishment of the main purpose of a trade, business or activity does not exceed 50% of its total gross income.
university, which is to educate its students.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply
However, if the university actually, directly and exclusively uses for educational to non-stock, non-profit educational institutions.
purposes the revenues earned from the lease of its school building, such revenues shall be
exempt from taxes and duties. The tax exemption no longer hinges on the use of the Thus, we declare the last paragraph of Section 30 of the Tax Code without force and
asset from which the revenues were earned, but on the actual, direct and exclusive use of effect for being contrary to the Constitution insofar as it subjects to tax the income and
the revenues for educational purposes. revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purpose. We make this declaration in the exercise of and
Parenthetically, income and revenues of non-stock, non-profit educational consistent with our duty93 to uphold the primacy of the Constitution.94
institution not used actually, directly and exclusively for educational purposes are not
exempt from duties and taxes. To avail of the exemption, the taxpayer must factually Finally, we stress that our holding here pertains only to non-stock, non-profit educational
prove that it used actually, directly and exclusively for educational purposes the revenues institutions and does not cover the other exempt organizations under Section 30 of the
or income sought to be exempted. Tax Code.

The crucial point of inquiry then is on the use of the assets or on the use of the For all these reasons, we hold that the income and revenues of DLSU proven to have been
revenues. These are two things that must be viewed and treated separately. But so long used actually, directly and exclusively for educational purposes are exempt from duties
as the assets or revenues are used actually, directly and exclusively for educational and taxes.
purposes, they are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
The tax exemption granted by the Constitution to non-stock, non-profit year 2003 is valid.
educational institutions, unlike the exemption that may be availed of by
proprietary educational institutions, is not subject to limitations imposed by DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003
law. and insists that the entire LOA should be voided for being contrary to RMO No. 43-90,
which provides that if tax audit includes more than one taxable period, the other periods
or years shall be specifically indicated in the LOA. Commissioner had the opportunity to argue for the validity of the LOA at the CTA En
Banc but she chose not to file her comment and memorandum despite notice. 102
A LOA is the authority given to the appropriate revenue officer to examine the books of
account and other accounting records of the taxpayer in order to determine the taxpayer's III. The CTA correctly admitted the supplemental evidence formally offered by
correct internal revenue liabilities95 and for the purpose of collecting the correct amount DLSU.
oftax,96 in accordance with Section 5 of the Tax Code, which gives the CIR the power to
obtain information, to summon/examine, and take testimony of persons. The LOA The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces
commences the audit process97 and informs the taxpayer that it is under audit for possible of documentary evidence.
deficiency tax assessment.
To recall, DLSU formally offered its supplemental evidence upon filing its motion for
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, reconsideration with the CTA Division.103 The CTA Division admitted the supplemental
and consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable evidence, which proved that a portion of DLSU's rental income was used actually, directly
year 2003? and exclusively for educational purposes. Consequently, the CTA Division reduced DLSU's
tax liabilities.
We answer in the negative.
We uphold the CTA Division's admission of the supplemental evidence on distinct but
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the
reads: formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the
chanRoblesvirtualLawlibrary technical rules of evidence.
A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year.
The practice of issuing [LOAs] covering audit of unverified prior years is hereby prohibited. First, the failure to object to the offered evidence renders it admissible, and the court
If the audit of a taxpayer shall include more than one taxable period, the other periods or cannot, on its own, disregard such evidence.104
years shall be specifically indicated in the [LOA].98
What this provision clearly prohibits is the practice of issuing LOAs covering audit The Court has held that if a party desires the court to reject the evidence offered, it must
of unverified prior years. RMO 43-90 does not say that a LOA which contains unverified so state in the form of a timely objection and it cannot raise the objection to the evidence
prior years is void. It merely prescribes that if the audit includes more than one taxable for the first time on appeal.105
period, the other periods or years must be specified. The provision read as a whole
requires that if a taxpayer is audited for more than one taxable year, the BIR must specify Because of a party's failure to timely object, the evidence offered becomes part of the
each taxable year or taxable period on separate LOAs. evidence in the case. As a consequence, all the parties are considered bound by any
outcome arising from the offer of evidence properly presented. 106
Read in this light, the requirement to specify the taxable period covered by the LOA is
simply to inform the taxpayer of the extent of the audit and the scope of the revenue As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of
officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer by evidence despite notice.107 The Commissioner objected to the admission of the
demanding random accounting records from random unverified years, which may include supplemental evidence only when the case was on appeal to the CTA En Banc. By the
documents from as far back as ten years in cases of fraud audit.99 time the Commissioner raised her objection, it was too late; the formal offer,
admission and evaluation of the supplemental evidence were all fait accompli.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified
Prior Years. The LOA does not strictly comply with RMO 43-90 because it includes We clarify that while the Commissioner's failure to promptly object had no bearing on the
unverified prior years. This does not mean, however, that the entire LOA is void. materiality or sufficiency of the supplemental evidence admitted, she was bound by the
outcome of the CTA Division's assessment of the evidence.108
As the CTA correctly held, the assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it was being audited Second, the CTA is not governed strictly by the technical rules of evidence. The CTA
for taxable year 2003. Corollarily, the assessments for taxable years 2001 and 2002 are Division's admission of the formal offer of supplemental evidence, without prompt
void for having been unspecified on separate LOAs as required under RMO No. 43-90. objection from the Commissioner, was thus justified.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at Notably, this Court had in the past admitted and considered evidence attached to the
the CTA Division, and thus, should not have been entertained on appeal, is not accurate. taxpayers' motion for reconsideration.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up In the case of BPI-Family Savings Bank v. Court of Appeals ,109 the tax refund claimant
during the trial.100 DLSU then raised the issue in its memorandum and motion for partial attached to its motion for reconsideration with the CTA its Final Adjustment Return. The
reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En Banc. Commissioner, as in the present case, did not oppose the taxpayer's motion for
Thus, the CTA En Banc could, as it did, pass upon the validity of the LOA. 101 Besides, the reconsideration and the admission of the Final Adjustment Return.110 We thus admitted
and gave weight to the Final Adjustment Return although it was only submitted upon
motion for reconsideration.
We held that while it is true that strict procedural rules generally frown upon the
submission of documents after the trial, the law creating the CTA specifically provides that
proceedings before it shall not be governed strictly by the technical rules of
evidence111 and that the paramount consideration remains the ascertainment of truth. We
ruled that procedural rules should not bar courts from considering undisputed facts to
arrive at a just determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest Development
Corporation v. Commissioner of Internal Revenue 113 and Commissioner of Internal
Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the strict
application of the technical rules of evidence in the present tax assessmentcase. If
anything, the liberal application of the rules assumes greater force and significance in the
case of a taxpayer who claims a constitutionally granted tax exemption. While the
taxpayers in the cited cases claimed refund of excess tax payments based on the Tax
Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality is afforded
to taxpayers who paid more than they should have under a statute, then with more
reason that we should allow a taxpayer to prove its exemption from tax based on the
Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only
because the Commissioner failed to promptly object, but more so because the strict
application of the technical tules of evidence may defeat the intent of the Constitution.
IV. The CTA's appreciation of evidence is generally binding on the Court unless
compelling reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its function of being dedicated exclusively to the resolution of
tax problems, has developed an expertise on the subject, unless there has been an abuse
or improvident exercise of authority.116 We thus accord the findings of fact by the CTA
with the highest respect. These findings of facts can only be disturbed on appeal if they
are not supported by substantial evidence or there is a showing of gross error or abuse on
the part of the CTA. In the absence of any clear and convincing proof to the contrary, this
Court must presume that the CTA rendered a decision which is valid in every respect.117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had
used actually, directly and exclusively for educational purposes a portion of its assessed
income and that it had remitted the DST payments though an online imprinting machine.
DLSU used actually, directly, and exclusively for educational purposes a portion of its
assessed income.
To see how the CTA arrived at its factual findings, we review the process undertaken,
from which it deduced that DLSU successfully proved that it used actually, directly and
exclusively for educational purposes a portion of its rental income.
The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of receipts,
statement of disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed P93.86 Million, 119 which was used to build
the university's Sports Complex. Based on these pieces of evidence, the CTA found that
DLSU's rental income from its concessionaires were indeed transmitted and used for the
payment of this loan. The CTA held that the degree of preponderance of evidence was
sufficiently met to prove actual, direct and exclusive use for educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which were
allegedly deposited to a fund (CF-CPA Account),120 intended for the university's capital
projects, was not proved to have been used actually, directly and exclusively for
educational purposes. The CTA observed that "[DLSU]...failed to fully account for and
substantiate all the disbursements from the [fund]." Thus, the CTA "cannot ascertain
whether rental income from the [other] concessionaires was indeed used for educational
purposes."121
To stress, the CTA's factual findings were based on and supported by the report of the
Independent CPA who reviewed, audited and examined the voluminous documents
submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination
and verification of receipts, invoices, vouchers and other long accounts; (b) reproduction
of, and comparison of such reproduction with, and certification that the same are faithful
copies of original documents, and pre-marking of documentary exhibits consisting of
voluminous documents; (c) preparation of schedules or summaries containing a
chronological listing of the numbers, dates and amounts covered by receipts or invoices or
other relevant documents and the amount(s) of taxes paid; (d) making findings as to
compliance with substantiation requirements under pertinent tax laws,
regulations and jurisprudence; (e) submission of a formal report with certification of
authenticity and veracity of findings and conclusions in the performance of the audit; (f)
testifying on such formal report; and (g) performing such other functions as the CTA may
direct.122
Based on the Independent CPA's report and on its own appreciation of the evidence, the
CTA held that only the portion of the rental income pertaining to the substantiated
disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was
considered as used actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements must be subjected to
income tax and VAT.123
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for
taxable years 2001 and 2002 due to the defective LOA.124
The Court finds that the above fact-finding process undertaken by the CTA shows that it
based its ruling on the evidence on record, which we reiterate, were examined and
verified by the Independent CPA. Thus, we see no persuasive reason to deviate from
these factual findings.
However, while we generally respect the factual findings of the CTA, it does not mean that
we are bound by its conclusions. In the present case, we do not agree with
the method used by the CTA to arrive at DLSU's unsubstantiated rental income ( i.e.,
income not proved to have been actually, directly and exclusively used for educational
purposes).
To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable
year 2003.125 DLSU earned this income from leasing a portion of its premises to: 1) MTO-
Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International,
and 6) MTO Bookstore.126
To prove that its rental income was used for educational purposes, DLSU identified the
transactions where the rental income was expended, viz.: 1) P4,007,724.00127 used to
pay the loan obtained by DLSU to build the Sports Complex; and
2) P6,602,655.00 transferred to the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00
transferred to the CF-CPA Account was used actually, directly and exclusively for
educational purposes. According to the Independent CPA' findings, DLSU was able to
substantiate disbursements from the CF-CPA Account amounting to P6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of
the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus,
subject to income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%.130The CTA
held as follows:
chanRoblesvirtualLawlibrary
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account,
petitioner again failed to fully account for and substantiate all the disbursements from the
CF-CPA Account; thus failing to prove that the rental income derived therein were actually,
directly and exclusively used for educational purposes. Likewise, the findings of the Court-
Commissioned Independent CPA show that the disbursements from the CF-CPA Account
for fiscal year 2003 amounts to P-6,259,078.30 only. Hence, this portion of the rental
income, being the substantiated disbursements of the CF-CPA Account, was considered by
the Special First Division as used actually, directly and exclusively for educational
purposes. Since for fiscal year 2003, the total disbursements per voucher is P6,259,078.3
(Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
P23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal
year 2003 is 26.68% (P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of
CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68%
with the total rent income added to and used in the CF-CPA Account in the amount of
P6,602,655.00 ts P1,761,588.35.131 (emphasis supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:
The CTA subtracted the rent income used in the construction of the Sports Complex
(P4,007,724.00) from the rental income (P10,610,379.00) earned from the
abovementioned concessionaries. The difference (P6,602,655.00) was the portion claimed
to have been deposited to the CF-CPA Account.
The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements
(P1,761,308.37) from the P6,602,655.00 to arrive at the supposed
unsubstantiated portion of the rental income (P4,841,066.65).132
The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived by
multiplying the rental income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total
disbursements (P23,463,543.02).
The 26.68% ratio134 was the result of dividing the substantiated disbursements from the
CF-CPA Account as found by the Independent CPA (P6,259,078.30) by the total
disbursements (P23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the
constitutional grant of tax exemption to non-stock, nonprofit educational institutions. The
CTA's reasoning is flawed because it required DLSU to substantiate an amount that is
greater than the rental income deposited in the CF-CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of
its rental income (which amounted to a total of P10.61 million) 135 were used for
educational purposes. This amount was divided into two parts: (a) the P4.01 million,
which was used to pay the loan obtained for the construction of the Sports Complex; and
(b) the P6.60 million,136 which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to P23.46
million.137 These figures, read in light of the constitutional exemption, raises the
question: does DLSU claim that the whole total CF-CPA disbursement of P23.46
million is tax-exempt so that it is required to prove that all these
disbursements had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46
million had been for educational purposes and should thus be tax-exempt; DLSU only
claimed P10.61 million for taxexemption and should thus be required to prove that this
amount had been used as claimed.
Of this amount, P4.01 had been proven to have been used for educational purposes, as
confirmed by the Independent CPA. The amount in issue is therefore the balance of P6.60
million which was transferred to the CF-CPA which in turn made disbursements of P23.46
million for various general purposes, among them the P6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for
educational purposes in year 2003 in the amount P6.26 million. Based on these given
figures, the CTA concluded that the expenses for educational purposes that had been
coursed through the CF-CPA should be prorated so that only the portion that P6.26 million
bears to the total CF-CPA disbursements should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-exempt. As
already mentioned above, DLSU is not claiming that the whole P23.46 million CF-CPA
disbursement had been used for educational purposes; it only claims that P6.60 million
transferred to CF-CPA had been used for educational purposes. This was what DLSU
needed to prove to have actually and directly used for educational purposes.
That this fund had been first deposited into a separate fund (the CF-CPA established to
fund capital projects) lends peculiarity to the facts of this case, but does not detract from
the fact that the deposited funds were DLSU revenue funds that had been confirmed and
proven to have been actually and directly used for educational purposes via the CF-CPA.
That the CF-CPA might have had other sources of funding is irrelevant because the commercial establishments to avail of the exemption. 140
assessment in the present case pertains only to the rental income which DLSU
indisputably earned as revenue in 2003. That the proven CF-CPA funds used for Given the lack of complete identity of the issues involved, the CTA held that it had to
educational purposes should not be prorated as part of its total CF-CPA disbursements for evaluate the separate sets of evidence differently. The CTA likewise stressed that DLSU
purposes of crediting to DLSU is also logical because no claim whatsoever had been made and Ateneo gave distinct defenses and that its wisdom "cannot be equated on its decision
that the totality of the CF-CPA disbursements had been for educational purposes. No on two different cases with two different issues ."141
prorating is necessary; to state the obvious, exemption is based on actual and direct
use and this DLSU has indisputably proven. DLSU disagrees with the CTA and argues that the entire assessment must be cancelled
because it submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's
Based on these considerations, DLSU should therefore be liable only for the difference argument for being non sequitur. Its reliance on the concept of uniformity of taxation is
between what it claimed and what it has proven. In more concrete terms, DLSU only had also incorrect.
to prove that its rental income for taxable year 2003 (P10,610,379.00) was used for
educational purposes. Hence, while the total disbursements from the CF-CPA Account First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency
amounted to P23,463,543.02, DLSU only had to substantiate its P10.6 million rental and materiality of the evidence supporting their respective claims for tax exemption
income, part of which was the P6,602,655.00 transferred to the CF-CPA account. Of this would necessarily differ because their attendant issues and facts differ.
latter amount, P6.259 million was substantiated to have been used for educational
purposes. To state the obvious, the amount of income received by DLSU and by Ateneo during the
taxable years they were assessed varied. The amount of tax assessment also varied. The
To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable amount of income proven to have been used for educational purposes also varied
year 2003 as follows: because the amount substantiated varied .142 Thus, the amount of tax assessment
chanRoblesvirtualLawlibrary cancelled by the CTA varied.
CTA Decision138 Revised
On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total
Rental income 10,610,379.00 10,610,379.00
deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was assessed
Less: Rent income used in construction of deficiency DST, while Ateneo was not.143
4,007,724.00 4,007,724.00
the Sports Complex
Thus, although both Ateneo and DLSU claimed that they used their rental income actually,
directly and exclusively for educational purposes by submitting similar evidence, e.g., the
testimony of their employees on the use of university revenues, the report of the
Rental income deposited to the CF-CPA Independent CPA, their income summaries, financial statements, vouchers, etc., the fact
6,602,655.00 6,602.655.00 remains that DLSU failed to prove that a portion of its income and revenues had indeed
Account
been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's
Less: Substantiated portion of CF-CPA claim were not produced in court. Indeed, the Independent CPA testified that some
1,761,588.35 6,259,078.30
disbursements disbursements had not been proven to have been used actually, directly and exclusively
for educational purposes.144

Tax base for deficiency income tax
4,841,066.65 343,576.70
and VAT
On DLSU's argument that the CTA should have appreciated its evidence in the same way
as it did with the evidence submitted by Ateneo in another separate case, the CTA
explained that the issue in the Ateneo case was not the same as the issue in the present
case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
income taxes and VAT under certain BIR and Department of Finance issuances139that
required the educational institution to own and operate the canteens, or other commercial
enterprises within its campus, as condition for tax exemption. The CTA held that the
Constitution does not require the educational institution to own or operate these
The final nail on the question of evidence is DLSU's own admission that the original of
these documents had not in fact been produced before the CTA although it claimed that
there was no bad faith on its part.145 To our mind, this admission is a good indicator of
how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to substantiate a
portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that
the contents of the missing supporting documents were proven by its recital in some other
authentic documents on record,146 can no longer be entertained at this late stage of the
proceeding. The CTA did not rule on this particular claim. The CTA also made no finding
on DLSU's assertion of lack of bad faith. Besides, it is not our duty to go over these
documents to test the truthfulness of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and
uniformity of taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate.147 A tax is uniform when it operates with the same force
and effect in every place where the subject of it is found. 148The concept requires that all
subjects of taxation similarly situated should be treated alike and placed in equal
footing.149
Finally, it is true that educational institutions are not included in the class of taxpayers
who can pay and remit DST through the On-Line Electronic DST Imprinting Machine under
RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it was not DLSU
who used the On-Line Electronic DST Imprinting Machine but the bank that handled its
mortgage and loan transactions. RR No. 9-2000 expressly includes banks in the class of
taxpayers that can use the On-Line Electronic DST Imprinting Machine.

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them
alike because their income proved to have been used actually, directly and exclusively for
educational purposes were exempted from taxes. The CTA equally applied the
requirements in the YMCA case to test if they indeed used their revenues for educational
purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its
income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU
secured a different result happened because it failed to fully prove that it used actually,
directly and exclusively for educational purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean that
subjects of taxation similarly situated are treated in literally the same way in all and every
occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit educational
institutions, does not mean that the CTA or this Court would similarly decide every case
for (or against) both universities. Success in tax litigation, like in any other litigation,
depends to a large extent on the sufficiency of evidence. DLSU's evidence was wanting,
thus, the CTA was correct in not fully cancelling its tax liabilities.
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the
assessed DST deficiency, except for the unpaid balance of P13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner of
Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and
March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No.
622, except for the total amount of deficiency tax liabilities of De La Salle University, Inc.,
which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the
petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of
Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATIONthat the
base for the deficiency income tax and VAT for taxable year 2003 is P343,576.70.
SO ORDERED.cralawlawlibrary

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions
were paid and remitted through its bank's On-Line Electronic DST Imprinting Machine. The
Commissioner argues that DLSU is not allowed to use this method of payment because an
educational institution is excluded from the class of taxpayers who can use the On-Line
Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the
Tax Code and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by
the person making, signing, issuing, accepting, or transferring the same. 150 The Tax Code
provides that whenever one party to the document enjoys exemption from DST, the other
party not exempt from DST shall be directly liable for the tax. Thus, it is clear that DST
shall be payable by any party to the document, such that the payment and compliance by
one shall mean the full settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These
agreements are subject to DST.151 For the purpose of showing that the DST on the loan
agreement has been paid, DLSU presented its agreements bearing the imprint showing
that DST on the document has been paid by the bank, its counterparty. The imprint
should be sufficient proof that DST has been paid. Thus, DLSU cannot be further assessed
for deficiency DST on the said documents.