1.

CIR vs British Airways

Facts:

Court of Tax Appeals (CTA)... set aside petitioner's assessment of deficiency income... taxes against
respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to
1970-71

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom... it operates air... transportation service and sells transportation tickets over the routes
of the other airline members.

BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a

Certificate of public convenience and necessity to operate in the Philippines... it did not carry...
passengers and/or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd.,
and later Qantas Airways which was responsible for selling BOAC tickets covering... passengers and
cargoes.

new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.

BOAC paid this new assessment under protest.

BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR

BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to
1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties

This prompted BOAC to file the Second Case before the Tax Court... praying that it be absolved of liability
for deficiency income tax for the years 1969 to 1971.

The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner
Barnes and Company, Ltd., and later by Qantas Airways, during the period in... question, do not
constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight
was performed by BOAC within the Philippines" and, therefore, said income is not subject to Philippine
income tax.

Issues:

Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC)
from sales of tickets in the Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources,... and, accordingly, taxable.
Whether or not during the fiscal years in question BOAC is a resident foreign corporation doing business
in the Philippines or has an office or place of business in the Philippines.

a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per
cent (35%) of its gross income received from all sources... within the Philippines."

Ruling:

the term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein.

The term 'non-resident foreign corporation' applies to a foreign corporation not engaged in trade or
business within the Philippines and not having any office or place of business therein."

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.

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.

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'

BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the
Philippines.

Those activities were in exercise of the functions which are normally incident to, and are in progressive
pursuit of, the purpose and object of its organization as an... international air carrier.

the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of
sales being the paramount objective... no doubt then that BOAC was "engaged in" business in the

Philippines through a local agent during the period covered by the assessments.

it is a resident foreign corporation subject to tax upon its total net income received in the preceding
taxable year from all sources within the Philippines.

"'Gross income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property, whether... real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or gains, profits, and income derived from any
source whatever"... broad and comprehensive to include proceeds from sales of transport documents.

'income from any source whatever'

Income means "cash received or its equivalent"; it is the amount of money coming to a person within a
specific time x x x; it means something distinct from principal or capital. For, while capital is a fund,
income is a flow. As used in our income tax... law, "income" refers to the flow of wealth.

The source of an income is the property, activity or service that produced the income.[8] 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 BOAC's case, the sale of tickets in the Philippines is the activity that produces the income.

The tickets exchanged hands here and payments for fares were also made here in Philippine currency.
The situs of the source of payments is the Philippines.

The flow of... wealth proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government.

A transportation ticket is not a mere piece of paper.

The ordinary ticket issued to members of the travelling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the... parties entering into the relationship

Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property... does not mention... income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines.

Section 37, by its language, does not intend the enumeration to be exclusive.

merely directs that the types... of income listed therein be treated as income from sources within the
Philippines... the section will show that it does not state that it is an all-inclusive enumeration, and that
no other kind of income maybe so considered

The absence of flight operations to and from the Philippines is not determinative of the source of income
or the situs of income taxation.

The test of taxability is the

"source", and the source of an income is that activity x x x which produced the income
The... word "source" conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines... the assessments upheld herein apply only to the fiscal years covered by the questioned
deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71

Presidential Decree No. 69,... promulgated on 24 November, 1972, international carriers are now taxed
as follows:

"x x x Provided, however, That international carriers shall pay a tax of 2-1/2 percent on their gross
Philippine billings.

Gross Philippine billings' includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo... or mail originates from the Philippines.

The 2 1/2% tax on gross Philippine billings is an income tax.

the common carrier's... tax is an excise tax, being a tax on the activity of transporting, conveying or
removing passengers and cargo from one place to another. It purports to tax the business of
transportation.[14] Being an excise tax, the same can be levied by the State... only when the acts,
privileges or businesses are done or performed within the jurisdiction of the Philippines. The subject
matter of the case under consideration is income tax, a direct tax on the income of persons and other
entities "of whatever kind and in whatever form... derived from any source."

Principles:

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.[2] "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'.

"'Gross income' includes gains, profits, and income derived from salaries, wages or compensation for
personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property, whether... real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or gains, profits, and income derived from any
source whatever"

"The words 'income from any source whatever' disclose a legislative policy to include all income not
expressly exempted within the class of taxable income under our... laws".

Income means "cash received or its equivalent"; it is the amount of money coming to a person within a
specific time x x x; it means something distinct from principal or capital. For, while capital is a fund,
income is a flow. As used in our income tax... law, "income" refers to the flow of wealth.

The source of an income is the property, activity or service that produced the income.[8] 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.

2. South African Airways v. CIR

G.R. No. 180356 February 16, 2010

VELASCO, JR., J.

Lessons Applicable: Taxes can be offset if intimately related, unless exempted assumed within the
purview of general rule, liabilities and tax credit must first be determined before offset can take place

Laws Applicable:

Facts:

South African Airways, a foreign corporation with no license to do business in the Philippines, sells
passage documents for off-line flights through Aerotel Limited, general sales agent in the Philippines

Feb 5, 2003: Petitioner filed a claim for refund erroneously paid tax on Gross Philippine Billing (GPB) for
the year 2010.

CTA: denied - petitioner is a resident foreign corp. engaged in trade or business in the Philippines and
therefore is NOT liable to pay tax on GPB under the Sec. 28 (A) (3) (a) of the 1997 NIRC but cannot be
allowed refund because liable for the 32% income tax from its sales of passage documents.

This is upheld by the CTA and CTA En Banc

Issue:

1. W/N petitioner is engaged in trade or business in the Philippines is subject to 32% income tax.

2. W/N petitioner is entitled to refund

HELD: CTA En Banc decision is set side

1. Yes. Since it does not maintain flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)
(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further posits the view that
due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for
its sale of passage documents in the Philippines. But, Sec. 28 (A)(1) of the 1997 NIRC does not exempt
all international air carriers from the coverage of Sec. 28 (A) (1) of the 1997 NIRC being a general rule.
Petitioner, being an international carrier with no flights originating from the Philippines, does not fall
under the exception. As such, petitioner must fall under the general rule. This principle is embodied in
the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being
excepted must be regarded as coming within the purview of the general rule.

2. Underterminable. Although offsetting of tax refund with tax deficiency is unavailing under Art. 1279
of the Civil Code, in CIR v. CTA it granted when deficiency assessment is intimately related and
inextricably intertwined with the right to claim for a tax refund. Sec. 72 Chapter XI of 1997 NIRC is not
applicable where petitioner's tax refund claim assumes that the tax return that it filed were correct
because petitioner is liable under Sec. 28 (A)(1), the correctness is now put in doubt and refund cannot
be granted. It cannot be assumed that the liabilities for two different provisions would be the same.
There is a necessity for the CTA to receive evidence and establish the correct amount before a refund can
be granted.

3. Air Canada vs CIR

FACTS: Air Canada is an offline air carrier selling passage tickets in the Philippines, through a general
sales agent, Aerotel. As an off-line carrier, [Air Canada] does not have flights originating from or coming
to the Philippines [and does not] operate any airplane [in] the Philippines[.]

Air Canada filed a claim for refund for more than 5 million pesos. It claims that there was overpayment,
saying that the applicable tax rate against it is 2.5% under the law on tax on Resident Foreign
Corporations (RFCs) for international carriers. It argues that, as an international carrier doing business in
the Philippines, it is not subject to tax at the regular rate of 32%.

Air Canada also claims that it is not taxable because its income is taxable only in Canada because of the
Philippines-Canada Treaty (treaty). According to it, even if taxable, the rate should not exceed 1.5% as
stated in said treaty.

However, the CTA ruled that Air Canada was engaged in business in the Philippines through a local agent
that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation at the
regular rate of 32%.
The CTA also said that Air Canada cannot avail of the lower tax rate under the treaty because it has a
"permanent establishment" in the Philippines. Hence, Air Canada cannot avail of the tax exemption
under the treaty.

ISSUES:

[1] Is Air Canada, an offline international carrier selling passage documents through Aerotel, a RFC?

[2] As an offline international carrier selling passage documents, is Air Canada subject to 2.5% tax on
Gross Philippine Billings or to the regular 32% tax?

[3] Can Air Canada benefit from the treaty's elimination of double taxation in favor of Canada or the
preferential rate of 1.5%?

[4] Can Air Canada validly refuse to pay its tax deficiency on the ground that there is a pending tax credit
proceeding it has filed?

[5] Is Air Canada entitled to the tax refund claimed at more than 5 million pesos?

HELD:

[1] Yes, Air Canada is a resident foreign corporation. Although there is no one rule in determining what
"doing business in the Philippines" means, the appointment of an agent or an employee is a good
indicator. This is especially true when there is effective control, similar to that of employer-employee
relationship. This is true between Air Canada and Aerotel. Hence, Air Canada is a RFC.

[2] No, because the 2.5% tax on Gross Philippine Billings applies only to carriers maintaining flights to
and from the Philippines. Air Canada's appointment of a general sales agent, Aerotel, here is only for the
purpose of selling passage documents. However, this is not the complete answer since the treaty is the
latter law that prevails in this case.

[3] Air Canada cannot avail of the elimination of double taxation in favor of Canada since the treaty
expressly excludes Canadian carriers with "permanent establishment." Through the appointment of
Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the
Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.

This is especially true since Aerotel has no "independent status" beacuse Air Canada exercises
comprehensive control and detailed instructions over the means and results of the activities of the
former.
[4] No, it cannot. Even if Air Canada succeeds in claiming tax refund, the general rule prevails that there
can be not setting off of taxes since the Government and the taxpayer are not creditors and debtors of
each other.

[5] No, Air Canada is not entitled to refund. The P5,185,676.77 Gross Philippine Billings tax paid by
petitioner was computed at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149
from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable
under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of taxable income, that is, gross
income less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article
VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

4. PHILIPPINE AMUSEMENT v. BIR, GR No. 172087, 2011-03-15

Facts:

Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue
Regulations No. 16-2005 for being contrary to law.

With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended.

Different groups came to this Court via petitions for certiorari and prohibition[11] assailing the validity
and constitutionality of R.A. No. 9337

10% Value Added Tax (VAT) on sale of goods and properties

10% VAT on importation of goods

10% VAT on sale of services and use or lease of properties... the Court dismissed all the petitions and
upheld the constitutionality of R.A. No. 9337.
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A.No. 9337.Furthermore, according to the
OSG,... public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because
the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

Issues:

whether or not PAGCOR is still exempt... hether or not PAGCOR is still exempt... t from

VAT with the enactment of R.A. No. 9337.

Ruling:

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT
is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can
be subjected to VAT. R.A. No. 9337 is clear only as to... the removal of petitioner's exemption from the
payment of corporate income tax, which was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k)
thereof... the following transactions shall be exempt from the value-added tax:

Transactions which are exempt under international agreements to which the Philippines is a signatory or
under special laws

Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is a special law
that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337
The following services performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate;

Services rendered to persons or entities whose exemption under special laws... subjects the supply of
such services to zero percent (0%) rate... although R.A. No. 9337 introduced amendments to Section 108
of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not amend the portion
of Section 108 (B) (3) that subjects to zero percent rate services performed by

VAT-registered persons to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0%
rate.

5. COMMISSIONER OF INTERNAL REVENUE v. YMCA

G.R. No. 124043 October 14, 1998

Panganiban, J.

Doctrine:

– Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is
not exempt from income taxation, even if such income is exclusively used for the accomplishment of its
objectives.

– A claim of statutory exemption from taxation should be manifest and unmistakable from the language
of the law on which it is based. Thus, it must expressly be granted in a statute stated in a language too
clear to be mistaken. Verba legis non est recedendum — where the law does not distinguish, neither
should we.

– The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax. It must prove with substantial evidence that (1) it
falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to
be exempted from taxation is used actually, directly, and exclusively for educational purposes.

– The Court cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it
would be overspilling its role and invading the realm of legislation. The Court, given its limited
constitutional authority, cannot rule on the wisdom or propriety of legislation. That prerogative belongs
to the political departments of government.

Facts:

Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and
activities that are beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives.

YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and from parking fees collected from non-members. Petitioner issued an
assessment to private respondent for deficiency taxes. Private respondent formally protested the
assessment. In reply, the CIR denied the claims of YMCA.

Issue:

Whether or not the income derived from rentals of real property owned by YMCA subject to income tax

Held:

Yes. Income of whatever kind and character of non-stock non-profit organizations from any of their
properties, real or personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under the NIRC.

Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is
not exempt from income taxation, even if such income is exclusively used for the accomplishment of its
objectives.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions (Commissioner of Internal Revenue v. Court of Appeals, 271
SCRA 605, 613, April 18, 1997). Furthermore, a claim of statutory exemption from taxation should be
manifest and unmistakable from the language of the law on which it is based. Thus, the claimed
exemption “must expressly be granted in a statute stated in a language too clear to be mistaken” (Davao
Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, G.R. No. 117359, p.
15 July 23, 1998).

Verba legis non est recedendum. The law does not make a distinction. The rental income is taxable
regardless of whence such income is derived and how it is used or disposed of. Where the law does not
distinguish, neither should we.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it “is a
non-stock, non-profit educational institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its properties and income.” This is
without merit since the exemption provided lies on the payment of property tax, and not on the income
tax on the rentals of its property. The bare allegation alone that one is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the payment of income tax.

For the YMCA to be granted the exemption it claims under the above provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution;
and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for
educational purposes. Unfortunately for respondent, the Court noted that not a scintilla of evidence was
submitted to prove that it met the said requisites.

The Court appreciates the nobility of respondent’s cause. However, the Court’s power and function are
limited merely to applying the law fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of
legislation. The Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom
or propriety of legislation. That prerogative belongs to the political departments of government.

6. Commissioner of Internal Revenue vs. St Luke's Medical Center

Facts:

St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-profit
corporation. St. Luke’s accepts both paying and non-paying patients. The BIR assessed St. Luke’s
deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax. The
BIR claimed that St. Luke’s should be liable for income tax at a preferential rate of 10% as provided for by
Section 27(B). Further, the BIR claimed that St. Luke’s was actually operating for profit in 1998 because
only 13% of its revenues came from charitable purposes. Moreover, the hospital’s board of trustees,
officers and employees directly benefit from its profits and assets.

On the other hand, St. Luke’s maintained that it is a non-stock and non-profit institution for charitable
and social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. It argued
that the making of profit per se does not destroy its income tax exemption.

Issue:

The sole issue is whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profit
hospitals.
Ruling:

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together without the removal of such tax exemption.

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. “Proprietary” means private, following the
definition of a “proprietary educational institution” as “any private school maintained and
administered by private individuals or groups” with a government permit. “Non-profit” means 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 conducted not for profit.

“Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino Inc.
de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of
its stockholders and members. The club was primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making
enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government.” However, despite its being a
tax exempt institution, any income such institution earns from activities conducted for profit is taxable,
as expressly provided in the last paragraph of Sec. 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes
by the government is compensated by its relief from doing public works which would have been funded
by appropriations from the Treasury

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution.
Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the
other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but
requires that the institution “actually, directly and exclusively” use the property for a charitable purpose.

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property “actually, directly and exclusively” for charitable purposes.

To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must
be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt from income
taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively” for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words “organized and operated
exclusively” by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such income, shall be subject to
tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
“any” activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt.

Thus, even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the “income of whatever
kind and character” of a charitable institution “from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax.” Prior to the introduction of
Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text
of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).

St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of
the NIRC 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. Luke’s, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke’s is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However,
St. Luke’s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke’s is “a corporation for purely charitable and social welfare purposes” and thus exempt from income
tax.

In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good faith and
honest belief that one is not subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.”

WHEREFORE, St. Luke’s Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998
based on the 10% preferential income tax rate under Section 27(8) of the National Internal Revenue
Code. However, it is not liable for surcharges and interest on such deficiency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and
Resolution of the Court of Tax Appeals are AFFIRMED.

7. CIR V DLSU G.R. 196596 Nov. 9 2016

Facts

In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue officers to examine
the book of accounts of and records for the year 2003 De La Salle University (DLSU) and later on issued a
demand letter to demand payment of tax deficiencies for:

Income tax on rental earnings from restaurants/canteens and bookstores operating within the campus;

Value-added tax (VAT) on business income; and

Documentary stamp tax (DST) on loans and lease contracts for the years 2001,2002, and 2003,
amounting to P17,303,001.12.

DLSU protested the assessment that was however not acted upon, and later on filed a petition for review
with the Court of Tax Appeals(CTA). DLSU argues that as a non-stock, non-profit educational institution, it
is exempt from paying taxes according to Article XIV, Section 4 (3) of the Constitution (All revenues and
assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.)
The CTA only granted the removal of assessment on the load transactions. Both CIR and DLSU moved for
reconsideration, the motion of the CIR was denied. The CIR appealed to the CTA en banc arguing that
DLSU’s use of its revenues and assets for non-educational or commercial purposes removed these items
from the exemption, that a tax-exempt organization like DLSU is exempt only from property tax but not
from income tax on the rentals earned from property. Thus, DLSU’s income from the leases of its real
properties is not exempt from taxation even if the income would be used for educational purposes.

DLSU on the other hand offered supplemental pieces of documentary evidence to prove that its rental
income was used actually, directly and exclusively for educational purposes and no objection was made
by the CIR.

Thereafter, DLSU filed a separate petition for review with the CTA En Banc on the following grounds:

The entire assessment should have been cancelled because it was based on an invalid LOA;

Assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because
DLSU submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a
separate case where the CTA cancelled Ateneo’s tax assessment; and

The CTA Division erred in finding that a portion of DLSU’s rental income was not proved to have been
used actually, directly and exclusively for educational purposes.

That under RMO No.43-90, LOA should cover only 1 year, the LOA issued by CIR is invalid for covering the
years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable because it involved different parties,
factual settings, bases of assessments, sets of evidence, and defenses, it however further reduced the
liability of DLSU to P2,554,825.47

CIR argued that the rental income is taxable regardless of how such income is derived, used or disposed
of. DLSU’s operations of canteens and bookstores within its campus even though exclusively serving the
university community do not negate income tax liability. Article XIV, Section 4 (3) of the Constitution
must be harmonized with Section 30 (H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit educational institution] from any of [its]
properties, real or personal, or from any of (its] activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed by this Code.

that a tax-exempt organization like DLSU is exempt only from property tax but not from income tax on
the rentals earned from property. Thus, DLSU’s income from the leases of its real properties is not
exempt from taxation even if the income would be used for educational purposes.
DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-
stock, non-profit educational institutions used actually, directly and exclusively for educational purposes
are exempt from taxes and duties. Under the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and effect. Section 30 (H)
of the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a non-
stock and non-profit educational institution from any of its properties, real or personal, or from any of its
activities conducted for profit regardless of the disposition made of such income, should be declared
without force and effect in view of the constitutionally granted tax exemption on “all revenues and
assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes.“

that it complied with the requirements for the application of Article XIV, Section 4 (3) of the Constitution.

Issue:

Whether DLSU is taxable as a non-stock, non-profit educational institution whose income have been
used actually, directly and exclusively for educational purposes.

Whether the entire assessment should be void because of the defective LOA

Held:

First issue:

A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the
revenues and income must have also been sourced from educational activities or activities related to the
purposes of an educational institution. The phrase all revenues is unqualified by any reference to the
source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively
for educational purposes, then said revenues and income shall be exempt from taxes and duties.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations.
It may refer to the sale of goods, rendition of services, or the return of an investment. Revenue is a
component of the tax base in income tax, VAT, and local business tax (LBT). Assets, on the other hand,
are the tangible and intangible properties owned by a person or entity. It may refer to real estate, cash
deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property from
which the person or entity may derive income or use to generate the same. In Philippine taxation, the
fair market value of real property is a component of the tax base in real property tax (RPT). Also, the
landed cost of imported goods is a component of the tax base in VAT on importation and tariff duties.
Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On
the other hand, when it also shows that it uses its assets in the form of real property for educational
purposes, it shall be exempted from RPT.

The last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purpose. We make this declaration in
the exercise of and consistent with our duty to uphold the primacy of the Constitution.

Second Issue:

No.“A Letter of Authority LOA should cover a taxable period not exceeding one taxable year. The practice
of issuing LOAs covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer
shall include more than one taxable period, the other periods or years shall be specifically indicated in
the LOA.”

The requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the
extent of the audit and the scope of the revenue officer’s authority. Without this rule, a revenue officer
can unduly burden the taxpayer by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases of fraud audit.

The assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU
was fully apprised that it was being audited for taxable year 2003. While the assessments for taxable
years 2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No.
43-90.

8. Creba vs Romulo

Facts: Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an association of real
estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code
which imposes the minimum corporate income tax (MCIT) on corporations.

Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income,
beginning on the 4th taxable year immediately following the year in which it commenced its business
operations, when such MCIT is greater than the normal corporate income tax. If the regular income tax is
higher than the MCIT, the corporation does not pay the MCIT.

CREBA argued, among others, that the use of gross income as MCIT base amounts to a confiscation of
capital because gross income, unlike net income, is not realized gain.
CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as the
Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection of
CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations:

Ø Use gross selling price (GSP) or fair market value (FMV) as basis for determining

the income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable
income as provided for under the Tax Code;

Ø Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code provision
which imposes income tax on net income at the end of the taxable period;

Ø Go against the due process clause because the government collects income tax even when the net
income has not yet been determined; gain is never assured by mere receipt of the selling price; and

Ø Contravene the equal protection clause because the CWT is being charged upon real estate
enterprises, but not on other business enterprises, more particularly, those in the manufacturing sector,
which do business similar to that of a real estate enterprise.

Issues: (1) Is the imposition of MCIT constitutional? (2) Is the imposition of CWT on income from sales of
real properties classified as ordinary assets constitutional?

Held: (1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory if
it taxes capital, because it is income, and not capital, which is subject to income tax. However, MCIT is
imposed on gross income which is computed by deducting from gross sales the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales.
Clearly, the capital is not being taxed.

Various safeguards were incorporated into the law imposing MCIT.

Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in
which the corporation commenced its operations.
Secondly, the law allows the carry-forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years.

Thirdly, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.

(2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property
classified as ordinary assets remains as the entity’s net taxable income as provided in the Tax Code, i.e.,
gross income less allowable costs and deductions. The seller shall file its income tax return and credit the
taxes withheld by the withholding agent-buyer against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit.

The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and
convenience. The knowledge of the withholding agent-buyer is limited to the particular transaction in
which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to
him.

Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the
sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the
taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
cancel its possible future tax obligation. They are installments on the annual tax which may be due at the
end of the taxable year. The withholding agent-buyer’s act of collecting the tax at the time of the
transaction, by withholding the tax due from the income payable, is the very essence of the withholding
tax method of tax collection.

On the alleged violation of the equal protection clause, the taxing power has the authority to make
reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular
class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself,
a class and can be validly treated differently from other business enterprises.

What distinguishes the real estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real property is bigger and its frequency
of transaction limited, making it less cumbersome for the parties to comply with the withholding tax
scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions
with several thousand customers every month involving both minimal and substantial amounts.
8. Cyanamid vs CA

CYANAMID PHIL., INC. V CA GR No. 108067, January 20, 2000

Facts: Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly
owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an
importer/indenter.

February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of
deficiency in come tax of P119,817 for taxable year 1981 which the petitioner on March 4, 1985,
protested particularly (1) 25% surtax assessment of P3,774,867.50; (2) 1981 deficiency income tax
assessment of P119,817; (3) 1981 deficiency percentage assessment of P3,346.72. CIR refused to allow
the cancellation of the assessment notices.

During the pendency of the case on appeal to the CTA, both parties agreed to compromise the 1981
deficiency income assessment of P119,817 and reduced to P26,577 as compromise settlement. But the
surtax on improperly accumulated profits remained unresolved. Petitioner claimed that the assessment
representing the 25% surtax had no legal basis for the following reasons: (a) petitioner accumulated its
earnings and profits for reasonable business requirements to meet working capital needs and retirement
of indebtedness, (b) petitioner is wholly owned subsidiary of American Cyanamid Co., a corporation
organized under the laws of the State of Maine, in the USA, whose shares of stock are listed and traded
in New York Stock Exchange. This being the case, no individual shareholder of petitioner could have
evaded or prevented the imposition of individual income taxes by petitioner’s accumulation of earnings
and profits, instead contribution of the same.

CTA denied said petition.

Issue: Whether petitioner is liable for the accumulated earnings tax for the year 1981.

Held: The amendatory provision of Sec. 25 of the 1977 NIRC, which was PD1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks, (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank to hold shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the laws granting exemption form tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.
The burden of proof rests upon the party claiming the exemption to prove that it is, in fact, covered by
the exemption so claimed; a burden which petitioner here has failed to discharge.

Unless rebutted, all presumptions generally are indulged in favor of the correctness of the CIR’s
assessment against the taxpayer. With petitioner’s failure to prove the CIR incorrect, clearly and
conclusively, this court is constrained to uphold the correctness of tax court’s ruling as affirmed by the
CA.

9. DEUTSCHE BANK AG MANILA BRANCH v. CIR, GR No. 188550, 2013-08-19

Facts:

Issues:

This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-
2000 will deprive persons or corporations of the benefit of a tax treaty.

Ruling:

RP-Germany Tax Treaty, which provides that where a resident of the Federal Republic of Germany has a
branch in the Republic of the Philippines, this branch may be subjected to the branch profits remittance
tax withheld at source in accordance with Philippine law but shall not... exceed 10% of the gross amount
of the profits remitted by that branch to the head office.

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.

The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayer's availment of the preferential tax rate.

We disagree.

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.

Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation
of entitlement to a tax treaty relief for failure to comply with the 15-day period.
CTA's... outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not
in harmony with the objectives of the contracting state to ensure that the benefits granted under tax
treaties are enjoyed by duly entitled persons or corporations.

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.

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.

10. CIR vs P&G 204 SCRA 377

Facts:

Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder,
P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the
BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal
Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the
dividends remitted was only 15%.

Issue:

Whether or not P&G Philippines is entitled to the refund or tax credit

Ruling:

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

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

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

Note:

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

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

11 PILMICO-MAURI FOODS CORP., v. CIR G.R. No. 175651, September 14, 2016

FACTS
[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal place of
business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru Revenue Officer
Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency income, value-
added [tax] (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against [PMFC]:

Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998, demanding payment for
deficiency withholding taxes for the year 1996 in the sum of P384,925.05 (inclusive of interest and other
penalties);

Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998, demanding payment of
deficiency value-added tax in the sum of P5,017,778.01 (inclusive of interest and other penalties); and

Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998, demanding payment of.
deficiency income tax for the year 1996 in the sum of P4,359,046.96 (inclusive of interest and other
penalties).

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On December 29,
1998, [PMFC] filed a protest letter against the aforementioned deficiency tax assessments through the
Regional Director, Revenue Region No. 13, Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the deficiency tax
liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30, broken down as follows:

Deficiency withholding tax from P384,925.05 to P197,780.67;

Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and

Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

On the basis of the foregoing facts, PMFC filed its Petition for Review on August 9, 2000. In the “Joint
Stipulation of Facts” filed on March 7, 2001, the parties have agreed that the following are the issues to
be resolved:

Whether [PMFC] is liable for the payment of deficiency income, value-added, expanded withholding,
final withholding and withholding tax (on compensation).

On the P1,180,382.84 deficiency income tax

Whether or not the P5,895,694.66 purchases of raw materials are unsupported;

Whether the cancelled invoices and expenses for taxes, repairs and freight are unsupported;

Whether commission, storage and trucking charges claimed are deductible; and

Whether the alleged deficiency income tax for the year 1996 was correctly computed.

Whether [CIR’s] decision on the 1996 internal revenue tax liabilities of [PMFC] is contrary to law and the
facts.

After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming the assessments
but in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency interest) representing
[PMFC’s] Income, VAT and Withholding Tax deficiencies for the taxable year 1996 plus 20% delinquency
interest per annum until fully paid.

The [CTA] in Division ruled as follows:

However, [PMFC’s] contention that the NIRC of 1977 did not impose substantiation requirements on
deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237 of
the National Internal Revenue Code of 1997] provides:

SEC. 238. Issuance of receipts or sales or commercial invoices. – All persons, subject to an internal
revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or
more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the
case of sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount, where
the sale or transfer is made by persons subject to value-added tax to other persons, also subject to
value-added tax; or, where the receipt is issued to cover payment made as rentals, commissions,
compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if
any, and address of the purchaser, customer, or client.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the
transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years from the close of the taxable
year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the
issuer, also in his place of business for a like period.
From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion thereof
amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices because of
[PMFC’s] failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45 (P5,893,694.64 less
P1,280,268.19) revealed the following:

In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods Corporation was erased and on
top of it the name [PMFC] was inserted but with a counter signature therein;

For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as Exhibits B-7 and B-11.
Exhibit B-11 is the original sales invoice whereas Exhibit B-7 is a photocopy thereof. Both exhibits
contained the word Mauri which was inserted on top and between the words Pilmico and Foods.

The only difference is that in the original copy (Exhibit B-11), there was a counter signature although the
ink used was different from that used in the rest of the writings in the said invoice; while in the
photocopied invoice (Exhibit B-7), no such counter signature appeared. [PMFC] did not explain why the
said countersignature did not appear in the photocopied invoice considering it was just a mere
reproduction of the original copy.

The official receipts presented by [PMFC] x x x, cannot be considered as valid proof of [PMFC’s] claimed
deduction for raw materials purchases. The said receipts did not conform to the requirements provided
for under Section 238 of the NIRC of 1977, as amended.

First the official receipts were not in the name of [PMFC] but in the name of Golden Restaurant. And
second, these receipts were issued by PFC and not the alleged seller, JTE.

Likewise, [PMFC’s] allegations regarding the offsetting of accounts between [PMFC], PFC and JTE is
untenable.

Considering that the official receipts and sales invoices presented by [PMFC] failed to comply with the
requirements of Section 238 of the NIRC of 1977, the disallowance by the [CIR] of the claimed deduction
for raw materials is proper.

PMFC filed a Motion for Partial Consideration on January 21, 2005 but PMFC’s Motion for
Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit.

PMFC then filed a petition for review before the CTA en banc, which adopted the CTA First Division’s
ruling and ratiocinations.
Issue:

Whether Sec. 29 of the 1977 NIRC and not by Sec. 238 of the 1977 NIRC will governed in determining the
deductibility of the purchase of raw materials from gross income.

NIRC of 1977

Section 29 as last updated by RA 7497 (1992) Deductions from gross income- n computing taxable
income subject to tax under Sections 21(a); 24(a), (b), and (c); and 25(a) (1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That, in
computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in
business or practice of profession, only the following direct costs shall be allowed as deductions:

a. Raw materials, supplies and direct labor; xxx

NIRC of 1997

SEC. 34. Deductions from Gross Income. – Except for taxpayers earning compensation income- xxx

b) Substantiation Requirements. – No deduction from gross income shall be allowed under Subsection
(A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or
other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or
relation of the expense being deducted to the development, management, operation and/or conduct of
the trade, business or profession of the taxpayer.

NIRC of 1977

SEC. 238. Issuance of receipts or sales or commercial invoices.-

All persons, subject to an internal revenue tax shall for each sale or transfer of merchandise or for
services rendered valued at P25.00 or more, issue receipts or sales or commercial invoices…xxx

NIRC of 1997

SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to an internal
revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five
pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least
in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or
nature of service: xxx

Held:

NO. The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together, and not for one
provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official receipts of
alleged purchases of raw materials. Thus, the CTA cannot be faulted for making references to the same,
and for applying Section 238 of the 1977 NIRC in rendering its judgment. Required or not, the official
receipts were submitted by PMFC as evidence. Inevitably, the said receipts were subjected to scrutiny,
and the CTA exhaustively explained why it had found them wanting.

It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from substantiating
claims for deductions. While official receipts are not the only pieces of evidence which can prove
deductible expenses, if presented, they shall be subjected to examination. PMFC submitted official
receipts as among its evidence, and the CTA doubted their veracity. PMFC was, however, unable to
persuasively explain and prove through other documents the discrepancies in the said receipts.
Consequently, the CTA disallowed the deductions claimed, and in its ruling, invoked Section 238 of the
1977 NIRC considering that official receipts are matters provided for in the said section.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and Resolution dated
December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No. 97 are AFFIRMED. However,
MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the finality of
this Resolution until full satisfaction, is here imposed upon the amount of P2,804,920.36 to be paid by
Pilmico-Mauri Foods Corporation to the Commissioner of Internal Revenue.

12. SUPREME TRANSLINER v. BPI FAMILY SAVINGS BANK, GR No. 165617, 2011-02-25

Facts:

Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez,
obtained a loan in the amount of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter
lot covered by Transfer Certificate of Title No.
T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.

non-payment of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the
bank as the highest bidder

Before the expiration of the one-year redemption period, the mortgagors notified the bank of their
intention to redeem the property.

the mortgagors filed a complaint against the bank to recover the allegedly unlawful and excessive
charges totaling P5,331,237.77, with prayer for damages and attorney's fees... the bank asserted that
the redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal and in
accordance with documents duly signed by the mortgagors. The bank further... contended that the
claims are deemed waived and the mortgagors are already estopped from questioning the terms and
conditions of their contract.

According to the trial court, plaintiffs-mortgagors are estopped from questioning the correctness of the
redemption price as they had freely and voluntarily signed the letter-agreement prepared by the
defendant bank

Issues:

whether the foreclosing mortgagee should pay capital gains tax upon execution of the certificate of sale,
and if paid by the mortgagee, whether the same should be shouldered by the redemptioner.

Ruling:

Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors' argument that
there is no legal basis for the inclusion of this charge in the redemption price.
every sale or exchange or... other disposition of real property classified as capital asset under Section
34(a)[17] of the Tax Code shall be subject to the final capital gains tax.

The term sale includes pacto de retro and other forms of conditional sale.

these conditional sales "necessarily include mortgage foreclosure sales (judicial and extrajudicial
foreclosure sales)."... in foreclosure sale, there is no actual transfer of the mortgaged real property until
after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is
consolidated in the name of the mortgagee in case of... non-redemption.

In the interim, the mortgagor is given the option whether or not to redeem the real property. The
issuance of the Certificate of Sale does not by itself transfer ownership.

RR No. 4-99

SEC. 3. CAPITAL GAINS TAX. -

(1) In case the mortgagor exercises his right of redemption within one year from the issuance of the
certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the
mortgagor and no sale or transfer of real property was... realized.

Considering that herein petitioners-mortgagors exercised their right of redemption before the expiration
of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax due on the
extrajudicial foreclosure sale.

There was no actual transfer of title... from the owners-mortgagors to the foreclosing bank. Hence, the
inclusion of the said charge in the total redemption price was unwarranted and the corresponding
amount paid by the petitioners-mortgagors should be returned to them.

13. G.R. No. 175410 November 12, 2014

SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

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

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

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

SMI-Ed Philippines “failed to commence operations.”. On August 1, 2000, it sold its buildings and some of
its installed machineries and equipment to Ibiden Philippines, Inc., another PEZA-registered enterprise,
for ¥2,100,000,000.00 (₱893,550,000.00). SMI-Ed Philippines was dissolved on November 30, 2000. In its
quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales of
itsproperties to 5% final tax on PEZA registered corporations. SMI-Ed Philippines paid taxes amounting to
₱44,677,500.00.

On Feb 2, 2001, SMI-Ed Philippines filed an administrative claim for the refund of ₱44,677,500.00 with
the Bureau of Internal Revenue (BIR). SMIEd Philippines alleged that the amount was erroneously paid. It
also indicated the refundable amount in its final income tax return filed on March 1, 2001. It also alleged
that it incurred a net loss of ₱2,233,464,538.00.
The BIR – did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for review
before the Court of Tax Appeals on September 9, 2002.

PETITIONER ARGUMENTS:

Court of Tax Appeals Second Division erroneously assessed the 6% capital gains tax on the sale of SMI-Ed
Philippines’ equipment, machineries, and buildings. Section 27(D)(5) of the National Internal Revenue
Code of 1997 is clear that the 6% capital gains tax on domestic corporations applies only on the sale of
lands and buildings and not to machineries and equipment.

It also argued that the Court of Tax Appeals Second Division cannot make an assessment at the first
instance. Its jurisdiction to make an assessment since its jurisdiction, with respect to the decisions of
respondent, is merely appellate.

Even if the Court of Tax Appeals Second Division has such power, the period to make an assessment had
already prescribed under Section 203 of the National Internal Revenue Code of 1997 since the return for
the erroneous payment was filed on September 13, 2000. This is more than three (3) years from the last
day prescribed by law for the filing of the return.

The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for refund in the decision
dated December 29, 2004, WITH THE findings:

The court found that SMI-Ed Philippines’ administrative claim for refund and the petition for review with
the Court of Tax Appeals were filed within the two-year prescriptive period.

However, fiscal incentives given to PEZA-registered enterprises may be availed only by PEZA-registered
enterprises that had already commenced operations. Since SMI-Ed Philippines had not commenced
operations, it was not entitled to the incentives of either the income tax holiday or the 5% preferential
tax rate. Payment of the 5% preferential tax amounting to ₱44,677,500.00 was erroneous. (so erroneous
ang self-assessment ni SMI)
After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39(A)(1) of
the National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division subjected the sale
of SMIEd Philippines’ assets to 6% capital gains tax under Section 27(D)(5) of the same Code and Section
2 of Revenue Regulations No. 8-98. It was found liable for capital gains tax amounting to ₱53,613,000.00.
Therefore, SMIEd Philippines must still pay the balance of ₱8,935,500.00 as deficiency tax “which
respondent should perhaps look into.

In its comment, respondent argued that the Court of Tax Appeals’ determination of petitioner’s liability
for capital gains tax was not an assessment.

Such determination was necessary to settle the question regarding the tax consequence of the sale of
the properties. This is clearly within the Court of Tax Appeals’ jurisdiction under Section 7 of Republic Act
No. 9282.42 Respondent also argued that “petitioner failed to justify its claim for refund.”

CTA EN BANC- AFFIRMED CTA DIVISION’S RULING

SMI-Ed Philippines filed a petition for review before this court on December 27, 2006, praying for the
grant of its claim for refund and the reversal of the Court of Tax Appeals En Banc’s decision.

ISSUES:

The honorable CTA En Banc grievously erred and acted beyond its jurisdiction when it assessed for
deficiency tax in the first instance.

Even assuming that the honorable CTA En Banc has the right to make an assessment against the
petitioner-appellant, it grievously erred in finding that the machineries and equipment sold by the
petitioner-appellant is subject to the six percent (6%) capital gains tax under Section 27(D)(5) of the Tax
Code.33

HELD:

Jurisdiction of the Court of Tax Appeals- there is jurisdiction

The term “assessment” refers to the determination of amounts due from a person obligated to make
payments. In the context of national internal revenue collection, it refers the determination of the taxes
due from a taxpayer under the National Internal Revenue Code of 1997.

The power and duty to assess national internal revenue taxes are lodged with the BIR.

Section 2 of the National Internal Revenue Code of 1997 provides:

SEC. 2. Powers and Duties of the Bureau of Internal Revenue. – The Bureau of Internal Revenue shall be
under the supervision and control of the Department of Finance and its powers and duties shall
comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and
the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this
Code or other laws. (Emphasis supplied) The BIR is not mandated to make an assessment relative to
every return filed with it. Tax returns filed with the BIR enjoy the presumption that these are in
accordance with the law. Tax returns are also presumed correct since these are filed under the penalty of
perjury.. Generally, however, the BIR assesses taxes when it appears, after a return had been filed, that
the taxes paid were incorrect or false, or fraudulent. The BIR also assesses taxes when taxes are due but
no return is filed.

Thus:

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax
Administration and Enforcement.–

(A) Examination of Returns and Determination of Tax Due. – After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may authorize
the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however;
That failure to file a return shall not prevent the Commissioner from authorizing the examination of any
taxpayer. The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative.
The Court of Tax Appeals has no power to make an assessment at the first instance. On matters such as
tax collection, tax refund, and others related to the national internal revenue taxes, the Court of Tax
Appeals’ jurisdiction is appellate in nature.

Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIR issues a
decision that is unfavorable to the taxpayer or if the BIR fails to act on a dispute brought by the taxpayer,
the BIR’s decision or inaction may be brought on appeal to the Court of Tax Appeals. The Court of Tax
Appeals then acquires jurisdiction over the case.

When the BIR’s unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of Tax
Appeals reviews the correctness of the BIR’s assessment and decision. In reviewing the BIR’s assessment
and decision, the Court of Tax Appeals had to make its own determination of the taxpayer’s tax liabilities.
The Court of Tax Appeals may not make such determination before the BIR makes its assessment and
before a dispute involving such assessment is brought to the Court of Tax Appeals on appeal.

The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR makes an assessment or a
decision unfavorable to the taxpayer. Because Republic Act No. 1125 also vests the Court of Tax Appeals
with jurisdiction over the BIR’s inaction on a taxpayer’s refund claim, there may be instances when the
Court of Tax Appeals has to take cognizance of cases that have nothing to do with the BIR’s assessments
or decisions.

WHEN THE BIR FAILS TO ACT ON A CLAIM FOR REFUND OF VOLUNTARILY BUT MISTAKENLY PAID TAXES,
FOR EXAMPLE, THERE IS NO DECISION OR ASSESSMENT INVOLVED.

Taxes are generally self-assessed. They are initially computed and voluntarily paid by the taxpayer. The
government does not have to demand it. If the tax payments are correct, the BIR need not make an
assessment. The self-assessing and voluntarily paying taxpayer, however, may later find that he or she
has erroneously paid taxes. Erroneously paid taxes may come in the form of amounts that should not
have been paid. Thus, a taxpayer may find that he or she has paid more than the amount that should
have been paid under the law. Erroneously paid taxes may also come in the form of tax payments for the
wrong category of tax. Thus, a taxpayer may find that he or she has paid a certain kind of tax that he or
she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request for refund, the
taxpayer may bring the matter to the Court of Tax Appeals.

From the taxpayer’s self-assessment and tax payment up to his or her request for refund and the BIR’s
inaction, the BIR’s participation is limited to the receipt of the taxpayer’s payment. The BIR does not
make an assessment; the BIR issues no decision; and there is no dispute yet involved. Since there is no
BIR assessment yet, the Court of Tax Appeals may not determine the amount of taxes due from the
taxpayer. There is also no decision yet to review. However, there was inaction on the part of the BIR. That
inaction is within the Court of Tax Appeals’ jurisdiction.

In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they do not involve
BIR assessments or decisions.

In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR had failed to act on petitioner’s claim for refund of
erroneously paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result of a disputed
assessment of a BIR decision.

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or
other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner’s
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in
view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are
due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were
correct.55 If the tax return filed was not proper, the correctness of the amount paid and, therefore, the
claim for refund become questionable. In that case, the court must determine if a taxpayer claiming
refund of erroneously paid taxes is more properly liable for taxes other than that paid.

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayer’s liability should be computed and deducted from the refundable amount.

Any liability in excess of the refundable amount, however, may not be collected in a case involving solely
the issue of the taxpayer’s entitlement to refund. The question of tax deficiencyis distinct and unrelated
to the question of petitioner’s entitlement to refund. Tax deficiencies should be subject to assessment
procedures and the rules of prescription. The court cannot be expected to perform the BIR’s duties
whenever it fails to do so either through neglect or oversight. Neither can court processes be used as a
tool to circumvent laws protecting the rights of taxpayers.

Petitioner’s entitlement to benefits given to PEZA-registered enterprises

Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5% preferential
tax rate under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This is because it never
began its operation.

Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage investments
and business activities that will generate employment.59 Giving fiscal incentives to businesses is one of
the means devised to achieve this purpose. It comes with the expectation that persons who will avail
these incentives will contribute to the purpose’s achievement. Hence, to avail the fiscal incentives under
Republic Act No. 7916, the law did not say that mere PEZA registration is sufficient.

Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides that the fiscal incentives and
the 5% preferential tax rate are available only to businesses operating within the Ecozone.60 A business
is considered in operation when it starts entering into commercial transactions that are not merely
incidental to but are related to the purposes of the business. It is similar to the definition of “doing
business,” as applied in actions involving the right of foreign corporations to maintain court actions:
“a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization” Petitioner never started its
operations since its registration on June 29, 199863 because of the Asian financial crisis.64 Petitioner
admitted this.65 Therefore, it cannot avail the incentives provided under Republic Act No. 7916. It is not
entitled to the preferential tax rate of 5% on gross income in lieu of all taxes. Because petitioner is not
entitled to a preferential rate, it is subject to ordinary tax rates under the National Internal Revenue Code
of 1997.

Imposition of capital gains tax

The Court of Tax Appeals found that petitioner’s sale of its properties is subject to capital gains tax.

For petitioner’s properties to be subjected to capital gains tax, the properties must form part of
petitioner’s capital assets.

Section 39(A)(1) of the National Internal Revenue Code of 1997 defines “capital assets”:

SEC. 39. Capital Gains and Losses. –

(A) Definitions.- As used in this Title –

(1) Capital Assets.- the term ‘capital assets’ means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade orbusiness, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade
or business of the taxpayer. (Emphasis supplied) Thus, “capital assets” refers to taxpayer’s property that
is NOT any of the following:

Stock in trade;

Property that should be included inthe taxpayer’s inventory at the close of the taxable year;

Property held for sale in the ordinary course of the taxpayer’s business;

Depreciable property used in the trade or business; and

Real property used in the trade or business.

The properties involved in this case include petitioner’s buildings, equipment, and machineries. They are
not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue Code of
1997. None of the properties were used in petitioner’s trade or ordinary course of business because
petitioner never commenced operations. They were not part of the inventory. None of themwere stocks
in trade. Based on the definition of capital assets under Section 39 of the National Internal Revenue
Code of 1997, they are capital assets.

Respondent insists that since petitioner’s machineries and equipment are classified as capital assets,
their sales should be subject to capital gains tax. Respondent is mistaken.

Capital gains of individuals and corporations from the sale of real properties are taxed differently.
Individuals are taxed on capital gains from sale of all real properties located in the Philippines and
classified as capital assets. Therefore, only the presumed gain from the sale of petitioner’s land and/or
building may be subjected to the 6% capital gains tax. The income from the sale of petitioner’s
machineries and equipment is subject to the provisions on normal corporate income tax.

To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax for the sold
land and/or building of petitioner and the amount of corporate income tax for the sale of petitioner’s
machineries and equipment should be deducted from the total final tax paid. Petitioner indicated,
however, in its March 1, 2001 income tax return for the 11-month period ending on November 30, 2000
that it suffered a net loss of ₱2,233,464,538.00.69
The BIR did not make a deficiency assessment for this declaration. Neither did the BIR dispute this
statement in its pleadings filed before this court. There is, therefore, no reason todoubt the truth that
petitioner indeed suffered a net loss in 2000.

Since petitioner had not started its operations, it was also not subject to the minimum corporate income
tax of 2% on gross income.70 Therefore, petitioner is not liable for any income tax.

Prescription

Section 203 of the National Internal Revenue Code of 1997 provides that as a general rule, the BIR has
three (3) years from the last day prescribed by law for the filing of a return to make an assessment. If the
return is filed beyond the last day prescribed by law for filing, the three-year period shall run from the
actual date of filing. This court said that the prescriptive period to make an assessment of internal
revenue taxes is provided “primarily to safeguard the interests of taxpayers from unreasonable
investigation.” Accordingly, the government must assess internal revenue taxes on time so as not to
extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after the expiration of reasonable period of time.73

Rules derogating taxpayers’ right against prolonged and unscrupulous investigations are strictly
construed against the government.74

The BIR had three years from the filing of petitioner’s final tax return in 2000 to assess petitioner’s taxes.
Nothing stopped the BIR from making the correct assessment. The elevation of the refund claim with the
Court of Tax Appeals was not a bar against the BIR’s exercise of its assessment powers.

The BIR, however, did not initiate any assessment for deficiency capital gains tax.78 Since more than a
decade have lapsed from the filing of petitioner’s return, the BIR can no longer assess petitioner for
deficiency capital gains taxes, if petitioner is later found to have capital gains tax liabilities in excess of
the amount claimed for refund.
The Court of Tax Appeals should not be expected to perform the BIR’s duties of assessing and collecting
taxes whenever the BIR, through neglect or oversight, fails to do so within the prescriptive period
allowed by law.

WHEREFORE, the Court of Tax Appeals’ November 3, 2006 decision is SET ASIDE. The Bureau of Internal
Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the amount of 5% final tax
paid to the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines Technology, Inc.
‘s land and building. In view of the lapse of the prescriptive period for assessment, any capital gains tax
accrued from the sale of its land and building that is in excess of the 5% final tax paid to the Bureau of
Internal Revenue may no longer be recovered from petitioner SMI-Ed Philippines Technology, Inc.

14. Calasanz vs CIR 144 SCRA 664

Facts:

Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make
such land saleable and later in it was sold to the public at a profit. The Revenue examiner adjudged
Ursula and her spouse as engaged in business as real estate dealers and required them to pay the real
estate dealer’s tax.

Issue:

Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or
capital gains taxable at capital gain rates

Ruling:

They are taxable as ordinary income. The activities of Calasanz 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. They did not sell the land in the
condition in which they acquired it. Inherited land which an heir subdivides and makes improvements
several times higher than the original cost of the land is not a capital asset but an ordinary asses. Thus, in
the course of selling the subdivided lots, they engaged in the real estate business and accordingly the
gains from the sale of the lots are ordinary income taxable in full.

15 UASON vs. LINGAD

[July 31, 1974; G.R. No. L-24248]

CASTRO, J

TOPIC: Ordinary gain, capital asset, NIRC Sec. 39 A (1)

DOCTRINE:

Captial Assets; definition: The term "capital assets" includes all the properties of a taxpayer whether or
not connected with his trade or business, except: (1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or
business; (3) property used in the trade or business of the taxpayer and subject to depreciation
allowance; and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the
properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss;
the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a
capital loss.

In the case at bar, Taxpayer operated a substantial rental business of several properties, not only those
subject in this case, such that the Taxpayer had to a real estate dealer's tax. Taxpayer's sales of the
several lots forming part of his rental business cannot be characterized as other than sales of non-capital
assets.

FACTS:

The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel of land located in the City
of Manila. She subdivided the land into twenty-nine (29) lots. Possession of the land was eventually
inherited by Taxpayer in 1948.

Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels
were all sold easily. The attorney-in-fact was not able to sell the twenty-ninth lot (hereinafter Lot 29)
immediately because it was located at a low elevation.

In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The small lots were then sold
over the years on a uniform 10-year annual amortization basis. The attorney-in-fact, did not employ any
broker nor did he put up advertisements in the matter of the sale thereof.
In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots (P102,050.79 and
P103,468.56, respectively) as long-term capital gains. The CIR upheld Taxpayer's treatment of this tax.

In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots
(P119,072.18) as capital gains. This treatment was initially approved by the CIR, but by 1963, the CIR
reversed itself and considered the Taxpayer's profits from the sales of the lots as ordinary gainsc

The CIR assesed a deficiency of P31,095.36 from the Taxpayer.

Contention of Taxpayer: As he was engaged in the business of leasing the lots he inherited from his
mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as
sales of capital assets but of “real property used in trade or business of the taxpayer.”

ISSUE/S:

Whether or not the properties in question which the Taxpayer had inherited and subsequently sold in
small lots to other persons should be regarded as capital assets.

HELD:

No. It is Ordinary Income

As thus defined by law, CAPITAL ASSETS include all properties of a taxpayer whether or not connected
with his trade or business, except:

stock in trade or other property included in the taxpayer's inventory;

property primarily for sale to customers in the ordinary course of his trade or business;
property used in the trade or business of the taxpayer and subject to depreciation allowance; and

real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the
taxpayer is a capital gain or a capital loss.

Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer (other than a corporation)
from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital
gain shall be taken into account in computing the net income.

The Tax Code's provisions on so-called long-term capital gains constitutes a statute of partial exemption.
In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, it is the taxpayer's burden to bring himself clearly
and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be
resolved against him.

In the case at bar, after a thoroughgoing study of all the circumstances, this Court is of the view and so
holds that Petitioner-Taxpayer's thesis is bereft of merit. Under the circumstances, Taxpayer's sales of the
several lots forming part of his rental business cannot be characterized as other than sales of non-capital
assets. the sales concluded on installment basis of the subdivided lots do not deserve a different
characterization for tax purposes.

This Court finds no error in the holding that the income of the Taxpayer from the sales of the lots in
question should be considered as ordinary income.