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II.

CONSTRUCTION OF STATUTORY EXEMPTIONS:

A. General rule;

B. Applicability to Claims for Refund;

C. When exemption statutes are liberally construed;

D. Cases:
E. RODRIGUEZ, INC. V COLLECTOR 28 SCRA 119;
FACTS: Congress enacted RA 333, pursuant to which the Philippines sued the petitioner,
among 4 other defendants for the appropriation of about 1,360,000 sqm of land owned by it
and situated within the area delimited for the new capital city site.

The CFI of QC rendered judgment declaring the Philippines entitled to retain and appropriate
the property and ordering the same to pay defendants as just compensation of the lands to
be taken from them.

After series of negotiations between the Philippines and defendants, the latter agree to the
payment of price awarded by the court. Part of the price was in the form of government bonds
of Php 625,315.90.

On March 1, 29151, E. Rodriguez filed income tax return for the year 1950. In the said return,
it did not include in the sum of Php 625,315.90 received by it from the govt in the form of
bonds in payment of its expropriated properties, in the belief that the said amount was free
or exempt from taxation.

The Collector of Internal Revenue then assessed deficiency income tax of Php 63,980.

The applicant’s main contention is on the basis of Section 9 of RA 333, which provides bonds
shall be exempt from taxation by the Government of the Republic of the Philippines or by any
political or municipal subdivisions thereof, which fact shall be stated upon their face, in
accordance with this Act, under which the said bonds are issued.

The CTA upheld the decision of the collector.

ISSUE: W/N the bonds made in payment of the expropriated property is exempt from income
tax?

HELD:
No, The SC held the ruling of the CTA, to wit: There can be no question that petitioner is
taxable on its income derived from the sale of its property to the Government. The fact that
a portion of the purchase price of the property was paid by the Government in the form of
tax exempt bonds does not operate to exempt said income from income tax. The income from
the sale of the land in question and the bond are two different and distinct taxable items so
that the exemption of one does not operate to exempt the other, unless the law expressly so
provides.

It is alleged that to deny exemption from income tax on the amount represented by the said
bonds would be to nullify the purpose of the law in granting exemption. The question has
been asked: If income or gain derived from the acceptance of such bonds in exchange for
private estates would be taxed, what inducement did such provision of Republic Act No. 333
give to landowners to accept payment in bonds for their properties in the proposed site of the
Capital City? To our mind, there is sufficient inducement, and that is, the exemption not only
of the bonds from documentary stamp tax but also of the interest derived from such bonds.
Section 29(b) (4) of the National Internal Revenue Code exempts interest derived from such
bonds from income tax to the extent provided in the law authorizing the issue thereof.

We find no cogent reasons to disturb the above holding of the Court of Tax Appeals. It has
been the constant and uniform holding of this Court that exemption from taxation is not
favored and is never presumed; in fact, if it is granted, the grant must be strictly construed
against the taxpayer. 4 Affirmatively put, the law requires courts to frown on alleged
exemptions from taxation, hence, an exempting provision in a legislative enactment should
be construed in strictissimi juris 5 against the taxpayer and liberally in favor of the taxing
authority. 6 This Court has been most consistent in this holding.

REPUBLIC FLOUR MILLS V CIR, 31 SCRA 148;


FACTS:

In 1957, the Republic Flour Mills, Inc., a domestic corporation engaged in the business of
manufacturing flour, was granted tax-exemption privileges as a new and necessary industry
pursuant to Republic Act 901, commencing on 28 January 1957 to continue as a diminishing
exemption until 31 December 1962.

In 1958, the corporation imported a quantity of wheat grains, part of which it was not able to
mill and use in the business that year, so that by 1 January 1959 the corporation carried a
surplus of P1,486,616.41 worth of wheat grains from the previous year's importation. These
surplus grains were finally utilized and manufactured into flour and sold in 1959. For the year
1959, the corporation paid manufacturer's sales tax on its produce in the sum of P37,275.55,
in the computation of which the cost of the wheat left over from the 1968 importation was
treated as a deductible item from the gross sales in 1959.

On 28 March 1961, the Commissioner of Internal Revenue assessed the corporation of


deficiency tax for 1959 in the total sum of P23,170.17. The corporation requested a
reinvestigation of the assessment, and when it was denied filed a petition for review in the
Court of Tax Appeals (CTA Case No. 1151) to contest the assessment of advance sales tax on
the wheat grains imported tax-free in 1958 and the disallowance of the deduction of the cost
of said wheat grains from its gross sales of flour in 1959.

Respondent Commissioner of Internal Revenue defended and maintained the assessment, on


the ground that by 1959 the raw materials used by petitioner in its tax-exempt industry were
already subject to payment of 10% tax thereon.
On 12 December 1965, the Court of Tax Appeals sustained the correctness of the disputed
assessment, and petitioner corporation was ordered to pay the sum of P24,587.98 as
deficiency sales tax and surcharge.

ISSUE:

Whether or not the cost of the tax-free wheat grains used in the manufacture of flour, which
is also tax-exempt, is a deductible item for purposes of computing the percentage tax (10%)
admittedly due on the said manufactured product in 1959.

HELD:

Yes. Petitioner insists that the cost of imported tax-free wheat grains is a deductible item
from its gross sales of the flour, pursuant to Section 186-A of the Internal Revenue Code,
which reads:

SEC. 186-A. Whenever a tax free product is utilized in the manufacture or


production of any article, in the determination of the value of such finished
article, the value of such tax free product shall be deducted.

Respondent Commissioner refutes this contention, saying that, as defined by the Internal
Revenue Office, the term "tax-free product" mentioned in the above-quoted Section 186-A
refers to raw materials purchased from tax-exempt industries, whereas the wheat grains
involved in the case, although used by a tax-exempt industry, were not acquired from one
enjoying tax-exemption privilege under our laws.

We agree with the petitioner that there is actually no cause here calling for an administrative
definition or interpretation of Section 186-A. For no reason exists to read into the provision a
qualification that is not there, nor to give to the phrase "tax-free product" a meaning other
than what it ordinarily and commonly conveys — a material or article exempted from payment
of tax.

It is true that in the construction of tax statutes tax exemptions (and deductions are of this
nature) are not favored in the law, and are construed strictissimi juris against the
taxpayer. However, it is equally a recognized principle that where the provision of the law is
clear and unambiguous, so that there is no occasion for the court's seeking the legislative
intent, the law must be taken as it is, devoid of judicial addition or subtraction. In this case,
we find the provision of Section 186-A — "whenever a tax free product is utilized, etc." — all
encompassing to comprehend tax-free raw materials, even if imported. Where the law
provided no qualification for the granting of the privilege, the court is not at liberty to supply
any.

The decision appealed from is reversed and set aside, and, in accordance with the stipulation
of the parties, petitioner is hereby ordered to pay to respondent Commissioner the sum of
P3,288.16 as deficiency tax, with legal interest thereon from the date the tax became due.
WONDER MECHANICAL ENGINEERING V CTA 64 SCRA 555;
FACTS: Wonder Mechanical Engineering was granted tax exemption privilege under Republic
Act 35 in respect to the "manufacture of machines for making cigarette paper, pails, lead
washers, rivets, nails, candies. chairs, etc.". The tax exemption expired on May 30, 1951. On
September 14, 1953, petitioner applied with the Secretary of Finance for reinstatement of the
exemption privilege under the provisions of R.A. 901 approved July 7, 1954, the reinstatement
to commence on June 20, 1953, the date Republic Act 901 took effect.

Commissioner of Internal Revenue, sometime in 1955, caused the investigation of petitioner


for the purpose of ascertaining whether or not it had any tax liability. During the investigation
it was found that during the years 1953 and 1954 Wonder Mech was engaged in the business
of manufacturing various articles, namely, auto spare parts, flourescent lamp shades, rice
threshers, post clips, radio screws, washers, electric irons, kerosene stoves and other articles;
that it also engaged in business of electroplating and in repair of machines; that although it
was engaged in said business, it did not provide itself with the proper privilege tax receipts
as required by Section 182 of the Tax Code and did not pay the sales tax on its gross sales of
articles manufactured by it and the percentage tax due on the gross receipts of its
electroplating and repair business pursuant to Sections 183, 185, 186 and 191 of the same
Code".

The Commissioner of Internal Revenue on October 6, 1961, assessed against the petitioner
"the payment of P25,080.91 as deficiency percentage taxes and 25% surcharge for 1957 to
1960 and suggested the payment of P5,020.00 as total compromise penalty in extrajudicial
settlement of the various violations of the Tax Code and Bookkeeping Regulation (pp. 28-29
B.I.R. rec.).

Regarding the compromise penalty suggested by respondent Bureau of Internal Revenue in


both G.R. L-22805 and L-27858, it does not appear that petitioner accepted the imposition of
the compromise amounts.

Wonder Mechanical Engineering contended that it was exempted from paying said taxes.

ISSUE: W/N Wonder Mech is exempted from paying taxes?

HELD:

No, The cardinal rule in taxation that exemptions therefrom are highly disfavored in law and
he who claims tax exemption must be able to justify his claim or right thereto by the dearest
grant of organic or statute law" as succinctly stated in the decision of the respondent Court
of Tax Appeals in C.T.A. No. 1265 (L-27858).

Tax exemption must be clearly expressed and cannot be established by implication.


Exemption from a common burden cannot be permitted to exist upon vague implication.

Republic Act 35, approved on September 30, 1946, grants to persons "who or which shall
engage in a new and necessary industry", for a period of four years from the date of the
organization of such industry, exemption "from the payment of all internal revenue taxes
directly payable by such person". Republic Act 901, approved on June 20, 1953, which
amended Republic Act 35 by extending the period of tax exemption, elaborated on the
meaning of "new and necessary industry" as follows:
Sec. 2. For the purposes of this Act, a "new industry is one not existing or
operating on a commercial scale prior to January first, nineteen hundred and
forty-five. Where several applications for exemptionare filed in connection with
the same kind of industry, the Secretary of Finance shall approve them in the
order in which they have been filed until the total output or production of those
already granted exemption for that particular kind of industry is sufficient to
meet local demand or consumption: Provided, That the limitation shall not
apply to products intended for export. (Emphasis for emphasis)

Sec. 3. For the purposes of this Act, a "necessary" industry is one complying
with the following requirements:

(1) Where the establishment of the industry will contribute to the


attainment of a stable and balanced national economy.

(2) Where the industry will operate on a commercial scale in


conformity with up-to-date practices and will make its products
available to the general public in quantities and at prices which
justify its operation with a reasonable degree of permanency.

(3) Where the imported raw materials represent a value not


exceeding sixty percentum of the manufacturing cost plus
reasonable selling price and administrative expenses:Provided,
That a grantee of tax exemption shall use materials of domestic
origin, growth, or manufacture wherever the same are available
or could be made available in reasonable quantity and quality
and at reasonable prices. ... (Emphasis for emphasis)

It is clear that an industry to be entitled to tax exemption must be "new and necessary" and
that the tax exemption was granted to new and necessary industries as an incentive to greater
and adequate production of products made scarce by the second world war which wrought
havoc on our national economy, a production "sufficient to meet local demand or
consumption"; that will contribute "to the attainment of a stable and balanced national
economy"; an industry that "will make its products available to the general public in quantities
and at prices which will justify its operation."

Viewed in the light of the foregoing reasons for the State grant of tax exemption, We are
firmly convinced that petitioner was granted tax exemption in the manufacture and sale "of
machines for making cigarette paper, pails, lead washers, nails, rivets, candies, etc.", as
explicitly stated in the Certificate of Exemption (Annex A of the petition in G.R. No. L-22805),
but certainly not for the manufacture and sale of the articles produced by those machines.

Luzon Stevedoring Corp. v CTA 163 SCRA 647;


FACTS: Petitioner is engaged in the business of unloading and loading of a vessel in port and
towing of barges containing cargoes. It imported various engine parts and other equipment
for the repair and maintenance of its tugboats. CIR assessed compensating tax for such
imports, which petitioner paid under protest. Unable to secure a tax refund from the CIR, it
filed a Petition for Review with the CTA, which the latter denied.

ISSUE: W/N petitioner’s tugboats can be interpreted to be included in the term “cargo
vessels” for purposes of the tax exemption provided for in Section 190 of the NIRC?
HELD:
No, Section 190 of the NIRC on compensating tax provides that the tax imposed in this section
shall not apply to articles to be used by the importer himself in the manufacture or preparation
of articles subject to specific tax or those for consignment abroad and are to form part thereof
or to articles to be used by the importer himself as passenger and/or cargo vessel, whether
coastwise or oceangoing, including engines and spare parts of said vessel.

Petitioner contends that tugboats are embraced and included in the term cargo vessel under
the tax exemption provisions of Section 190 of the Revenue Code, as amended by Republic
Act. No.3176. He argues that in legal contemplation, the tugboat and a barge loaded with
cargoes with the former towing the latter for loading and unloading of a vessel in part,
constitute a single vessel. Accordingly, it concludes that the engines, spare parts and
equipment imported by it and used in the repair and maintenance of its tugboats are exempt
from compensating tax.

On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are


not "Cargo vessel" because they are neither designed nor used for carrying and/or
transporting persons or goods by themselves but are mainly employed for towing and pulling
purposes.

This Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or diminution thereof
with respect to its mode or its rate, must be strictly construed, and the same must be coached
in clear and unmistakable terms in order that it may be applied.” More specifically stated,
the general rule is that any claim for exemption from the tax statute should be strictly
construed against the taxpayer.

Under the definition of a tugboat, petitioner's tugboats clearly do not fall under the categories
of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction
that where a provision of law speaks categorically, the need for interpretation is obviated, no
plausible pretense being entertained to justify non-compliance.

And, even if construction and interpretation of the law is insisted upon, following another
fundamental rule that statutes are to be construed in the light of purposes to be achieved and
the evils sought to be remedied, it will be noted that the legislature in amending Section 190
of the Tax Code by Republic Act 3176, as appearing in the records, intended to provide
incentives and inducements to bolster the shipping industry and not the business of
stevedoring.

Under the circumstances, there appears to be no plausible reason to disturb the findings and
conclusion of the Court of Tax Appeals. As a matter of principle, this Court will not set aside
the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems
and has necessarily developed an expertise on the subject unless there has been an abuse or
improvident exercise of authority, which is not present in the instant case.

Floro Cement v Hen. Gorospe 200 SCRA 480;


FACTS: The municipality of Lugait, province of Misamis Oriental, filed a verified complaint for
collection of manufacturer’s and exporter’s taxes against Floro Cement Corporation, engaged
in the manufacture and selling, including exporting, of cement. The municipality alleged that
the imposition and collection of these taxes is based on its Municipal Ordinance No. 5
(Municipal Revenue Code of 1974) which was passed pursuant to PD No. 231 and also
Municipal Ordinance No. 10 pursuant to PD No. 426, amending PD No. 231.

Floro Cement Corporation set up the defense that it is not liable to pay manufacturer's and
exporter's taxes alleging among others that the municipality’s power to levy and collect taxes,
fees, rentals, royalties or charges of any kind whatsoever has been limited or withdrawn by
Section 52 of PD No. 463.
Sec. 52. Power to Levy Taxes on Mines, Mining Corporation and Mineral Products.—
Any law to the contrary notwithstanding, no province, city, municipality, barrio or
municipal district shall levy and collect taxes, fees, rentals, royalties or charges of any
kind whatsoever on mines, mining claims, mineral products, or on any operation,
process or activity connected therewith.

CFI: Ordered Floro Cement Corporation to pay the manufacturer’s and exporter’s taxes.

ISSUE: W/N Ordinances Nos. 5 and 10 of Lugait, Misamis Oriental apply to petitioner Floro
Corporation notwithstanding the limitation on the taxing power of local government as
provided for in Sec. 5 of P.D. 231 and Sec. 52 of P.D. 463?

HELD:
Yes, Cement is not a mineral product but rather a manufactured product.

As the power of taxation is a high prerogative of sovereignty, the relinquishment is never


presumed and any reduction or diminution thereof with respect to its mode or its rate, must
be strictly construed, and the same must be coached in clear and unmistakable terms in order
that it may be applied. More specifically stated, the general rule is that any claim for
exemption from the tax statute should be strictly construed against the taxpayer. He who
claims an exemption must be able to point out some provision of law creating the right; it
cannot be allowed to exist upon a mere vague implication or inference. It must be shown
indubitably to exist, for every presumption is against it, and a well-founded doubt is fatal to
the claim. Floro Cement Corporation failed to meet this requirement.

The exemption mentioned in Sec. 52 of P.D. No. 463 refers only to machineries, equipment,
tools for production, etc., as provided in Sec. 53 of the same decree. The manufacture and
the export of cement does not fall under the said provision for it is not a mineral product. It
is not cement that is mined only the mineral products composing the finished product.

By the parties’ own stipulation of facts submitted before the CFI, it is admitted that Floro
Cement Corporation is engaged in the manufacturing and selling, including exporting of
cement. As such, and since the taxes sought to be collected were levied on these activities
pursuant to Sec. 19 of P.D. No. 231, Ordinances Nos. 5 and 10, which were enacted pursuant
to P.D. No. 231 and P.D. No. 426, respectively, properly apply to Floro Cement Corporation.

CIR v Ledesma 31 SCRA 95;


FACTS: 1st- Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma and Vicente
Gustilo Jr purchased from their parents a sugar plantation known as Hacienda Fortuna
consisting of 36 parcels of land, located in San Carlos, Negros Occidental, with an area of
1202 hectares and with a sugar quota of 79,211.17 piculs.

2nd- By virtue of the purchase, Carlos Ledesma acquired the one-third undivided portion of
the plantation for the price of P 144,043.00, Julieta Ledesma acquired another one-third of
the undivided portion for the same price and respondents Amparo and Vicente acquired the
remaining one-third portion for the same price.

3rd- Prior to the purchase, the sugar quota of 79,211.17 piculs was registered in the names
of the vendors Julio and Florentina Ledesma, under Plantation Audit 38-101 of the milling
district of San Carlos Milling Co. By virtue of the purchase Plantation Audit No. 58-101 was
cancelled, and during the sugar crop year 1948-1949 the said sugar quota of 79,211.17 piculs
was transferred to, apportioned among, and separately registered in the names of, the
respondents, as follows: one-third to Vicente Gustilo, Jr. and Amparo Ledesma de Gustilo,
under Plantation Audit No. 38-246; one-third to Carlos Ledesma, under Plantation Audit No.
38-247; and one-third to Julieta Ledesma under Plantation Audit No. 38248.

After their purchase of the plantation, herein respondents took over the sugar cane farming
on the plantation beginning with the crop year 1948-1949. For the crop year 1948- 1949 the
San Carlos Milling Co., Ltd. credited the respondents with their shares in the gross sugar
production, Gross Production:

Amparo Ledesma and


Vicente Gustilo, Jr. 21,308.30 piculs
Carlos Ledesma 21,308.30 "
Julieta Ledesma 21,308.30 "
TOTAL 63,924.90 piculs
Planters' Share:
Amparo Ledesma and
Vicente Gustilo, Jr. 13,317.70 piculs
Carlos Ledesma 13,317.70 "
Julieta Ledesma 13,317.70 "
TOTAL 39,953.10 piculs

The respondents shared equally the expenses of production, on the basis of their respective
one-third undivided portions of the plantation. In their individual income tax returns for the
year 1949 the respondents included as part of their income their respective net profits derived
from their individual sugar production from the "Hacienda Fortuna," as herein-above stated.

On July 11, 1949, the respondents organized themselves into a general co-partnership under
the firm name "Hacienda Fortuna", for the "production of sugar cane for conversion into sugar,
palay and corn and such other products as may profitably be produced on said hacienda,
which products shall be sold or otherwise disposed of for the purpose of realizing profit for
the partnership." The articles of general co-partnership were registered in the commercial
register of the office of the Register of Deeds in Bacolod City, Negros Occidental, on July 14,
1949. Paragraph 14 of the articles of general partnership provides that the agreement shall
have retroactive effect as of January 1, 1949.

ISSUE: W/N respondent operated the “Hacienda Fortuna” as partnership prior to the exe-
cution of articles of co-partnership?

HELD:
Yes, Respondents operated the "Hacienda Fortuna" as a partnership prior to the execution of
the articles of general co-partnership based on their intention as clearly shown in paragraph
14 of the articles of general co-partnership which provides that the partnership agreement
"shall beretroactive as of January 1, 1949.
RESINS, INC. V AUDITOR GEN. 25, SCRA 754;
FACTS: Resins Incorporated seeks a refund from Central Bank on the claim that it was exempt
from the margin fee under Republic Act No. 2609 for the importation of urea and
formaldehyde, as separate units, used for the production of synthetic glue of which it was a
manufacturer. The specific language of the Act speak of "urea formaldehyde," and petitioner
Resins admittedly did import urea and formaldehyde separately.

ISSUE: W/N Resins should be exempt from payment of margin fee under RA 2609?

HELD:
Since a refund undoubtedly partakes of a nature of an exemption, it cannot be allowed unless
granted in the most explicit and categorical language. It has been the constant and uniform
holding that exemption from taxation is not favored and is never presumed, so that if granted
it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on
exemption from taxation, hence, an exempting provision should be construed strictissimi
juris." Certainly, whatever may be said of the statutory language found in Republic Act 2609,
it would be going too far to assert that there was such a clear and manifest intention of
legislative will as to compel such a refund. 'urea formaldehyde' is clearly a finished product,
which is patently distinct and different from 'urea' and 'formaldehyde', as separate articles
used in the manufacture of the synthetic resins known as 'urea formaldehyde'.

CIR v. CA & YMCA 298 SCRA 83;


FACTS: Private Respondent YMCA--a non-stock, non-profit institution, which conducts various
programs beneficial to the public pursuant to its religious, educational and charitable
objectives--leases out a portion of its premises to small shop owners, like restaurants and
canteen operators, deriving substantial income for such. Seeing this, the Commissioner of
Internal Revenue (CIR) issued an assessment to private respondent for deficiency income
tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency
withholding tax on wages. YMCA opposed arguing that its rental income is not subject to tax,
mainly because of the provisions of Section 27 of NIRC which provides that civic league or
organizations not organized for profit but operate exclusively for promotion of social welfare
and those organized exclusively for pleasure, recreation and other non-profitble businesses
shall not be taxed.

ISSUE: W/N the contention of YMCA tenable?

HELD:
No, Because taxes are the lifeblood of the nation, the Court has always applied the doctrine
of strict in interpretation in construing tax exemptions. Furthermore, a claim of statutory
exemption from taxation should be manifest and unmistakable from the language of the law
on which it is based. Thus, the claimed exemption "must expressly be granted in a statute
stated in a language too clear to be mistaken."

CHAPTER IV: SOURCES AND CONSTRUCTION OF TAX LAWS:

I. SOURCES OF TAX LAW;

A. Statutes;
B. Revenue Regulations

C. Revenue Memorandum Circulars/Orders;


BIR Revenue Administrative Order (RAO) No. 2-2001; (Separate Print)

D. BIR Rulings;
BIR Revenue Administrative Order (RAO) No. 2-2001; (Separate Print)

Revenue Regulation 5-2012; (Separate Print)

E. Opinions of the Secretary of Justice;

F. Legislative Materials;

G. Court Decision;

II. THE STATUTE:

A. Existing Tax Law;

1. National;

a. National Internal revenue Code of 1997;

b. Tariff and Customs Code;

2. Local;
a. Book II, 1991 Local Government Code
III. REVENUE REGULATIONS:

A. BIR-RR;

1. Authority to promulgate. S244;


SEC. 244. Authority of Secretary of Finance to Promulgate Rules and Regulations. - The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code.

2. Specific provisions to be contained in RR. S245;


SEC. 245. Specific Provisions to be Contained in Rules and Regulations. - The rules and
regulations of the Bureau of Internal Revenue shall, among other things, contain provisions
specifying, prescribing or defining:

(a) The time and manner in which Revenue Regional Directors shall canvass their
respective Revenue Regions for the purpose of discovering persons and property liable
to national internal revenue taxes, and the manner in which their lists and records of
taxable persons and taxable objects shall be made and kept;

(b) The forms of labels, brands or marks to be required on goods subject to an excise
tax, and the manner in which the labelling, branding or marking shall be effected;

(c) The conditions under which and the manner in which goods intended for export,
which if not exported would be subject to an excise tax, shall be labelled, branded or
marked;

(d) The conditions to be observed by revenue officers respecting the institutions and
conduct of legal actions and proceedings;

(e) The conditions under which goods intended for storage in bonded warehouses shall
be conveyed thither, their manner of storage and the method of keeping the entries
and records in connection therewith, also the books to be kept by Revenue Inspectors
and the reports to be made by them in connection with their supervision of such
houses;

(f) The conditions under which denatured alcohol may be removed and dealt in, the
character and quantity of the denaturing material to be used, the manner in which the
process of denaturing shall be effected, so as to render the alcohol suitably denatured
and unfit for oral intake, the bonds to be given, the books and records to be kept, the
entries to be made therein, the reports to be made to the Commissioner, and the signs
to be displayed in the business ort by the person for whom such denaturing is done or
by whom, such alcohol is dealt in;

(g) The manner in which revenue shall be collected and paid, the instrument,
document or object to which revenue stamps shall be affixed, the mode of cancellation
of the same, the manner in which the proper books, records, invoices and other papers
shall be kept and entries therein made by the person subject to the tax, as well as the
manner in which licenses and stamps shall be gathered up and returned after serving
their purposes;
(h) The conditions to be observed by revenue officers respecting the enforcement of
Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as
well as on gifts and such other rules and regulations which the Commissioner may
consider suitable for the enforcement of the said Title III;

(i) The manner in which tax returns, information and reports shall be prepared and
reported and the tax collected and paid, as well as the conditions under which evidence
of payment shall be furnished the taxpayer, and the preparation and publication of tax
statistics;

(j) The manner in which internal revenue taxes, such as income tax, including
withholding tax, estate and donor's taxes, value-added tax, other percentage taxes,
excise taxes and documentary stamp taxes shall be paid through the collection officers
of the Bureau of Internal Revenue or through duly authorized agent banks which are
hereby deputized to receive payments of such taxes and the returns, papers and
statements that may be filed by the taxpayers in connection with the payment of the
tax: Provided, however, That notwithstanding the other provisions of this Code
prescribing the place of filing of returns and payment of taxes, the Commissioner may,
by rules and regulations, require that the tax returns, papers and statements that may
be filed by the taxpayers in connection with the payment of the tax. Provided, however,
That notwithstanding the other provisions of this Code prescribing the place of filing of
returns and payment of taxes, the Commissioner may, by rules and regulations require
that the tax returns, papers and statements and taxes of large taxpayers be filed and
paid, respectively, through collection officers or through duly authorized agent banks:
Provided, further, That the Commissioner can exercise this power within six (6) years
from the approval of Republic Act No. 7646 or the completion of its comprehensive
computerization program, whichever comes earlier: Provided, finally, That separate
venues for the Luzon, Visayas and Mindanao areas may be designated for the filing of
tax returns and payment of taxes by said large taxpayers.

For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any of the
following criteria;

(1) Value-Added Tax (VAT) - Business establishment with VAT paid or payable of at
least One hundred thousand pesos (P100, 000) for any quarter of the preceding
taxable year;

(2) Excise tax - Business establishment with excise tax paid or payable of at least One
million pesos (P1, 000,000) for the preceding taxable year;

(3) Corporate Income Tax - Business establishment with annual income tax paid or
payable of at least One million pesos (P1,000,000) for the preceding taxable year; and

(4) Withholding tax - Business establishment with withholding tax payment or


remittance of at least One million pesos (P1,000,000) for the preceding taxable year.

Provided, however, That the Secretary of Finance, upon recommendation of the


Commissioner, may modify or add to the above criteria for determining a large taxpayer after
considering such factors as inflation, volume of business, wage and employment levels, and
similar economic factors.

The penalties prescribed under Section 248 of this Code shall be imposed on any violation of
the rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, prescribing the place of filing of returns and payments of taxes by large
taxpayers.

3. What is the force and effect of RR?;

Art. 7, Civil Code;


Article 7. Laws are repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse, or custom or practice to the contrary.

When the courts declared a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.

Administrative or executive acts, orders and regulations shall be valid only when they are not
contrary to the laws or the Constitution.

Case:
Asturias Sugar Central v Comm., 29 SCRA 617;

This is a petition for review of the decision of the Court of Tax Appeals of November 20,
1961, which denied recovery of the sum of P28,629.42, paid by the petitioner, under
protest, in the concept of customs duties and special import tax, as well as the petitioner's
alternative remedy to recover the said amount minus one per cent thereof by way of a
drawback under sec. 106 (b) of the Tariff and Customs Code.

The petitioner Asturias Sugar Central, Inc. is engaged in the production and milling of
centrifugal sugar for exert, the sugar so produced being placed in containers known as jute
bags. In 1957 it made two importations of jute bags. The first shipment consisting of
44,800 jute bags and declared under entry 48 on January 8, 1967, entered free of customs
duties and special import tax upon the petitioner's filing of Re-exportation and Special
Import Tax Bond no. 1 in the amounts of P25,088 and P2,464.50, conditioned upon the
exportation of the jute bags within one year from the date of importation. The second
shipment consisting of 75,200 jute bags and declared under entry 243 on February 8, 1957,
likewise entered free of customs duties and special import tax upon the petitioner's filing of
Re-exportation and Special Import Tax Bond no. 6 in the amounts of P42,112 and
P7,984.44, with the same conditions as stated in bond no. 1.

Of the 44,800 jute bags declared under entry 48, only 8,647 were exported within one year
from the date of importation as containers of centrifugal sugar. Of the 75,200 jute bags
declared under entry 243, only 25,000 were exported within the said period of one year. In
other words, of the total number of imported jute bags only 33,647 bags were exported
within one year after their importation. The remaining 86,353 bags were exported after the
expiration of the one-year period but within three years from their importation.

On February 6, 1958 the petitioner, thru its agent Theo. H. Davies & Co., Far East, Ltd.,
requested the Commissioner of Customs for a week's extension of Re-exportation and
Special Import Tax Bond no. 6 which was to expire the following day, giving the following as
the reasons for its failure to export the remaining jute bags within the period of one year:
(a) typhoons and severe floods; (b) picketing of the Central railroad line from November 6
to December 21, 1957 by certain union elements in the employ of the Philippine Railway
Company, which hampered normal operations; and (c) delay in the arrival of the vessel
aboard which the petitioner was to ship its sugar which was then ready for loading. This
request was denied by the Commissioner per his letter of April 15, 1958.

Due to the petitioner's failure to show proof of the exportation of the balance of 86,353 jute
bags within one year from their importation, the Collector of Customs of Iloilo, on March 17,
1958, required it to pay the amount of P28,629.42 representing the customs duties and
special import tax due thereon, which amount the petitioner paid under protest.

In its letter of April 10, 1958, supplemented by its letter of May 12, 1958, the petitioner
demanded the refund of the amount it had paid, on the ground that its request for
extension of the period of one year was filed on time, and that its failure to export the jute
bags within the required one-year period was due to delay in the arrival of the vessel on
which they were to be loaded and to the picketing of the Central railroad line. Alternatively,
the petitioner asked for refund of the same amount in the form of a drawback under section
106(b) in relation to section 105(x) of the Tariff and Customs Code.

After hearing, the Collector of Customs of Iloilo rendered judgment on January 21, 1960
denying the claim for refund. From his action, appeal was taken to the Commissioner of
Customs who upheld the decision of the Collector. Upon a petition for review the Court of
Tax Appeals affirmed the decision of the Commissioner of Customs.

The petitioner imputes three errors to the Court of Tax Appeals, namely:

1. In not declaring that force majeure and/or fortuitous event is a sufficient


justification for the failure of the petitioner to export the jute bags in question within
the time required by the bonds.

2. In not declaring that it is within the power of the Collector of Customs and/or the
Commissioner of Customs to extend the period of one (1) year within which the jute
bags should be exported.

3. In not declaring that the petitioner is entitled to a refund by way of a drawback


under the provisions of section 106, par. (b), of the Tariff and Customs Code.

1. The basic issue tendered for resolution is whether the Commissioner of Customs is
vested, under the Philippine Tariff Act of 1909, the then applicable law, with discretion to
extend the period of one year provided for in section 23 of the Act. Section 23 reads:

SEC. 23. That containers, such as casks, large metal, glass, or other receptacles
which are, in the opinion of the collector of customs, of such a character as to be
readily identifiable may be delivered to the importer thereof upon identification and
the giving of a bond with sureties satisfactory to the collector of customs in an
amount equal to double the estimated duties thereon, conditioned for the
exportation thereof or payment of the corresponding duties thereon within one year
from the date of importation, under such rules and regulations as the Insular
Collector of Customs shall provide.1

To implement the said section 23, Customs Administrative Order 389 dated December 6,
1940 was promulgated, paragraph XXVIII of which provides that "bonds for the re-
exportation of cylinders and other containers are good for 12 months without extension,"
and paragraph XXXI, that "bonds for customs brokers, commercial samples, repairs and
those filed to guarantee the re-exportation of cylinders and other containers are not
extendible."

And insofar as jute bags as containers are concerned, Customs Administrative Order 66
dated August 25, 1948 was issued, prescribing rules and regulations governing the
importation, exportation and identification thereof under section 23 of the Philippine Tariff
Act of 1909. Said administrative order provides:

That importation of jute bags intended for use as containers of Philippine products
for exportation to foreign countries shall be declared in a regular import entry
supported by a surety bond in an amount equal to double the estimated duties,
conditioned for the exportation or payment of the corresponding duties thereon
within one year from the date of importation.

It will be noted that section 23 of the Philippine Tariff Act of 1909 and the superseding sec.
105(x) of the Tariff and Customs Code, while fixing at one year the period within which the
containers therein mentioned must be exported, are silent as to whether the said period
may be extended. It was surely by reason of this silence that the Bureau of Customs issued
Administrative Orders 389 and 66, already adverted to, to eliminate confusion and provide a
guide as to how it shall apply the law, 2 and, more specifically, to make officially known its
policy to consider the one-year period mentioned in the law as non-extendible.

Considering that the statutory provisions in question have not been the subject of previous
judicial interpretation, then the application of the doctrine of "judicial respect for
administrative construction," 3 would, initially, be in order.

Only where the court of last resort has not previously interpreted the statute is the rule
applicable that courts will give consideration to construction by administrative or executive
departments of the state.41awphîl.nèt

The formal or informal interpretation or practical construction of an ambiguous or


uncertain statute or law by the executive department or other agency charged with
its administration or enforcement is entitled to consideration and the highest respect
from the courts, and must be accorded appropriate weight in determining the
meaning of the law, especially when the construction or interpretation is long
continued and uniform or is contemporaneous with the first workings of the statute,
or when the enactment of the statute was suggested by such agency. 5

The administrative orders in question appear to be in consonance with the intention of the
legislature to limit the period within which to export imported containers to one year,
without extension, from the date of importation. Otherwise, in enacting the Tariff and
Customs Code to supersede the Philippine Tariff Act of 1909, Congress would have amended
section 23 of the latter law so as to overrule the long-standing view of the Commissioner of
Customs that the one-year period therein mentioned is not extendible.

Implied legislative approval by failure to change a long-standing administrative


construction is not essential to judicial respect for the construction but is an element
which greatly increases the weight given such construction.6
The correctness of the interpretation given a statute by the agency charged with
administering its provision is indicated where it appears that Congress, with full
knowledge of the agency's interpretation, has made significant additions to the
statute without amending it to depart from the agency's view.7

Considering that the Bureau of Customs is the office charged with implementing and
enforcing the provisions of our Tariff and Customs Code, the construction placed by it
thereon should be given controlling weight.1awphîl.nèt

In applying the doctrine or principle of respect for administrative or practical construction,


the courts often refer to several factors which may be regarded as bases of the principle, as
factors leading the courts to give the principle controlling weight in particular instances, or
as independent rules in themselves. These factors are the respect due the governmental
agencies charged with administration, their competence, expertness, experience, and
informed judgment and the fact that they frequently are the drafters of the law they
interpret; that the agency is the one on which the legislature must rely to advise it as to the
practical working out of the statute, and practical application of the statute presents the
agency with unique opportunity and experiences for discovering deficiencies, inaccuracies,
or improvements in the statute; ... 8

If it is further considered that exemptions from taxation are not favored, 9 and that tax
statutes are to be construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority, 10 then we are hard put to sustain the petitioner's stand that it was
entitled to an extension of time within which to export the jute bags and, consequently, to a
refund of the amount it had paid as customs duties.

In the light of the foregoing, it is our considered view that the one-year period prescribed in
section 23 of the Philippine Tariff Act of 1909 is non-extendible and compliance therewith is
mandatory.

The petitioner's argument that force majeure and/or fortuitous events prevented it from
exporting the jute bags within the one-year period cannot be accorded credit, for several
reasons. In the first place, in its decision of November 20, 1961, the Court of Tax Appeals
made absolutely no mention of or reference to this argument of the petitioner, which can
only be interpreted to mean that the court did not believe that the "typhoons, floods and
picketing" adverted to by the petitioner in its brief were of such magnitude or nature as to
effectively prevent the exportation of the jute bags within the required one-year period. In
point of fact nowhere in the record does the petitioner convincingly show that the so-called
fortuitous events or force majeure referred to by it precluded the timely exportation of the
jute bags. In the second place, assuming, arguendo, that the one-year period is extendible,
the jute bags were not actually exported within the one-week extension the petitioner
sought. The record shows that although of the remaining 86,353 jute bags 21,944 were
exported within the period of one week after the request for extension was filed, the rest of
the bags, amounting to a total of 64,409, were actually exported only during the period
from February 16 to May 24, 1958, long after the expiration of the one-week extension
sought by the petitioner. Finally, it is clear from the record that the typhoons and floods
which, according to the petitioner, helped render impossible the fulfillment of its obligation
to export within the one-year period, assuming that they may be placed in the category of
fortuitous events or force majeure, all occurred prior to the execution of the bonds in
question, or prior to the commencement of the one-year period within which the petitioner
was in law required to export the jute bags.
2. The next argument of the petitioner is that granting that Customs Administrative Order
389 is valid and binding, yet "jute bags" cannot be included in the phrase "cylinders and
other containers" mentioned therein. It will be noted, however, that the Philippine Tariff Act
of 1909 and the Tariff and Customs Code, which Administrative Order 389 seeks to
implement, speak of "containers" in general. The enumeration following the word
"containers" in the said statutes serves merely to give examples of containers and not to
specify the particular kinds thereof. Thus, sec. 23 of the Philippine Tariff Act states,
"containers such as casks large metals, glass or other receptacles," and sec. 105 (x) of the
Tariff and Customs Code mentions "large containers," giving as examples "demijohn
cylinders, drums, casks and other similar receptacles of metal, glass or other materials."
(emphasis supplied) There is, therefore, no reason to suppose that the customs authorities
had intended, in Customs Administrative Order 389 to circumscribe the scope of the word
"container," any more than the statures sought to be implemented actually intended to do.

3. Finally, the petitioner claims entitlement to a drawback of the duties it had paid, by virtue
of section 106 (b) of the Tariff and Customs Code, 11 which reads:

SEC. 106. Drawbacks: ...

b. On Articles Made from Imported Materials or Similar Domestic Materials and


Wastes Thereof. — Upon the exportation of articles manufactured or produced in the
Philippines, including the packing, covering, putting up, marking or labeling thereof,
either in whole or in part of imported materials, or from similar domestic materials of
equal quantity and productive manufacturing quality and value, such question to be
determined by the Collector of Customs, there shall be allowed a drawback equal in
amount to the duties paid on the imported materials so used, or where similar
domestic materials are used, to the duties paid on the equivalent imported similar
materials, less one per cent thereof: Provided, That the exportation shall be made
within three years after the importation of the foreign material used or constituting
the basis for drawback ... .

The petitioner argues that not having availed itself of the full exemption granted by sec.
105(x) of the Tariff and Customs Code due to its failure to export the jute bags within one
year, it is nevertheless, by authority of the above-quoted provision, entitled to a 99%
drawback of the duties it had paid, averring further that sec. 106(b) does not presuppose
immediate payment of duties and taxes at the time of importation.

The contention is palpably devoid of merit.

The provisions invoked by the petitioner (to sustain his claim for refund) offer two options to
an importer. The first, under sec. 105 (x), gives him the privilege of importing, free from
import duties, the containers mentioned therein as long as he exports them within one year
from the date of acceptance of the import entry, which period as shown above, is not
extendible. The second, presented by sec. 106 (b), contemplates a case where import
duties are first paid, subject to refund to the extent of 99% of the amount paid, provided
the articles mentioned therein are exported within three years from importation.

It would seem then that the Government would forego collecting duties on the articles
mentioned in section 105(x) of Tariff and Customs Code as long as it is assured, by the
filing of a bond, that the same shall be exported within the relatively short period of one
year from the date of acceptance of the import entry. Where an importer cannot provide
such assurance, then the Government, under sec. 106(b) of said Code, would require
payment of the corresponding duties first. The basic purpose of the two provisions is the
same, which is, to enable a local manufacturer to compete in foreign markets, by relieving
him of the disadvantages resulting from having to pay duties on imported merchandise,
thereby building up export trade and encouraging manufacture in the country. 12 But there
is a difference, and it is this: under section 105(x) full exemption is granted to an importer
who justifies the grant of exemption by exporting within one-year. The petitioner, having
opted to take advantage of the provisions of section 105(x), may not, after having failed to
comply with the conditions imposed thereby, avoid the consequences of such failure by
being allowed a drawback under section 106(b) of the same Act without having complied
with the conditions of the latter section.

For it is not to be supposed that the legislature had intended to defeat compliance with the
terms of section 105(x) thru a refuge under the provisions of section 106(b). A construction
should be avoided which affords an opportunity to defeat compliance with the terms of a
statute. 13 Rather courts should proceed on the theory that parts of a statute may be
harmonized and reconciled with each other.

A construction of a statute which creates an inconsistency should be avoided when a


reasonable interpretation can be adopted which will not do violence to the plain words of the
act and will carry out the intention of Congress.

In the construction of statutes, the courts start with the assumption that the
legislature intended to enact an effective law, and the legislature is not to be
presumed to have done a vain thing in the enactment of a statute. Hence, it is a
general principle, embodied in the maxim, "ut res magis valeat quam pereat," that
the courts should, if reasonably possible to do so without violence to the spirit and
language of an act, so interpret the statute to give it efficient operation and effect as
a whole. An interpretation should, if possible, be avoided under which a statute or
provision being construed is defeated, or as otherwise expressed, nullified,
destroyed, emasculated, repealed, explained away, or rendered insignificant,
meaningless, inoperative, or nugatory. 14

ACCORDINGLY, the judgment of the Court of Tax Appeals of November 20, 1961 is
affirmed, at petitioner's cost.

IV. BIR RULINGS:

A. Power of CIR to Interpret Tax Laws. S4;


SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of Internal Revenue is vested in
the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

B. Non-Retroactivity of Rulings; S246;


SEC. 246. Non- Retroactivity of Rulings. - Any revocation, modification or reversal of any of
the rules and regulations promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the taxpayers,
except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.

Cases:
CIR v Burroughs Ltd., G.R. 66653. June 19, 1986;

Petition for certiorari to review and set aside the Decision dated June 27, 1983 of
respondent Court of Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited
vs. Commissioner of Internal Revenue" which ordered petitioner Commissioner of Internal
Revenue to grant in favor of private respondent Burroughs Limited, tax credit in the sum of
P172,058.90, representing erroneously overpaid branch profit remittance tax.

Burroughs Limited is a foreign corporation authorized to engage in trade or business in the


Philippines through a branch office located at De la Rosa corner Esteban Streets, Legaspi
Village, Makati, Metro Manila.

Sometime in March 1979, said branch office applied with the Central Bank for authority to
remit to its parent company abroad, branch profit amounting to P7,647,058.00. Thus, on
March 14, 1979, it paid the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2)
(ii) and remitted to its head office the amount of P6,499,999.30 computed as follows:

Amount applied for remittance................................ P7,647,058.00

Deduct: 15% branch profit

remittance tax ..............................................1,147,058.70

Net amount actually remitted.................................. P6,499,999.30

Claiming that the 15% profit remittance tax should have been computed on the basis of the
amount actually remitted (P6,499,999.30) and not on the amount before profit remittance
tax (P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the
refund or tax credit of the amount of P172,058.90 representing alleged overpaid branch
profit remittance tax, computed as follows:

Profits actually remitted .........................................P6,499,999.30

Remittance tax rate .......................................................15%

Branch profit remittance tax-

due thereon ......................................................P 974,999.89


Branch profit remittance

tax paid .............................................................Pl,147,058.70

Less: Branch profit remittance

tax as above computed................................................. 974,999.89

Total amount refundable........................................... P172,058.81

On February 24, 1981, private respondent filed with respondent court, a petition for review,
docketed as C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of
P172,058.81.

On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which
reads—

ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered to grant a


tax credit in favor of petitioner Burroughs Limited the amount of P 172,058.90. Without
pronouncement as to costs.

SO ORDERED.

Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant
petition before this Court with the prayers as herein earlier stated upon the sole issue of
whether the tax base upon which the 15% branch profit remittance tax shall be imposed
under the provisions of section 24(b) of the Tax Code, as amended, is the amount applied
for remittance on the profit actually remitted after deducting the 15% profit remittance tax.
Stated differently is private respondent Burroughs Limited legally entitled to a refund of the
aforementioned amount of P172,058.90.

We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24
(b) (2) (ii) which states:

Sec. 24. Rates of tax on corporations....

(b) Tax on foreign corporations. ...

(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a
branch to its head office shall be subject to a tax of fifteen per cent (15 %) ...

In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting
Commissioner of Internal Revenue Hon. Efren I. Plana the aforequoted provision had been
interpreted to mean that "the tax base upon which the 15% branch profit remittance tax ...
shall be imposed...(is) the profit actually remitted abroad and not on the total branch profits
out of which the remittance is to be made. " The said ruling is hereinbelow quoted as
follows:

In reply to your letter of November 3, 1978, relative to your query as to the


tax base upon which the 15% branch profits remittance tax provided for
under Section 24 (b) (2) of the 1977 Tax Code shall be imposed, please be
advised that the 15% branch profit tax shall be imposed on the branch profits
actually remitted abroad and not on the total branch profits out of which the
remittance is to be made.

Please be guided accordingly.

Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an
overpayment in the amount of P172,058.90 which is the difference between the remittance
tax actually paid of Pl,147,058.70 and the remittance tax that should have been paid of
P974,999,89, computed as follows

Profits actually remitted......................................... P6,499,999.30

Remittance tax rate.............................................................. 15%

Remittance tax due................................................... P974,999.89

is well-taken. As correctly held by respondent Court in its assailed decision-

Respondent concedes at least that in his ruling dated January 21, 1980 he
held that under Section 24 (b) (2) of the Tax Code the 15% branch profit
remittance tax shall be imposed on the profit actually remitted abroad and
not on the total branch profit out of which the remittance is to be made.
Based on such ruling petitioner should have paid only the amount of
P974,999.89 in remittance tax computed by taking the 15% of the profits of
P6,499,999.89 in remittance tax actually remitted to its head office in the
United States, instead of Pl,147,058.70, on its net profits of P7,647,058.00.
Undoubtedly, petitioner has overpaid its branch profit remittance tax in the
amount of P172,058.90.

Petitioner contends that respondent is no longer entitled to a refund because Memorandum


Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of
January 21, 1980. The said memorandum circular states—

Considering that the 15% branch profit remittance tax is imposed and
collected at source, necessarily the tax base should be the amount actually
applied for by the branch with the Central Bank of the Philippines as profit to
be remitted abroad.

Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still
the Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid
the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No.
8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of
the National Internal Revenue Code which provides-

Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or


reversal of any of the rules and regulations promulgated in accordance with
the preceding section or any of the rulings or circulars promulgated by the
Commissioner shag not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-
CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)

The prejudice that would result to private respondent Burroughs Limited by a retroactive
application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of
the substantial amount of P172,058.90. And, insofar as the enumerated exceptions are
concerned, admittedly, Burroughs Limited does not fall under any of them.

WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED.
No pronouncement as to costs.

CIR v Mega Gen. Merchandising 166 SCRA 166;

This is a petition for review of the decision of the Court of Tax Appeals, promulgated on May
21, 1984, in CTA Case No. 3078 entitled "Mega General Merchandising Corporation vs.
Commissioner of Internal Revenue," holding that respondent corporation is not liable for
specific tax in the sum of P275,652.00 on its importations of crude paraffin wax on June 21
and August 17, 1977 under Section 142(i) of the Tax Code, as amended by P.D. No. 392,
but to 7% advance sales tax, (now Section 197 II) in relation to Section 186 (now Section
200 of the Tax Code) and further ordering the Commissioner of Internal Revenue to refund
or credit to petitioner the said assessment (Rollo, Annex "C", pp. 38-47).

The antecedent facts of this case are as follows:

Prior to the promulgation of P.D. No. 392 on February 18, 1974, all importations of paraffin
wax, irrespective of kind and nature, were subject to 7% advance sales tax on landed costs
plus 25% mark up pursuant to Section 183(b) now Section 197(II) in relation to Section
186 (now Section 200) of the Tax Code.

With the promulgation of P.D. No. 392, a new provision for the imposition of specific tax
was added to Section 142 of the Tax Code, that is, sub- section (i) which reads:

Section 142. Specific tax on manufactured oils and other fuels.—On refined
and manufactured mineral oils and other motor fuels, there shall be collected
the following taxes:

xxx xxx xxx

(i) Greases, waxes and petroleum, per kilogram, thirty-five centavos; ...

Therefore, beginning February 18,1974, the date of effectivity of P.D. No. 392, all
importations of paraffin wax were subject to the specific tax imposed under Section 142(i)
of the Tax Code, instead of the former 7% sales tax.

Hence, respondent corporation paid the corresponding specific tax thereon in the total
amount of P177,750.00 which applies to its total importation of crude paraffin on April 18,
1975, or exactly 1 year and 2 months after the effectivity of P.D. No. 392.
On April 22, 1975, the respondent corporation wrote the Commissioner of Internal Revenue
for clarification as to whether imported crude paraffin wax is subject to specific tax under
Section 142 (i) of the Tax Code, as amended by P.D. No. 392, or to the 7% advance sales
tax.

Former Commissioner Misael P. Vera in his reply to said query dated May 14, 1975
ruled that only wax used as high pressure lubricant and micro crystallin is subject to specific
tax; that paraffin which was used as raw material in the manufacture of candles, wax paper,
matches, crayons, drugs, appointments etc., is subject to the 7% advance sales tax, the tax
to be based on the landed cost thereof, plus 25% mark-up.

Due to Commissioner Vera's ruling of May 14, 1975, several importers including respondent
corporation filed several claims for tax refund or tax credit of specific tax paid by them on
importation of crude paraffin wax.

Considering that respondent corporation had paid the amount of P477,750.00 as specific tax
pursuant to Section 142(i) of the Tax Code on its importation of crude paraffin wax on April
18, 1975 (an amount bigger than the 7% advance sales tax prescribed under Section
183(b) (now Section 197 II) in relation to Section 186 (now Sec. 200 of the Tax Code)
respondent corporation in a letter, dated November 27, 1975, requested for a refund or tax
credit of the amount of P321,436.79 representing the difference between the amount paid
as specific tax and the 7% advance sales tax.

Since the law (Section 142(i) of the Tax Code, amended by P.D. No. 392) does not make
any distinction as to the kind of wax subject to specific tax, then Acting Commissioner of
Internal Revenue Efren I. Plana, on January 28, 1977 denied respondent Corporation's claim
for refund or tax credit of the amount of P321,436,79. On this ruling, respondent
corporation filed a request for reconsideration. This was denied by petitioner.

During the pendency of respondent corporation's request for reconsideration, an


investigation was conducted by the Bureau of Internal Revenue in connection with the
importations of wax and petroleum that arrived in the country on or subsequent to the date
of the ruling of January 28, 1977 and it was ascertained that respondent Corporation owes
the government specific tax for importation of 1,214,400 kilograms of paraffin wax on June
21, 1977 and August 17, 1977 which gave rise to the letter of assessment dated May 8,
1978 for P275,652.00 re the subject matter in this case.

Prior, however, to the issuance of the said letter of assessment of May 8, 1978, petitioner in
a letter dated January 11, 1978, granted respondent corporation's claim for refund or tax
credit of the amount of P321,436.79 since the importation which had arrived in Manila on
April 18, 1975 was covered by the ruling of May 14, 1975 (before its revocation by the
ruling of January 28, 1977).

Respondent corporation protested the tax assessment of May 8,1978 in the amount of
P275,652.00 in a letter dated June 5, 1978 alleging that crude paraffin wax is subject to 7%
advance sales tax pursuant to petitioner's ruling of May 14, 1975. The protest was denied
by petitioner in a letter dated February 15, 1980.

During the pendency of the request of respondent corporation for reconsideration, it


appealed to respondent Court of Tax Appeals (Annex "A", Rollo, pp. 26-35) and petitioner
filed his answer on September 10, 1980 (Annex "B", Rollo, pp. 3647).
On May 21,1984, respondent Court of Tax Appeals rendered its decision, the dispositive
portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue appealed


from is hereby reversed. Petitioner is not liable for specific tax on its
importation of crude paraffin wax in the sum of P275,652.00 imposed against
petitioner, but only subject to the 7% advance sales tax which petitioner had
already paid. Accordingly, respondent is hereby ordered to refund or credit
petitioner specific tax it paid in the sum of P275,652.00. Without
pronouncement as to costs.

SO ORDERED.

(p. 9, Decision; p. 46, Rollo)

This was later amended to read:

WHEREFORE the decision of the Commissioner of Internal Revenue appealed


from is hereby reversed. Petitioner is not liable for specific tax on its
importation of crude paraffin wax in the sum of P275,652.00 imposed against
petitioner but only subject to the 7% D advance sales tax which petitioner
had already paid. Without pro- announcement as to costs.

SO ORDERED.

Hence, this petition filed on January 15, 1984 (Rollo, pp. 824).

The sole issue raised by petitioner is whether or not respondent corporation's importation of
crude paraffin wax on June 21 and August 17, 1977 are subject to specific tax under Section
142(i) of the Tax Code, as amended by P.D. No. 392, promulgated on February 18, 1974.

Petitioner contends that the controlling interpretation is that given by Commissioner Plana
and not that of Commissioner Vera.

Petitioner further argues that respondent corporation's request for refund of the amount of
P321,436.79 was granted in the letter of petitioner dated January 11, 1978 because the
importation of private respondent was made on April 18,1975 wherein petitioner made clear
that all importation of crude paraffin wax only after the ruling of January 28, 1977, is
subject to specific tax prescribed in Section 142(i) of the Tax Code as amended by P.D. No.
392.

Moreover, the importation which gave rise to the assessment in the amount of P275,652.00
subject of this case, was made on June 27, 1977 and August 17, 1977 and that the
petitioner's ruling of January 28,1977 was not revoked or overruled by his letter of January
11, 1978 granting respondent corporation's request for refund of the amount of
P321,436.79.

Petitioner's contention is completely meritorious.

The Court of Tax Appeals' decision aptly stated:


It will be starkly noted that in a ruling of respondent Commissioner of Internal
Revenue dated January 11, 1978 (p. 204, BIR Rec.), the request for
reconsideration of petitioner of the ruling holding it liable for specific tax and
for the tax credit of the sum of P321,436.79 paid as specific tax was granted
by the Commissioner of Internal Revenue. In effect, this ruling overrules that
of January 28, 1977 holding petitioner liable for specific tax on its
importations of crude paraffin wax. The ruling of January 11, 1978 having
overruled that of January 28, 1977, the importations of crude paraffin made
on June 21 and August 17, 1977 ostensibly became once more subject to the
ruling of May 14, 1975 which held such importation of crude paraffin wax as
not liable to specific tax under the provisions of Section 142(i) of the National
Internal Revenue Code, as amended by PD 392. In other words, there was no
other ruling which is prior to or was made to apply to the importations of
petitioner of crude paraffin wax on June 21 and August 17, 1977, except only
that ruling of the Commissioner of Internal Revenue of May 14, 1975 which
applied Section 142(i), as amended by PD 392, of the National Revenue Code,
which took effect on February 18, 1974, and that this provision of Section
142(i), as amended, has remained unchanged since then. It is clearly and
legally justified to conclude that this ruling of the Commissioner of Internal
Revenue of May 14, 1975 shall prospectively apply in favor of the
importations of crude paraffin wax on June 21 and August 17, 1977 in
question. This is the ruling which assured the taxpayer, Mega General
Merchandising Corporation, that for its importations of crude paraffin wax, it
shall only be liable to 7% advance sales tax and no more. To make petitioner
liable for specific tax after it has made the importations, would surely
prejudice petitioner as it would be subject to a tax liability of which the
Bureau of Internal Revenue has not made it fully aware. As a result, the
rulings of May 8, 1978 and February 15, 1980 having been issued long after
the importations on June 21 and August 1 7, 1977 in question cannot be
applied with legal effect in this case because to do so will violate the
prohibition against retroactive application of the rulings of executive bodies.
Rulings or circulars promulgated by the Commissioner of Internal Revenue,
such as the rulings of January 28, 1977 and those of May 8, 1978 and
February 15, 1980, can not have any retroactive application, where to do so,
as it did in the case at bar, would prejudice the taxpayer. (ABS-CBN
Broadcasting Corp. vs. Court of Tax Appeals & Com. of Int. Revenue, G.R. No.
L-523b6, October 23, 1981). Also, the re-enactment of Section 142(i) of the
National Internal Revenue Code, as amended by PD 392, which provision of
law has substantially remained unchanged is a clear indication that Congress
has adopted its prior executive construction and which means that imported
crude paraffin wax is not subject to specific tax thereunder pursuant to the
BIR ruling dated May 14, 1975. (Alexander Howden & Co., Ltd. vs. Coll. of
Int. Rev., 13 SCRA 601). (pp. 11-13, Petition; pp. 18-20, Rollo)

Contrary to the Court of Tax Appeals' ruling, We believe that the letter of Commissioner
Plana dated January 11, 1978 did not in any way revoke his ruling dated January 28,1977
which ruling applied the specific tax to wax (without distinction). The reason he removed in
1978 private respondent's liability for the specific tax was NOT (as erroneously pointed out
by the Court of Tax Appeals) because he wanted to revoke, expressly or implicitly, his ruling
of January 28, 1977 but because the P321,436.79 tax referred to importation BEFORE
January 28, 1977 and hence still covered by the ruling of Commissioner Vera, and not by
the January 28,1977 ruling of Commissioner Plana.
PREMISES CONSIDERED, the decision of the Court of Tax Appeals is hereby REVERSED and
SET ASIDE, and the private respondent is ordered to pay the tax as assessed by the
Commissioner of Internal Revenue, together with interest. No costs.

1. Exceptions;

Case:
PBCOM vs. CIR 302 SCRA 241;
FACTS: Petitioner, Philippine Bank of Communications (PBCom), a commercial banking
corporation duly organized under Philippine laws, filed its quarterly income tax returns for the
first and second quarters of 1985, reported profits, and paid the total income tax of
P5,016,954.00 by applying PBCom's tax credit memos for P3,401,701.00 and P1,615,253.00,
respectively. Subsequently, however, PBCom suffered net loss of P25,317,228.00, thereby
showing no income tax liability in its Annual Income Tax Returns for the year-ended December
31, 1985. For the succeeding year, ending December 31, 1986, the petitioner likewise
reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees
withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal
Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of
taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld
by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner


instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA).
The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications
vs. Commissioner of Internal Revenue."

The CTA decided in favor of the BIR on the ground that the Petition was filed out of time as
the same was filed beyond the two-year reglementary period. A motion for Reconsideration
was denied and the appeal to Court of Appeals was likewise denied. Thus, this appeal to
Supreme Court.

ISSUE:
a) W/N Revenue Regulations No. 7-85 which alters the reglementary period from two (2)
years to ten (10) years is valid?

b) W/N the petition for tax refund had already prescribed?

HELD:
RR 7-85 altering the 2-year prescriptive period imposed by law to 10-year prescriptive period
is invalid.

Administrative issuances are merely interpretations and not expansions of the provisions of
law, thus, in case of inconsistency, the law prevails over them. Administrative agencies have
no legislative power.
“When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.”

“It bears repeating that Revenue memorandum-circulars are considered administrative


rulings (in the sense of more specific and less general interpretations of tax laws) which are
issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that
the interpretation placed upon a statute by the executive officers, whose duty is to enforce it,
is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive
and will be ignored if judicially found to be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with,
the law they seek to apply and implement.”

“Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents. As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do
so would, in effect, amend the statute.”

By implication of the above, claim for refund had already prescribed.

Since the petition had been filed beyond the prescriptive period, the same has already
prescribed. The fact that the final adjusted return show an excess tax credit does not
automatically entitle taxpayer claim for refund without any express intent.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed
from is AFFIRMED, with COSTS against the petitioner.

V. CONSTRUCTION OF TAX LAW:

A. General Rules of Construction of Tax Laws;

Case:
Stevedoring v Trinidad, 43 Phil. 803;
FACTS: Luzon Stevedoring Corp imported various engine parts and other equipment for
tugboat repair and maintenance in 1961 and 1962. It paid the assessed compensation tax
under protest. Unable to secure a tax refund from the Commissioner for the amount of
P33,442.13, it filed a petition for review with the Court of Tax Appeals. The CTA denied the
petition as well as the motion for reconsideration filed thereafter. Hence, this petition.

ISSUE: W/N the Corporation exempt from compensation tax?

HELD:
No, As the power of taxation is a high prerogative of sovereignty, the relinquishment of such
is never presumed and any reduction or diminution thereof with respect to its mode or its
rate, must be strictly construed, and the same must be couched in clear and unmistakable
terms in order that it may be applied.
The corporation’s tugboats do not fall under the categories of passenger or cargo vessels to
avail of the exemption from compensation tax in Section 190 of the Tax Code. It may be
further noted that the amendment of Section 190 of Republic Act of 3176 was intended to
provide incentives and inducements to bolster the shipping industry and not in the business
of stevedoring, in which the corporation is engaged in.

Thus, Luzon Stevedoring Corp is not exempt from compensation tax under Section 190, and
is thus not entitled to refund.

B. Mandatory vs. Directory Provisions;

A Mandatory provision declares or imposes a duty or requirement that must be followed.

A Directory provision sets forth procedures or " confers discretion on the legislature" for
its implementation.

Case:
SERAFICA V TREASURER OF ORMOC CITY, 27 SCRA 110;
FACTS: Serafica seeks to nullify Ordinance 13 imposing a tax on every 1,000 board feet of
lumber. He contends that the charter of Ormoc authorizes it to regulate and not tax. He
alleges that the tax on the lumber constitutes double taxation.

ISSUE: W/N the city authorized to tax?

HELD:
Yes, Under the Local Autonomy Act, the power is broad and sufficiently plenary to cover
everything, except those mentioned. Regulation and taxation are two different things, the
first being an exercise of police power and the latter is not. Double taxation is not prohibited
in the Philippines.

C. Application of Tax Laws;

Tax law in the Philippines covers national and local taxes. National taxes refer to national
internal revenue taxes imposed and collected by the national government through the Bureau
of Internal Revenue (BIR) and local taxes refer to those imposed and collected by the local
government.
Part II – INCOME TAXATION

Chapter I – General Principles

I. Features of Philippine Income Taxation;


a) Direct tax;

b) Progressive;

c) Comprehensive;

d) Semi-schedular or semi-global tax system;

A. Tax Situs;
Situs of taxation literally means place of taxation.

a. Nationality;

b. Residence;

c. Source;

B. Progressive vs. Regressive System of Taxation;


A progressive tax is defined as a tax whose rate increases as the payer's income increases.
That is, individuals who earn high incomes have a greater proportion of their incomes taken
to pay the tax.

A regressive tax, on the other hand, is one whose rate increases as the payer's income
decreases.

Warren Buffett Rule: Class Warfare or Tax Fairness?


http://abcnews.go.com/Business/nobel-prize-winner-joseph-stiglitz-raising-
taxes-class/story?id=14554508

In proposing the "Buffett Rule," President Obama is invoking a name synonymous with
success to raise taxes for the wealthy in what political analysts are saying will be a tough sell
to Congress.

The chairman and chief executive of investment company Berkshire Hathaway is widely
known to have friends on both sides of the aisle, including former Treasury Secretary Henry
Paulsen and Federal Reserve chairman Ben Bernanke - both Republicans. Of course, he is
known for being a billionaire businessman who lives rather modestly in Omaha, Neb.

In opposition to the Buffett Rule, Republicans have attacked the president's proposed tax
hikes, crying "class warfare."
"Class warfare will simply divide this country more. It will attack job creators, divide people
and it doesn't grow the economy," Rep. Paul Ryan said on FOX News Sunday. "Class warfare
may make for really good politics, but it makes for rotten economics."

Joseph Stiglitz, Nobel prize winner in economics and professor at Columbia University, said
he disagrees.

"It's not class warfare to ask everyone in the country to pay their fair share. To say the
wealthy have taken advantage of their political position and have not paid their share of taxes
is not class warfare. It's a statement of fact," Stiglitz told ABC News. "The fact is they are
paying lower taxes and most Americans think this is unjust and unfair. Tax loopholes don't
just appear out of thin air. They are the result of big political investments that rich people
have particularly made to get tax preferences."

In an ABC/Washington Post poll in July, 72 percent of those surveyed supported raising taxes
on people with incomes of more than $250,000 a year to help reduce the national debt while
55 percent supported it strongly. That was the most popular of nine different debt-reduction
approaches tested and the only one to win majority "strong" support. The next closest was
raising the amount of income taxable for Social Security purposes.

Stiglitz said there is "no justification" why hedge funds should be taxed at a lower rate than
workers. He said it is possible that raising taxes by 0.5 percent, particularly with millionaires,
could raise GDP by 1 to 1.5 percentage points.

"This could make a significant contribution to the country, especially if we spend it well," he
said. "So from economic point of view, the current tax system is a distortion and this is partial
fix for that distortion."

Buffett and billionaire George Soros have also has said if the wealthy make certain sacrifices,
it could be a sign of national solidarity.

"It's a good sign that responsible successful investors say it will strengthen our economy and
won't undermine investment," Stiglitz said. "They think the system is unfair. And I think it's
a great tribute to them that they say this."

Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life, said many
former presidents and legislators have asked Buffett for his advisory services. She said
Obama's working relationship with Buffett most likely began when the president asked him to
join his Transition Economic Advisory Board in 2008.

She said naming the new tax rule after Buffett is a sales tactic to reach a broad base.

"Just by using one word, Buffett, you sum up three ideas," Schroeder said. "First, he is
egalitarian."

Buffett has long noted that the poor inordinately carry the country's tax burden. He has said
the super-wealthy often pay little because their investment gains are not taxed as income. In
August, Buffett wrote an op-ed for the New York Times in which he said last year his federal
tax bill was $6,938,744, only 17.4 percent of his taxable income. That is lower than what the
other 20 people in his office paid, which ranged from 33 percent to 41 percent and averaged
36 percent.
President Obama quickly mentioned the op-ed the next day. The president has also asked for
Buffett's guidance, among that of other business leaders, for his jobs plan.

Roger Lowenstein, author of Buffett: The Making of an American Capitalist, said Buffett has
always been "slightly left of center" in advocating for a progressive tax system, because the
Depression shaped most of his political views.

"His father was a conservative congressman, but Warren saw that an active government in
the New Deal stopped some bleeding when the country was in trouble," Lowenstein said. "I
think he grew up with that mindset: the government can help and people who can contribute
should."

Second, Schroeder said Buffett is the symbol of financial success, which symbolizes that the
tax will work because Buffett has been enormously successful in business. Buffett reportedly
said he approves that Obama chose to name the rule after him.

The third idea the Buffett rule can invoke is that the American people can actually relate to
him, despite being a multi-billionaire.

"He's down to earth, the one billionaire that everyone can relate to, as opposed to the yacht
crowd or mansion crowd," Schroeder said. "If you take him to a nice French restaurant, he
won't know what to order. He's a steak and hamburger person."

Schroeder said Buffett does not have a lavish lifestyle. He does not have a home in the
Hamptons, nor a yacht, and his home in Omaha has not been renovated in 30 years. She said
his second home in Laguna Beach, Calif., is mostly used by his children, as Buffett does not
often go on vacation.

"He's lived in Omaha all his life," she said. "He loves Wendy's hamburgers. He doesn't collect
art. He just doesn't have the trappings of the rich and famous in any respect."

Erica Payne, founder of the advocacy group The Agenda Project and coordinator of the
Patriotic Millionaires for Fiscal Strength, said her organization supports any name for the
proposed rule if it helps to obtain Congress' approval.

Payne said her organization reached out to Buffett, and while he did not decline the invitation
to join the organization's petition, he usually "operates independently."

The Patriotic Millionaires, now numbering 200, are a group of wealthy individuals who began
petitioning the president last year to allow the Bush tax cuts on incomes greater than $1
million to expire at the end of 2010. Despite the extension of the Bush tax cuts, the group
has continued to push legislators. The organization is now petitioning before the final 10
weeks before the super committee's deadline to consider taxing the wealthy for the deficit
reduction plan. The Patriotic Millionaires are targeting millionaire politicians who may oppose
the Buffett rule, including Reps. Paul Ryan, R-Wis., Ron Paul, R-Texas, John Boehner, R-Ohio,
Eric Cantor, R-Va., Sen. John McCain, R-Ariz. and Sen. Orrin Hatch, R-Utah.

C. Global vs. Schedular System of Taxation;


A schedular income tax is one in which separate taxes are imposed on different categories
of income.
A global income tax is one in which a single tax is imposed on all income, whatever its
nature. “natural person,” and refers to the tax as individual income tax or personal income
tax.

II. General Principles of Income Taxation S23;


SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise
provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the
Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income derived from sources
within the Philippines: Provided, That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated as
an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and
without the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the


Philippines, is taxable only on income derived from sources within the Philippines.

III. Scope of Income Taxation;

A. Definition of Terms S22;

B. Taxpayer S22(N);
(N) The term 'taxpayer' means any person subject to tax imposed by this Title.

C. Persons S22(A);
(A) The term 'person' means an individual, a trust, estate or corporation.

D. Case:
“Persons liable to tax”
CIR vs. Procter & Gamble 204 SCRA 378;
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes
down to 15% ONLY IF the country of domicile of the foreign stockholder corporation “shall
allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,”
applicable against the tax payable to the domiciliary country by the foreign stockholder
corporation. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a
minimum, reach an amount equivalent to 20 percentage points
FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole
stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend
withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the
Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section
24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369,
the applicable rate of withholding tax on the dividends remitted was only 15%.

ISSUE: W/N P&G Philippines is entitled to the refund or tax credit?

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

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

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


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

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

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

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

P 65.00 -- dividends remittable


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

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

P35 is the income tax paid.


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

Reason behind the law:


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

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


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

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

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

E. Revenue Regulation 1-2011; (Separate Print)

F.http://www.bloomberg.com/news/articles/2016-10-11/instagram-stars-
beware-indonesia-s-taxmen-are-coming-for-you

Chapter II – Classification of Income Taxpayers [Definitions]

G. Individuals;

a. Citizens S1 – S2, Art IV 1987 Constitution;


Section 1. The following are citizens of the Philippines:
[1] Those who are citizens of the Philippines at the time of the adoption of this Constitution;

[2] Those whose fathers or mothers are citizens of the Philippines;

[3] Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship
upon reaching the age of majority; and

[4] Those who are naturalized in accordance with law.

i. Resident Citizens;

ii. Non-Resident Citizens S22(E);


(E) The term 'nonresident citizen' means;

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.

(4) A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the Philippines
shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in
the Philippines with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be for purpose of this Section.

b. Alien;

i. Resident Alien; S22(F);


(F) The term 'resident alien' means an individual whose residence is within the Philippines and
who is not a citizen thereof.

Sec 5 last par, Revenue Regulations No. 2;

ii. Non-resident Alien S22(G);


(G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.

1. engaged in trade or business;


2. not engaged in trade or business;

c. General Professional Partnership S22(B);


(B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.

i. Tan vs. CIR GR L-109289 October 3, 1994;


FACTS: Two consolidated cases assail the validity of RA 7496 or the Simplified Net Income
Taxation Scheme ("SNIT"), which amended certain provisions of the NIRC, as well as the
Rules and Regulations promulgated by public respondents pursuant to said law.

Petitioners posit that RA 7496 is unconstitutional as it allegedly violates the following


provisions of the Constitution:

- Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject
which shall be expressed in the title thereof.

- Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.

- Article III, Section 1 — No person shall be deprived of . . . property without due process of
law, nor shall any person be denied the equal protection of the laws.

Petitioner contends that the title of HB 34314, progenitor of RA 7496, is deficient for being
merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and
Professionals Engaged in the Practice of their Profession"(Petition in G.R. No. 109289) when
the full text of the title actually reads, 'An Act Adopting the Simplified Net Income Taxation
Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession,
Amending Sections 21 and 29 of the National Internal Revenue Code,' as amended. Petitioners
also contend it violated due process.

Petitioners also contended that public respondents exceeded their rule-making authority in
applying SNIT to general professional partnerships.

The several propositions advanced by petitioners revolve around the question of whether or
not public respondents have exceeded their authority in promulgating Section 6, Revenue
Regulations No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership (GPP) and
the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net
profit of the partnership, only the direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by partners in their individual
capacities in the practice of their profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not deductible from his gross income
The real objection of petitioners is focused on the administrative interpretation of public
respondents that would apply SNIT to partners in general professional partnerships. Hence,
this petition.

ISSUE: (Only first issue is relevant to the topic. Included other issues just in case.)

1. W/N SNIT is applicable to the GPP itself or to professionals in a GPP only

HELD: SNIT is applicable to the partners in a general professional partnership and NOT on
the GPP itself.

A general professional partnership, unlike an ordinary business partnership (which is treated


as a corporation for income tax purposes and so subject to the corporate income tax), is not
itself an income taxpayer. The income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their individual capacity computed on
their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been
amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax only in
their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or otherwise,
shall be returned for taxation and the tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner—
(1) Shall take into account separately his distributive share of the partnership's income, gain,
loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.”

There is, then and now, no distinction in income tax liability between a person who practices
his profession alone or individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common profession. Indeed, outside of the
gross compensation income tax and the final tax on passive investment income, under the
present income tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of rules.

The Tax Code classifies taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable
both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships."
Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and
thus alluded to as "taxable partnerships") which, for purposes of the above categorization,
are by law assimilated to be within the context of, and so legally contemplated as,
corporations. Except for few variances, such as in the application of the "constructive receipt
rule" in the derivation of income, the income tax approach is alike to both juridical persons.
Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions
in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor
even considered as independent taxable entities for income tax purposes. A general
professional partnership is such an example.4 Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration
and data]), are liable for the payment of income tax in their individual capacity computed on
their respective and distributive shares of profits. In the determination of the tax liability, a
partner does so as an individual, and there is no choice on the matter. In fine, under the Tax
Code on income taxation, the general professional partnership is deemed to be no more than
a mere mechanism or a flow-through entity in the generation of income by, and the ultimate
distribution of such income to, respectively, each of the individual partners.

2. Whether or not the tax law is unconstitutional for violating due process

HELD: NO. The due process clause may correctly be invoked only when there is a clear
contravention of inherent or constitutional limitations in the exercise of the tax power. No
such transgression is so evident in herein case.

1. Uniformity of taxation, like the concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated, are to be treated alike both in privileges
and liabilities. Uniformity does not violate classification as long as: (1) the standards that are
used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve
the legislative purpose, (3) the law applies, all things being equal, to both present and future
conditions, and (4) the classification applies equally well to all those belonging to the same
class.

2. What is apparent from the amendatory law is the legislative intent to increasingly shift the
income tax system towards the schedular approach in the income taxation of individual
taxpayers and to maintain, by and large, the present global treatment on taxable
corporations. The Court does not view this classification to be arbitrary and inappropriate.

3. Whether or not public respondents exceeded their authority in promulgating the


RR

HELD: No. There is no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the income tax treatment
of professionals who practice their respective professions individually and of those who do it
through a general professional partnership.

H. Estates & Trusts;


d. Definition of an “Estate” & “Trusts”;
Estates and Trusts.
Generally, a trust is a right in property (real or personal) which is held in a fiduciary
relationship by one party for the benefit of another. The trustee is the one who holds title to
the trust property, and the beneficiary is the person who receives the benefits of the trust.

e. CIR v Visayas Electric 23 SCRA 715;


FACTS: Visayan Electric Co. (Visayan) holds a legislative franchise to operate and maintain
an electric light, heat, and power system in Cebu City, some municipalities in the Province of
Cebu and other surrounding places. It established a pension fund known as the Employees
Reserve for Pensions for the benefit of its present and future employees in the event of a
retirement, accident, and disability. An amount is set aside for this purpose every month and
is taken from the gross operating receipts of the company. This reserve fund was later
invested by the company in stocks of San Miguel Brewery, Inc. for which dividends have been
regularly received but these dividends were not declared for tax purposes.
The Auditor General sent Visayan a letter in 1949, informing them that since the company
retained full control of the fund, the dividends are therefore not tax exempt but that such
dividends may be excluded from gross receipts for franchise tax purposes provided that they
are declared for income tax purposes. Because of this, the Provincial Auditor of Cebu allowed
the company the option to declare the dividends either as part of the company’ s income for
income tax purposes or as part of its income for franchise tax purposes. The company chose
the latter.

The Revenue Examiner of Cebu conducted a separate investigation for the BIR and also
discovered that the company is the custodian or has complete control of the fund but
disagreed with the Provincial Auditor and instead considered the dividends as subject to the
corporate income tax under Sec. 24 of the NIRC.

The Examiner also concluded that Visayan violated Sec. 259 of the Tax Code which imposes
a 25% surcharge of the franchise taxes remain unpaid for fifteen days and Sec. 2 of Act 465
for not paying additional residence tax. With the Examiner’ s report as the basis, the
Commissioner of Internal Revenue assessed P2,443.30 as deficiency income tax for 1953 to
1958 plus interest and 50% surcharge, P3,850 as additional residence tax from 1954 to 1959,
and P35,419.05 as 25% surcharge for late payment of franchise taxes for the years 1957,
1958, and 1959. Visayan appealed to the CA which sustained the additional residence tax but
freed the company from liability for deficiency income tax and the 25% surcharge for late
payment of franchise taxes and cited Sec. 8, Act 3499 as basis.

ISSUES:
1. Is Visayan Electric Company liable for deficiency income tax on dividends from the stock
investment of its employees' reserve fund for pensions?
2. Is it also liable for 25% surcharge on alleged late payment of franchise tax?

HELD:
1. No.
2. No

1. The disputed income are not receipts, revenues or profits of the company. They do not go
to the general fund of the company. They are dividends from the San Miguel Brewery, Inc.
investment which form part of and are added to the reserve pension fund which is solely for
the benefit of the employees to be distributed among them. Visayan is merely acting, with
respect to the reserve fund, as trustee for its employees when it sets aside monthly amounts
from its gross operating receipts for that fund. And for tax purposes, the employees’ reserve
fund is a separate taxable entity.

Visayan then, while retaining legal title and custody over the property, holds it in trust for the
beneficiaries mentioned in the resolution creating the trust, in the absence of any condition
therein which would, in effect, destroy the intention to create a trust. And there is no such
condition because nothing in the company’ s act suggests that it reserved the power to revoke
the fund or appropriate it for itself. The fund may not be diverted for any other purpose and
the trust created is irrevocable.

Therefore, the CIR misconceived the import of the law when he assessed such dividends as
part of the income of the company. But the trust fund is still subject to tax under individuals
under Sec. 56 (a) of the Tax Code. But under Sec. 331 of the Tax Code, internal revenue
taxes should be assessed within 5 years after the return is filed and since the Company was
in good faith and the CIR made the honest mistake of assessing income tax based on
corporate tax and not on income tax, then Sec. 332 applies and thus, the tax on the
employees’ reserve fund as individual income tax may still be collected within 10 years. But
the 50% surcharge cannot be imposed on Visayan because there was no willful or fraudulent
neglect to file a return. 2. Sec. 183 provides that taxes shall be paid within 20 days after the
end of each month while the franchise extended to Visayan states that the taxes are due and
payable quarterly. The due and payable quarterly in the franchise only indicates the frequency
of payment of the franchise tax, that is, every three months. It does not refer to the time
limit or the date on which the taxes must be paid.

There is no conflict between Sec. 183 and the franchise payment period given to Visayan in
the franchise. If there is no period, then Sec. 183 is controlling, which gives the taxed entity
15 days to pay the tax. But where there is a period, then the period is controlling. In this
case, Visayan’ s franchise indicated that franchise tax shall be due and payable quarterly or
every 3 months. Since Sec. 183 grants 20 days after the last day of each quarter and Sec.
259 grants another 15 days grace period after that, before imposing the 25% surcharge, then
the period for Visayan to pay the franchise tax is within 20 days after the end of each quarter
and if such tax remains unpaid for 15 days after that 20 days, then the 25% surcharge shall
be imposed upon them.

The tax cannot be immediately demandable at the end of each calendar quarter because the
transactions on the last day of the quarter must have to be included in the computation of
the taxpayer’ s return for each particular quarter. It is well impossible for the taxpayer to add
up his income, write down the deductions, and compute the net amount taxable as of the last
working hour of the last day of the quarter, and at the same time go to the nearest revenue
office, submit the quarterly return and pay the tax.

f. CIR v. CA, CTA, GCL Retirement Plan 207 SCRA 487;


FACTS: There is no dispute with respect to the facts. Private Respondent, GCL Retirement
Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to
provide retirement, pension, disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income tax by Petitioner Commissioner
of Internal Revenue in accordance with Rep. Act No. 4917.

In 1984, Respondent GCL made investsments and earned therefrom interest income from
which was witheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree
No. 1959,2 which took effect on 15 October 1984.

The refund requested having been denied, Respondent GCL elevated the matter to respondent
Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that employees' trusts
are exempt from the 15% final withholding tax on interest income and ordering a refund of
the tax withheld. Upon appeal, originally to this Court, but referred to respondent Court of
Appeals, the latter upheld the CTA Decision. Before us now, Petitioner assails that disposition.
It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec.
56 (b) of the National Internal Revenue Code (Tax Code, for brevity), employees' trusts were
exempt from income tax. That law provided:

Sec. 56 Imposition of tax. —(a) Application of tax. — The taxes imposed by this Title upon
individuals shall apply to the income of estates or of any kind of property held in trust,
including —

xxx xxx xxx

(b) Exception. — The tax imposed by this Title shall not apply to employees' trust which forms
a part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some
or all of his employees (1) if contributions are made to trust by such employer, or employees,
or both, for the purpose of distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan.

It is to be noted that the exemption from withholding tax on interest on bank deposits
previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of
the interest income is exempt from income taxation, and the imposition of the preferential
tax rates if the recipient of the income is enjoying preferential income tax treatment, were
both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the
exempting and preferential tax treatment provisions under the old law is a clear manifestation
that the single 15% (now 20%) rate is impossible on all interest incomes from deposits,
deposit substitutes, trust funds and similar arrangements, regardless of the tax status or
character of the recipients thereof. In short, petitioner's position is that from 15 October 1984
when Pres. Decree No. 1959 was promulgated, employees' trusts ceased to be exempt and
thereafter became subject to the final withholding tax.

Upon the other hand, GCL contends that the tax exempt status of the employees' trusts
applies to all kinds of taxes, including the final withholding tax on interest income. That
exemption, according to GCL, is derived from Section 56(b) and not from Section 21 (d) or
24 (cc) of the Tax Code, as argued by Petitioner.

ISSUE: whether or not the GCL Plan is exempt from the final withholding tax on interest
income from money placements and purchase of treasury bills required by Pres. Decree No.
1959.

HELD: We uphold the exemption.


The tax-exemption privilege of employees' trusts, as distinguished from any other kind of
property held in trust, springs from the foregoing provision. It is unambiguous. Manifest
therefrom is that the tax law has singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts.
Employees' trusts or benefit plans normally provide economic assistance to employees upon
the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working group. What
is more, it is established for their exclusive benefit and for no other purpose.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution accumulated income and
reduce whatever the trust beneficiaries would receive out of the trust fund. This would run
afoul of the very intendment of the law.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and
preferential tax rates under the old law, therefore, can not be deemed to extent to employees'
trusts. Said Decree, being a general law, can not repeal by implication a specific provision,
Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income
tax to employees' trusts. Rep. Act 1983, which excepted employees' trusts in its Section 56
(b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted on 17 June 1967,
long before the issuance of Pres. Decree No. 1959 on 15 October 1984. A subsequent statute,
general in character as to its terms and application, is not to be construed as repealing a
special or specific enactment, unless the legislative purpose to do so is manifested. This is so
even if the provisions of the latter are sufficiently comprehensive to include what was set
forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA
190).
Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on
"Income Tax." Section 21 (d), as amended by Rep. Act No. 1959, refers to the final tax on
individuals and falls under Chapter II; Section 24 (cc) to the final tax on corporations under
Chapter III; Section 53 on withholding of final tax to Returns and Payment of Tax under
Chapter VI; and Section 56 (b) to tax on Estates and Trusts covered by Chapter VII, Section
56 (b), taken in conjunction with Section 56 (a), supra, explicitly excepts employees' trusts
from "the taxes imposed by this Title." Since the final tax and the withholding thereof are
embraced within the title on "Income Tax," it follows that said trust must be deemed exempt
therefrom. Otherwise, the exception becomes meaningless.

There can be no denying either that the final withholding tax is collected from income in
respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code).
The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring
its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status
from income, we see no logic in withholding a certain percentage of that income which it is
not supposed to pay in the first place.

Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October 1984, and
Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as
authorities for the argument that Pres. Decree No. 1959 withdrew the exemption of
employees' trusts from the withholding of the final tax on interest income. Said Circular and
Ruling pronounced that the deletion of the exempting and preferential tax treatment
provisions by Pres. Decree No. 1959 is a clear manifestation that the single 15% tax rate is
imposable on all interest income regardless of the tax status or character of the recipient
thereof. But since we herein rule that Pres. Decree No. 1959 did not have the effect of
revoking the tax exemption enjoyed by employees' trusts, reliance on those authorities is now
misplaced.

I. Corporations S22(B);
B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.

g. Domestic Corporation S22(C);


(C) The term 'domestic', when applied to a corporation, means created or organized in the
Philippines or under its laws.

i. Co-ownership Art. 484 Civil Code;


Art. 484. There is co-ownership whenever the ownership of an undivided thing or right
belongs to different persons.

In default of contracts, or of special provisions, co-ownership shall be governed by the


provisions of this Title.

h. Foreign Corporation S22(D);


(D) The term 'foreign', when applied to a corporation, means a corporation which is not
domestic

i. Resident Foreign Corporation S22(H);


(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade
or business within the Philippines.

ii. Non-Resident Corporation S22(I);


(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in
trade or business within the Philippines.

i. Cases;

i. Lorenzo Oña v. CIR 45 SCRA 74;

ii. Evangelista vs. Coll 102 Phil 140;


Facts: Petitioners borrowed sum of money from their father and together with their own
personal funds they used said money to buy several real properties. They then appointed
their brother (Simeon) as manager of the said real properties with powers and authority to
sell, lease or rent out said properties to third persons. They realized rental income from the
said properties for the period 1945-1949.

On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and corporation residence tax for
the years 1945-1949. The letter of demand and corresponding assessments were delivered
to petitioners on December 3, 1954, whereupon they instituted the present case in the Court
of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of
demand dated September 24, 1954" be reversed, and that they be absolved from the
payment of the taxes in question. CTA denied their petition and subsequent MR and New
Trials were denied. Hence this petition.

ISSUE: Whether or not petitioners have formed a partnership and consequently, are subject
to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise
known as the National Internal Revenue Code, as well as to the residence tax for corporations
and the real estate dealers fixed tax.

HELD:
Yes, The essential elements of a partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common
fund. Upon consideration of all the facts and circumstances surrounding the case, we are fully
satisfied that their purpose was to engage in real estate transactions for monetary gain and
then divide the same among themselves, because of the following observations, among
others: (1) Said common fund was not something they found already in existence;(2) They
invested the same, not merely in one transaction, but in a series of transactions;(3) The
aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein.

Although, taken singly, they might not suffice to establish the intent necessary to constitute
a partnership, the collective effect of these circumstances is such as to leave no room for
doubt on the existence of said intent in petitioners herein.
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are subject to the income tax
for corporations.

iii. Pascual v. CIR 166 SCRA 560;


FACTS: Petitioners bought two (2) parcels of land and a year after; they bought another three
(3) parcels of land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized
net profits. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974
by availing of the tax amnesties granted in the said years. However, the Acting BIR
Commissioner assessed and required Petitioners to pay a total amount of P107,101.70 as
alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested
the said assessment asserting that they had availed of tax amnesties way back in 1974. In a
reply, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership
or joint venture taxable as a corporation under Section 20(b) and its income was subject to
the taxes prescribed under Section 24, both of the National Internal Revenue Code; that the
unregistered partnership was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended, relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners were required to pay the deficiency income
tax assessed.

ISSUE: Whether the Petitioners should be treated as an unregistered partnership or a co-


ownership for the purposes of income tax.

HELD: The Petitioners are simply under the regime of co-ownership and not under
unregistered partnership.

By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves (Art. 1767, Civil Code of the Philippines). In the present case, there is no evidence
that petitioners entered into an agreement to contribute money, property or industry to a
common fund, and that they intended to divide the profits among themselves. Moreover, the
transactions they entered into were isolated. Petitioners here bought two (2) parcels of land
in 1965. They did not sell the same nor make any improvements thereon.

In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when
they sold the two (2) parcels of land after which they did not make any additional or new
purchase. The remaining three (3) parcels were sold by them in 1970. Thus, the character of
habituality peculiar to business transactions for the purpose of gain was not present. The
sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property.

There must be a clear intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party to transfer or assign the
whole property. Hence, there is no adequate basis to support the proposition that they thereby
formed an unregistered partnership. They shared in the gross profits as co- owners and paid
their capital gains taxes on their net profits and availed of the tax amnesty thereby. And even
assuming such unregistered partnership have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be held individually liable as
partners for this unpaid obligation of the partnership. However, as petitioners have availed of
the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.

iv. Afisco Insurance Corp vs. CIR GR 112675 Jan 25, 1999 302 SCRA 1;
FACTS: The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler
Explosion and Contractors All Risk insurance policies, the petitioners on August 1, 1965
entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign
insurance corporation. The reinsurance treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners was formed on the same day.

The CIR assessed deficiency corporate taxes in the amount of P1,843,273.60, and withholding
taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to
the petitioners, respectively.

The petitioner contested the assessment but later on denied. The CA affirmed the denial.

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point
out that the reinsurance policies were written by them individually and separately, and that
their liability was limited to the extent of their allocated share in the original risks thus
reinsured.

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers,
did not share the same risk or solidary liability; (2) there was no common fund (3) the
executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation; and (4) the pool or clearing house was not and could not
possibly have engaged in the business of reinsurance from which it could have derived income
for itself.

ISSUE: WON, the Clearing House or the Pool, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation.

HELD:
Yes, It is subject to tax as a corporation.

1. Section 22 of the NIRC defines corporation as follows:

The term corporation shall include partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government.

2. The case before the SC unmistakably indicates a partnership or association covered by


Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited
in the name and credit of the pool. This common fund pays for the administration and
operation expenses of the pool.

(2) The pool functions through an executive board, which resembles the board of directors of
a corporation, composed of one representative for each of the ceding companies.

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however,
its work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums. The
ceding companies share in the business ceded to the pool and in the expenses according to a
Rules of Distribution annexed to the Pool Agreement. Profit motive or business is, therefore,
the primordial reason for the pools formation.