TAXATION

SUMMARY OF CASES
CASE TOPIC RULING
GENERAL PRINCIPLES
1. CIR v. Algue Life Blood Theory The existence of government is a necessity; it cannot exist nor endure without the means to pay
its expenses; and for those means, the government has the right to compel all its citizens and
property within its limits to contribute in the form of taxes.

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.

The Supreme Court stated that taxes are what we pay for civilized society. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income, every person who is able must
contribute his share in the running of the government and the latter, for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the
people and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by
those in the seat of power.

2. Tio v. Videogram Regulatory The Supreme Court held that the levy of 30% tax on videogram operators was imposed
Regulatory Board primarily to answer the need for regulating the video industry, particularly rampant film piracy
and flagrant violation of intellectual property rights.

3. Philippine Health Care The Supreme Court, on the issue of whether Health maintenance organizations (HMOs) were
Providers V. CIR exempt from Documentary Stamp Tax (DST), held that it is not the purpose of the government
to throttle private business. On the contrary, the government ought to encourage private
enterprise. HMOs, just like any concern organized for a lawful economic activity have a right
to maintain a legitimate business. Hence, HMOs should not be arbitrarily and unjustly included
in the DST coverage.

4. Mactan Cebu International
Airport Authority v. Marcos
Inherently Legislative
The power of taxation is inherent in the State, being an attribute of sovereignty. The power to
tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature
no limits, so that security against abuse is to be found only in the responsibility of the legislature
which imposes the tax on the constituency who are to pay it. This is so because the very
existence of the State is dependent on taxes.

The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against abuse is to be found only in the responsibility
of the legislature which imposes the tax on the constituency who are to pay it.

NOTE:
 MIAA v. CA
The Supreme Court, in resolving the issue on whether the lands and buildings owned by the
Manila International Airport Authority were subject to real property tax, ruled in the negative.
The Supreme Court opined that since MIAA is not a GOCC but instead as government
instrumentality vested with corporate powers or a government corporate entity, it is exempt
from real property tax. By express provision of the Local Government Code, local governments
cannot levy taxes, fees or charges of any

5. Napocor v. City of The power to tax is no longer vested exclusively on Congress. The local governments are now
Cabanatuan given direct authority to levy taxes, fees and other charges pursuant to Section 5, Article X, of
the 1987 Constitution. It must be noted, further, that the power is not inherent in the local
government unlike in the national government.

6. Abakada v. Ermita Article VI Section 28 (1) The Supreme Court ruled that the 12% VAT imposition was equitable as it imposes safeguards
and limits in the form of VAT exemption granted to gross sales below P1.5 million

7. Tolentiono v. Secretary of The Supreme Court in explained that what Congress is required by the Constitution to do is only
Finance to "evolve a progressive system of taxation." This is a directive to Congress, just like the
directive to it to give priority to the enactment of laws for the enhancement of human dignity
and the reduction of social, economic and political inequalities or for the promotion of the right
to "quality education." These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights. Thus, even if the VAT is regressive because it
is an indirect tax, it is not prohibited by the Constitution.

8. St. Paul College v. CIR Article VI Section 28 (2)

9. Lung Center of the Article VI Section 28 (3) What is meant by actual, direct, and exclusive use of the property for charitable institutions is
Philippines the direct and immediate and actual application of the property itself to the purpose for which
the charitable institution is organized.

The Supreme Court stated that, as a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it derives income from paying
patients , whether out-patient or confined in the hospital or receives subsidies from the
government, as long as the money received is devoted or used altogether to the charitable object
which it is intended to achieve, and no money inures to the private benefit of the persons
managing or operating the institution.

The Supreme Court held that the hospital was not exempt from real property tax on the portions
of its property not actually, directly, and exclusively used for charitable purposes. Thus, those
leased out for commercial purposes are subject to real property tax. Those used by the hospital
even if used for paying patients remain exempt from real property taxes

10. CIR v. CA The Supreme Court ruled that the income from the lease and parking fees were not exempt. The
last paragraph of Section 27 of the NIRC clearly provides that profits realized by exempt
organizations (non-profit clubs) from real property from whatever source and wherever used
are taxable. The Court noted that while YMCA is exempt from real property taxes, it is not
exempt from income tax on the rentals from its property. Further, YMCA failed to prove that it

11. CIR v. St. Lukes Medical
Center
was a non-stock, non-profit educational institution under Article XIV, Section 4(3) of the
Constitution.
DOCTRINE: A proprietary non-profit hospital is subject to 10% tax under Section 27(B) of
the Tax Code. FACTS: St. Lukes Medical Center is a hospital organized as a nonstock and non-
profit corporation. It admits both paying and non-paying patients. The CIR claimed that St.
Lukes was liable for income tax at 10% as provided under Section 27(B)10 of the NIRC. St.
Lukes argues that it is a non-stock, non-profit institution for charitable and social welfare
purposes exempt from income tax under Section 30(E) and (G) of the NIRC.
HELD: St. Lukes cannot claim full tax exemption under Section 30 because it has paying
patients and this is notwithstanding the fact that it is a non-profit hospital. For Section 27(B) to
apply, the hospital must be non-profit which means that no net income or asset accrues to or
benefits any member or specific person and all the activities of the hospital are non-profit. On
the other hand, Section 30(E) and (G), while providing for an exemption is qualified by the last
paragraph which, in turn, provides that activities conducted for profit shall be taxable. Section
30(E) and (G) requires that an institution be operated exclusively for charitable purposes to be
completely exempt from income tax. In this case, however, St. Lukes is not operated exclusively
for charitable purposes insofar as its revenues from paying patients are concerned. Such revenue
is subject to income tax at 10% under Section 27(B).
Note: This case is very important because it reconciles the following constitutional and statutory
provisions: Section 28, Article VI (tax exemption of real property actually, directly, and
exclusively used for religious, charitable or educational purposes); Section 4(3) Article XIV
(tax exemption of income of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes); Section 27(B), Tax Code (10% preferential
tax rate to income of proprietary educational institutions); Section 30(E) and (G) (tax exemption
of the income of non-stock non-profit corporations organized and operated exclusively for
charitable purposes.).
With regard to taxation of real property, the doctrine laid down in LUNG CENTER OF THE
PHILIPPINES V. QUEZON CITY [433 SCRA 119] still holds. The lands, buildings, and
improvements actually, directly and exclusively used for religious, charitable and educational
purposes shall remain exempt from real property taxes even if there is, in the case of a hospital,
admission of paying patients. If the hospital were to lease to private persons portions of its
property for profit, the real property will not be exempt from real property taxes. That’s for real
property taxes. Income taxation is another thing.
With regard to income taxation, the statement of the Court must be noted: “Non-profit does not
necessarily mean charitable.” This is affirmed in the constitutional provision with regard to non-
stock, non-profit educational institutions. For their income to be exempt, their revenues and
assets must be used actually, directly, and exclusively for educational purposes. The rule now
can be laid down as follows: For the income of a non-stock, non-profit corporation to be totally
exempt, it must be organized and operated exclusively for educational or charitable purposes.
In such case, it will fall within the coverage of Section 30(E) and (G) of the Tax Code. However,
if it conducts for-profit activities, like the admission of paying patients, it will not be exempt
 with regard to that particular income. Section 27(B) will apply and the income will be taxed at
the preferential rate of 10%.
5. Exemption from taxes of the revenues and assets of educational institutions including grants,
endowments, donations or contributions. (Article XVI, Section 4, par. 3)

12. Pepsi Cola Bottling Article III, Section I (Due Process) The Supreme Court held that taking of property without due process of law may not be passed
Company v. Municipality of over under the guise of taxing power, except when the latter is exercised lawfully as when:
Tanauan
1. the tax is for a public purpose;
2. the rule on uniformity of taxation is observed;
3. either the person or property taxed is within the jurisdiction of the government levying the
tax; and
4. in the assessment and collection of taxes notice and opportunity for hearing are provided.

There is direct double taxation if the two taxes are imposed:

1. On the same subject matter
2. For the same purpose
3. By the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. The taxes must be of the same kind or character

13. John Hay v. Lim Article III, Section I (Equal The Supreme Court ruled that tax exemptions must be strictly and expressly provided for and
Protection) that the power to grant exemption is only within Congress

14. British American Tobacco v. The Supreme Court held that the classification freeze does not violate the equal protection
Camacho clause as it passes the rational basis test and is meant to improve the efficiency and effectivity
of the tax administration over sin products while trying to balance the same with state interests.
It addresses the concerns in the simplification of tax administration of sin products, elimination
of potential areas for abuse and corruption in tax collection, buoyant and stable revenue
generation, and ease of projection of revenues

15. Republic v. Ablaza
Prospectivity of Tax Laws
The law prescribing a limitation of actions for the collection of the income tax is beneficial both
to the Government and to its citizens; to the Government because tax officers would be obliged
to act promptly in the making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against unscrupulous tax agents who
will always find an excuse to inspect the books of taxpayers, not to determine the latter's real
liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens.

16. CIR v. Solidbank Corp.
Double Taxation First, the taxes herein are imposed on two different subject matters. The subject matter of the
FWT is the passive income generated in the form of interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT is the privilege of engaging in the business of
banking.
Second, although both taxes are national in scope because they are imposed by the same taxing
authority -- the national government under the Tax Code -- and operate within the same
Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect

17. Compania General
Tabacos v. City of Manila
18. City of Baguio v. De Leon
19. Asia International
Auctioneers v. CIR
20. Republic v. Caguioa
21. CIR v. Gould Pumps Inc.
22. Filinvest Development
Corporation v. CIR
are different. The FWT is deducted and withheld as soon as the income is earned, and is paid
after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted
nor withheld, but is paid only after every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax subject
to withholding, while the GRT is a percentage tax not subject to withholding. Hence, there is
no double taxation
De The Supreme Court held that both a license fee and a tax may be imposed on the same business
and occupation and such as not a violation of the rule against double taxation. The impositions
are of a different character. The first is a license fee for the privilege of engaging in the sale of
liquor in the exercise of police power while the other is imposed for revenue purposes based on
the sales made.
It has been expressly affirmed by the Supreme Court that such an argument against double
taxation may not be invoked where one tax is imposed by the state and the other is imposed by
the city, it being widely recognized that there is nothing inherently obnoxious in the requirement
that license fees or taxes be exacted with respect to the same occupation, calling or activity by
both the state and the political subdivisions thereof.
Direct vs Indirect Taxes AIA is not a withholding agent. Indirect taxes, like VAT and excise tax, are different from
withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on one person
but the burden thereof can be shifted or passed on to another person, such as when the tax is
imposed upon goods before reaching the consumer who ultimately pays for it. On the other
hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity,
the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely
collects, by withholding, the tax due from income payments to entities arising from certain
transactions and remits the same to the government. Due to this difference, the deficiency VAT
cannot be “deemed” as withholding taxes merely because they constitute indirect taxes.
Moreover, records in this case support the conclusion that AIA was assessed not as a
withholding agent but, as the one directly liable for the said deficiency taxes.
Tax Exemption That there is no vested right in a tax exemption and more so when the latest expression of
legislative intent renders it continuance doubtful. In the said case, RA 7227 granted private
domestic corporations doing business in the Subic SEZ tax exemptions on importations of
general merchandise. However, RA 9334 withdrew the tax exemption on the importations of
cigars, cigarettes, distilled spirits, fermented liquors and wines.
Compensation and Set-Off The erroneous payment of final withholding tax cannot be used to offset or be treated as advance
tax payment, and cannot be used against the succeeding final withholding tax.
Solutio Indebiti The Court held that in the field of taxation where the State exacts strict compliance upon its
citizens, the State must likewise deal with taxpayers with fairness and honesty. Hence, under
the principle of solutio indebiti, the Government has to restore to petitioner the sums
representing erroneous payments of taxes.
23. Manila Railroad v. Collector
of Customs
24. Philippine Health Care
Providers v. CIR
25. Commissioner of Customs v.
Hypermix Feeds
26. Meralco v. Vera
27. Quezon City v. ABS-CBN
28. PBCOM v. CIR
Liberal Construction in favour of
Taxpayers
Non-retroactive Application
Tax statutes are strictly construed against the taxing authority because taxation is a destructive
power which interferes with the personal and property rights of the people and takes from them
a portion of their property for the support of the government.
DOCTRINE: Rule and regulations, which are the product of a delegated power to create new
and additional legal provisions that have effect of law, should be within the scope of the
statutory authority granted by the legislature to the administrative agency
The Supreme Court held that the determination of whether a specific rule or set of rules issued
by an administrative agency contravenes the law or the constitution is within the jurisdiction of
the regular courts. Indeed, the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial courts. This is
within the scope of judicial power, which includes the authority of the courts to determine the
validity of the acts of the political departments. Also, Section 1403 of the Tariff and customs
law mandates that the customs officer must first assess and determine the classification of the
imported article before tariff may be imposed. Unfortunately, CMO 232007 has already
classified the article even before the customs officer had the chance to examine it. In effect,
petitioner Commissioner of Customs diminished the powers granted by the Tariff and Customs
Code with regard to wheat importation when it no longer required the customs officer’s prior
examination and assessment of the proper classification of the wheat. It is well-settled that rules
and regulations, which are the product of a delegated power to create new and additional legal
provisions that have the effect of law, should be within the scope of the statutory authority
granted by the legislature to the administrative agency. It is required that the regulation be
germane to the objects and purposes of the law; and that it be not in contradiction to, but in
conformity with, the standards prescribed by law.
The Supreme Court held that the “in lieu of all taxes” provision is limited in scope to taxes
“upon the privileges, earnings, income, franchise and poles, wires, transformers, and insulators
of the grantee.” Construing this provision strictly against MERALCO, the Supreme Court held
that the provision covers only an exemption from property taxes on the poles, wires, and
transformers.
Statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally
in favor of the taxing authority. He who claims an exemption from his share of common burden
must justify his claim that the legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they presumed.
A tax exemption must be strictly construed against the one claiming the exemption because it
is contrary to the lifeblood theory which is the underlying basis for taxes.
The Supreme Court opined that the non-retroactivity of rulings by the CIR is inapplicable where
the nullity of the issuance was declared by the Courts and not by the CIR.
29. BDO et. al v. Republic of the
Philippines and CIR
30. CIR v. Estate of Toda
31. Garrison v. CA
32. AFISCO Insurance
Corporation v. CA
33. Pascual v. CIR
34. Obillos v. CIR
35. Ona v. CIR
Tax Avoidance v. Evasion
Resident Citizens and Resident
Aliens
Corporations
Income in General
The Supreme Court held that the three factors in tax evasion were present. The two transfers
were tainted with fraud since the intermediary transfer (from the corporation to a natural person)
was prompted only by the desire to mitigate tax liabilities and not for any business purpose.
INCOME TAX
Supreme Court held that what the law requires is merely physical or bodily presence in a given
place for a period of time, not the intention to make it a permanent place of abode.
The Supreme Court further held that, as laid clearly in RR No. 2, whether an alien is a transient
or not is determined by his intentions with regard to the length and nature of his stay. A mere
floating intention indefinite as to time, to return to another country is not sufficient to constitute
him as a transient. If he lives in the Philippines and has no definite intention as to his stay, he is
a resident.15 In other words, stay is indefinite.
One who comes to the Philippines for a definite purpose, which in its nature may be promptly
accomplished, is a transient.16 In other words, the stay is for a definite short period of time.
But if his purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes the Philippines his temporary home, he
becomes a resident, although he intends to return to his domicile abroad.17 In other words, the
stay is definite but extended.
Where several local insurance ceding companies enter into a Pool Agreement or an association
that would handle all the insurance businesses covered under their quota-share reinsurance
treaty and surplus reinsurance treaty with a non-resident foreign reinsurance company, the
resulting pool having a common fund, and functions through an executive board and its work is
indispensable, beneficial and economically useful to the business of the ceding companies and
the foreign firm, such circumstances indicate a partnership or an association taxable as a
corporation.
A co-ownership who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. 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.
Here, 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. 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.
The income from inherited properties may be considered as individual income of the respective
heirs only as long as the inheritance or estate is not distributed, or, at least, partitioned. But the
moment their respective known shares are used as part of the common assets of heirs to be used

36. Madrigal v. Rafferty
37. Fisher v. Trinidad
38. Limpan Investment Corp. v.
CIR
39. Conwi v. CTA
40. Commissioner v. Glenshaw
Glass Co.
in making profits, it is but proper that the income from such shares should be considered as part
of the taxable income of an unregistered partnership. (see ONA V. CIR [MAY 25, 1972]).
Note: Thus, we make a distinction. Before the partition of property, the income of the co-
ownership arising from the death of a decedent is not subject to income tax, if the activities of
the co-owners are limited to the preservation of the property and the collection of the income
therefrom. However, after partition, should the co-owners invest the income of the co-
ownership in any income producing properties, they would be constituting themselves into an
unregistered partnership which is consequently subject to income tax as a corporation.
Income is that flow of services rendered by that capital by the payment of money from it or any
other benefit rendered by a fund of capital in relation to such fund through a period of time.
Income is the “fruit” of capital or labor severed from the “tree.”
Mere advance in the value of property or a corporation in no sense constitutes the income
specified in the law. Such advance constitutes and can be treated merely as an increase in capital.
Income is received not only when it is actually handed to a taxpayer but also when it is merely
constructively received by him. The lessees opted to deposit their payments when the lessor
refused to accept the same in 1957. The lessor did not report these payments in his 1957 income
tax return. The Supreme Court held that the failure to report the said rental income is unjustified
as, when the payments were deposited, the lessor was deemed to have constructive received
such rentals.
Note:
Actual receipt may be actual or physical receipt while constructive receipt occurs when
money consideration or its equivalent is placed at the control of the person who rendered the
service without restriction by the payor
The constructive receipt doctrine provides than an item is treated as income when it is credited
to the account of the taxpayer, or made unconditionally available to the taxpayer; no physical
possession is required
The Supreme Court defined income tax as an amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest, or profit from
investment.
Glenshaw Co was engaged in a protracted litigation with Hartford-Empire Co where the former
demanded exemplary damages for fraud and treble damages for injury to its business by reason
of the latter’s violation of federal antitrust laws. The parties settled. Glenshaw did not report the
money received as damages from the settlement in its income tax return. The Commissioner
assessed Glenshaw for the deficiency. Glenshaw contended that punitive damages, as windfalls
flowing from culpable conduct of third parties are not taxable income. The US Supreme Court
held that money received as damages must be reported as they constitute income. The mere fact
that such payments were extracted from wrongdoers cannot detract from their character as
taxable income. The Court also stated that punitive damages cannot be classified as gifts.
41. Murphy v. Internal Revenue
Service
42. Old Colony Trust Co. v. CIR
43. Helvering v. Bruun
44. CIR v. CA (1999)
45. Wise & Co., v. Meer
46. James v. United States
47. CIR v. CA (1992)
48. CIR v. CA (1991)
49. Re: Request of Atty.
Bernardo Zialcita
50. Intercontinental
Broadcasting Corporation v.
Amarilla
The US Court of Appeals (District of Columbia), held that the amount received as compensatory
damages on for emotional distress and loss of reputation constitutes taxable income.
Note:
It must be noted, however, that in the Murphy case, what was involved was physical injuries.
Note under our Tax Code, amounts received as compensation for personal injuries are excluded
from gross income and hence, not taxable. Thus, we must make a distinction. If it’s non-physical
injuries like mental anguish, the damages are included in gross income and hence taxable but if
it’s physical injuries, it is excluded from gross income.
Compensation of Services The US Supreme Court held that the payment of the tax by the employer was in consideration
of services rendered by the employee. The payment constituted income to the employee. The
Court also added that it cannot be argued that the payment was a gift. The payment for services,
even though voluntary, was nevertheless compensation for services rendered.
Rents The US Supreme Court stated that it is not necessary to recognition of taxable gain that the
lessor be able to sever the improvement begetting the gain from his original capital.
Dividends
“From whatever source” The Supreme Court ruled that embezzled money constitutes gross income. It opined that
unlawful, as well, as lawful gain are comprehended within the term “gross income.” The Court
has given a liberal construction to “gross income” in recognition of the intent of Congress to
tax all gains except those specifically exempted.
Retirement Benefits, etc. The Supreme Court said retirement benefits received by officials and employees of private firms
in accordance with a reasonable private benefit plan maintained by the employer shall be exempt
from all taxes
The Supreme Court held that terminal leave pay received by a government official or employee
is not subject to withholding (income) tax. The rationale behind the employee’s entitlement to
an exemption from withholding tax on his terminal leave is that commutation of leave credits,
more commonly known as terminal leave, is applied for by an officer or employee who retires,
resigns or is separated from the service through no fault of his own. In the exercise of sound
personnel policy, the Government encourages unused leaves to be accumulated. Terminal leave
payments are given not only at the same time but also for the same policy considerations
governing retirement benefits. In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit, terminal leave pay is not subject to
income tax
For the retirement benefits to be exempt from income tax, the taxpayer is burdened to prove the
concurrence of the following elements:
1. a reasonable private benefit plan is maintained by the employer;
 2. the retiring official or employee has been in the service of the same employer for at least ten
(10) years;
3. the retiring official or employee is not less than fifty (50) years of age at the time of his
retirement; and
4. the benefit had been availed of only once
5. The retirement plan must be submitted to and approved by the BIR

51. CIR v. Mitsubishi Metal
Corporation
Income derived by Foreign The burden of proof rests upon the party claiming an exemption to prove that it is in fact covered
Government by the exemption. In the said case, the Supreme Court found that the foreign government
financing institution had nothing to do with the sales and loans agreement. It is the foreign
corporation, not the foreign government financing institution that is the sole creditor of the
domestic corporation.

SOURCE OF INCOME RULES

52. CIR v. Marubeni Gross Income from Sources within A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the
Corporation Philippines terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority.

53. CIR v. BOAC

54. Commissioner v. CTA and It depends. Either it can be deducted in full or partly. Where an expense is clearly related to the
Smith Kline & French production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine
Overseas personnel, rental of office building in the Philippines), that expense can be deducted from the
gross income acquired in the Philippines without resorting to apportionment. However, where
there are items included in the overhead expenses incurred by the parent company, all of which
cannot be definitely allocated or identified with the operations of the Philippine branch, the
company may claim as its deductible share a ratable part of such expenses based upon the ratio
of the local branch's gross income to the total gross income, worldwide, of the multinational
corporation.

55. Philippine Guaranty Co., “Sources” means the activity, property, or service giving rise to the income. The original
Inc. v. CIR insurance undertakings took place in the Philippines. It is not required that the foreign
corporation be engaged in business in the Philippines. What is controlling is no the place of
business, but the place of activity that created the income. Thus, the income is subject to income
tax.

56. Howden & Co., Ltd. V. CIR

57. Philippine American Life The services covered by the management service agreement fall under the meaning of royalties.
Insurance Company Inc. v. It is immaterial if the non-resident foreign corporation has no properties in the Philippines. The
CTA test of taxability is the source and the source of an income is that activity which produced the
income. It is not the presence of any property from which one derives rentals and royalties that
is controlling, but rather as expressed under the expanded meaning of royalties, it includes
“royalties for the supply of scientific, technical, industrial, or commercial, knowledge or
information; and the technical advice, assistance or services rendered in connection with the
technical management and administration of any scientific, industrial or commercial
undertaking, venture, project or scheme.
58. CIR v. Baier-Nickel The source of an income is the property, activity or service that produced the income. With
respect of rendition of labor or personal service, as in the instant case, it is the place where the
labor or service is performed that determines the source of income. There is therefore no merit
in A’s interpretation which equates source of income in labor or personal service with the
residence of the payor or the place of payment of the income.

Note:
That in this case, Baier-Nickel argued that the services were done in Germany. However, she
failed to prove that such was the fact. Thus, the services were deemed performed in the
Philippines, and, as such, is subject to income tax

59. Quill Corp. v. North Dakota The US Supreme Court ruled that there must be physical presence in a state for the corporation
to be liable for sales and use taxes.

60. Vodafone International The Indian Supreme Court ruled that VIH had no liability to withhold tax as the transaction was
Holdings B.V v. Union of between two non-residents with no taxable presence in India. Under Section 9(1) of the Income
India & Anr. Tax Act of India, all income accruing or arising, whether directly or indirectly through transfer
of capital assets situated in India shall be deemed to accrue or arise in India.69 The Supreme
Court stated that the section clearly applied to a transfer of capital asset situated in India and
could not be expanded to cover indirect transfers of capital assets or property situated in India.
The words “directly or indirectly” go with the income and not with the transfer of a capital asset.

DEDUCTIONS
61. CIR v. Isabela Cultural Business Expenses The Supreme Court held that one of the requisites for the deductibility of a business expenses
Corporation is that it must have been paid or incurred during the taxable year. Hence, the professional fees
should have been claimed as deductions during the years where they were paid or incurred.
1. They are made in good faith
2. They are given for personal services actually rendered
3. The bonus when added to salaries is reasonable when measured by the amount and quality of
the services performed with relation to the business of the particular taxpayer
62. CIR v. General Foods Inc. The Supreme Court ruled in favor of the CIR. Advertising is generally of two kinds: (1)
advertising to stimulate the current sale of merchandise or use of services and (2) advertising
designed to stimulate the future sale of merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the
taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member.
If the expenditures are for the advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of the second kind, then normally
they should be spread out over a reasonable period of time The protection of brand franchise is
analogous to the maintenance of goodwill or title to one’s property. This is a capital expenditure
which should be spread out over a reasonable period of time. This was akin to the acquisition
of capital assets and therefore expenses related thereto were not to be considered as business
expenses but as capital expenditures. The advertising expense incurred by General Foods fall
under the second type.
63. Aguinaldo Industries Corp.
v. CIR
64. Atlas Consolidated Mining
& Development Corp. v. CIR
65. Zamora v. CIR
66. C.M. Hoskins & Co.,Inc. v.
CIR
67. Calanoc v. Collector of
Internal Revenue
The Supreme Court held that the said bonuses cannot be deducted because there is no evidence
that the said officers did any work which would be the basis of the grant of the bonuses. One of
the requisites for the deductibility of bonuses is that they are given for personal services actually
rendered.
The Supreme Court held that this is not deductible because it is a capital expenditure. Expenses
relating to the recapitalization and reorganization of the corporation, promotion expenses and
commission or fees for the sale of stock reorganization are capital expenditures.
The Supreme Court stated that promotional expenses are deductible but must be substantiated.
When some of the representation expenses claimed by the taxpayer were evidenced by vouchers
or chits, but others were without vouchers or chits, documents or supporting papers; that there
is no more than oral proof to the effect that payments have been made for representation
expenses allegedly made by the taxpayer and about the general nature of such alleged expenses;
that accordingly, it is not possible to determine the actual amount covered by supporting papers
and the amount without supporting papers, the court should determine from all available data,
the amount properly deductible as representation expenses. In view of this, the Supreme Court
held CTA did not commit error in allowing as promotion expenses in A’s income tax returns at
merely one-half.
(iii) A reasonable allowance for rentals and/or other payments which are required as a condition
for the continued use or possession, for purposes of the trade, business or profession, of property
to which the taxpayer has not taken or is not taking title or in which he has no equity other than
that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses during the
taxable year, that are directly connected to the development, management and operation of the
trade, business or profession of the taxpayer, or that are directly related to or in furtherance of
the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings
as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of
the Commissioner, taking into account the needs as well as the special circumstances, nature
and character of the industry, trade, business, or profession of the taxpayer: Provided, That any
expense incurred for entertainment, amusement or recreation that is contrary to law, morals
public policy or public order shall in no case be allowed as a deduction.
The Supreme Court held that such was not deductible for failing to pass the reasonableness test.
If allowed, Hoskin would be receiving on his salary, bonus, and supervision fees at total of
P185,000 which is double the company’s reported net income. The Supreme Court stated that
if it was a onetime payment, it could have been deducted since Hoskin was an experienced
realtor. However, the P100,000 supervision fee was being paid every year (for three years) for
the entire duration of he company’s project with Paradise Farms.
The Supreme Court held that the police protection fees were not deductible as they are illegal
since it was consideration for the performance of functions required of policemen by law. As to
 the gifts and parties, they were deemed excessive considering that the purpose of the exhibition
was for a charitable cause.

INCLUDING:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal
services actually rendered, including the grossed-up monetary value of fringe benefit furnished
or granted by the employer to the employee: Provided, That the final tax imposed under Section
33 hereof has been paid
68. Kuenzle & Streiff, Inc. v. The Supreme Court held that the bonuses to its resident officers and employees were reasonable
CIR taking into account the situation at the time when the services were rendered: unsettling
conditions after the war, the imposition of controls on exports and imports, and the use of
foreign exchange which resulted in diminution of the amount of business.

(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the
pursuit of trade, business or profession

69. Paper Industries Interest The Supreme Court ruled that Paper Industries is entitled to its claimed deduction for interest
Corporation of the payments on loans for, among other things, the purchase of machinery and equipment. The
Philippines v. CA general rule is that interest expenses are deductible against gross income and this certainly
includes interest paid under loans incurred in connection with the carrying on of the business of
the taxpayer. In this case, the CIR does not dispute that the interest payments were made on
loans incurred in connection with the carrying on of the registered operations of Paper
Industries, i.e., the financing of the purchase of machinery and equipment actually used in the
registered operations of Paper Industries. Neither does the CIR deny that such interest payments
were legally due and demandable under the terms of such loans, and in fact paid by Paper
Indusries during the tax year. The CIR has been unable to point to any provision of the Tax
Code or any other Statute that requires the disallowance of the interest payments made by Paper
Industries. The general rule that interest payments on a legally demandable loan are deductible
from gross income must be applied.

70. CIR v. Vda. De Prieta
The Supreme Court held that although interest payment for delinquent taxes is not deductible
as tax under Section 34(C) of the Tax Code, the taxpayer is not precluded thereby from claiming
said interest payment as deduction under Section 34(B) of the same Code. It is a well-settled
rule that tax obligations constitute indebtedness for purposes of deduction from gross income
of the amount of interest paid on indebtedness

71. CIR v. Lednicky Taxes The Supreme Court held that to allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government is incompatible with the status of the Philippines
as a sovereign state. This is because the foreign government will have the power to reduce the
tax income of the Philippine government simply by increasing their tax rates.

Note:
 That at the time this case was decided, resident aliens were still allowed to claim a tax
credit. The present rule is that only resident citizens and domestic corporations can
claim a tax credit. Also, in this case, their net income for foreign sources was zero
and, thus, there was no need to apply the tax credit.)
  Also important is this case is the statement made by the court on the exception: a
taxpayer may only be allowed to deduct from his gross income, taxes paid to a foreign
country when such taxpayer is entitled to a foreign tax credit and he does not choose
to exercise such right. The right to deduct foreign tax paid is only an alternative to the
taxpayer’s right to the foreign tax credit.

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed.

Provided, That taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of the income tax benefit of
said deduction

72. Paper Industries Corp. of the
Philippines v. CA
Losses The Supreme Court ruled that the deduction was improper. NOLCO of the taxpayer shall not
be transferred or assigned to another person, whether directly or indirectly, such as, but not
limited to, the transfer or assignment thereof through merger, consolidation or any form of
business combination of such taxpayer with another person. To allow the deduction claimed by
the surviving corporation would be to permit one corporation or enterprise to benefit from the
operating losses accumulated by another corporation or enterprise.

73. Philex Mining Corporation Bad Debts The Supreme Court held that Philex cannot deduct the amounts as bad debt. The agreement
v. CIR provided for a distribution of assets of the mine upon termination, a provision that is more
consistent with a partnership than a creditor-debtor relationship. In this connection, there is no
contractual basis for the execution of the two compromise agreements in which Baguio Gold
recognized a debt in favor of Philex. Philex’s advances should be treated as investments in a
partnership. The advances were not "debts" of Baguio Gold to Philex inasmuch as the latter was
under no unconditional obligation to return the same to the former.
As for the amounts that Philex paid as guarantor to Baguio Gold’s creditors, the debts were not
yet due and demandable at the time that Philex paid the same. Philex cannot claim the advances
as a bad debt deduction from its gross income. Deductions for income tax purposes partake of
the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed. In this case, Philex failed to
substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be
deducted from its gross income. Consequently, it could not claim the advances as a valid bad
debt deduction.

74. Philippine Refining The Supreme Court stated that before a debt can be considered worthless, the taxpayer must
Company v. CA also show that it is indeed uncollectible even in the future. PRC here failed to prove the
worthlessness of the amounts receivable.

75. Fernandez Hermanos, Inc. v. The Court opined that assuming that in this case there was a valid and subsisting debt and that
CIR the debtor was incapable of paying the debt, the debt is still not deductible as a worthless debt
because the debtor was still in operation. It has been held that if the debtor corporation, although

76. Basilan Estate, Inc. v. CIR
77. Limpan Investment Corp. v.
CIR
78. Consolidated Mines, Inc. v.
CTA
79. 3M Philippines, Inc. v. CIR
80. Supreme Transliner, Inc. v.
BPI Family Savings Bank,
Inc.
81. M.E. Holdings Corporation
v. CIR & CTA
82. Air New Zealand v. CIR
Depreciation
Depletion
Research and Development
Capital Gains Tax
OCWs/Senior Citizens/Disabled
CORPORATIONS
International Carrier
losing money or insolvent, was still operating at the end of the taxable year, the debt is not
considered worthless and therefore not deductible.
The Supreme Court held that such value cannot be deducted from gross income as it was beyond
the acquisition cost. Depreciation as a deduction is allowed so that the owner of the assets can
set aside some money to buy a replacement or, in other words, to gradually recover the
acquisition cost. The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. The reason is that deductions from gross income are privileges, not matters of
right. More importantly, the recovery, free of income tax, of an amount more than the invested
capital in an asset will run counter to the purpose of a depreciation allowance. For then, the
taxpayer can not only recover the acquisition cost, but also make some profit. Recovery in due
time through depreciation of investment made is the philosophy behind depreciation allowance;
the idea of profit on the investment made has never been the underlying reason for the allowance
of a deduction for depreciation.
The Supreme Court opined that depreciation is a question of fact and is not measured by
theoretical yardstick, but should be determined by a consideration of actual facts. The findings
of the tax court in this respect should not be disturbed when not shown to be arbitrary or in
abuse of discretion. Limpan has not shown any arbitrariness or abuse of discretion on the part
of the CTA. In fact, the CTA applied rates of depreciation in accordance with Bulletin F of the
US Federal Internal Revenue Service, which the Supreme Court, has pronounced as having
strong persuasive effect.
Although the Tax Code allows payments of royalty to be deducted from gross income as
business expenses, it is CB Circular No. 393 that defines what royalty payments are proper.
Hence, improper payments of royalty are not deductible as legitimate business expenses.
INDIVIDUALS
In foreclosure sale, there is no actual transfer of the mortgaged real property until after the
expiration of the one-year period and title is consolidated in the name of the mortgagee in case
of non-redemption. This is because before the period expires there is yet no transfer of title and
no profit or gain is realized by the mortgagor.
the Supreme Court noted that under RA 9257 or the Expanded Senior Citizens Act of 2003,
starting taxable year 2004, the 20% sales discount shall be treated as a tax deduction and no
longer as a tax credit.
CTA: We affirm the Court in Division's ruling that since petitioner admitted that it sells passage
documents .in the Philippines through its sales agent, Aerotel, and that it derives revenues from
the conduct of its business activity regularly pursued within the Philippines, petitioner is a
resident foreign corporation engaged in trade or business in the Philippines and must be subject
to income tax.
 Considering, therefore, that petitioner is a resident foreign corporation doing business in the
Philippines, and applying Article 8(2) of the RP-New Zealand Tax Treaty, it shall be subject to
an income tax equivalent to 1 1/2 %on the profits derived from sources within the Philippines.

To reiterate, the absence of flight operations to and from the Philippines is not determinative of
the source of income for purposes of ascertaining income tax liability. It is sufficient that the
income is derived from activity within the Philippine territory. Therefore, petitioner is a resident
foreign corporation doing business in the Philippines within the purview of our tax law and the
income earned from its flight operations outside the Philippines is subject to income tax.

83. CIR v. BOAC For the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In ABC’s case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets exchanged hands here in the
country and the payments for fares were also made with Philippine currency. The site of the
source of payments is the Philippines. The absence of flight operations to and from the
Philippines is not determinative of the source of income/site of income taxation for the test of
taxability is the “source.”
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific
criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case
must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and
in progressive prosecution of commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to establish a continuous business, such
as the appointment of a local agent, and not one of a temporary character.
84. United Airlines, Inc. v. CIR A taxpayer may not offset taxes due from the claims that he may have against the government.
Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

85. Bank of America NT & SA v. Branch Profit Remittance Tax The statute employs "Any profit remitted abroad by a branch to its head office shall be subject
CA to a tax of fifteen per cent (15%)" — without more. Nowhere is there said of "base on the total
amount actually applied for by the branch with the Central Bank of the Philippines as profit to
be remitted abroad, which shall be collected and paid as provided in Sections 53 and 54 of this
Code." Where the law does not qualify that the tax is imposed and collected at source based on
profit to be remitted abroad, that qualification should not be read into the law.

86. Compania Genreral de RMC 8-82: Having found that the questioned taxes were paid the applicable ruling is revenue
Tabacos de Filipinas v. CIR Memorandum Circular No. 8 - 82, "then what should apply as taxable base in computing the
15X branch profit remittance tax is the amount applied for with the Central Bank as profit to be
remitted abroad.
With regard to the passive income already subjected to the final tax, That interests, dividends,
rents, royalties, including remunerations for technical services, salaries, wages, premiums,
annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits,
income and capital gains received by a foreign corporation during each taxable year from all
 sources within the Philippines shall not be considered as branch profits unless the same are
effectively connected with the conduct of the trade or business in the Philippines.

87. CIR v. S.C. Johnson and
Son, Inc.
Nonresident Foreign Corporations
In General
The Supreme Court held that the concessional tax rate of 10% provided for in the RPGermany
Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the
two taxes imposed under the two tax treaties are not paid under similar circumstances and do
not contain similar provisions on tax crediting. It is not proved that the RPUS Tax Treaty grants
similar tax reliefs to residents of the US in respect of the taxes imposable upon royalties earned
from sources within the Philippines as those allowed to their German counterparts. Further, the
RP-Germany Tax Treaty allows for crediting against German income and corporate tax of 20%
of the gross amount of royalties paid under the law of the Philippines. On the other hand, the
RP-US Tax Treaty does not provide for the similar crediting of 20% of the gross amount of
royalties paid. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need for equality of
treatment. since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty,
XYZ cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the
reason that there is no payment of taxes on royalties under similar circumstances.

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

89. N.V. Reederij “Amsterdam” In order that a foreign corporation may be considered engaged in trade or business, its business
and Royal InterOcean Lines transactions must be continuous. A casual business activity in the Philippines by a foreign
v. CIR corporation does not amount to engaging in trade or business in the Philippines for income tax
purposes. Accordingly, its taxable income for purposes of our income tax law consists of its
gross income from all sources within the Philippines.

90. CIR v. Procter & Gamble Intercorporate Dividends the Tax Code does not require that the foreign country’s tax laws deemed the parent-corporation
Philippines Manufacturing to have paid the dividend tax waived by the Philippines. The Code only requires that the foreign
Corp. country shall allow the corporation a “deemed paid” tax credit in an amount equivalent to the
percentage points waived by the Philippines.

IN SHORT:
Concluded that if the country of domicile of the recipient corporation allows a credit
against the tax imposable by it an amount equivalent to 20%113 of the dividends remitted
from a Philippine domestic corporation to corporations domiciled therein, the dividends
remitted are subject to FWT at the preferential rate of 15% in accordance with Section
28 (b)(5)(b) of the Tax Code of 1997, as amended.
91. Interpublic Group of The CIR, in response, raised the question of whether the US corporation is entitled to the FWT
Companies v. CIR at the rate of 15% or the rate of 20% in accordance with the RP-US Tax Treaty.

92. Mirant Operations Income covered by Tax Treaties Mirant made income payments to VHL enterprises, a US nonresident foreign corporation and
Corporation v. CIR to WES World, a UK nonresident foreign corporation. It accordingly withheld the tax due on
these interest payments. Thereafter, Mirant filed for a refund contending that the two foreign
corporations have created “permanent establishments” in the Philippines and thus making
applicable the lower withholding tax rate under the RP-UK and RP-US tax treaties. The CTA
noted that under those treaties, VHL and WES World, while not having a fixed place of business
have established “permanent establishments” in the Philippines because they have “furnished
services through their employees or other personnel for a period or periods the aggregate of
which is more than 183 days in a twelve-month period."

However, under RMO 01-2000, it is provided that the availment of a tax treaty provision must
be preceded by an application for a tax treaty relief with its International Tax Affairs Division
(ITAD). A foreign corporation wishing to avail of the benefits of the tax treaty should invoke
the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to
it, before the benefits may be extended to such corporation.The CTA noted that Mirant did not
make such application. Thus, the CTA finally held that the income payments of Mirant to VHL
and WES, which are both non-resident foreign corporations, are subject to the final tax of 32%.

Note:
As provided in RMO 072-10 [AUGUST 25, 2010], the ITAD is the sole office charged with the
receiving of tax treaty relief applications (TTRA). All tax treaty relief applications relative to
the implementation and interpretation of the provisions of Philippine tax treaties shall only be
submitted to and received by the International Tax Affairs Division (ITAD). All rulings relative
to the application, implementation and interpretation of the provisions of Philippine tax treaties
shall emanate from ITAD.

93. Deustche Bank v. CIR Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a
tax of 15% based on the total profits applied for or earmarked for remittance without any
deduction of the tax component. However, by virtue of the RP-Germany Tax Treaty, we are
bound to extend to a branch in the Philippines, remitting to its head office in Germany, the
benefit of a preferential rate equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the
tax treaty relief must be preceded by an application with ITAD at least 15 days before the
transaction. The Order was issued to streamline the processing of the application of tax treaty
relief in order to improve efficiency and service to the taxpayers. Further, it also aims to prevent
the consequences of an erroneous interpretation and/or application of the treaty provisions (i.e.,
filing a claim for a tax refund/credit for the overpayment of taxes or for deficiency tax liabilities
for underpayment).

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the
 relief as it would constitute a violation of the duty required by good faith in complying with a
tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within
the prescribed period under the administrative issuance would impair the value of the tax treaty.
At most, the application for a tax treaty relief from the BIR should merely operate to confirm
the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No.
1-2000.
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax treaty
or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken."20 Thus, laws and issuances must ensure that the reliefs granted under tax treaties
are accorded to the parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international agreements. More
so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment
of the benefits under said agreement

WITHHOLDING TAX
94. CIR v. Smart Final Withholding Tax at Source The Supreme Court disagreed and stated that such relationship is not required. A withholding
Communication, Inc. agent has a legal right to file a claim for refund. First, he is considered a taxpayer under the Tax
Code as he is personally liable for the withholding tax as well as for deficiency assessments,
surcharges, and penalties, should the amount withheld be finally found to be less than the
amount that should have been withheld. Second, as an agent of the taxpayer, his authority to
file the income tax return and remit the tax withheld to the government includes the authority
to file a claim for refund and to bring an action for recovery of such claim.

The Supreme Court ruled that while the withholding agent has the right to recover the taxes
erroneously or illegally collected, he nevertheless has the obligation to remit the same;
otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer from
whom the taxes were withheld, and from whom he derives his legal right to file a claim for
refund.

95. Filipinas Synthetic Fiber Creditable Withholding Tax The Supreme Court stated that the Tax Code is silent as to when the duty to withhold taxes
Corp. v. CA arises. In this case, to determine when the duty to withhold the taxes arose, the Court inquired
into the nature of accrual method of accounting, the procedure used by the taxpayer, and to the
modus vivendi of withholding tax at source come. It noted that under the accrual basis method
of accounting, income is reportable when all the events have occurred that fix the taxpayer’s
right to receive the income and the amount can be determined with reasonable accuracy. Such
method is allowed by law in reporting incomes.

SPECIAL RULES
96. Chamber of Real Estate Minimum Corporate Income Tax The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses
Builders’ Association, Inc. v. after operations of a corporation or consistent reports of minimal net income render its financial
Executive Secretary statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by
 corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters.
As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems.
Since the tax base was broader, the tax rate was lowered.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by the
corporation in the sale of its goods, i.e. the cost of goods and other direct expenses from gross
sales. Thus, the capital is not being taxed. Furthermore, the MCIT is not an additional tax
imposition. It is imposed in lieu of the RCIT.

97. CIR v. Philippine Airline, The Supreme Court noted there is a distinction between taxable income, which is the basis for
Inc. basic corporate income tax; and gross income, which is the basis for the MCIT under Section
27(E). The two terms have their respective technical meanings, and cannot be used
interchangeably. Hence, the basic corporate income tax cannot cover MCIT since the basis for
the first is the annual net taxable income; while the basis for the second is gross. Thus, MCIT
is included in “all other taxes” from which PAL is exempted.

98. The Manila Wine Improperly Accumulated Earnings The Supreme Court ruled against MWM. It noted that the bonds were bought in 1951 and until
Merchants, Inc. v. CIR Tax 1961; it was never used to aid MWM’s importations. To justify an accumulation of earnings
and profits for the reasonably anticipated future needs, such accumulation must be used within
a reasonable time after the close of the taxable year.

The Supreme Court stated that to determine if profits are reasonably accumulated for business
needs, the controlling intention is that manifested at the time of accumulation and not later ones.
The second reason given by MWM was too indefinite and was a mere afterthought.

99. CIR v. Tuason The Supreme Court ruled that Tuason was liable for IAET. Tuason was a mere holding company
as it was not involved itself in the development of the subdivisions but merely subdivided its
own lots and sold them for bigger profits. It derived its income from interest, dividends, and
rental from the sale of realty. The touchstone of liability is the purpose behind the accumulation
of the income and not the consequences of the accumulation. The company's failure to distribute
dividends to its stockholders was clearly for reasons other than the reasonable needs of the
business

100. Cyanamid Philippines, Inc. The imposition of IAET discouraged tax avoidance through corporate surplus accumulation.
v. CA When corporations do not declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed

101. CIR v. Filinvest Transfer Pricing Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income
Development Corp. under Section 50, the same does not include the power to impute theoretical interest even with
regard to controlled taxpayers’ transactions. This is true even if the CIR is able to prove that the
interest expense was in fact claimed by FDC. The term in the definition of gross income that
even those income “from whatever source derived” is covered still requires that there must be
actual or at least probable receipt or realization of the time of gross income sought to be

102. Her Majesty the Queen v.
Glaxo Smith Klein Inc.
103. CIR v. St. Luke’s Medical
Center, Inc.
apportioned, distributed or reallocated. Finally, under the Civil Code, no interest shall be due
unless expressly stipulated in writing.
The Supreme Court of Canada states that a proper application of the arm’s length principle
requires that regard be had for the “economically relevant characteristics” of the arm’s length
and non-arm’s length circumstances to ensure they are “sufficiently comparable.” The
“economically relevant characteristics of the situations being compared” may make it necessary
to consider other transactions that impact the transfer price under consideration. Such
circumstances will include agreements that may confer rights and benefits in addition to the
purchase of property where those agreements are linked to the purchasing agreement. The
objective is to determine what an arm’s length purchaser would pay for the property and the
rights and benefits together where the rights and benefits are linked to the price paid for the
property. In this case, GSK was paying for at least some of the rights and benefits under the
Licence Agreement as part of the purchase prices for ranitidine from Adechsa. As such, the
Licence Agreement could not be ignored in determining the reasonable amount paid to Adechsa
which applies not only to payment for goods but also to payment for services.
SPECIAL ENTITIES
Proprietary Educational Institution “nonprofit” does not necessarily mean “charitable.”
and Hospitals
Section 27(B) provides that proprietary educational institutions and hospitals which are non-
profit shal pay a tax of ten percent (10%) on their taxable income
Section 30(E), NIRC provides that a non-stock corporation or association organized and
operated exclusively for charitable purposes is exempt from income tax while Section 30(G)
provides that a civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare is likewise exempt.
The Supreme Court ruled that St. Lukes cannot claim full tax exemption under Section 30
because it has paying patients and this is notwithstanding the fact that it is a non-profit hospital.
For Section 27(B) to apply, the hospital must be non-profit which means that no net income or
asset accrues to or benefits any member or specific person and all the activities of the hospital
are non-profit. On the other hand, Section 30(E) and (G), while providing for an exemption is
qualified by the last paragraph which, in turn, provides that activities conducted for profit shall
be taxable. Section 30(E) and (G) requires that an institution be operated exclusively for
charitable purposes to be completely exempt from income tax.
In this case however, St. Lukes is not operated exclusively for charitable purposes insofar as its
revenues from paying patients are concerned. Such revenue is subject to income tax at 10%
under Section 27(B).
To be exempt from income taxes, Section 30(E) requires that the charitable institution must be
organized and operated exclusively for charitable purpose. It is nevertheless allowed to engage
in “activities conducted for profit” without losing its tax-exempt status for its notfor-profit
activities. The consequence, however, is that such income from activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax.

104. Philippine Amusement and GOCCs
Gaming Corporation v.
Bureau of Internal Revenue
(2011)
105. Philippine Amusement and
Gaming Corporation v. BIR
(2014)
106. Bloombery v. BIR
For proprietary educational institutions and hospitals which are non-profit to avail of the
preferential tax rate, no net income or asset accrues to or benefits any member or specific person,
with all the net income or asset devoted to the institution’s purposes and all its activities.
Thus, while the St. Lukes did not qualify as a non-profit, non-stock charitable institution under
Section 30(E) as it was not operated exclusively for charitable purposes, it remains to be a
proprietary nonprofit hospital under Section 27(E) as long as it does not distribute any of its
profits to its members and such profits are reinvested pursuant to its corporate purposes. St.
Lukes, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its
net income from its for-profit activities.
The Supreme Court held that the original exemption of PAGCOR from corporate income tax
was not made pursuant to a valid classification based on substantial distinction so that the law
may operate only on some and not on all. Instead, the same was merely granted to the
acquiescence of the House Committee on Ways and Means to the request of PAGCOR. The
argument that the withdrawal of the exemption violates the non-impairment clause will not hold
since any franchise is subject to amendment, alteration or repeal by Congress. The Court,
however, made clear that PAGCOR remains to be exempt from VAT. Nowhere in RA 9337 is
it provided that PAGCOR can be subjected to VAT. Thus, the provision of RR 16- 2005 which
the BIR issued to implement the VAT law subjecting PAGCOR to VAT is invalid for being
contrary to RA 9337.
The Court upheld earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of
R.A. No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional. In addition, Court held that:
1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes
with respect to its income from gaming operations, pursuant to P.D. 1869, as amended, is not
repealed or amended by Section 1(c) of R.A. No. 9337;
2. Petitioner’s income from gaming operations is subject to the five percent (5%) franchise tax
only; and
3. Petitioner’s income from other related services is subject to corporate income tax (10%) only.
As the PAGCOR Charter states in unequivocal terms that exemptions granted for earnings
derived from the operations conducted under the franchise specifically from the payment of any
tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit
of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
PAGCOR or operator has any contractual relationship in connection with the operations of the
casino(s) authorized to be conducted under this Franchise, so it must be that all contractees and
licensees of PAGCOR, upon payment of the 5% franchise tax, shall likewise be exempted from
all other taxes, including corporate income tax realized from the operation of casinos.
For the same reasons that made us conclude in the 10 December 2014 Decision of the Court
sitting En Banc in G.R. No. 215427 that PAGCOR is subject to corporate income tax for "other
related services", we find it logical that its contractees and licensees shall likewise pay corporate
income tax for income derived from such "related services."
107. Dumaguete Cathedral
Credit Cooperatives v. CIR
108. CIR v. G. Sinco Educational
Corp.
109. Calasanz v. CIR
110. Tuason v. Lingad
111. China Banking Corporation
v. CA
Exempt Corporations
CAPITAL GAINS AND LOSSES
Capital assets/income
Ordinary assets/income
Limitation on capital loss
Since interest from any Philippine currency bank deposit yield or any other monetary benefit
from deposit substitutes are paid by banks, other entities such as cooperative are not required to
withhold the corresponding tax on the interest from savings and time deposits of its members.
The fact that “similar arrangements” is preceded by banking terms means that those subject to
withholding must have deposit peculiarities. This is also consistent with the preferential
treatment accorded to members of cooperatives who are exempt in the same way as the
cooperative themselves.
The Supreme Court held that the amount of fees charged by the school depends upon the policy
and a given administration at a given time and is not conclusive of the purposes of the institution.
It does not in itself make a school a profit-making enterprise.
The statutory definition of capital assets is negative in nature. If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary
assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain
or an ordinary gain depending on the kind of asset involved in the transaction. In this case, the
activities of A are indistinguishable from those invariably employed by one engaged in the
business of selling real estate. One strong factor is the business element of development which
is very much in evidence. A did not sell the land in the condition in which he acquired it. In the
course of selling the subdivided lots, A engaged in the real estate business and accordingly, the
gains from the sale of the lots are ordinary income taxable in full
In this case, the properties should be regarded as ordinary assets. When Y obtained by
inheritance the parcels in question, transferred to him was not merely the duty to respect the
terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of
the business and property which the decedent had established and maintained. Under the
circumstances, Y’s sales of the several lots forming part of his rental business cannot be
characterized as other than sales of ordinary assets. The sales concluded on installment basis of
the subdivided lots comprising the last lot do not deserve a different characterization for tax
purposes. The following circumstances in combination show unequivocally that the petitioner
was, at the time material to this case, engaged in the real estate business.
As ruled by the Supreme Court, an equity investment is a capital, not ordinary, asset of the
investor the sale or exchange of which results in either a capital gain or a capital loss.
Losses from sales of exchanges of capital assets shall be allowed to be deducted only to the
extent of the gains from such sales or exchanges.
The Supreme Court ruled that the equity investment is not indebtedness in the first place but
rather capital, not an ordinary, asset. Shares of stock would be ordinary assets only to a dealer
in securities or a person engaged in the purchase and sale of, or an active trader (for his own
account) in, securities. In the hands, however, of another who holds the shares of stock by way
of an investment, the shares to him would be capital assets. When the shares held by such
investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital
assets.
 The Court further stated that assuming that the equity investment of CBC has indeed become
"worthless," the loss sustained is a capital, not an ordinary, loss. The rule thus is that capital loss
can be deducted only from capital gains. The capital loss sustained by CBC can only be
deducted from capital gains if any derived by it during the same taxable year that the securities
have become "worthless.

Note:
The exception (where the capital loss limitation rule will not apply) – If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of whose business is the receipt
of deposits sells any bond, debenture, note or certificate or other evidence of indebtedness issued
by an corporation with interest coupons or in registered form, any losss resulting from such sale
shall not be subject to the above limitations and shall not be included in determining the
applicability of such limitation to other losses. )

DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY

112. CIR v. Rufino
Merger or Consolidation It is well established that where stocks for stocks were exchanged, and distributed to the
stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of
reorganization, such exchange is exempt from capital gains tax. The basic consideration, of
course, is the purpose of the merger, as this would determine whether the exchange of properties
involved therein shall be subject or not to the capital gains tax. The criterion laid down by the
law is that the merger" must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden of taxation." It is clear, in fact, that the purpose of the merger
was to continue the business of the Old Corporation, whose corporate life was about to expire,
through the New Corporation to which all the assets and obligations of the former had been
transferred. The exemption from the tax of the gain derived from exchanges of stock solely for
stock of another corporation was intended to encourage corporations in pooling, combining or
expanding their resources conducive to the economic development of the country. The merger
in question involved a pooling of resources aimed at the continuation and expansion of business
and so came under the letter and intendment of the NIRC exempting from the capital gains tax
exchanges of property.

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or

consolidation, solely for the stock of another corporation also a party to the merger or
consolidation.

113. CIR v. Filinvest Transfer of Property for Shares of The Supreme Court stated that the requisites for the non-recognition of gain or loss of a transfer
Development Corporation Stocks of property for shares of stock are as follows:
(a) the transferee is a corporation;
(b) the transferee exchanges its shares of stock for property/ies of the transferor;
(c) the transfer is made by a person, acting alone or together with others, not exceeding four
persons; and, (d) as a result of the exchange the transferor, alone or together with others, not
exceeding four, gains control of the transferee.

Rather than isolating FDC, the shares issued to FDC should be appreciated in combination with
the new shares issued to FAI. Together, FDC and FAI’s shares add to 70.99% of FLI’s shares.
Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing

114. Gregory v. Helvering
115. Consolidated Mines, Inc. v.
CTA
116. Bibiano V. Banas, Jr. v. CA
117. Systra Philippines, Inc. v.
CIR
at least fifty-one percent of the total voting power of classes of stocks entitled to one vote, “ the
exchange of property for stocks between FDC-FAI and FLI clearly qualify as a tax-free
transaction.
Business Purpose A transfer of assets by one corporation to another must have a business purpose. Here, it was a
mere device which followed the form of a corporate reorganization to conceal its real character
which was a transfer of stock of XYZ shares to A
ADMINISTRATIVE PROVISIONS
Accounting Method or Accrual The rule is that a taxpayer may use any one method of accounting but not a combination of two
Hybrid Method or more methods of accounting for each type of business during the taxable year. The use of a
hybrid method of accounting is not allowed
Installment Basis The transaction remains to be an instalment (not cash) sale as the law expressly excludes
evidence of indebtedness in the determination of how much was paid for the year. However,
even if the proceeds of discounted note is not considered as part of the initial payment, the
income realized from the discounting itself is still a separate taxable income in the year it was
converted into cash because it was at this year that there was actual gain on the discounted notes.
Final Adjustment Return A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes
paid has two options:
(1) to carry over the excess credit or
(2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to
carry over the excess credit is exercised, the same shall be irrevocable for that taxable period.
In exercising its option, the corporation must signify in its annual corporate adjustment return
(by marking the option box provided in the BIR form) its intention either to carry over the
excess credit or to claim a refund. To facilitate tax collection, these remedies are in the
alternative and the choice of one precludes the other.
This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of
the Tax Code. The phrase "such option shall be considered irrevocable for that taxable period"
means that the option to carry over the excess tax credits of a particular taxable year can no
longer be revoked.
The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid:
(1) as automatic credit against taxes for the taxable quarters of the succeeding years for which
no tax credit certificate has been issued and
(2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed
for cash refund.
In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the
irrevocable option to carry them over as tax credits for the next taxable year. Under Section 76
of the Tax Code, a claim for refund of such excess credits can no longer be made. The excess
credits will only be applied "against income tax due for the taxable quarters of the succeeding
taxable years."
118. Philam Asset Management, Under Section 76 of the National Internal Revenue Code, a taxable corporation with excess
Inc. v. CIR quarterly income tax payments may apply for either a tax refund or a tax credit, but not both.
The choice of one precludes the other.

Failure to indicate a choice, however, will not bar a valid request for a refund, should this option
be chosen by the taxpayer later on.

In GR No. 162004, however, the subsequent acts of petitioner demonstrated its option to carry
over its tax credit for 1998, even if it again failed to tick the appropriate box for that option in
its 1998 ITR.

The fact that it filled out the portion Prior Years Excess Credits in its 1999 FAR means that it
categorically availed itself of the carry-over option. In fact, the line that precedes that phrase in
the BIR form clearly states Less: Tax Credits/Payments. The contention that it merely filled out
that portion because it was a requirement -- and that to have done otherwise would have been
tantamount to falsifying the FAR -- is a long shot.

The FAR is the most reliable first hand evidence of corporate acts pertaining to income taxes.
In it are found the itemization and summary of additions to and deductions from income taxes
due. These entries are not without rhyme or reason. They are required, because they facilitate
the tax administration process.
Failure to indicate the amount of prior years excess credits does not mean falsification by a
taxpayer of its current years FAR. On the contrary, if an application for a tax refund has been -
- or will be -- filed, then that portion of the BIR form should necessarily be blank, even if the
FAR of the previous taxable year already shows an overpayment in taxes.

119. BPI v. CIR Return of Corporations Upon the SEC’s approval of the Articles of Merger in July 1, 1985, BPI became the successor-
Contemplating in-interestof Family Bank and Trust Company (FBTC). Prior to the approval of the merger,
Dissolution/Reorganization FBTC earned rental fees and interest from treasury notes. FBTC’s lessees withheld 5% on the
rentals pursuant to the expanding Withholding Tax Regulations while the Central Bank
withheld 15% on the treasury notes.The withheld taxes totaling to 174k were remitted to FBTC.
FBTC’s excess credit amounted to 2.14M.

In 1986, FBTC filed its return showing (a 65.5M net loss and) a refundable amount of the
withheld tax. BPI, as successor0in-interest, asked the BIR for refund of the excess credit and
the withheld taxes. The BIR refused.In 1987 BPI brought a petition for review before the CTA.
The CTA dismissed it on the ground that the claim for tax refund had prescribed. MR denied,
hence this petition for review.

CTA: Since FBTC is a dissolving corporation, it is required to file its income tax return within
30 day after the cessation of business or 30 days after the approval of the merger. For BPI to
claim the refund, it should have filed the action within to years from the day in which FBTC as
corporate taxpayer is required to file its final income tax return. BPI filed it on Dec 1987, when
it had until July 1987 to file it. Petitioner misled the CTA by claiming that what is required is
only an information return. An ongoing corporation files a quarterly corporate return and the

120. United Airlines, Inc. v. CIR
final adjustment return refers to final adjustment income tax return. All references by BPI relate
to the filing of an ‘accurate income tax return.’
The correct return for the case of FBTC is the Final Adjustment Income Tax Return.
RATIO: Reckoning period of the 2-year prescriptive period in claiming a refund is from the
time claimant is required to file his return.
Other Income Requirements Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is
made in case of any list, statement or return, which in the opinion of the Commissioner was
false or fraudulent or contained any understatement or undervaluation, no tax collected under
such assessment shall be recovered by any suit, unless it is proved that the said list, statement
or return was not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created a
doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said
return which, by itself and without unquestionable evidence, cannot be the basis for the grant
of the refund.
In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to
a refund based on the facts. On the assumption that petitioner filed a correct return, it had the
right to file a claim for refund of GPB tax on passenger revenues it paid in 1999 when it was
not operating passenger flights to and from the Philippines. However, upon examination by the
CTA, petitioners return was found erroneous as it understated its gross cargo revenue for the
same taxable year due to deductions of two (2) items consisting of commission and other
incentives of its agent. Having underpaid the GPB tax due on its cargo revenues for 1999,
petitioner is not entitled to a refund of its GPB tax on its passenger revenue, the amount of the
former being even much higher (P31.43 million) than the tax refund sought (P5.2 million). The
CTA therefore correctly denied the claim for tax refund after determining the proper assessment
and the tax due.
RATIO:
Offsetting of tax refund with tax due (valid return): NO
Offsetting of tax refund with tax deficiency (invalid/understated return): YES