G.R. No. 188497
February 19, 2014
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION,
Respondent.
RESOLUTION
VILLARAMA, JR., J.:
For resolution are the Motion for
Reconsideration dated May 22, 2012 and
Supplemental Motion for Reconsideration
dated December 12, 2012 filed by Pilipinas Shell
Petroleum Corporation (respondent). As
directed, the Solicitor General on behalf of
petitioner Commissioner of Internal Revenue
filed their Comment, to which respondent filed
its Reply.
In our Decision promulgated on April 25, 2012,
we ruled that the Court of Tax Appeals (CTA)
erred in granting respondent's claim for tax
refund because the latter failed to establish a
tax exemption in its favor under Section 135(a)
of the National Internal Revenue Code of 1997
(NIRC).
WHEREFORE, the petition for review on
certiorari is GRANTED. The Decision dated
March 25, 2009 and Resolution dated June 24,
2009 of the Court of Tax Appeals En Banc in CTA
EB No. 415 are hereby REVERSED and SET
ASIDE. The claims for tax refund or credit filed
by respondent Pilipinas Shell Petroleum
Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.1
Respondent argues that a plain reading of
Section 135 of the NIRC reveals that it is the
petroleum products sold to international
carriers which are exempt from excise tax for
which reason no excise taxes are deemed to
have been due in the first place. It points out
that excise tax being an indirect tax, Section 135
in relation to Section 148 should be interpreted
as referring to a tax exemption from the point
of production and removal from the place of
production considering that it is only at that
point that an excise tax is imposed. The
situation is unlike the value-added tax (VAT)
which is imposed at every point of turnover –
from production to wholesale, to retail and to
end-consumer. Respondent thus concludes that
exemption could only refer to the imposition of
the tax on the statutory seller, in this case the
respondent. This is because when a tax paid by
the statutory seller is passed on to the buyer it
is no longer in the nature of a tax but an added
cost to the purchase price of the product sold.
Respondent also contends that our ruling that
Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the
burden of excise tax to international carriers
has adverse economic impact as it severely
curtails the domestic oil industry. Requiring
local petroleum manufacturers to absorb the
tax burden in the sale of its products to
international carriers is contrary to the State’s
policy of "protecting gasoline dealers and
distributors from unfair and onerous trade
conditions," and places them at a competitive
disadvantage since foreign oil producers,
particularly those whose governments with
which we have entered into bilateral service
agreements, are not subject to excise tax for
the same transaction. Respondent fears this
could lead to cessation of supply of petroleum
products to international carriers, retrenchment
of
employees
of
domestic
manufacturers/producers to prevent further
losses, or worse, shutting down of their
production of jet A-1 fuel and aviation gas due
to unprofitability of sustaining operations.
Under this scenario, participation of Filipino
capital, management and labor in the domestic
oil industry is effectively diminished.
Lastly, respondent asserts that the imposition
by the Philippine Government of excise tax on
petroleum products sold to international
carriers is in violation of the Chicago Convention
on
International
Aviation
("Chicago
Convention") to which it is a signatory, as well
as other international agreements (the Republic
of the Philippines’ air transport agreements
with the United States of America, Netherlands,
Belgium and Japan).
In his Comment, the Solicitor General
underscores the statutory basis of this Court’s
ruling that the exemption under Section 135
does not attach to the products. Citing
Exxonmobil Petroleum & Chemical Holdings,
Inc.-Philippine Branch v. Commissioner of
Internal Revenue,2 which held that the excise
tax, when passed on to the purchaser, becomes
part of the purchase price, the Solicitor General
claims this refutes respondent’s theory that the
exemption attaches to the petroleum product
itself and not to the purchaser for it would have
been erroneous for the seller to pay the excise
tax and inequitable to pass it on to the
purchaser if the excise tax exemption attaches
to the product.
As to respondent’s reliance in the cases of
Silkair (Singapore) Pte. Ltd. v. Commissioner of
Internal Revenue3 and Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v.
Commissioner of Internal Revenue,4 the
Solicitor General points out that there was no
pronouncement in these cases that petroleum
manufacturers selling petroleum products to
international carriers are exempt from paying
excise taxes. In fact, Exxonmobil even cited the
case of Philippine Acetylene Co, Inc. v.
Commissioner of Internal Revenue.5 Further,
the ruling in Maceda v. Macaraig, Jr.6 which
confirms that Section 135 does not intend to
exempt manufacturers or producers of
petroleum products from the payment of excise
tax.
The Court will now address the principal
arguments proffered by respondent: (1) Section
135 intended the tax exemption to apply to
petroleum products at the point of production;
(2) Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue and Maceda
v. Macaraig, Jr. are inapplicable in the light of
previous rulings of the Bureau of Internal
Revenue (BIR) and the CTA that the excise tax
on petroleum products sold to international
carriers for use or consumption outside the
Philippines attaches to the article when sold to
said international carriers, as it is the article
which is exempt from the tax, not the
international carrier; and (3) the Decision of this
Court will not only have adverse impact on the
domestic oil industry but is also in violation of
international agreements on aviation.
Under Section 129 of the NIRC, excise taxes are
those applied to goods manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported. Excise taxes as used in our Tax
Code fall under two types – (1) specific tax
which is based on weight or volume capacity
and other physical unit of measurement, and
(2) ad valorem tax which is based on selling
price or other specified value of the goods.
Aviation fuel is subject to specific tax under
Section 148 (g) which attaches to said product
"as soon as they are in existence as such."
On this point, the clarification made by our
esteemed colleague, Associate Justice Lucas P.
Bersamin regarding the traditional meaning of
excise tax adopted in our Decision, is welltaken.
The transformation undergone by the term
"excise tax" from its traditional concept up to its
current definition in our Tax Code was
explained in the case of Petron Corporation v.
Tiangco,7 as follows:
Admittedly, the proffered definition of an excise
tax as "a tax upon the performance, carrying on,
or exercise of some right, privilege, activity,
calling or occupation" derives from the
compendium
American
Jurisprudence,
popularly referred to as Am Jur and has been
cited in previous decisions of this Court,
including those cited by Petron itself. Such a
definition would not have been inconsistent
with previous incarnations of our Tax Code,
such as the NIRC of 1939, as amended, or the
NIRC of 1977 because in those laws the term
"excise tax" was not used at all. In contrast, the
nomenclature used in those prior laws in
referring to taxes imposed on specific articles
was "specific tax." Yet beginning with the
National Internal Revenue Code of 1986, as
amended, the term "excise taxes" was used and
defined as applicable "to goods manufactured
or produced in the Philippines… and to things
imported." This definition was carried over into
the present NIRC of 1997. Further, these two
latest codes categorize two different kinds of
excise taxes: "specific tax" which is imposed and
based on weight or volume capacity or any
other physical unit of measurement; and "ad
valorem tax" which is imposed and based on
the selling price or other specified value of the
goods. In other words, the meaning of "excise
tax" has undergone a transformation, morphing
from the Am Jur definition to its current
signification which is a tax on certain specified
goods or articles.
The change in perspective brought forth by the
use of the term "excise tax" in a different
connotation was not lost on the departed
author Jose Nolledo as he accorded divergent
treatments in his 1973 and 1994 commentaries
on our tax laws. Writing in 1973, and essentially
alluding to the Am Jur definition of "excise tax,"
Nolledo observed:
Are specific taxes, taxes on property or excise
taxes –
In the case of Meralco v. Trinidad ([G.R.] 16738,
1925) it was held that specific taxes are
property taxes, a ruling which seems to be
erroneous. Specific taxes are truly excise taxes
for the fact that the value of the property taxed
is taken into account will not change the nature
of the tax. It is correct to say that specific taxes
are taxes on the privilege to import,
manufacture and remove from storage certain
articles specified by law.
In contrast, after the tax code was amended to
classify specific taxes as a subset of excise taxes,
Nolledo, in his 1994 commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers
to taxes applicable to certain specified goods or
articles manufactured or produced in the
Philippines for domestic sale or consumption or
for any other disposition and to things imported
into the Philippines. They are either specific or
ad valorem.
2. Nature of excise taxes. – They are imposed
directly on certain specified goods. (infra) They
are, therefore, taxes on property. (see Medina
vs. City of Baguio, 91 Phil. 854.)
A tax is not excise where it does not subject
directly the produce or goods to tax but
indirectly as an incident to, or in connection
with, the business to be taxed.
In their 2004 commentaries, De Leon and De
Leon restate the Am Jur definition of excise tax,
and observe that the term is "synonymous with
‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a
caveat that "[e]xcise tax, as [defined by Am Jur],
is not to be confused with excise tax imposed
[by the NIRC] on certain specified articles
manufactured or produced in, or imported into,
the Philippines, ‘for domestic sale or
consumption or for any other disposition.’"
It is evident that Am Jur aside, the current
definition of an excise tax is that of a tax levied
on a specific article, rather than one "upon the
performance, carrying on, or the exercise of an
activity."
This current definition was already in place
when the Code was enacted in 1991, and we
can only presume that it was what the Congress
had intended as it specified that local
government units could not impose "excise
taxes on articles enumerated under the [NIRC]."
This prohibition must pertain to the same kind
of excise taxes as imposed by the NIRC, and not
those previously defined "excise taxes" which
were not integrated or denominated as such in
our present tax law.8 (Emphasis supplied.)
That excise tax as presently understood is a tax
on property has no bearing at all on the issue of
respondent’s entitlement to refund. Nor does
the nature of excise tax as an indirect tax
supports respondent’s postulation that the tax
exemption provided in Sec. 135 attaches to the
petroleum
products
themselves
and
consequently
the
domestic
petroleum
manufacturer is not liable for the payment of
excise tax at the point of production. As already
discussed in our Decision, to which Justice
Bersamin concurs, "the accrual and payment of
the excise tax on the goods enumerated under
Title VI of the NIRC prior to their removal at the
place of production are absolute and admit of
no exception." This also underscores the fact
that the exemption from payment of excise tax
is conferred on international carriers who
purchased the petroleum products of
respondent.
On the basis of Philippine Acetylene, we held
that a tax exemption being enjoyed by the
buyer cannot be the basis of a claim for tax
exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer
or seller. The excise tax imposed on petroleum
products under Section 148 is the direct liability
of the manufacturer who cannot thus invoke
the excise tax exemption granted to its buyers
who are international carriers. And following
our pronouncement in Maceda v. Macarig, Jr.
we further ruled that Section 135(a) should be
construed as prohibiting the shifting of the
burden of the excise tax to the international
carriers who buy petroleum products from the
local manufacturers. Said international carriers
are thus allowed to purchase the petroleum
products without the excise tax component
which otherwise would have been added to the
cost or price fixed by the local manufacturers or
distributors/sellers.
Excise tax on aviation fuel used for international
flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on
International Aviation (Chicago Convention).
Article 249 of the Convention has been
interpreted to prohibit taxation of aircraft fuel
consumed for international transport. Taxation
of international air travel is presently at such
low level that there has been an intensified
debate on whether these should be increased
to "finance development rather than simply to
augment national tax revenue" considering the
"cross-border environmental damage" caused
by aircraft emissions that contribute to global
warming, not to mention noise pollution and
congestion at airports).10 Mutual exemptions
given under bilateral air service agreements are
seen as main legal obstacles to the imposition
of indirect taxes on aviation fuel. In response to
present realities, the International Civil Aviation
Organization (ICAO) has adopted policies on
charges and emission-related taxes and
charges.11
Section 135(a) of the NIRC and earlier
amendments to the Tax Code represent our
Governments’ compliance with the Chicago
Convention,
its
subsequent
resolutions/annexes, and the air transport
agreements entered into by the Philippine
Government with various countries. The
rationale for exemption of fuel from national
and local taxes was expressed by ICAO as
follows:
...The Council in 1951 adopted a Resolution and
Recommendation on the taxation of fuel, a
Resolution on the taxation of income and of
aircraft, and a Resolution on taxes related to
the sale or use of international air transport (cf.
Doc 7145) which were further amended and
amplified by the policy statements in Doc 8632
published in 1966. The Resolutions and
Recommendation concerned were designed to
recognize the uniqueness of civil aviation and
the need to accord tax exempt status to certain
aspects of the operations of international air
transport and were adopted because multiple
taxation on the aircraft, fuel, technical supplies
and the income of international air transport, as
well as taxes on its sale and use, were
considered as major obstacles to the further
development of international air transport.
Non-observance of the principle of reciprocal
exemption envisaged in these policies was also
seen as risking retaliatory action with adverse
repercussions on international air transport
which plays a major role in the development
and expansion of international trade and
travel.12
In the 6th Meeting of the Worldwide Air
Transport Conference (ATCONF) held on March
18-22, 2013 at Montreal, among matters agreed
upon was that "the proliferation of various
taxes and duties on air transport could have
negative
impact
on
the
sustainable
development of air transport and on
consumers." Confirming that ICAO’s policies on
taxation remain valid, the Conference
recommended that "ICAO promote more
vigorously its policies and with industry
stakeholders to develop analysis and guidance
to States on the impact of taxes and other levies
on air transport."13 Even as said conference
was being held, on March 7, 2013, President
Benigno Aquino III has signed into law Republic
Act (R.A.) No. 1037814 granting tax incentives
to foreign carriers which include exemption
from the 12% value-added tax (VAT) and 2.5%
gross Philippine billings tax (GPBT). GPBT is a
form of income tax applied to international
airlines or shipping companies. The law, based
on reciprocal grant of similar tax exemptions to
Philippine carriers, is expected to increase
foreign tourist arrivals in the country.
Indeed, the avowed purpose of a tax exemption
is always "some public benefit or interest,
which the law-making body considers sufficient
to offset the monetary loss entailed in the grant
of the exemption."15 The exemption from
excise tax of aviation fuel purchased by
international carriers for consumption outside
the Philippines fulfills a treaty obligation
pursuant to which our Government supports
the promotion and expansion of international
travel through avoidance of multiple taxation
and ensuring the viability and safety of
international air travel. In recent years,
developing economies such as ours focused
more serious attention to significant gains for
business and tourism sectors as well. Even
without such recent incidental benefit, States
had long accepted the need for international
cooperation in maintaining a capital intensive,
labor intensive and fuel intensive airline
industry, and recognized the major role of
international air transport in the development
of international trade and travel.
Under the basic international law principle of
pacta sunt servanda, we have the duty to fulfill
our treaty obligations in good faith. This entails
harmonization of national legislation with treaty
provisions. In this case, Sec. 135(a) of the NIRC
embodies
our
compliance
with
our
undertakings under the Chicago Convention and
various bilateral air service agreements not to
impose excise tax on aviation fuel purchased by
international
carriers
from
domestic
manufacturers or suppliers. In our Decision in
this case, we interpreted Section 135 (a) as
prohibiting domestic manufacturer or producer
to pass on to international carriers the excise
tax it had paid on petroleum products upon
their removal from the place of production,
pursuant to Article 148 and pertinent BIR
regulations. Ruling on respondent’s claim for
tax refund of such paid excise taxes on
petroleum products sold to tax-exempt
international carriers, we found no basis in the
Tax Code and jurisprudence to grant the refund
of an "erroneously or illegally paid" tax.
Justice Bersamin argues that "(T)he shifting of
the tax burden by manufacturers-sellers is a
business prerogative resulting from the
collective impact of market forces," and that it
is "erroneous to construe Section 135(a) only as
a prohibition against the shifting by the
manufacturers-sellers of petroleum products of
the tax burden to international carriers, for such
construction will deprive the manufacturerssellers of their business prerogative to
determine the prices at which they can sell their
products."
We maintain that Section 135 (a), in fulfillment
of international agreement and practice to
exempt aviation fuel from excise tax and other
impositions, prohibits the passing of the excise
tax to international carriers who buys
petroleum
products
from
local
manufacturers/sellers such as respondent.
However, we agree that there is a need to
reexamine the effect of denying the domestic
manufacturers/sellers’ claim for refund of the
excise taxes they already paid on petroleum
products sold to international carriers, and its
serious implications on our Government’s
commitment to the goals and objectives of the
Chicago Convention.
The Chicago Convention, which established the
legal framework for international civil aviation,
did not deal comprehensively with tax matters.
Article 24 (a) of the Convention simply provides
that fuel and lubricating oils on board an
aircraft of a Contracting State, on arrival in the
territory of another Contracting State and
retained on board on leaving the territory of
that State, shall be exempt from customs duty,
inspection fees or similar national or local
duties and charges. Subsequently, the
exemption of airlines from national taxes and
customs duties on spare parts and fuel has
become a standard element of bilateral air
service agreements (ASAs) between individual
countries.
The importance of exemption from aviation fuel
tax was underscored in the following
observation made by a British author16 in a
paper assessing the debate on using tax to
control aviation emissions and the obstacles to
introducing excise duty on aviation fuel, thus:
Without any international agreement on taxing
fuel, it is highly likely that moves to impose duty
on international flights, either at a domestic or
European level, would encourage 'tankering':
carriers filling their aircraft as full as possible
whenever they landed outside the EU to avoid
paying tax.1âwphi1 Clearly this would be
entirely counterproductive. Aircraft would be
travelling further than necessary to fill up in
low-tax jurisdictions; in addition they would be
burning up more fuel when carrying the extra
weight of a full fuel tank.
With the prospect of declining sales of aviation
jet fuel sales to international carriers on
account of major domestic oil companies'
unwillingness to shoulder the burden of excise
tax, or of petroleum products being sold to said
carriers by local manufacturers or sellers at still
high prices , the practice of "tankering" would
not be discouraged. This scenario does not
augur well for the Philippines' growing economy
and the booming tourism industry. Worse, our
Government would be risking retaliatory action
under several bilateral agreements with various
countries. Evidently, construction of the tax
exemption provision in question should give
primary consideration to its broad implications
on our commitment under international
agreements.
In view of the foregoing reasons, we find merit
in respondent's motion for reconsideration. We
therefore hold that respondent, as the statutory
taxpayer who is directly liable to pay the excise
tax on its petroleum products, is entitled to a
refund or credit of the excise taxes it paid for
petroleum products sold to international
carriers, the latter having been granted
exemption from the payment of said excise tax
under Sec. 135 (a) of the NIRC.
WHEREFORE, the Court hereby resolves to:
(1) GRANT the original and supplemental
motions for reconsideration filed by respondent
Pilipinas Shell Petroleum Corporation; and
(2) AFFIRM the Decision dated March 25, 2009
and Resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CT A EB No.
415; and DIRECT petitioner Commissioner of
Internal Revenue to refund or to issue a tax
credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of J195,014,283.00
representing the excise taxes it paid on
petroleum products sold to international
carriers from October 2001 to June 2002.
SO ORDERED.
G.R. No. 188497
February 19, 2014
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION,
Respondent.
SEPARATE OPINION
BERSAMIN, J.:
In essence, the Resolution written for the Court
by my esteemed colleague, Justice Martin S.
Villarama, Jr., maintains that the exemption
from payment of the excise tax under Section
135(a) of the National Internal Revenue Code
(NIRC) is conferred on the international carriers;
and that, accordingly, and in fulfillment of
international agreement and practice to exempt
aviation fuel from the excise tax and other
impositions, Section 135(a) of the NIRC
prohibits the passing of the excise tax to
international carriers purchasing petroleum
products from local manufacturers/sellers.
Hence, he finds merit in the Motion for
Reconsideration filed by Pilipinas Shell
Petroleum Corporation (Pilipinas Shell), and
rules that Pilipinas Shell, as the statutory
taxpayer directly liable to pay the excise tax on
its petroleum products, is entitled to the refund
or credit of the excise taxes it paid on the
petroleum products sold to international
carriers, the latter having been granted
exemption from the payment of such taxes
under Section 135(a) of the NIRC.
I CONCUR in the result.
I write this separate opinion only to explain that
I hold a different view on the proper
interpretation of the excise tax exemption
under Section 135(a) of the NIRC. I hold that the
excise tax exemption under Section 135(a) of
the NIRC is conferred on the petroleum
products on which the excise tax is levied in the
first place in view of its nature as a tax on
property, the liability for the payment of which
is statutorily imposed on the domestic
petroleum manufacturer.
I submit the following disquisition in support of
this separate opinion.
The issue raised here was whether the
manufacturer was entitled to claim the refund
of the excise taxes paid on the petroleum
products sold to international carriers exempt
under Section 135(a) of the NIRC.
We ruled in the negative, and held that the
exemption from the excise tax under Section
135(a) of the NIRC was conferred on the
international carriers to whom the petroleum
products were sold. In the decision
promulgated onn April 25, 2012,1 the Court
granted the petition for review on certiorari
filed by the Commissioner of Internal Revenue
(CIR), and disposed thusly:
WHEREFORE, the petition for review on
certiorari is GRANTED. The Decision dated
March 25, 2009 and Resolution dated June 24,
2009 of the Court of Tax Appeals En Banc in CTA
EB No. 415 are hereby REVERSED and SET
ASIDE. The claims for tax refund or credit filed
by respondent Pilipinas Shell Petroleum
Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.2
We thereby agreed with the position of the
Solicitor General that Section 135(a) of the NIRC
must be construed only as a prohibition for the
manufacturer-seller of the petroleum products
from shifting the tax burden to the international
carriers by incorporating the previously-paid
excise tax in the selling price. As a consequence,
the manufacturer-seller could not invoke the
exemption from the excise tax granted to
international carriers. Concluding, we said: –
Respondent’s locally manufactured petroleum
products are clearly subject to excise tax under
Sec. 148. Hence, its claim for tax refund may
not be predicated on Sec. 229 of the NIRC
allowing a refund of erroneous or excess
payment of tax. Respondent’s claim is premised
on what it determined as a tax exemption
"attaching to the goods themselves," which
must be based on a statute granting tax
exemption, or "the result of legislative grace."
Such a claim is to be construed strictissimi juris
against the taxpayer, meaning that the claim
cannot be made to rest on vague inference.
Where the rule of strict interpretation against
the taxpayer is applicable as the claim for
refund partakes of the nature of an exemption,
the claimant must show that he clearly falls
under the exempting statute.
The exemption from excise tax payment on
petroleum products under Sec. 135 (a) is
conferred on international carriers who
purchased the same for their use or
consumption outside the Philippines. The only
condition set by law is for these petroleum
products to be stored in a bonded storage tank
and may be disposed of only in accordance with
the rules and regulations to be prescribed by
the
Secretary
of
Finance,
upon
recommendation of the Commissioner.3
xxxx
Because an excise tax is a tax on the
manufacturer and not on the purchaser, and
there being no express grant under the NIRC of
exemption from payment of excise tax to local
manufacturers of petroleum products sold to
international carriers, and absent any provision
in the Code authorizing the refund or crediting
of such excise taxes paid, the Court holds that
Sec. 135 (a) should be construed as prohibiting
the shifting of the burden of the excise tax to
the international carriers who buys petroleum
products from the local manufacturers. Said
provision thus merely allows the international
carriers to purchase petroleum products
without the excise tax component as an added
cost in the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil
companies which sold such petroleum products
to international carriers are not entitled to a
refund of excise taxes previously paid on the
goods.4
In its Motion for Reconsideration filed on May
23, 2012, Pilipinas Shell principally contends
that the Court has erred in its interpretation of
Section 135(a) of the 1997 NIRC; that Section
135(a) of the NIRC categorically exempts from
the excise tax the petroleum products sold to
international carriers of Philippine or foreign
registry for their use or consumption outside
the Philippines;5 that no excise tax should be
imposed on the petroleum products, whether in
the hands of the qualified international carriers
or in the hands of the manufacturer-seller;6
that although it is the manufacturer, producer
or importer who is generally liable for the excise
tax when the goods or articles are subject to the
excise tax, no tax should accordingly be
collected from the manufacturer, producer or
importer in instances when the goods or articles
themselves are not subject to the excise tax;7
and that as a consequence any excise tax paid in
advance on products that are exempt under the
law should be considered erroneously paid and
subject of refund.8
Pilipinas Shell further contends that the Court’s
decision, which effectively prohibits petroleum
manufacturers from passing on the burden of
the excise tax, defeats the rationale behind the
grant of the exemption;9 and that without the
benefit of a refund or the ability to pass on the
burden of the excise tax to the international
carriers, the excise tax will constitute an
additional production cost that ultimately
increases the selling price of the petroleum
products.10
The CIR counters that the decision has clearly
set forth that the excise tax exemption under
Section 135(a) of the NIRC does not attach to
the products; that Pilipinas Shell’s reliance on
the Silkair rulings is misplaced considering that
the Court made no pronouncement therein that
the manufacturers selling petroleum products
to international carriers were exempt from
paying the taxes; that the rulings that are more
appropriate are those in Philippine Acetylene
Co., Inc. v. Commissioner of Internal Revenue11
and Maceda v. Macaraig, Jr.,12 whereby the
Court confirmed the obvious intent of Section
135 of the NIRC to grant the excise tax
exemption to the international carriers or
agencies as the buyers of petroleum products;
and that this intention is further supported by
the requirement that the petroleum
manufacturer must pay the excise tax in
advance without regard to whether or not the
petroleum purchaser is qualified for exemption
under Section 135 of the NIRC.
In its Supplemental Motion for Reconsideration,
Pilipinas Shell reiterates that what is being
exempted under Section 135 of the NIRC is the
petroleum product that is sold to international
carriers; that the exemption is not given to the
producer or the buyer but to the product itself
considering that the excise taxes, according to
the NIRC, are taxes applicable to certain specific
goods or articles for domestic sale or
consumption or for any other disposition,
whether manufactured in or imported into the
Philippines; that the excise tax that is passed on
to the buyer is no longer in the nature of a tax
but of an added cost to the purchase price of
the product sold; that what is contemplated
under Section 135 of the NIRC is an exemption
from the excise tax, not an exemption from the
burden to shoulder the tax; and that inasmuch
as the exemption can refer only to the
imposition of the tax on the statutory seller, like
Pilipinas Shell, a contrary interpretation renders
Section 135 of the NIRC nugatory because the
NIRC does not impose the excise tax on
subsequent holders of the product like the
international carriers.
As I earlier said, I agree to GRANT Pilipinas
Shell’s motions for reconsideration.
Excise tax is essentially a tax
on goods, products or articles
Taxes are classified, according to subject matter
or object, into three groups, to wit: (1)
personal, capitation or poll taxes; (2) property
taxes; and (3) excise or license taxes. Personal,
capitation or poll taxes are fixed amounts
imposed upon residents or persons of a certain
class without regard to their property or
business, an example of which is the basic
community tax.13 Property taxes are assessed
on property or things of a certain class, whether
real or personal, in proportion to their value or
other reasonable method of apportionment,
such as the real estate tax.14 Excise or license
taxes are imposed upon the performance of an
act, the enjoyment of a privilege, or the
engaging in an occupation, profession or
business.15 Income tax, value-added tax, estate
and donor’s tax fall under the third group.
Excise tax, as a classification of tax according to
object, must not be confused with the excise
tax under Title VI of the NIRC. The term "excise
tax" under Title VI of the 1997 NIRC derives its
definition from the 1986 NIRC,16 and relates to
taxes applied to goods manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported.17 In contrast, an excise tax
that is imposed directly on certain specified
goods – goods manufactured or produced in the
Philippines, or things imported – is undoubtedly
a tax on property.18
The payment of excise taxes is the direct
liability of the manufacturer or producer
The production, manufacture or importation of
the goods belonging to any of the categories
enumerated in Title VI of the NIRC (i.e., alcohol
products, tobacco products, petroleum
products, automobiles and non-essential goods,
mineral products) are not the sole determinants
for the proper levy of the excise tax. It is further
required that the goods be manufactured,
produced or imported for domestic sale,
consumption or any other disposition.19 The
accrual of the tax liability is, therefore,
contingent on the production, manufacture or
importation of the taxable goods and the
intention of the manufacturer, producer or
importer to have the goods locally sold or
consumed or disposed in any other manner.
This is the reason why the accrual and liability
for the payment of the excise tax are imposed
directly on the manufacturer or producer of the
taxable goods,20 and arise before the removal
of the goods from the place of their
production.21
The manufacturer’s or producer’s direct liability
to pay the excise taxes similarly operates
although the goods produced or manufactured
within the country are intended for export and
are "actually exported without returning to the
Philippines, whether so exported in their
original state or as ingredients or parts of any
manufactured goods or products." This is
implied from the grant of a tax credit or refund
to the manufacturer or producer by Section
130(4)(D) of the NIRC, thereby presupposing
that the excise tax corresponding to the goods
exported were previously paid. Section
130(4)(D) reads:
xxxx
(D) Credit for Excise Tax on Goods Actually
Exported. - When goods locally produced or
manufactured are removed and actually
exported without returning to the Philippines,
whether so exported in their original state or as
ingredients or parts of any manufactured goods
or products, any excise tax paid thereon shall be
credited or refunded upon submission of the
proof of actual exportation and upon receipt of
the corresponding foreign exchange payment:
Provided, That the excise tax on mineral
products, except coal and coke, imposed under
Section 151 shall not be creditable or
refundable even if the mineral products are
actually exported. (Emphasis supplied.)
Simply stated, the accrual and payment of the
excise tax under Title VI of the NIRC materially
rest on the fact of actual production,
manufacture or importation of the taxable
goods in the Philippines and on their presumed
or intended domestic sale, consumption or
disposition. Considering that the excise tax
attaches to the goods upon the accrual of the
manufacturer’s direct liability for its payment,
the subsequent sale, consumption or other
disposition of the goods becomes relevant only
to determine whether any exemption or tax
relief may be granted thereafter.
The actual sale, consumption or disposition
of the taxable goods confirms the proper tax
treatment of goods previously subjected
to the excise tax
Conformably with the foregoing discussion, the
accrual and payment of the excise tax on the
goods enumerated under Title VI of the NIRC
prior to their removal from the place of
production are absolute and admit of no
exception. As earlier mentioned, even locally
manufactured goods intended for export
cannot escape the imposition and payment of
the excise tax, subject to a future claim for tax
credit or refund once proof of actual
exportation has been submitted to the
Commissioner of Internal Revenue (CIR).22
Verily, it is the actual sale, consumption or
disposition of the taxable goods that confirms
the proper tax treatment of goods previously
subjected to the excise tax. If any of the goods
enumerated under Title VI of the NIRC are
manufactured or produced in the Philippines
and eventually sold, consumed, or disposed of
in any other manner domestically, therefore,
there can be no claim for any tax relief
inasmuch as the excise tax was properly levied
and collected from the manufacturer-seller.
Here, the point of interest is the proper tax
treatment of the petroleum products sold by
Pilipinas Shell to various international carriers.
An international carrier is engaged in
international transportation or contract of
carriage between places in different territorial
jurisdictions.23
Pertinent is Section 135(a) of the NIRC, which
provides:
SEC. 135. Petroleum Products Sold to
International Carriers and Exempt Entities or
Agencies. - Petroleum products sold to the
following are exempt from excise tax:
(a) International carriers of Philippine or foreign
registry on their use or consumption outside
the Philippines: Provided, That the petroleum
products sold to these international carriers
shall be stored in a bonded storage tank and
may be disposed of only in accordance with the
rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner; x x x
xxxx
As the taxpayer statutorily and directly liable for
the accrual and payment of the excise tax on
the petroleum products it manufactured and it
intended for future domestic sale or
consumption, Pilipinas Shell paid the
corresponding excise taxes prior to the removal
of the goods from the place of production.
However, upon the sale of the petroleum
products to the international carriers, the goods
became exempt from the excise tax by the
express provision of Section 135(a) of the NIRC.
In the latter instance, the fact of sale to the
international carriers of the petroleum products
previously subjected to the excise tax confirms
the proper tax treatment of the goods as
exempt from the excise tax.
It is worthy to note that Section 135(a) of the
NIRC is a product of the 1944 Convention of
International Civil Aviation, otherwise known as
the Chicago Convention, of which the
Philippines is a Member State. Article 24(a) of
the Chicago Convention provides –
Article 24
Customs duty
(a) Aircraft on a flight to, from, or across the
territory of another contracting State shall be
admitted temporarily free of duty, subject to
the customs regulations of the State. Fuel,
lubricating oils, spare parts, regular equipment
and aircraft stores on board an aircraft of a
contracting State, on arrival in the territory of
another contracting State and retained on
board on leaving the territory of that State shall
be exempt from customs duty, inspection fees
or similar national or local duties and charges.
This exemption shall not apply to any quantities
or articles unloaded, except in accordance with
the customs regulations of the State, which may
require that they shall be kept under customs
supervision. x x x (Bold emphasis supplied.)
This provision was extended by the ICAO
Council in its 1999 Resolution, which stated that
"fuel … taken on board for consumption" by an
aircraft from a contracting state in the territory
of another contracting State departing for the
territory of any other State must be exempt
from all customs or other duties. The Resolution
broadly interpreted the scope of the Article 24
prohibition to include "import, export, excise,
sales, consumption and internal duties and
taxes of all kinds levied upon . . . fuel."24
Given the nature of the excise tax on petroleum
products as a tax on property, the tax
exemption espoused by Article 24(a) of the
Chicago Convention, as now embodied in
Section 135(a) of the NIRC, is clearly conferred
on the aviation fuel or petroleum product onboard international carriers. Consequently, the
manufacturer’s or producer’s sale of the
petroleum products to international carriers for
their use or consumption outside the
Philippines operates to bring the tax exemption
of the petroleum products into full force and
effect.
Pilipinas Shell, the statutory taxpayer, is
the proper party to claim the refund of
the excise taxes paid on petroleum
products sold to international carriers
The excise taxes are of the nature of indirect
taxes, the liability for the payment of which may
fall on a person other than whoever actually
bears the burden of the tax.25
In Commissioner of Internal Revenue v.
Philippine
Long
Distance
Telephone
Company,26 the Court has discussed the nature
of indirect taxes in the following manner:
[I]ndirect taxes are those that are demanded, in
the first instance, from, or are paid by, one
person in the expectation and intention that he
can shift the burden to someone else. Stated
elsewise, indirect taxes are taxes wherein the
liability for the payment of the tax falls on one
person but the burden thereof can be shifted or
passed on to another person, such as when the
tax is imposed upon goods before reaching the
consumer who ultimately pays for it. When the
seller passes on the tax to his buyer, he, in
effect, shifts the tax burden, not the liability to
pay it, to the purchaser, as part of the price of
goods sold or services rendered.27
In another ruling, the Court has observed:
Accordingly, the party liable for the tax can shift
the burden to another, as part of the purchase
price of the goods or services. Although the
manufacturer/seller is the one who is statutorily
liable for the tax, it is the buyer who actually
shoulders or bears the burden of the tax, albeit
not in the nature of a tax, but part of the
purchase price or the cost of the goods or
services sold.28
Accordingly, the option of shifting the burden to
pay the excise tax rests on the statutory
taxpayer, which is the manufacturer or
producer in the case of the excise taxes
imposed on the petroleum products. Regardless
of who shoulders the burden of tax payment,
however, the Court has ruled as early as in the
1960s that the proper party to question or to
seek a refund of an indirect tax is the statutory
taxpayer, the person on whom the tax is
imposed by law and who paid the same, even if
he shifts the burden thereof to another.29 The
Court has explained:
In Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue, the Court
held that the sales tax is imposed on the
manufacturer or producer and not on the
purchaser, "except probably in a very remote
and inconsequential sense." Discussing the
"passing on" of the sales tax to the purchaser,
the Court therein cited Justice Oliver Wendell
Holmes’ opinion in Lash’s Products v. United
States wherein he said:
"The phrase ‘passed the tax on’ is inaccurate, as
obviously the tax is laid and remains on the
manufacturer and on him alone. The purchaser
does not really pay the tax. He pays or may pay
the seller more for the goods because of the
seller’s obligation, but that is all. x x x The price
is the sum total paid for the goods. The amount
added because of the tax is paid to get the
goods and for nothing else. Therefore it is part
of the price x x x."
Proceeding from this discussion, the Court went
on to state:
It may indeed be that the economic burden of
the tax finally falls on the purchaser; when it
does the tax becomes a part of the price which
the purchaser must pay. It does not matter that
an additional amount is billed as tax to the
purchaser. x x x The effect is still the same,
namely, that the purchaser does not pay the
tax. He pays or may pay the seller more for the
goods because of the seller’s obligation, but
that is all and the amount added because of the
tax is paid to get the goods and for nothing else.
But the tax burden may not even be shifted to
the purchaser at all. A decision to absorb the
burden of the tax is largely a matter of
economics. Then it can no longer be contended
that a sales tax is a tax on the purchaser.30
The Silkair rulings involving the excise taxes on
the petroleum products sold to international
carriers firmly hold that the proper party to
claim the refund of excise taxes paid is the
manufacturer-seller.
In the February 2008 Silkair ruling,31 the Court
declared:
The proper party to question, or seek a refund
of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and
who paid the same even if he shifts the burden
thereof to another. Section 130 (A) (2) of the
NIRC provides that "[u]nless otherwise
specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or
producer before removal of domestic products
from place of production." Thus, Petron
Corporation, not Silkair, is the statutory
taxpayer which is entitled to claim a refund
based on Section 135 of the NIRC of 1997 and
Article 4(2) of the Air Transport Agreement
between RP and Singapore.
Even if Petron Corporation passed on to Silkair
the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part
of the price which Silkair had to pay as a
purchaser
In the November 2008 Silkair ruling,32 the
Court reiterated:
Section 129 of the NIRC provides that excise
taxes refer to taxes imposed on specified goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported. The excise
taxes are collected from manufacturers or
producers before removal of the domestic
products from the place of production.
Although excise taxes can be considered as
taxes on production, they are really taxes on
property as they are imposed on certain
specified goods.
Section 148(g) of the NIRC provides that there
shall be collected on aviation jet fuel an excise
tax of ₱3.67 per liter of volume capacity. Since
the tax imposed is based on volume capacity,
the tax is referred to as "specific tax." However,
excise tax, whether classified as specific or ad
valorem tax, is basically an indirect tax imposed
on the consumption of a specified list of goods
or products. The tax is directly levied on the
manufacturer upon removal of the taxable
goods from the place of production but in
reality, the tax is passed on to the end
consumer as part of the selling price of the
goods sold
xxxx
When Petron removes its petroleum products
from its refinery in Limay, Bataan, it pays the
excise tax due on the petroleum products thus
removed. Petron, as manufacturer or producer,
is the person liable for the payment of the
excise tax as shown in the Excise Tax Returns
filed with the BIR. Stated otherwise, Petron is
the taxpayer that is primarily, directly and
legally liable for the payment of the excise
taxes. However, since an excise tax is an indirect
tax, Petron can transfer to its customers the
amount of the excise tax paid by treating it as
part of the cost of the goods and tacking it on to
the selling price.
As correctly observed by the CTA, this Court
held in Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue:
It may indeed be that the economic burden of
the tax finally falls on the purchaser; when it
does the tax becomes part of the price which
the purchaser must pay.
Even if the consumers or purchasers ultimately
pay for the tax, they are not considered the
taxpayers. The fact that Petron, on whom the
excise tax is imposed, can shift the tax burden
to its purchasers does not make the latter the
taxpayers and the former the withholding
agent.
Petitioner, as the purchaser and end-consumer,
ultimately bears the tax burden, but this does
not transform petitioner's status into a
statutory taxpayer.
In the refund of indirect taxes, the statutory
taxpayer is the proper party who can claim the
refund.
Section 204(c) of the NIRC provides:
Sec. 204. Authority of the Commissioner to
Compromise, Abate, and Refund or Credit
Taxes. The Commissioner may –
xxxx
(b) Credit or refund taxes erroneously or
illegally received or penalties imposed without
authority, refund the value of internal revenue
stamps when they are returned in good
condition by the purchaser, and, in his
discretion, redeem or change unused stamps
that have been rendered unfit for use and
refund their value upon proof of destruction.
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund
within two (2) years after the payment of the
tax or penalty: Provided, however, That a return
filed showing an overpayment shall be
considered as a written claim for credit or
refund. (Emphasis and underscoring supplied)
The person entitled to claim a tax refund is the
statutory taxpayer. Section 22(N) of the NIRC
defines a taxpayer as "any person subject to
tax." In Commissioner of Internal Revenue v.
Procter and Gamble Phil. Mfg. Corp., the Court
ruled that:
A "person liable for tax" has been held to be a
"person subject to tax" and properly considered
a "taxpayer." The terms "liable for tax" and
"subject to tax" both connote a legal obligation
or duty to pay a tax.
The excise tax is due from the manufacturers of
the petroleum products and is paid upon
removal of the products from their refineries.
Even before the aviation jet fuel is purchased
from Petron, the excise tax is already paid by
Petron. Petron, being the manufacturer, is the
"person subject to tax." In this case, Petron,
which paid the excise tax upon removal of the
products from its Bataan refinery, is the "person
liable for tax." Petitioner is neither a "person
liable for tax" nor "a person subject to tax."
There is also no legal duty on the part of
petitioner to pay the excise tax; hence,
petitioner cannot be considered the taxpayer.
Even if the tax is shifted by Petron to its
customers and even if the tax is billed as a
separate item in the aviation delivery receipts
and invoices issued to its customers, Petron
remains the taxpayer because the excise tax is
imposed directly on Petron as the
manufacturer. Hence, Petron, as the statutory
taxpayer, is the proper party that can claim the
refund of the excise taxes paid to the BIR.33
It is noteworthy that the foregoing
pronouncements were applied in two more
Silkair cases34 involving the same parties and
the same cause of action but pertaining to
different periods of taxation.
The shifting of the tax burden by
manufacturers-sellers is a business prerogative
resulting from the collective impact of market
forces. Such forces include government
impositions like the excise tax. Hence, the
additional amount billed to the purchaser as
part of the price the purchaser pays for the
goods acquired cannot be solely attributed to
the effect of the tax liability imposed on the
manufacture-seller. It is erroneous to construe
Section 135(a) only as a prohibition against the
shifting by the manufacturers-sellers of
petroleum products of the tax burden to
international carriers, for such construction will
deprive the manufacturers-sellers of their
business prerogative to determine the prices at
which they can sell their products.
Section 135(a) of the NIRC cannot be further
construed as granting the excise tax exemption
to the international carrier to whom the
petroleum products are sold considering that
the international carrier has not been subjected
to excise tax at the outset. To reiterate, the
excise tax is levied on the petroleum products
because it is a tax on property. Levy is the act of
imposition by the Legislature such as by its
enactment of a law.35 The law enacted here is
the NIRC whereby the excise tax is imposed on
the petroleum products, the liability for the
payment of which is further statutorily imposed
on the domestic petroleum manufacturer.
Accordingly, the exemption must be allowed to
the petroleum products because it is on them
that the tax is imposed. The tax status of an
international carrier to whom the petroleum
products are sold is not based on exemption;
rather, it is based on the absence of a law
imposing the excise tax on it. This further
supports the position that the burden passed
on by the domestic petroleum manufacturer is
not anymore in the nature of a tax – although
resulting from the previously-paid excise tax –
but as an additional cost component in the
selling price. Consequently, the purchaser of the
petroleum products to whom the burden of the
excise tax has been shifted, not being the
statutory taxpayer, cannot claim a refund of the
excise tax paid by the manufacturer or
producer.
Applying the foregoing, the Court concludes
that: (1) the exemption under Section 135(a) of
the NIRC is conferred on the petroleum
products on which the excise tax was levied in
the first place; (2) Pilipinas Shell, being the
manufacturer or producer of petroleum
products, was the statutory taxpayer of the
excise tax imposed on the petroleum products;
(3) as the statutory taxpayer, Pilipinas Shell’s
liability to pay the excise tax accrued as soon as
the petroleum products came into existence,
and Pilipinas Shell accordingly paid its excise tax
liability prior to its sale or disposition of the
taxable goods to third parties, a fact not
disputed by the CIR; and (3) Pilipinas Shell’s sale
of the petroleum products to international
carriers for their use or consumption outside
the Philippines confirmed the proper tax
treatment of the subject goods as exempt from
the excise tax.1âwphi1
Under the circumstances, therefore, Pilipinas
Shell erroneously paid the excise taxes on its
petroleum products sold to international
carriers, and was entitled to claim the refund of
the excise taxes paid in accordance with
prevailing jurisprudence and Section 204(C) of
the NIRC, viz:
Section 204. Authority of the Commissioner to
Compromise, Abate and Refund or Credit Taxes.
– The Commissioner may – x x x
xxxx
(C) Credit or refund taxes erroneously or
illegally received or penalties imposed without
authority, refund the value of internal revenue
stamps when they are returned in good
condition by the purchaser, and, in his
discretion, redeem or change unused stamps
that have been rendered unfit for use and
refund their value upon proof of destruction.
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund
within two (2) years after payment of the tax or
penalty: Provided, however, That a return filed
showing an overpayment shall be considered as
a written claim for credit or refund.
IN VIEW OF THE FOREGOING, I VOTE TO GRANT
the Motion for Reconsideration and
Supplemental Motion for Reconsideration of
Pilipinas Shell Petroleum Corporation and,
accordingly:
(a) TO AFFIRM the decision dated March 25,
2009 and resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CTA EB No. 415;
and
(b) TO DIRECT petitioner Commissioner of
Internal Revenue to refund or to issue a tax
credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of ₱95,014,283.00
representing the excise taxes it paid on the
petroleum products sold to international
carriers in the period from October 2001 to
June 2002.
LUCAS P. BERSAMIN
Associate Justice
ANGELES UNIVERSITY FOUNDATION,
Petitioner,
- versus CITY OF ANGELES, JULIET G.
QUINSAAT, in her capacity as
G.R. No. 189999
Present:
LEONARDO-DE CASTRO,J.,*
Acting Chairperson,
BERSAMIN,
VILLARAMA, JR.,
PEREZ,** and
PERLAS-BERNABE,*** JJ.
Treasurer of Angeles City and ENGR. DONATO
N. DIZON, in his capacity as Acting Angeles City
Building Official,
Respondents.
Promulgated:
June 27, 2012
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari
under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, which seeks to reverse
and set aside the Decision[1] dated July 28,
2009 and Resolution[2] dated October 12, 2009
of the Court of Appeals (CA) in CA-G.R. CV No.
90591. The CA reversed the Decision[3] dated
September 21, 2007 of the Regional Trial Court
of Angeles City, Branch 57 in Civil Case No.
12995 declaring petitioner exempt from the
payment of building permit and other fees and
ordering respondents to refund the same with
interest at the legal rate.
The factual antecedents:
Petitioner Angeles University Foundation (AUF)
is an educational institution established on May
25, 1962 and was converted into a non-stock,
non-profit education foundation under the
provisions of Republic Act (R.A.) No. 6055[4] on
December 4, 1975.
Sometime in August 2005, petitioner filed with
the Office of the City Building Official an
application for a building permit for the
construction of an 11-storey building of the
Angeles University Foundation Medical Center
in its main campus located at MacArthur
Highway, Angeles City, Pampanga. Said office
issued a Building Permit Fee Assessment in the
amount of P126,839.20. An Order of Payment
was also issued by the City Planning and
Development Office, Zoning Administration Unit
requiring petitioner to pay the sum of
P238,741.64 as Locational Clearance Fee.[5]
In separate letters dated November 15, 2005
addressed to respondents City Treasurer Juliet
G. Quinsaat and Acting City Building Official
Donato N. Dizon, petitioner claimed that it is
exempt from the payment of the building
permit and locational clearance fees, citing legal
opinions rendered by the Department of Justice
(DOJ).
Petitioner
also
reminded
the
respondents that they have previously issued
building permits acknowledging such exemption
from payment of building permit fees on the
construction of petitioners 4-storey AUF
Information Technology Center building and the
AUF Professional Schools building on July 27,
2000 and March 15, 2004, respectively.[6]
Respondent City Treasurer referred the matter
to the Bureau of Local Government Finance
(BLGF) of the Department of Finance, which in
turn endorsed the query to the DOJ. Then
Justice Secretary Raul M. Gonzalez, in his letterreply dated December 6, 2005, cited previous
issuances of his office (Opinion No. 157, s. 1981
and Opinion No. 147, s. 1982) declaring
petitioner to be exempt from the payment of
building permit fees. Under the 1st
Indorsement dated January 6, 2006, BLGF
reiterated the aforesaid opinion of the DOJ
stating further that xxx the Department of
Finance, thru this Bureau, has no authority to
review the resolution or the decision of the
DOJ.[7]
Petitioner wrote the respondents reiterating its
request to reverse the disputed assessments
and invoking the DOJ legal opinions which have
been affirmed by Secretary Gonzalez. Despite
petitioners plea, however, respondents refused
to issue the building permits for the
construction of the AUF Medical Center in the
main campus and renovation of a school
building located at Marisol Village. Petitioner
then appealed the matter to City Mayor
Carmelo F. Lazatin but no written response was
received by petitioner.[8]
Consequently, petitioner paid under protest[9]
the following:
Medical Center (new construction)
Building Permit and Electrical Fee
P 217,475.20
Locational Clearance Fee
283,741.64
Fire Code Fee
144,690.00
Total - P 645,906.84
School Building (renovation)
Building Permit and Electrical Fee
P 37,857.20
Locational Clearance Fee
6,000.57
Fire Code Fee
5,967.74
Total - P 49,825.51
Petitioner likewise paid the following sums as
required by the City Assessors Office:
Real Property Tax Basic Fee
P 86,531.10
SEF
43,274.54
Locational Clearance Fee
1,125.00
Total P130,930.64[10]
[GRAND TOTAL - P 826,662.99]
By reason of the above payments, petitioner
was issued the corresponding Building Permit,
Wiring Permit, Electrical Permit and Sanitary
Building Permit. On June 9, 2006, petitioner
formally requested the respondents to refund
the fees it paid under protest. Under letters
dated June 15, 2006 and August 7, 2006,
respondent City Treasurer denied the claim for
refund.[11]
On August 31, 2006, petitioner filed a
Complaint[12] before the trial court seeking the
refund of P826,662.99 plus interest at the rate
of 12% per annum, and also praying for the
award of attorneys fees in the amount of
P300,000.00 and litigation expenses.
In its Answer,[13] respondents asserted that the
claim of petitioner cannot be granted because
its structures are not among those mentioned
in Sec. 209 of the National Building Code as
exempted from the building permit fee.
Respondents argued that R.A. No. 6055 should
be considered repealed on the basis of Sec.
2104 of the National Building Code. Since the
disputed assessments are regulatory in nature,
they are not taxes from which petitioner is
exempt. As to the real property taxes imposed
on petitioners property located in Marisol
Village, respondents pointed out that said
premises will be used as a school dormitory
which cannot be considered as a use exclusively
for educational activities.
Petitioner countered that the subject building
permit are being collected on the basis of Art.
244 of the Implementing Rules and Regulations
of the Local Government Code, which
impositions are really taxes considering that
they are provided under the chapter on Local
Government Taxation in reference to the
revenue raising power of local government
units (LGUs). Moreover, petitioner contended
that, as held in Philippine Airlines, Inc. v.
Edu,[14] fees may be regarded as taxes
depending on the purpose of its exaction. In any
case, petitioner pointed out that the Local
Government Code of 1991 provides in Sec. 193
that non-stock and non-profit educational
institutions like petitioner retained the tax
exemptions or incentives which have been
granted to them. Under Sec. 8 of R.A. No. 6055
and applicable jurisprudence and DOJ rulings,
petitioner is clearly exempt from the payment
of building permit fees.[15]
On September 21, 2007, the trial court
rendered judgment in favor of the petitioner
and against the respondents. The dispositive
portion of the trial courts decision[16] reads:
WHEREFORE, premises considered, judgment is
rendered as follows:
a. Plaintiff is exempt from the payment of
building permit and other fees Ordering the
Defendants to refund the total amount of Eight
Hundred Twenty Six Thousand Six Hundred
Sixty Two Pesos and 99/100 Centavos
(P826,662.99) plus legal interest thereon at the
rate of twelve percent (12%) per annum
commencing on the date of extra-judicial
demand or June 14, 2006, until the aforesaid
amount is fully paid.
b. Finding the Defendants liable for attorneys
fees in the amount of Seventy Thousand Pesos
(Php70,000.00), plus litigation expenses.
c. Ordering the Defendants to pay the costs of
the suit.
SO ORDERED.[17]
Respondents appealed to the CA which
reversed the trial court, holding that while
petitioner is a tax-free entity, it is not exempt
from the payment of regulatory fees. The CA
noted that under R.A. No. 6055, petitioner was
granted exemption only from income tax
derived from its educational activities and real
property used exclusively for educational
purposes. Regardless of the repealing clause in
the National Building Code, the CA held that
petitioner is still not exempt because a building
permit cannot be considered as the other
charges mentioned in Sec. 8 of R.A. No. 6055
which refers to impositions in the nature of tax,
import duties, assessments and other
collections for revenue purposes, following the
ejusdem generisrule. The CA further stated that
petitioner has not shown that the fees collected
were excessive and more than the cost of
surveillance, inspection and regulation. And
while petitioner may be exempt from the
payment of real property tax, petitioner in this
case merely alleged that the subject property is
to be used actually, directly and exclusively for
educational purposes, declaring merely that
such premises is intended to house the sports
and other facilities of the university but by
reason of the occupancy of informal settlers on
the area, it cannot yet utilize the same for its
intended use. Thus, the CA concluded that
petitioner is not entitled to the refund of
building permit and related fees, as well as real
property tax it paid under protest.
Petitioner filed a motion for reconsideration
which was denied by the CA.
Hence, this petition raising the following
grounds:
THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR AND DECIDED A QUESTION
OF SUBSTANCE IN A WAY NOT IN ACCORDANCE
WITH LAW AND THE APPLICABLE DECISIONS OF
THE HONORABLE COURT AND HAS DEPARTED
FROM THE ACCEPTED AND USUAL COURSE OF
JUDICIAL PROCEEDINGS NECESSITATING THE
HONORABLE COURTS EXERCISE OF ITS POWER
OF SUPERVISION CONSIDERING THAT:
I. IN REVERSING THE TRIAL COURTS DECISION
DATED 21 SEPTEMBER 2007, THE COURT OF
APPEALS
EFFECTIVELY
WITHDREW
THE
PRIVILEGE OF EXEMPTION GRANTED TO NONSTOCK,
NON-PROFIT
EDUCATIONAL
FOUNDATIONS BY VIRTUE OF RA 6055 WHICH
WITHDRAWAL IS BEYOND THE AUTHORITY OF
THE COURT OF APPEALS TO DO.
A. INDEED, RA 6055 REMAINS VALID AND IS IN
FULL FORCE AND EFFECT. HENCE, THE COURT
OF APPEALS ERRED WHEN IT RULED IN THE
QUESTIONED DECISION THAT NON-STOCK,
NON-PROFIT EDUCATIONAL FOUNDATIONS ARE
NOT EXEMPT.
B. THE COURT OF APPEALS APPLICATION OF
THE PRINCIPLE OF EJUSDEM GENERIS IN
RULING IN THE QUESTIONED DECISION THAT
THE TERM OTHER CHARGES IMPOSED BY THE
GOVERNMENT UNDER SECTION 8 OF RA 6055
DOES NOT INCLUDE BUILDING PERMIT AND
OTHER RELATED FEES AND/OR CHARGES IS
BASED
ON
ITS
ERRONEOUS
AND
UNWARRANTED ASSUMPTION THAT THE
TAXES, IMPORT DUTIES AND ASSESSMENTS AS
PART OF THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT
EDUCATIONAL FOUNDATIONS ARE LIMITED TO
COLLECTIONS FOR REVENUE PURPOSES.
C. EVEN ASSUMING THAT THE BUILDING
PERMIT AND OTHER RELATED FEES AND/OR
CHARGES ARE NOT INCLUDED IN THE TERM
OTHER
CHARGES
IMPOSED
BY
THE
GOVERNMENT UNDER SECTION 8 OF RA 6055,
ITS IMPOSITION IS GENERALLY A TAX MEASURE
AND THEREFORE, STILL COVERED UNDER THE
PRIVILEGE OF EXEMPTION.
II. THE COURT OF APPEALS DENIAL OF
PETITIONER AUFS EXEMPTION FROM REAL
PROPERTY TAXES CONTAINED IN ITS
QUESTIONED DECISION AND QUESTIONED
RESOLUTION IS CONTRARY TO APPLICABLE LAW
AND JURISPRUDENCE.[18]
Petitioner stresses that the tax exemption
granted to educational stock corporations
which have converted into non-profit
foundations was broadened to include any
other charges imposed by the Government as
one of the incentives for such conversion. These
incentives necessarily included exemption from
payment of building permit and related fees as
otherwise there would have been no incentives
for educational foundations if the privilege
were only limited to exemption from taxation,
which is already provided under the
Constitution.
Petitioner further contends that this Court has
consistently held in several cases that the
primary purpose of the exaction determines its
nature. Thus, a charge of a fixed sum which
bears no relation to the cost of inspection and
which is payable into the general revenue of the
state is a tax rather than an exercise of the
police power. The standard set by law in the
determination of the amount that may be
imposed as license fees is such that is
commensurate with the cost of regulation,
inspection and licensing. But in this case, the
amount representing the building permit and
related fees and/or charges is such an
exorbitant amount as to warrant a valid
imposition; such amount exceeds the probable
cost of regulation. Even with the alleged criteria
submitted by the respondents (e.g., character
of occupancy or use of building/structure, cost
of construction, floor area and height), and the
construction by petitioner of an 11-storey
building, the costs of inspection will not amount
to P645,906.84, presumably for the salary of
inspectors or employees, the expenses of
transportation for inspection and the
preparation and reproduction of documents.
Petitioner thus concludes that the disputed fees
are substantially and mainly for purposes of
revenue rather than regulation, so that even
these fees cannot be deemed charges
mentioned in Sec. 8 of R.A. No. 6055, they
should properly be treated as tax from which
petitioner is exempt.
In their Comment, respondents maintain that
petitioner is not exempt from the payment of
building permit and related fees since the only
exemptions provided in the National Building
Code are public buildings and traditional
indigenous family dwellings. Inclusio unius est
exclusio alterius. Because the law did not
include petitioners buildings from those
structures exempt from the payment of building
permit fee, it is therefore subject to the
regulatory fees imposed under the National
Building Code.
Respondents assert that the CA correctly
distinguished a building permit fee from those
other charges mentioned in Sec. 8 of R.A. No.
6055. As stated by petitioner itself, charges
refer to pecuniary liability, as rents, and fees
against persons or property. Respondents point
out that a building permit is classified under the
term fee. A fee is generally imposed to cover
the cost of regulation as activity or privilege and
is essentially derived from the exercise of police
power; on the other hand, impositions for
services rendered by the local government units
or for conveniences furnished, are referred to
as service charges.
Respondents also disagreed with petitioners
contention that the fees imposed and collected
are exorbitant and exceeded the probable
expenses of regulation. These fees are based on
computations and assessments made by the
responsible officials of the City Engineers Office
in accordance with the Schedule of Fees and
criteria provided in the National Building Code.
The bases of assessment cited by petitioner
(e.g. salary of employees, expenses of
transportation
and
preparation
and
reproduction of documents) refer to charges
and fees on business and occupation under Sec.
147 of the Local Government Code, which do
not apply to building permit fees. The
parameters set by the National Building Code
can be considered as complying with the
reasonable cost of regulation in the assessment
and collection of building permit fees.
Respondents likewise contend that the
presumption of regularity in the performance of
official duty applies in this case. Petitioner
should have presented evidence to prove its
allegations that the amounts collected are
exorbitant or unreasonable.
For resolution are the following issues: (1)
whether petitioner is exempt from the payment
of building permit and related fees imposed
under the National Building Code; and (2)
whether the parcel of land owned by petitioner
which has been assessed for real property tax is
likewise exempt.
R.A. No. 6055 granted tax exemptions to
educational institutions like petitioner which
converted to non-stock, non-profit educational
foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt
from the payment of all taxes, import duties,
assessments, and other charges imposed by the
Government onall income derived from or
property, real or personal, used exclusively for
the
educational
activities
of
the
Foundation.(Emphasis supplied.)
On February 19, 1977, Presidential Decree
(P.D.) No. 1096 was issued adopting the
National Building Code of the Philippines. The
said Code requires every person, firm or
corporation, including any agency or
instrumentality of the government to obtain a
building permit for any construction, alteration
or
repair
of
any
building
or
structure.[19]Building permit refers to a
document issued by the Building Official x x x to
an owner/applicant to proceed with the
construction, installation, addition, alteration,
renovation, conversion, repair, moving,
demolition or other work activity of a specific
project/building/structure or portions thereof
after the accompanying principal plans,
specifications and other pertinent documents
with the duly notarized application are found
satisfactory and substantially conforming with
the National Building Code of the Philippines x x
x and its Implementing Rules and Regulations
(IRR).[20] Building permit fees refers to the
basic permit fee and other charges imposed
under the National Building Code.
Exempted from the payment of building permit
fees are: (1) public buildings and (2) traditional
indigenous family dwellings.[21] Not being
expressly included in the enumeration of
structures to which the building permit fees do
not apply, petitioners claim for exemption rests
solely on its interpretation of the term other
charges imposed by the National Government
in the tax exemption clause of R.A. No. 6055.
A charge is broadly defined as the price of, or
rate for, something, while the word fee pertains
to a charge fixed by law for services of public
officers or for use of a privilege under control of
government.[22] As used in the Local
Government Code of 1991 (R.A. No. 7160),
charges refers to pecuniary liability, as rents or
fees against persons or property, while fee
means a charge fixed by law or ordinance for
the regulation or inspection of a business or
activity.[23]
That charges in its ordinary meaning appears to
be a general term which could cover a specific
fee does not support petitioners position that
building permit fees are among those other
charges from which it was expressly exempted.
Note that the other charges mentioned in Sec. 8
of R.A. No. 6055 is qualified by the words
imposed by the Government on all x x x
property used exclusively for the educational
activities of the foundation. Building permit fees
are not impositions on property but on the
activity subject of government regulation. While
it may be argued that the fees relate to
particular properties, i.e., buildings and
structures, they are actually imposed on certain
activities the owner may conduct either to build
such structures or to repair, alter, renovate or
demolish the same. This is evident from the
following provisions of the National Building
Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the
State to safeguard life, health, property, and
public welfare, consistent with theprinciples of
sound environmental management and control;
and tothis end, make it the purpose of this Code
to provide for allbuildings and structures, a
framework of minimum standards and
requirements to regulate and control their
location, site, design quality of materials,
construction, use, occupancy, and maintenance.
Section 103. Scope and Application
(a) The provisions of this Code shall apply to the
design,location, sitting, construction, alteration,
repair,conversion,
use,
occupancy,
maintenance, moving, demolitionof, and
addition to public and private buildings
andstructures, except traditional indigenous
family dwellingsas defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any
agency orinstrumentality of the government
shall erect, construct, alter, repair, move,
convert or demolish any building or structure or
causethe same to be done without first
obtaining a building permittherefor from the
Building Official assigned in the place where
thesubject building is located or the building
work is to be done. (Italics supplied.)
That a building permit fee is a regulatory
imposition is highlighted by the fact that in
processing an application for a building permit,
the Building Official shall see to it that the
applicant satisfies and conforms with approved
standard requirements on zoning and land use,
lines and grades, structural design, sanitary and
sewerage, environmental health, electrical and
mechanical safety as well as with other rules
and regulations implementing the National
Building Code.[24] Thus, ancillary permits such
as electrical permit, sanitary permit and zoning
clearance must also be secured and the
corresponding fees paid before a building
permit may be issued. And as can be gleaned
from the implementing rules and regulations of
the National Building Code, clearances from
various government authorities exercising and
enforcing regulatory functions affecting
buildings/structures, like local government
units, may be further required before a building
permit may be issued.[25]
Since building permit fees are not charges on
property, they are not impositions from which
petitioner is exempt.
As to petitioners argument that the building
permit fees collected by respondents are in
reality taxes because the primary purpose is to
raise revenues for the local government unit,
the same does not hold water.
A charge of a fixed sum which bears no relation
at all to the cost of inspection and regulation
may be held to be a tax rather than an exercise
of the police power.[26] In this case, the
Secretary of Public Works and Highways who is
mandated to prescribe and fix the amount of
fees and other charges that the Building Official
shall collect in connection with the performance
of regulatory functions,[27] has promulgated
and issued the Implementing Rules and
Regulations[28] which provide for the bases of
assessment of such fees, as follows:
1. Character of occupancy or use of building
2.
Cost of construction 10,000/sq.m
(A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)
3. Floor area
4. Height
Petitioner failed to demonstrate that the above
bases of assessment were arbitrarily
determined or unrelated to the activity being
regulated. Neither has petitioner adduced
evidence to show that the rates of building
permit fees imposed and collected by the
respondents were unreasonable or in excess of
the cost of regulation and inspection.
In Chevron Philippines, Inc. v. Bases Conversion
Development
Authority,[29]
this
Court
explained:
In distinguishing tax and regulation as a form of
police power, the determining factor is the
purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it
will be deemed a tax even though the measure
results in some form of regulation. On the other
hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise
of the police power of the state, even though
incidentally, revenue is generated. Thus, in
Gerochi v. Department of Energy, the Court
stated:
The conservative and pivotal distinction
between these two (2) powers rests in the
purpose for which the charge is made. If
generation of revenue is the primary purpose
and regulation is merely incidental, the
imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is
incidentally raised does not make the
imposition a tax.[30] (Emphasis supplied.)
Concededly, in the case of building permit fees
imposed by the National Government under the
National Building Code, revenue is incidentally
generated for the benefit of local government
units. Thus:
Section 208. Fees
Every Building Official shall keep a permanent
record and accurate account of all fees and
other charges fixed and authorized by the
Secretary to be collected and received under
this Code.
Subject to existing budgetary, accounting and
auditing rules and regulations, the Building
Official is hereby authorized to retain not more
than twenty percent of his collection for the
operating expenses of his office.
The remaining eighty percent shall be deposited
with the provincial, city or municipal treasurer
and shall accrue to the General Fund of the
province, city or municipality concerned.
Petitioners reliance on Sec. 193 of the Local
Government Code of 1991 is likewise
misplaced. Said provision states:
SECTION 193. Withdrawal of Tax Exemption
Privileges. -- Unless otherwise provided in this
Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether
natural or juridical, including governmentowned or controlled corporations, except local
water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied.)
Considering that exemption from payment of
regulatory fees was not among those incentives
granted to petitioner under R.A. No. 6055, there
is no such incentive that is retained under the
Local Government Code of 1991. Consequently,
no reversible error was committed by the CA in
ruling that petitioner is liable to pay the subject
building permit and related fees.
Now, on petitioners claim that it is exempted
from the payment of real property tax assessed
against its real property presently occupied by
informal settlers.
Section 28(3), Article VI of the 1987
Constitution provides:
xxxx
(3) Charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly
and exclusively used for religious, charitable or
educational purposes shall be exempt from
taxation.
x x x x (Emphasis supplied.)
Section 234(b) of the Local Government Code of
1991 implements the foregoing constitutional
provision by declaring that -SECTION 234. Exemptions from Real Property
Tax. The following are exempted from payment
of the real property tax:
xxxx
(b) Charitable institutions, churches, parsonages
or convents appurtenant thereto, mosques,
non-profit or religious cemeteries and all lands,
buildings, and improvements actually, directly,
and exclusively used for religious, charitable or
educational purposes;
x x x x (Emphasis supplied.)
In Lung Center of the Philippines v. Quezon
City,[31] this Court held that only portions of
the hospital actually, directly and exclusively
used for charitable purposes are exempt from
real property taxes, while those portions leased
to private entities and individuals are not
exempt from such taxes. We explained the
condition for the tax exemption privilege of
charitable and educational institutions, as
follows:
Under the 1973 and 1987 Constitutions and
Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove,
by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for charitable purposes. Exclusive is defined as
possessed and enjoyed to the exclusion of
others; debarred from participation or
enjoyment; and exclusively is defined, in a
manner to exclude; as enjoying a privilege
exclusively. If real property is used for one or
more commercial purposes, it is not exclusively
used for the exempted purposes but is subject
to taxation. The words dominant use or
principal use cannot be substituted for the
words used exclusively without doing violence
to the Constitutions and the law. Solely is
synonymous with exclusively.
What is meant by actual, direct and exclusive
use of the property for charitable purposes is
the direct and immediate and actual application
of the property itself to the purposes for which
the charitable institution is organized. It is not
the use of the income from the real property
that is determinative of whether the property is
used for tax-exempt purposes.[32] (Emphasis
and underscoring supplied.)
Petitioner failed to discharge its burden to
prove that its real property is actually, directly
and exclusively used for educational purposes.
While there is no allegation or proof that
petitioner leases the land to its present
occupants, still there is no compliance with the
constitutional and statutory requirement that
said real property is actually, directly and
exclusively used for educational purposes. The
respondents correctly assessed the land for real
property taxes for the taxable period during
which the land is not being devoted solely to
petitioners educational activities. Accordingly,
the CA did not err in ruling that petitioner is
likewise not entitled to a refund of the real
property tax it paid under protest.
WHEREFORE, the petition is DENIED. The
Decision dated July 28, 2009 and Resolution
dated October 12, 2009 of the Court of Appeals
in CA-G.R. CV No. 90591 are AFFIRMED.
No pronouncement as to costs.
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and
HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable
grounds to reverse the questioned decision of
the Intermediate Appellate Court, to set aside
the auction sale of his property which took
place on December 5, 1977, and to allow him
to recover a 203 square meter lot which was,
sold at public auction to Ho Fernandez and
ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a
residential lot and a two-story house built
upon it situated at Barrio San Isidro, now
District of Sta. Clara, Pasay City, Metro
Manila. The lot, with an area of about 328
square meters, is described and covered by
Transfer Certificate of Title No. 4739 (37795)
of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter
portion of Francia's property was expropriated
by the Republic of the Philippines for the sum
of P4,116.00 representing the estimated
amount equivalent to the assessed value of
the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia
failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at
public auction by the City Treasurer of Pasay
City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property
Tax Code in order to satisfy a tax delinquency
of P2,400.00. Ho Fernandez was the highest
bidder for the property.
Francia was not present during the auction
sale since he was in Iligan City at that time
helping his uncle ship bananas.
On March 3, 1979, Francia received a notice
of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title"
filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the
issuance in his name of a new certificate of
title. Upon verification through his lawyer,
Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by
the City Treasurer on December 11, 1978.
The auction sale and the final bill of sale were
both annotated at the back of TCT No. 4739
(37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint
to annul the auction sale. He later amended
his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a
decision, the dispositive portion of which
reads:
WHEREFORE, in view of the
foregoing, judgment is hereby
rendered dismissing the
amended complaint and
ordering:
(a) The
Register of
Deeds of
Pasay City to
issue a new
Transfer
Certificate of
Title in favor of
the defendant
Ho Fernandez
over the parcel
of land
including the
improvements
thereon,
subject to
whatever
encumbrances
appearing at
the back of
TCT No. 4739
(37795) and
ordering the
same TCT No.
4739 (37795)
cancelled.
(b) The plaintiff
to pay
defendant Ho
Fernandez the
sum of
P1,000.00 as
attorney's fees.
(p. 30, Record
on Appeal)
The Intermediate Appellate Court affirmed the
decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the
following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE
APPELLATE COURT COMMITTED A
GRAVE ERROR OF LAW IN NOT HOLDING
PETITIONER'S OBLIGATION TO PAY
P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE
AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE
FORMER.
II
RESPONDENT INTERMEDIATE
APPELLATE COURT COMMITTED A
GRAVE AND SERIOUS ERROR IN NOT
HOLDING THAT PETITIONER WAS NOT
PROPERLY AND DULY NOTIFIED THAT AN
AUCTION SALE OF HIS PROPERTY WAS
TO TAKE PLACE ON DECEMBER 5, 1977
TO SATISFY AN ALLEGED TAX
DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE
APPELLATE COURT FURTHER
COMMITTED A SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN NOT
HOLDING THAT THE PRICE OF P2,400.00
PAID BY RESPONTDENT HO FERNANDEZ
WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING
TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF
LAW, AND CONSEQUENTLY, THE
AUCTION SALE MADE THEREOF IS VOID.
(pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more
thorough inquiry into the petitioner's
allegations that his property was sold at public
auction without notice to him and that the
price paid for the property was shockingly
inadequate, amounting to fraud and
deprivation without due process of law.
A careful review of the case, however,
discloses that Mr. Francia brought the
problems raised in his petition upon himself.
While we commiserate with him at the loss of
his property, the law and the facts militate
against the grant of his petition. We are
constrained to dismiss it.
Francia contends that his tax delinquency of
P2,400.00 has been extinguished by legal
compensation. He claims that the government
owed him P4,116.00 when a portion of his
land was expropriated on October 15, 1977.
Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977.
There is no legal basis for the contention. By
legal compensation, obligations of persons,
who in their own right are reciprocally debtors
and creditors of each other, are extinguished
(Art. 1278, Civil Code). The circumstances of
the case do not satisfy the requirements
provided by Article 1279, to wit:
(1) that each one of the
obligors be bound principally
and that he be at the same
time a principal creditor of the
other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has
no merit. We have consistently ruled that
there can be no off-setting of taxes against the
claims that the taxpayer may have against the
government. A person cannot refuse to pay a
tax on the ground that the government owes
him an amount equal to or greater than the tax
being collected. The collection of a tax cannot
await the results of a lawsuit against the
government.
In the case of Republic v. Mambulao Lumber
Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the
subject of set-off or compensation. We stated
that:
A claim for taxes is not such a
debt, demand, contract or
judgment as is allowed to be
set-off under the statutes of
set-off, which are construed
uniformly, in the light of public
policy, to exclude the remedy
in an action or any
indebtedness of the state or
municipality to one who is
liable to the state or
municipality for taxes. Neither
are they a proper subject of
recoupment since they do not
arise out of the contract or
transaction sued on. ... (80
C.J.S., 7374). "The general
rule based on grounds of
public policy is well-settled that
no set-off admissible against
demands for taxes levied for
general or local governmental
purposes. The reason on
which the general rule is
based, is that taxes are not in
the nature of contracts
between the party and party
but grow out of duty to, and
are the positive acts of the
government to the making and
enforcing of which, the
personal consent of individual
taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to
pay his tax when called upon by the collector
because he has a claim against the
governmental body not included in the tax
levy.
This rule was reiterated in the case of Corders
v. Gonda (18 SCRA 331) where we stated
that: "... internal revenue taxes can not be the
subject of compensation: Reason:
government and taxpayer are not mutually
creditors and debtors of each other' under
Article 1278 of the Civil Code and a "claim for
taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off."
There are other factors which compel us to
rule against the petitioner. The tax was due to
the city government while the expropriation
was effected by the national government.
Moreover, the amount of P4,116.00 paid by
the national government for the 125 square
meter portion of his lot was deposited with the
Philippine National Bank long before the sale
at public auction of his remaining property.
Notice of the deposit dated September 28,
1977 was received by the petitioner on
September 30, 1977. The petitioner admitted
in his testimony that he knew about the
P4,116.00 deposited with the bank but he did
not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit
so that he could pay the tax obligation thus
aborting the sale at public auction.
Petitioner had one year within which to
redeem his property although, as well be
shown later, he claimed that he pocketed the
notice of the auction sale without reading it.
Petitioner contends that "the auction sale in
question was made without complying with the
mandatory provisions of the statute governing
tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law
on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez
has the affirmative of this issue, the burden of
proof therefore rests upon him to show that
plaintiff was duly and properly notified ...
.(Petition for Review, Rollo p. 18; emphasis
supplied)
We agree with the petitioner's claim that Ho
Fernandez, the purchaser at the auction sale,
has the burden of proof to show that there
was compliance with all the prescribed
requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil.
492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be
followed in tax proceedings
must be established by proof
and thegeneral rule is that the
purchaser of a tax title is
bound to take upon himself the
burden of showing the
regularity of all proceedings
leading up to the
sale. (emphasis supplied)
There is no presumption of the regularity of
any administrative action which results in
depriving a taxpayer of his property through a
tax sale. (Camo v. Riosa Boyco, 29 Phil. 437);
Denoga v. Insular Government, 19 Phil. 261).
This is actually an exception to the rule that
administrative proceedings are presumed to
be regular.
But even if the burden of proof lies with the
purchaser to show that all legal prerequisites
have been complied with, the petitioner can
not, however, deny that he did receive the
notice for the auction sale. The records
sustain the lower court's finding that:
[T]he plaintiff claimed that it
was illegal and irregular. He
insisted that he was not
properly notified of the auction
sale. Surprisingly, however, he
admitted in his testimony that
he received the letter dated
November 21, 1977 (Exhibit
"I") as shown by his signature
(Exhibit "I-A") thereof. He
claimed further that he was not
present on December 5, 1977
the date of the auction sale
because he went to Iligan City.
As long as there was
substantial compliance with
the requirements of the notice,
the validity of the auction sale
can not be assailed ... .
We quote the following testimony of the
petitioner on cross-examination, to wit:
Q. My question
to you is this
letter marked
as Exhibit I for
Ho Fernandez
notified you
that the
property in
question shall
be sold at
public auction
to the highest
bidder on
December 5,
1977 pursuant
to Sec. 74 of
PD 464. Will
you tell the
Court whether
you received
the original of
this letter?
A. I just signed
it because I
was not able to
read the same.
It was just sent
by mail carrier.
Q. So you
admit that you
received the
original of
Exhibit I and
you signed
upon receipt
thereof but you
did not read
the contents of
it?
A. Yes, sir, as I
was in a hurry.
Q. After you
received that
original where
did you place
it?
A. I placed it in
the usual place
where I place
my mails.
Petitioner, therefore, was notified about the
auction sale. It was negligence on his part
when he ignored such notice. By his very own
admission that he received the notice, his now
coming to court assailing the validity of the
auction sale loses its force.
Petitioner's third assignment of grave error
likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon
v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA
289; Tolentino v. Agcaoili, 91 Phil. 917
Unrep.). See also Barrozo Vda. de Gordon v.
Court of Appeals (109 SCRA 388) we held
that "alleged gross inadequacy of price is not
material when the law gives the owner the
right to redeem as when a sale is made at
public auction, upon the theory that the lesser
the price, the easier it is for the owner to effect
redemption." In Velasquez v. Coronel (5
SCRA 985), this Court held:
... [R]espondent treasurer now
claims that the prices for which
the lands were sold are
unconscionable considering
the wide divergence between
their assessed values and the
amounts for which they had
been actually sold. However,
while in ordinary sales for
reasons of equity a transaction
may be invalidated on the
ground of inadequacy of price,
or when such inadequacy
shocks one's conscience as to
justify the courts to interfere,
such does not follow when the
law gives to the owner the
right to redeem, as when a
sale is made at public auction,
upon the theory that the lesser
the price the easier it is for the
owner to effect the
redemption. And so it was
aptly said: "When there is the
right to redeem, inadequacy of
price should not be material,
because the judgment debtor
may reacquire the property or
also sell his right to redeem
and thus recover the loss he
claims to have suffered by
reason of the price obtained at
the auction sale."
The reason behind the above rulings is well
enunciated in the case of Hilton et. ux. v. De
Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is
held to be a valid objection to
a sale for taxes, the collection
of taxes in this manner would
be greatly embarrassed, if not
rendered altogether
impracticable. In Black on Tax
Titles (2nd Ed.) 238, the
correct rule is stated as
follows: "where land is sold for
taxes, the inadequacy of the
price given is not a valid
objection to the sale." This rule
arises from necessity, for, if a
fair price for the land were
essential to the sale, it would
be useless to offer the
property. Indeed, it is
notorious that the prices
habitually paid by purchasers
at tax sales are grossly out of
proportion to the value of the
land. (Rothchild Bros. v.
Rollinger, 32 Wash. 307, 73 P.
367, 369).
In this case now before us, we can aptly use
the language of McGuire, et al. v. Bean, et al.
(267 P. 555):
Like most cases of this
character there is here a
certain element of hardship
from which we would be glad
to relieve, but do so would
unsettle long-established rules
and lead to uncertainty and
difficulty in the collection of
taxes which are the life blood
of the state. We are convinced
that the present rules are just,
and that they bring hardship
only to those who have invited
it by their own neglect.
We are inclined to believe the petitioner's
claim that the value of the lot has greatly
appreciated in value. Precisely because of the
widening of Buendia Avenue in Pasay City,
which necessitated the expropriation of
adjoining areas, real estate values have gone
up in the area. However, the price quoted by
the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the
foregoing reasons which answer the
petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give
relief to the petitioner on equitable grounds,
there are no strong considerations of
substantial justice in his favor. Mr. Francia
failed to pay his taxes for 14 years from 1963
up to the date of the auction sale. He claims to
have pocketed the notice of sale without
reading it which, if true, is still an act of
inexplicable negligence. He did not withdraw
from the expropriation payment deposited with
the Philippine National Bank an amount
sufficient to pay for the back taxes. The
petitioner did not pay attention to another
notice sent by the City Treasurer on
November 3, 1978, during the period of
redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith
or collusion in the purchase of the property by
Mr. Fernandez. The petitioner has no standing
to invoke equity in his attempt to regain the
property by belatedly asking for the annulment
of the sale.
WHEREFORE, IN VIEW OF THE
FOREGOING, the petition for review is
DISMISSED. The decision of the respondent
court is affirmed.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and
Cortes, JJ., concur.
[G.R. No. 125704. August 28, 1998]
PHILEX MINING CORPORATION, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE,
COURT OF APPEALS, and THE COURT OF TAX
APPEALS, respondents.
DECISION
ROMERO, J.:
Petitioner Philex Mining Corp. assails the
decision of the Court of Appeals promulgated
on April 8, 1996 in CA-G.R. SP No. 36975[1]
affirming the Court of Tax Appeals decision in
CTA Case No. 4872 dated March 16, 1995[2]
ordering it to pay the amount of
P110,677,668.52 as excise tax liability for the
period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR
sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of
1991 as well as the 1st and 2nd quarter of 1992
in the total amount of P123,821,982.52
computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE
INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15
3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30
2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03
2,631,837.72 26,889,937.88
------------------- ----------------- ----------------- -------------------47,312,353.94 11,828,088.48 8,988,362.97
68,128,805.39
1st Qtr., 1992 23,341,849.94 5,835,462.49
1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94
215,580.18 24,805,194.88
43,013,541.70 10,753,385.43 1,926,250.00
55,693,177.13
90,325,895.64 22,581,473.91 10,914,612.97
123,821,982.52
==========
==========
===========
===========[3]
In a letter dated August 20, 1992,[4] Philex
protested the demand for payment of the tax
liabilities stating that it has pending claims for
VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of
P119,977,037.02 plus interest. Therefore, these
claims for tax credit/refund should be applied
against the tax liabilities, citing our ruling in
Commissioner of Internal Revenue v. ItogonSuyoc Mines, Inc.[5]
In reply, the BIR, in a letter dated September 7,
1992,[6] found no merit in Philexs position.
Since these pending claims have not yet been
established or determined with certainty, it
follows that no legal compensation can take
place. Hence, he BIR reiterated its demand that
Philex settle the amount plus interest within 30
days from the receipt of the letter.
In view of the BIRs denial of the offsetting of
Philexs claim for VAT input credit/refund
against its exercise tax obligation, Philex raised
the issue to the Court of Tax Appeals on
November 6, 1992.[7] In the course of the
proceedings, the BIR issued a Tax Credit
Certificate SN 001795 in the amount of
P13,144,313.88 which, applied to the total tax
liabilities of Philex of P123,821,982.52;
effectively lowered the latters tax obligation of
P110,677,688.52.
Despite the reduction of its tax liabilities, the
CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest,
elucidating its reason, to wit:
Thus, for legal compensation to take place, both
obligations
must
be
liquidated
and
demandable. Liquidated debts are those where
the exact amount has already been determined
(PARAS, Civil Code of the Philippines,
Annotated, Vol. IV, Ninth Edition, p. 259). In the
instant case, the claims of the Petitioner for VAT
refund is still pending litigation, and still has to
be determined by this Court (C.T.A. Case No.
4707). A fortiori, the liquidated debt of the
Petitioner to the government cannot, therefore,
be set-off against the unliquidated claim which
Petitioner conceived to exist in its favor (see
Compaia General de Tabacos vs. French and
Unson, No. 14027, November 8, 1918, 39 Phil.
34).[8]
Moreover, the Court of Tax Appeals ruled that
taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt
or contract.[9] The dispositive portion of the
CTA decision[10] provides:
In all the foregoing, this Petition for Review is
hereby DENIED for lack of merit and Petitioner
is hereby ORDERED to PAY the Respondent the
amount of P110,677,668.52 representing excise
tax liability for the period from the 2nd quarter
of 1991 to the 2nd quarter of 1992 plus 20%
annual interest from August 6, 1994 until fully
paid pursuant to Section 248 and 249 of the Tax
Code, as amended.
Aggrieved with the decision, Philex appealed
the case before the Court of Appeals docketed
as CA-G.R. CV No. 36975.[11] Nonetheless, on
April 8, 1996, the Court of Appeals affirmed the
Court of Tax Appeals observation. The pertinent
portion of which reads:[12]
WHEREFORE, the appeal by way of petition for
review is hereby DISMISSED and the decision
dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which
was, nevertheless, denied in a Resolution dated
July 11, 1996.[13]
However, a few days after the denial of its
motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for
the taxable year 1989 to 1991 but also for 1992
and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of
Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996
P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996
P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996
P36,501,147.95
In view of the grant of its VAT input
credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax
liabilities[15] since both had already become
due and demandable, as well as fully
liquidated;[16] hence, legal compensation can
properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we
have already made the pronouncement that
taxes cannot be subject to compensation for
the simple reason that the government and the
taxpayer are not creditors and debtors of each
other.[17] There is a material distinction
between a tax and debt. Debts are due to the
Government in its corporate capacity, while
taxes are due to the Government in its
sovereign capacity.[18] We find no cogent
reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v.
Intermediate
Appellate
Court,[19]
we
categorically held that taxes cannot be subject
to set-off or compensation, thus:
We have consistently ruled that there can be no
off-setting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount
equal to or greater than the tax being collected.
The collection of tax cannot await the results of
a lawsuit against the government.
The ruling in Francia has been applied to the
subsequent case of Caltex Philippines, Inc. v.
Commission on Audit,[20] which reiterated
that:
x x x a taxpayer may not offset taxes due from
the claims that he may have against the
government. Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is
allowed to be set-off.
Further, Philexs reliance on our holding in
Commissioner of Internal Revenue v. ItogonSuyoc Mines, Inc., wherein we ruled that a
pending refund may be set off against an
existing tax liability even though the refund has
not
yet
been
approved
by
the
Commissioner,[21] is no longer without any
support in statutory law.
It is important to note that the premise of our
ruling in the aforementioned case was
anchored on Section 51(d) of the National
Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was
enacted, the same provision upon which the
Itogon-Suyoc pronouncement was based was
omitted.[22]
Accordingly,
the
doctrine
enunciated in Itogon-Suyoc cannot be invoked
by Philex.
Despite the foregoing rulings clearly adverse to
Philexs position, it asserts that the imposition of
surcharge and interest for the non-payment of
the excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had
no obligation to pay the excise liabilities within
the prescribed period since, after all, it still has
pending claims for VAT input credit/refund with
BIR.[23]
We fail to see the logic of Philexs claim for this
is an outright disregard of the basic principle in
tax law that taxes are the lifeblood of the
government and so should be collected without
unnecessary hindrance.[24] Evidently, to
countenance Philexs whimsical reason would
render ineffective our tax collection system.
Too simplistic, it finds no support in law or in
jurisprudence.
To be sure, we cannot allow Philex to refuse the
payment of its tax liabilities on the ground that
it has a pending tax claim for refund or credit
against the government which has not yet been
granted. It must be noted that a distinguishing
feature of a tax is that it is compulsory rather
than a matter of bargain.[25] Hence, a tax does
not depend upon the consent of the
taxpayer.[26] If any payer can defer the
payment of taxes by raising the defense that it
still has a pending claim for refund or credit,
this would adversely affect the government
revenue system. A taxpayer cannot refuse to
pay his taxes when they fall due simply because
he has a claim against the government or that
the collection of the tax is contingent on the
result of the lawsuit it filed against the
government.[27] Moreover, Philex's theory that
would automatically apply its VAT input
credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the
government of authority over the manner by
which taxpayers credit and offset their tax
liabilities.
Corollarily, the fact that Philex has pending
claims for VAT input claim/refund with the
government is immaterial for the imposition of
charges and penalties prescribed under Section
248 and 249 of the Tax Code of 1977. The
payment of the surcharge is mandatory and the
BIR is not vested with any authority to waive
the collection thereof.[28] The same cannot be
condoned for flimsy reasons,[29] similar to the
one advanced by Philex in justifying its nonpayment of its tax liabilities.
Finally, Philex asserts that the BIR violated
Section 106(e)[30] of the National Internal
Revenue Code of 1977, which requires the
refund of input taxes within 60 days,[31]when it
took five years for the latter to grant its tax
claim for VAT input credit/refund.[32]
In this regard, we agree with Philex. While there
is no dispute that a claimant has the burden of
proof to establish the factual basis of his or her
claim for tax credit or refund,[33] however,
once the claimant has submitted all the
required documents, it is the function of the BIR
to assess these documents with purposeful
dispatch. After all, since taxpayers owe honesty
to government it is but just that government
render fair service to the taxpayers.[34]
In the instant case, the VAT input taxes were
paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted
in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could
have granted the refund earlier. We need not
remind the BIR that simple justice requires the
speedy refund of wrongly-held taxes.[35] Fair
dealing and nothing less, is expected by the
taxpayer from the BIR in the latter's discharge
of its function. As aptly held in Roxas v. Court of
Tax Appeals:[36]
"The power of taxation is sometimes called also
the power to destroy. Therefore it should be
exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the
tax collectot kill the 'hen that lays the golden
egg.' And, in the order to maintain the general
public's trust and confidence in the Government
this power must be used justly and not
treacherously."
Despite our concern with the lethargic manner
by which the BIR handled Philex's tax claim, it is
a settled rule that in the performance of
governmental function, the State is not bound
by the neglect of its agents and officers.
Nowhere is this more true than in the field of
taxation.[37] Again, while we understand
Philex's predicament, it must be stressed that
the same is not valid reason for the nonpayment of its tax liabilities.
To be sure, this is not state that the taxpayer is
devoid of remedy against public servants or
employees especially BIR examiners who, in
investigating tax claims are seen to drag their
feet needlessly. First, if the BIR takes time in
acting upon the taxpayer's claims for refund,
the latter can seek judicial remedy before the
Court of Tax Appeals in the manner prescribed
by law.[38] Second, if the inaction can be
characterized as willful neglect of duty, then
recourse under the Civil Code and the Tax Code
can also be availed of.
Article 27 of the Civil Code provides:
"Art. 27. Any person suffering material or moral
loss because a public servant or employee
refuses or neglects, without just cause, to
perform his official duty may file an action for
damages and other relief against the latter,
without prejudice to any disciplinary action that
may be taken."
More importantly, Section 269 (c) of the
National Internal Revenue Act of 1997 states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law
required for any sum collected in the
performance of duty or wilfully neglecting to
perform, any other duties enjoined by law."
Simply put, both provisions abhor official
inaction, willful neglect and unreasonable delay
in the performance of official duties.[39] In no
uncertain terms must we stress that every
public employee or servant must strive to
render service to the people with utmost
diligence and efficiency. Insolence and delay
have no place in government service. The BIR,
being the government collecting arm, must and
should do no less. It simply cannot be apathetic
and laggard in rendering service to the taxpayer
if it wishes to remain true to its mission of
hastening the country's development. We take
judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it
is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's
apparent callousness in performing its duties,
still, the same cannot justify Philex's nonpayment of its tax liabilities. The adage "no one
should take the law into his own hands" should
have guided Philex's action.
WHEREFORE, in view of the foregoing, the
instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated
April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., (Chairman), Kapunan and
Purisima, JJ., concur.
G.R. No. L-18994
June 29, 1963
MELECIO R. DOMINGO, as Commissioner of
Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as
Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the
Intestate Estate of the late Walter Scott
Price,respondents.
Office of the Solicitor General and Atty. G. H.
Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus
against the Judge of the Court of First Instance
of Leyte, Ron. Lorenzo C. Garlitos, presiding,
seeking to annul certain orders of the court and
for an order in this Court directing the
respondent court below to execute the
judgment in favor of the Government against
the estate of Walter Scott Price for internal
revenue taxes.
It appears that in Melecio R. Domingo vs. Hon.
Judge S. C. Moscoso, G.R. No. L-14674, January
30, 1960, this Court declared as final and
executory the order for the payment by the
estate of the estate and inheritance taxes,
charges and penalties, amounting to
P40,058.55, issued by the Court of First Instance
of Leyte in, special proceedings No. 14 entitled
"In the matter of the Intestate Estate of the
Late Walter Scott Price." In order to enforce the
claims against the estate the fiscal presented a
petition dated June 21, 1961, to the court
below for the execution of the judgment. The
petition was, however, denied by the court
which held that the execution is not justifiable
as the Government is indebted to the estate
under administration in the amount of
P262,200. The orders of the court below dated
August 20, 1960 and September 28, 1960,
respectively, are as follows:
Atty. Benedicto submitted a copy of the
contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband
Walter Scott Price and Director Zoilo Castrillo of
the Bureau of Lands dated September 19, 1956
and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in
Malacañang to Executive Secretary De Leon
dated December 14, 1956, the note of His
Excellency, Pres. Carlos P. Garcia, to Director
Castrillo dated August 2, 1958, directing the
latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of
Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte
Cadastral Survey, Inc., represented by the
administratrix Simeona K. Price, as directed in
the above note of the President. Considering
these facts, the Court orders that the payment
of inheritance taxes in the sum of P40,058.55
due the Collector of Internal Revenue as
ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme
Court promulgated July 30, 1960 in G.R. No. L14674, be deducted from the amount of
P262,200.00 due and payable to the
Administratrix Simeona K. Price, in this estate,
the balance to be paid by the Government to
her without further delay. (Order of August 20,
1960)
The Court has nothing further to add to its
order dated August 20, 1960 and it orders that
the payment of the claim of the Collector of
Internal Revenue be deferred until the
Government shall have paid its accounts to the
administratrix
herein
amounting
to
P262,200.00. It may not be amiss to repeat that
it is only fair for the Government, as a debtor,
to its accounts to its citizens-creditors before it
can insist in the prompt payment of the latter's
account to it, specially taking into consideration
that the amount due to the Government draws
interests while the credit due to the present
state does not accrue any interest. (Order of
September 28, 1960)
The petition to set aside the above orders of the
court below and for the execution of the claim
of the Government against the estate must be
denied for lack of merit. The ordinary procedure
by which to settle claims of indebtedness
against the estate of a deceased person, as an
inheritance tax, is for the claimant to present a
claim before the probate court so that said
court may order the administrator to pay the
amount thereof. To such effect is the decision
of this Court in Aldamiz vs. Judge of the Court of
First Instance of Mindoro, G.R. No. L-2360, Dec.
29, 1949, thus:
. . . a writ of execution is not the proper
procedure allowed by the Rules of Court for the
payment of debts and expenses of
administration. The proper procedure is for the
court to order the sale of personal estate or the
sale or mortgage of real property of the
deceased and all debts or expenses of
administrator and with the written notice to all
the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and
Rule 90, section 2. And when sale or mortgage
of real estate is to be made, the regulations
contained in Rule 90, section 7, should be
complied with.1äwphï1.ñët
Execution may issue only where the devisees,
legatees or heirs have entered into possession
of their respective portions in the estate prior
to settlement and payment of the debts and
expenses of administration and it is later
ascertained that there are such debts and
expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order
for that purpose, after hearing, settle the
amount of their several liabilities, and order
how much and in what manner each person
shall contribute, and mayissue execution if
circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.) And
this is not the instant case.
The legal basis for such a procedure is the fact
that in the testate or intestate proceedings to
settle the estate of a deceased person, the
properties belonging to the estate are under
the jurisdiction of the court and such
jurisdiction continues until said properties have
been distributed among the heirs entitled
thereto. During the pendency of the
proceedings all the estate is in custodia legis
and the proper procedure is not to allow the
sheriff, in case of the court judgment, to seize
the properties but to ask the court for an order
to require the administrator to pay the amount
due from the estate and required to be paid.
Another ground for denying the petition of the
provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the
claim of the estate against the Government has
been recognized and an amount of P262,200
has already been appropriated for the purpose
by a corresponding law (Rep. Act No. 2700).
Under the above circumstances, both the claim
of the Government for inheritance taxes and
the claim of the intestate for services rendered
have already become overdue and demandable
is well as fully liquidated. Compensation,
therefore, takes place by operation of law, in
accordance with the provisions of Articles 1279
and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned
in article 1279 are present, compensation takes
effect by operation of law, and extinguished
both debts to the concurrent amount,
eventhough the creditors and debtors are not
aware of the compensation.
It is clear, therefore, that the petitioner has no
clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott
Price. Furthermore, the petition for certiorari
and mandamus is not the proper remedy for
the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without
costs.
Padilla, Bautista Angelo, Concepcion, Barrera,
Paredes, Dizon, Regala and Makalintal, JJ.,
concur.
Bengzon, C.J., took no part.
Applicable Quarter[/]Year
Date Filed/Paid
Amount of Tax
3rd Qtr 2000 November 29, 2000
P
395,165.00
Annual ITR
2000
April
16,
2001
381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August
29,
2001
1,033,423.34
3rd Qtr 2001 November
29,
2001
765,021.28
Annual ITR 2001
April
15,
2002
328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August
29,
2002
1,164,664.11
TOTAL
P 5,185,676.77 11
G.R. No. 169507
AIR CANADA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
DECISION
LEONEN, J.:
An offline international air carrier selling
passage tickets in the Philippines, through a
general sales agent, is a resident foreign
corporation doing business in the Philippines.
As such, it is taxable under Section 28(A)(l), and
not Section 28(A)(3) of the 1997 National
Internal Revenue Code, subject to any
applicable tax treaty to which the Philippines is
a signatory. Pursuant to Article 8 of the
Republic of the Philippines-Canada Tax Treaty,
Air Canada may only be imposed a maximum
tax of 1 ½% of its gross revenues earned from
the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the
August 26, 2005 Decision2 of the Court of Tax
Appeals En Banc, which in turn affirmed the
December 22, 2004 Decision3 and April 8, 2005
Resolution4 of the Court of Tax Appeals First
Division denying Air Canada’s claim for refund.
Air Canada is a "foreign corporation organized
and existing under the laws of Canada[.]"5 On
April 24, 2000, it was granted an authority to
operate as an offline carrier by the Civil
Aeronautics Board, subject to certain
conditions, which authority would expire on
April 24, 2005.6 "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[.]"7
On July 1, 1999, Air Canada engaged the
services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines.8 Aerotel
"sells [Air Canada’s] passage documents in the
Philippines."9
For the period ranging from the third quarter of
2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual
income tax returns and paid the income tax on
Gross Philippine Billings in the total amount of
₱5,185,676.77,10 detailed as follows:
1âwphi1
On November 28, 2002, Air Canada filed a
written claim for refund of alleged erroneously
paid income taxes amounting to ₱5,185,676.77
before the Bureau of Internal Revenue,12
Revenue District Office No. 47-East Makati.13 It
found basis from the revised definition14 of
Gross Philippine Billings under Section
28(A)(3)(a) of the 1997 National Internal
Revenue Code:
SEC. 28. Rates of Income Tax on Foreign
Corporations. (A) Tax on Resident Foreign Corporations. ....
(3) International Carrier. - An international
carrier doing business in the Philippines shall
pay a tax of two and onehalf percent (2 1/2%)
on its ‘Gross Philippine Billings’ as defined
hereunder:
(a) International Air Carrier. - ‘Gross Philippine
Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to
another international airline form part of the
Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines:
Provided, further, That for a flight which
originates
from
the
Philippines,
but
transshipment of passenger takes place at any
port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis
supplied)
To prevent the running of the prescriptive
period, Air Canada filed a Petition for Review
before the Court of Tax Appeals on November
29, 2002.15 The case was docketed as C.T.A.
Case No. 6572.16
On December 22, 2004, the Court of Tax
Appeals First Division rendered its Decision
denying the Petition for Review and, hence, the
claim for refund.17 It found 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%.18
Further, according to the Court of Tax Appeals
First Division, Air Canada was deemed to have
established a "permanent establishment"19 in
the Philippines under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty20
by the appointment of the local sales agent, "in
which [the] petitioner uses its premises as an
outlet where sales of [airline] tickets are
made[.]"21
Air Canada seasonably filed a Motion for
Reconsideration, but the Motion was denied in
the Court of Tax Appeals First Division’s
Resolution dated April 8, 2005 for lack of
merit.22 The First Division held that while Air
Canada was not liable for tax on its Gross
Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate
income tax on income derived from the sale of
airline tickets within the Philippines pursuant to
Section 28(A)(1).23
On May 9, 2005, Air Canada appealed to the
Court of Tax Appeals En Banc.24 The appeal was
docketed as CTA EB No. 86.25
In the Decision dated August 26, 2005, the
Court of Tax Appeals En Banc affirmed the
findings of the First Division.26 The En Banc
ruled that Air Canada is subject to tax as a
resident foreign corporation doing business in
the Philippines since it sold airline tickets in the
Philippines.27 The Court of Tax Appeals En Banc
disposed thus:
WHEREFORE, premises considered, the instant
petition is hereby DENIED DUE COURSE, and
accordingly,DISMISSED for lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an
offline international carrier selling passage
documents through a general sales agent in the
Philippines, is a resident foreign corporation
within the meaning of Section 28(A)(1) of the
1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is
subject to the 2½% tax on Gross Philippine
Billings pursuant to Section 28(A)(3). If not,
whether an offline international carrier selling
passage documents through a general sales
agent can be subject to the regular corporate
income tax of 32%30 on taxable income
pursuant to Section 28(A)(1);
Third, whether the Republic of the PhilippinesCanada Tax Treaty applies, specifically:
a. Whether the Republic of the PhilippinesCanada Tax Treaty is enforceable;
b. Whether the appointment of a local general
sales agent in the Philippines falls under the
definition of "permanent establishment" under
Article V(2)(i) of the Republic of the PhilippinesCanada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled
to the refund of ₱5,185,676.77 pertaining
allegedly to erroneously paid tax on Gross
Philippine Billings from the third quarter of
2000 to the second quarter of 2002.
Petitioner claims that the general provision
imposing the regular corporate income tax on
resident foreign corporations provided under
Section 28(A)(1) of the 1997 National Internal
Revenue Code does not apply to "international
carriers,"31 which are especially classified and
taxed under Section 28(A)(3).32 It adds that the
fact that it is no longer subject to Gross
Philippine Billings tax as ruled in the assailed
Court of Tax Appeals Decision "does not render
it ipso facto subject to 32% income tax on
taxable income as a resident foreign
corporation."33Petitioner argues that to impose
the 32% regular corporate income tax on its
income would violate the Philippine
government’s covenant under Article VIII of the
Republic of the Philippines-Canada Tax Treaty
not to impose a tax higher than 1½% of the
carrier’s gross revenue derived from sources
within the Philippines.34 It would also allegedly
result in "inequitable tax treatment of on-line
and off-line international air carriers[.]"35
Also, petitioner states that the income it
derived from the sale of airline tickets in the
Philippines was income from services and not
income from sales of personal property.36
Petitioner cites the deliberations of the
Bicameral Conference Committee on House Bill
No. 9077 (which eventually became the 1997
National Internal Revenue Code), particularly
Senator Juan Ponce Enrile’s statement,37 to
reveal the "legislative intent to treat the
revenue derived from air carriage as income
from services, and that the carriage of
passenger or cargo as the activity that
generates the income."38 Accordingly, applying
the principle on the situs of taxation in taxation
of services, petitioner claims that its income
derived "from services rendered outside the
Philippines [was] not subject to Philippine
income taxation."39
Petitioner further contends that by the
appointment of Aerotel as its general sales
agent, petitioner cannot be considered to have
a "permanent establishment"40 in the
Philippines pursuant to Article V(6) of the
Republic of the Philippines-Canada Tax
Treaty.41 It points out that Aerotel is an
"independent general sales agent that acts as
such for . . . other international airline
companies in the ordinary course of its
business."42 Aerotel sells passage tickets on
behalf of petitioner and receives a commission
for its services.43 Petitioner states that even
the Bureau of Internal Revenue—through VAT
Ruling No. 003-04 dated February 14, 2004—
has conceded that an offline international air
carrier, having no flight operations to and from
the Philippines, is not deemed engaged in
business in the Philippines by merely appointing
a general sales agent.44 Finally, petitioner
maintains that its "claim for refund of
erroneously paid Gross Philippine Billings
cannot be denied on the ground that [it] is
subject to income tax under Section 28 (A)
(1)"45 since it has not been assessed at all by
the Bureau of Internal Revenue for any income
tax liability.46
On the other hand, respondent maintains that
petitioner is subject to the 32% corporate
income tax as a resident foreign corporation
doing business in the Philippines. Petitioner’s
total payment of ₱5,185,676.77 allegedly shows
that petitioner was earning a sizable income
from the sale of its plane tickets within the
Philippines during the relevant period.47
Respondent further points out that this court in
Commissioner of Internal Revenue v. American
Airlines, Inc.,48 which in turn cited the cases
involving the British Overseas Airways
Corporation and Air India, had already settled
that "foreign airline companies which sold
tickets in the Philippines through their local
agents . . . [are] considered resident foreign
corporations engaged in trade or business in
the country."49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978,
which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets
in the Philippines by offline international
airlines either by themselves or through their
agents."50
Respondent further contends that petitioner is
not entitled to its claim for refund because the
amount of ₱5,185,676.77 it paid as tax from the
third quarter of 2000 to the second quarter of
2001 was still short of the 32% income tax due
for the period.51 Petitioner cannot allegedly
claim good faith in its failure to pay the right
amount of tax since the National Internal
Revenue Code became operative on January 1,
1998 and by 2000, petitioner should have
already been aware of the implications of
Section 28(A)(3) and the decided cases of this
court’s ruling on the taxability of offline
international carriers selling passage tickets in
the Philippines.52
I
At the outset, we affirm the Court of Tax
Appeals’ ruling that petitioner, as an offline
international carrier with no landing rights in
the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28(A)(3) of the
1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign
Corporations. –
(A) Tax on Resident Foreign Corporations. ....
(3) International Carrier. - An international
carrier doing business in the Philippines shall
pay a tax of two and one-half percent (2 1/2%)
on its ‘Gross Philippine Billings’ as defined
hereunder:
(a) International Air Carrier. - 'Gross Philippine
Billings' refers to the amount of gross revenue
derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to
another international airline form part of the
Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines:
Provided, further, That for a flight which
originates
from
the
Philippines,
but
transshipment of passenger takes place at any
port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis
supplied)
Under the foregoing provision, the tax attaches
only when the carriage of persons, excess
baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted
flight, regardless of where the passage
documents were sold.
Not having flights to and from the Philippines,
petitioner is clearly not liable for the Gross
Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident
foreign corporation for income tax purposes.
Petitioner falls within the definition of resident
foreign corporation under Section 28(A)(1) of
the 1997 National Internal Revenue Code, thus,
it may be subject to 32%53 tax on its taxable
income:
SEC. 28. Rates of Income Tax on Foreign
Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in
this Code, a corporation organized, authorized,
or existing under the laws of any foreign
country, engaged in trade or business within
the Philippines, shall be subject to an income
tax equivalent to thirty-five percent (35%) of
the taxable income derived in the preceding
taxable year from all sources within the
Philippines: Provided, That effective January 1,
1998, the rate of income tax shall be thirty-four
percent (34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%); and
effective January 1, 2000 and thereafter, the
rate shall be thirty-two percent (32%54).
(Emphasis supplied)
The definition of "resident foreign corporation"
has not substantially changed throughout the
amendments of the National Internal Revenue
Code. All versions refer to "a foreign
corporation engaged in trade or business within
the Philippines."
Commonwealth Act No. 466, known as the
National Internal Revenue Code and approved
on June 15, 1939, defined "resident foreign
corporation" as applying to "a foreign
corporation engaged in trade or business within
the Philippines or having an office or place of
business therein."55
Section 24(b)(2) of the National Internal
Revenue Code, as amended by Republic Act No.
6110, approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation
organized, authorized, or existing under the
laws of any foreign country, except a foreign life
insurance company, engaged in trade or
business within the Philippines, shall be taxable
as provided in subsection (a) of this section
upon the total net income received in the
preceding taxable year from all sources within
the Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on
June 3, 1977 amending certain sections of the
1939 National Internal Revenue Code. Section
24(b)(2) on foreign resident corporations was
amended, but it still provides that "[a]
corporation organized, authorized, or existing
under the laws of any foreign country, engaged
in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this
section upon the total net income received in
the preceding taxable year from all sources
within the Philippines[.]"57
As early as 1987, this court in Commissioner of
Internal Revenue v. British Overseas Airways
Corporation58declared
British
Overseas
Airways Corporation, an international air carrier
with no landing rights in the Philippines, as a
resident foreign corporation engaged in
business in the Philippines through its local
sales agent that sold and issued tickets for the
airline company.59 This court discussed that:
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 acontinuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of commercial gain or
for the purpose and object of the business
organization. "In order that a foreign
corporation may be regarded as doing business
within a State, there must be continuity of
conduct and intention to establish a continuous
business, such as the appointment of a local
agent, and not one of a temporary character.["]
BOAC, during the periods covered by the
subject-assessments, maintained a general sales
agent in the Philippines. That general sales
agent, from 1959 to 1971, "was engaged in (1)
selling and issuing tickets; (2) breaking down
the whole trip into series of trips — each trip in
the series corresponding to a different airline
company; (3) receiving the fare from the whole
trip; and (4) consequently allocating to the
various airline companies on the basis of their
participation in the services rendered through
the mode of interline settlement as prescribed
by Article VI of the Resolution No. 850 of the
IATA Agreement." 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. In fact, the regular sale
of tickets, its main activity, is the very lifeblood
of the airline business, the generation of sales
being the paramount objective. There should be
no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent
during the period covered by the assessments.
Accordingly, 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.60 (Emphasis
supplied, citations omitted)
Republic Act No. 7042 or the Foreign
Investments Act of 1991 also provides guidance
with its definition of "doing business" with
regard to foreign corporations. Section 3(d) of
the law enumerates the activities that
constitute doing business:
d. the phrase "doing business" shall include
soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches; appointing representatives or
distributors domiciled in the Philippines or who
in any calendar year stay in the country for a
period or periods totalling one hundred eighty
(180) days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that
imply a continuity of commercial dealings or
arrangements, and contemplate 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 of the purpose and object of
the business organization: Provided, however,
That the phrase "doing business" shall not be
deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business,
and/or the exercise of rights as such investor;
nor having a nominee director or officer to
represent its interests in such corporation; nor
appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account[.]61 (Emphasis supplied)
While Section 3(d) above states that
"appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account" is not considered as "doing business,"
the Implementing Rules and Regulations of
Republic Act No. 7042 clarifies that "doing
business" includes "appointing representatives
or distributors, operating under full control of
the foreign corporation, domiciled in the
Philippines or who in any calendar year stay in
the country for a period or periods totaling one
hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not
certificated by the [Civil Aeronautics] Board, but
who maintains office or who has designated or
appointed agents or employees in the
Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air
carrier and/or others, or negotiate for, or holds
itself out by solicitation, advertisement, or
otherwise sells, provides, furnishes, contracts,
or arranges for such transportation."63
"Anyone desiring to engage in the activities of
an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."64 Each
offline carrier must file with the Civil
Aeronautics Board a monthly report containing
information on the tickets sold, such as the
origin and destination of the passengers,
carriers involved, and commissions received.65
Petitioner is undoubtedly "doing business" or
"engaged in trade or business" in the
Philippines.
Aerotel performs acts or works or exercises
functions that are incidental and beneficial to
the purpose of petitioner’s business. The
activities of Aerotel bring direct receipts or
profits to petitioner.66 There is nothing on
record to show that Aerotel solicited orders
alone and for its own account and without
interference from, let alone direction of,
petitioner. On the contrary, Aerotel cannot
"enter into any contract on behalf of [petitioner
Air Canada] without the express written
consent of [the latter,]"67 and it must perform
its functions according to the standards
required by petitioner.68 Through Aerotel,
petitioner is able to engage in an economic
activity in the Philippines.
Further, petitioner was issued by the Civil
Aeronautics Board an authority to operate as an
offline carrier in the Philippines for a period of
five years, or from April 24, 2000 until April 24,
2005.69
Petitioner is, therefore, a resident foreign
corporation that is taxable on its income
derived from sources within the Philippines.
Petitioner’s income from sale of airline tickets,
through Aerotel, is income realized from the
pursuit of its business activities in the
Philippines.
III
However, the application of the regular 32% tax
rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider
the existence of an effective tax treaty between
the Philippines and the home country of the
foreign air carrier.
In the earlier case of South African Airways v.
Commissioner of Internal Revenue,70 this court
held that Section 28(A)(3)(a) does not
categorically exempt all international air
carriers from the coverage of Section 28(A)(1).
Thus, if Section 28(A)(3)(a) is applicable to a
taxpayer, then the general rule under Section
28(A)(1) does not apply. If, however, Section
28(A)(3)(a) does not apply, an international air
carrier would be liable for the tax under Section
28(A)(1).71
This court in South African Airways declared
that the correct interpretation of these
provisions is that: "international air carrier[s]
maintain[ing] flights to and from the Philippines
. . . shall be taxed at the rate of 2½% of its Gross
Philippine Billings[;] while international air
carriers that do not have flights to and from the
Philippines but nonetheless earn income from
other activities in the country [like sale of airline
tickets] will be taxed at the rate of 32% of such
[taxable] income."72
In this case, there is a tax treaty that must be
taken into consideration to determine the
proper tax rate.
A tax treaty is an agreement entered into
between sovereign states "for purposes of
eliminating double taxation on income and
capital, preventing fiscal evasion, promoting
mutual trade and investment, and according
fair and equitable tax treatment to foreign
residents or nationals."73 Commissioner of
Internal Revenue v. S.C. Johnson and Son, Inc.74
explained the purpose of a tax treaty:
The purpose of these international agreements
is to reconcile the national fiscal legislations of
the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax
conventions are drafted with a view towards
the elimination ofinternational juridical double
taxation, which is defined as the imposition of
comparable taxes in two or more states on the
same taxpayer in respect of the same subject
matter and for identical periods.
The apparent rationale for doing away with
double taxation is to encourage the free flow of
goods and services and the movement of
capital, technology and persons between
countries, conditions deemed vital in creating
robust and dynamic economies. Foreign
investments will only thrive in a fairly
predictable and reasonable international
investment climate and the protection against
double taxation is crucial in creating such a
climate.75 (Emphasis in the original, citations
omitted)
Observance of any treaty obligation binding
upon the government of the Philippines is
anchored on the constitutional provision that
the Philippines "adopts the generally accepted
principles of international law as part of the law
of the land[.]"76 Pacta sunt servanda is a
fundamental international law principle that
requires agreeing parties to comply with their
treaty obligations in good faith.77
Hence, the application of the provisions of the
National Internal Revenue Code must be subject
to the provisions of tax treaties entered into by
the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v.
Commissioner of Internal Revenue,78 this court
stressed the binding effects of tax treaties. It
dealt with the issue of "whether the failure to
strictly comply with [Revenue Memorandum
Order] RMO No. 1-200079 will deprive persons
or corporations of the benefit of a tax
treaty."80 Upholding the tax treaty over the
administrative issuance, this court reasoned
thus:
Our Constitution provides for adherence to the
general principles of international law as part of
the law of the land. The time-honored
international principle of pacta sunt servanda
demands the performance in good faith of
treaty obligations on the part of the states that
enter into the agreement. Every treaty in force
is binding upon the parties, and obligations
under the treaty must be performed by them in
good faith. More importantly, treaties have the
force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the
national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid
simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son,
Inc.further clarifies that "tax conventions are
drafted with a view towards the elimination of
international juridical double taxation, which is
defined as the imposition of comparable taxes
in two or more states on the same taxpayer in
respect of the same subject matter and for
identical periods. The apparent rationale for
doing away with double taxation is to
encourage the free flow of goods and services
and the movement of capital, technology and
persons between countries, conditions deemed
vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international
investment climate and the protection against
double taxation is crucial in creating such a
climate." Simply put, tax treaties are entered
into to minimize, if not eliminate the harshness
of international juridical double taxation, which
is why they are also known as double tax treaty
or double tax agreements.
"A state that has contracted valid international
obligations is bound to make in its legislations
those modifications that may be necessary to
ensure the fulfillment of the obligations
undertaken." Thus, laws and issuances must
ensure that the reliefs granted under tax
treaties are accorded to the parties entitled
thereto. The BIR must not impose additional
requirements that would negate the availment
of the reliefs provided for under international
agreements. More so, when the RPGermany
Tax Treaty does not provide for any prerequisite for the availment of the benefits
under said agreement.
....
Bearing in mind the rationale of tax treaties, the
period of application for the availment of tax
treaty relief as required by RMO No. 1-2000
should not operate to divest entitlement to the
relief as it would constitute a violation of the
duty required by good faith in complying with a
tax treaty. The denial of the availment of tax
relief for the failure of a taxpayer to apply
within the prescribed period under the
administrative issuance would impair the value
of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely
operate to confirm the entitlement of the
taxpayer to the relief.
The obligation to comply with a tax treaty must
take precedence over the objective of RMO No.
1-2000. Logically, noncompliance with tax
treaties has negative implications on
international relations, and unduly discourages
foreign investors. While the consequences
sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may
be
remedied
through
other
system
management processes, e.g., the imposition of
a fine or penalty. But we cannot totally deprive
those who are entitled to the benefit of a treaty
for failure to strictly comply with an
administrative
issuance
requiring
prior
application for tax treaty relief.81 (Emphasis
supplied, citations omitted)
On March 11, 1976, the representatives82 for
the government of the Republic of the
Philippines and for the government of Canada
signed the Convention between the Philippines
and Canada for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income (Republic of
the Philippines-Canada Tax Treaty). This treaty
entered into force on December 21, 1977.
Article V83 of the Republic of the PhilippinesCanada Tax Treaty defines "permanent
establishment" as a "fixed place of business in
which the business of the enterprise is wholly or
partly carried on."84
Even though there is no fixed place of business,
an enterprise of a Contracting State is deemed
to have a permanent establishment in the other
Contracting State if under certain conditions
there is a person acting for it.
Specifically, Article V(4) of the Republic of the
Philippines-Canada Tax Treaty states that "[a]
person acting in a Contracting State on behalf of
an enterprise of the other Contracting State
(other than an agent of independent status to
whom paragraph 6 applies) shall be deemed to
be a permanent establishment in the firstmentioned State if . . . he has and habitually
exercises in that State an authority to conclude
contracts on behalf of the enterprise, unless his
activities are limited to the purchase of goods
or merchandise for that enterprise[.]" The
provision seems to refer to one who would be
considered an agent under Article 186885 of
the Civil Code of the Philippines.
On the other hand, Article V(6) provides that
"[a]n enterprise of a Contracting State shall not
be deemed to have a permanent establishment
in the other Contracting State merely because it
carries on business in that other State through a
broker, general commission agent or any other
agent of an independent status, where such
persons are acting in the ordinary course of
their business."
Considering Article XV86 of the same Treaty,
which covers dependent personal services, the
term "dependent" would imply a relationship
between the principal and the agent that is akin
to an employer-employee relationship.
Thus, an agent may be considered to be
dependent on the principal where the latter
exercises comprehensive control and detailed
instructions over the means and results of the
activities of the agent.87
Section 3 of Republic Act No. 776, as amended,
also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a
person, not a bonafide employee of an air
carrier, who pursuant to an authority from an
airline, by itself or through an agent, sells or
offers for sale any air transportation, or
negotiates for, or holds himself out by
solicitation, advertisement or otherwise as one
who sells, provides, furnishes, contracts or
arranges for, such air transportation."88
General sales agents and their property,
property rights, equipment, facilities, and
franchise are subject to the regulation and
control of the Civil Aeronautics Board.89 A
permit or authorization issued by the Civil
Aeronautics Board is required before a general
sales agent may engage in such an activity.90
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.
Petitioner appointed Aerotel as its passenger
general sales agent to perform the sale of
transportation on petitioner and handle
reservations, appointment, and supervision of
International Air Transport Associationapproved
and petitioner-approved sales agents, including
the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on
behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity
act solely and entirely for the benefit of AC in
every matter relating to this Agreement;
....
c) Promotion of passenger transportation on
AC;
....
e) Without the need for endorsement by AC,
arrange for the reissuance, in the Territory of
the GSA [Philippines], of traffic documents
issued by AC outside the said territory of the
GSA [Philippines], as required by the
passenger(s);
....
h) Distribution among passenger sales agents
and display of timetables, fare sheets, tariffs
and publicity material provided by AC in
accordance with the reasonable requirements
of AC;
....
j) Distribution of official press releases provided
by AC to media and reference of any press or
public relations inquiries to AC;
....
o) Submission for AC’s approval, of an annual
written sales plan on or before a date to be
determined by AC and in a form acceptable to
AC;
....
q) Submission of proposals for AC’s approval of
passenger sales agent incentive plans at a
reasonable time in advance of proposed
implementation.
r) Provision of assistance on request, in its
relations with Governmental and other
authorities, offices and agencies in the Territory
[Philippines].
....
u) Follow AC guidelines for the handling of
baggage claims and customer complaints and,
unless otherwise stated in the guidelines, refer
all such claims and complaints to AC.91
Under the terms of the Passenger General Sales
Agency Agreement, Aerotel will "provide at its
own expense and acceptable to [petitioner Air
Canada], adequate and suitable premises,
qualified staff, equipment, documentation,
facilities and supervision and in consideration of
the remuneration and expenses payable[,] [will]
defray all costs and expenses of and incidental
to the Agency."92 "[I]t is the sole employer of
its employees and . . . is responsible for [their]
actions . . . or those of any subcontractor."93 In
remuneration for its services, Aerotel would be
paid by petitioner a commission on sales of
transportation plus override commission on
flown revenues.94 Aerotel would also be
reimbursed "for all authorized expenses
supported by original supplier invoices."95
Aerotel is required to keep "separate books and
records of account, including supporting
documents, regarding all transactions at,
through or in any way connected with
[petitioner Air Canada] business."96
"If representing more than one carrier, [Aerotel
must] represent all carriers in an unbiased
way."97 Aerotel cannot "accept additional
appointments as General Sales Agent of any
other carrier without the prior written consent
of [petitioner Air Canada]."98
The Passenger General Sales Agency Agreement
"may be terminated by either party without
cause upon [no] less than 60 days’ prior notice
in writing[.]"99 In case of breach of any
provisions of the Agreement, petitioner may
require Aerotel "to cure the breach in 30 days
failing which [petitioner Air Canada] may
terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s
dependent status:
First, Aerotel must give petitioner written
notice "within 7 days of the date [it] acquires or
takes control of another entity or merges with
or is acquired or controlled by another person
or entity[.]"101 Except with the written consent
of petitioner, Aerotel must not acquire a
substantial interest in the ownership,
management, or profits of a passenger sales
agent affiliated with the International Air
Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated
passenger sales agent acquire a substantial
interest in Aerotel as to influence its
commercial policy and/or management
decisions.102 Aerotel must also provide
petitioner "with a report on any interests held
by [it], its owners, directors, officers, employees
and their immediate families in companies and
other entities in the aviation industry or . . .
industries related to it[.]"103 Petitioner may
require that any interest be divested within a
set period of time.104
Second, in carrying out the services, Aerotel
cannot enter into any contract on behalf of
petitioner without the express written consent
of the latter;105 it must act according to the
standards required by petitioner;106 "follow
the terms and provisions of the [petitioner Air
Canada] GSA Manual [and all] written
instructions of [petitioner Air Canada;]"107 and
"[i]n the absence of an applicable provision in
the Manual or instructions, [Aerotel must] carry
out its functions in accordance with [its own]
standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic
documents approved by [petitioner Air Canada]
for all transportation over [its] services[.]"109
All use of petitioner’s name, logo, and marks
must be with the written consent of petitioner
and according to petitioner’s corporate
standards and guidelines set out in the
Manual.110
Fourth, all claims, liabilities, fines, and expenses
arising from or in connection with the
transportation sold by Aerotel are for the
account of petitioner, except in the case of
negligence of Aerotel.111
Aerotel is a dependent agent of petitioner
pursuant to the terms of the Passenger General
Sales Agency Agreement executed between the
parties. It has the authority or power to
conclude contracts or bind petitioner to
contracts entered into in the Philippines. A
third-party liability on contracts of Aerotel is to
petitioner as the principal, and not to Aerotel,
and liability to such third party is enforceable
against petitioner. While Aerotel maintains a
certain independence and its activities may not
be devoted wholly to petitioner, nonetheless,
when representing petitioner pursuant to the
Agreement, it must carry out its functions solely
for the benefit of petitioner and according to
the latter’s Manual and written instructions.
Aerotel is required to submit its annual sales
plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines
the transportation business of petitioner. It is a
conduit or outlet through which petitioner’s
airline tickets are sold.112
Under Article VII (Business Profits) of the
Republic of the Philippines-Canada Tax Treaty,
the "business profits" of an enterprise of a
Contracting State is "taxable only in that State[,]
unless the enterprise carries on business in the
other Contracting State through a permanent
establishment[.]"113 Thus, income attributable
to Aerotel or from business activities effected
by petitioner through Aerotel may be taxed in
the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article
VIII115 (Shipping and Air Transport) of the same
Treaty, the tax imposed on income derived
from the operation of ships or aircraft in
international traffic should not exceed 1½% of
gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign
corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable
income116 from sale of airline tickets in the
Philippines, it could only be taxed at a
maximum of 1½% of gross revenues, pursuant
to Article VIII of the Republic of the PhilippinesCanada Tax Treaty that applies to petitioner as
a "foreign corporation organized and existing
under the laws of Canada[.]"117
Tax treaties form part of the law of the land,118
and jurisprudence has applied the statutory
construction principle that specific laws prevail
over general ones.119
The Republic of the Philippines-Canada Tax
Treaty was ratified on December 21, 1977 and
became valid and effective on that date. On the
other hand, the applicable provisions120
relating to the taxability of resident foreign
corporations and the rate of such tax found in
the National Internal Revenue Code became
effective on January 1, 1998.121 Ordinarily, the
later provision governs over the earlier one.122
In this case, however, the provisions of the
Republic of the Philippines-Canada Tax Treaty
are more specific than the provisions found in
the National Internal Revenue Code.
These rules of interpretation apply even though
one of the sources is a treaty and not simply a
statute.
Article VII, Section 21 of the Constitution
provides:
SECTION 21. No treaty or international
agreement shall be valid and effective unless
concurred in by at least two-thirds of all the
Members of the Senate.
This provision states the second of two ways
through which international obligations become
binding. Article II, Section 2 of the Constitution
deals with international obligations that are
incorporated, while Article VII, Section 21 deals
with international obligations that become
binding through ratification.
"Valid and effective" means that treaty
provisions that define rights and duties as well
as definite prestations have effects equivalent
to a statute. Thus, these specific treaty
provisions may amend statutory provisions.
Statutory provisions may also amend these
types of treaty obligations.
We only deal here with bilateral treaty state
obligations that are not international
obligations erga omnes. We are also not
required to rule in this case on the effect of
international customary norms especially those
with jus cogens character.
The second paragraph of Article VIII states that
"profits from sources within a Contracting State
derived by an enterprise of the other
Contracting State from the operation of ships or
aircraft in international traffic may be taxed in
the first-mentioned State but the tax so charged
shall not exceed the lesser of a) one and onehalf per cent of the gross revenues derived from
sources in that State; and b) the lowest rate of
Philippine tax imposed on such profits derived
by an enterprise of a third State."
The Agreement between the government of the
Republic of the Philippines and the government
of Canada on Air Transport, entered into on
January 14, 1997, reiterates the effectivity of
Article VIII of the Republic of the PhilippinesCanada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance
with the provisions of Article VIII of the
Convention between the Philippines and
Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with
Respect to Taxes on Income, signed at Manila
on March 31, 1976 and entered into force on
December 21, 1977, and any amendments
thereto, in respect of the operation of aircraft in
international traffic.123
Petitioner’s income from sale of ticket for
international carriage of passenger is income
derived from international operation of aircraft.
The sale of tickets is closely related to the
international operation of aircraft that it is
considered incidental thereto.
"[B]y reason of our bilateral negotiations with
[Canada], we have agreed to have our right to
tax limited to a certain extent[.]"124 Thus, we
are bound to extend to a Canadian air carrier
doing business in the Philippines through a local
sales agent the benefit of a lower tax equivalent
to 1½% on business profits derived from sale of
international air transportation.
V
Finally, we reject petitioner’s contention that
the Court of Tax Appeals erred in denying its
claim for refund of erroneously paid Gross
Philippine Billings tax on the ground that it is
subject to income tax under Section 28(A)(1) of
the National Internal Revenue Code because (a)
it has not been assessed at all by the Bureau of
Internal Revenue for any income tax
liability;125 and (b) internal revenue taxes
cannot be the subject of set-off or
compensation,126 citing Republic v. Mambulao
Lumber Co., et al.127 and Francia v.
Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v.
Commissioner of Internal Revenue,129 we have
ruled that "[i]n 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."130 The determination of the
proper category of tax that should have been
paid is incidental and necessary to resolve the
issue of whether a refund should be
granted.131Thus:
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. 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.
In South African Airways v. Commissioner of
Internal Revenue, South African Airways
claimed for refund of its erroneously paid 2½%
taxes on its gross Philippine billings. This court
did not immediately grant South African’s claim
for refund. This is because although this court
found that South African Airways was not
subject to the 2½% tax on its gross Philippine
billings, this court also found that it was subject
to 32% tax on its taxable income.
In this case, petitioner’s claim that it
erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in
2000 was improper. Hence, to determine if
petitioner was entitled to the refund being
claimed, the Court of Tax Appeals has the duty
to determine if petitioner was indeed not liable
for the 5% final tax and, instead, liable for taxes
other than the 5% final tax. As in South African
Airways, petitioner’s request for refund can
neither be granted nor denied outright without
such determination.
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
deficiency is 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.132
Hence, the Court of Tax Appeals properly
denied petitioner’s claim for refund of allegedly
erroneously paid tax on its Gross Philippine
Billings, on the ground that it was liable instead
for the regular 32% tax on its taxable income
received from sources within the Philippines. Its
determination of petitioner’s liability for the
32% regular income tax was made merely for
the purpose of ascertaining petitioner’s
entitlement to a tax refund and not for
imposing any deficiency tax.
In this regard, the matter of set-off raised by
petitioner is not an issue. Besides, the cases
cited are based on different circumstances. In
both cited cases,133 the taxpayer claimed that
his (its) tax liability was off-set by his (its) claim
against the government.
Specifically, in Republic v. Mambulao Lumber
Co., et al., Mambulao Lumber contended that
the amounts it paid to the government as
reforestation charges from 1947 to 1956, not
having been used in the reforestation of the
area covered by its license, may be set off or
applied to the payment of forest charges still
due
and owing from it.134Rejecting
Mambulao’s claim of legal compensation, this
court ruled:
[A]ppellant and appellee are not mutually
creditors and debtors of each other.
Consequently, the law on compensation is
inapplicable. On this point, the trial court
correctly observed:
Under Article 1278, NCC, compensation should
take place when two persons in their own right
are creditors and debtors of each other. With
respect to the forest charges which the
defendant Mambulao Lumber Company has
paid to the government, they are in the coffers
of the government as taxes collected, and the
government does not owe anything to
defendant Mambulao Lumber Company. So, it is
crystal clear that the Republic of the Philippines
and the Mambulao Lumber Company are not
creditors and debtors of each other, because
compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that
internal revenue taxes, such as the forest
charges in question, can not be the subject of
set-off or compensation.
A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off
under the statutes of set-off, which are
construed uniformly, in the light of public
policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to
one who is liable to the state or municipality for
taxes. Neither are they a proper subject of
recoupment since they do not arise out of the
contract or transaction sued on. * * *. (80 C.J.S.
73–74.)
The general rule, based on grounds of public
policy is well-settled that no set-off is
admissible against demands for taxes levied for
general or local governmental purposes. The
reason on which the general rule is based, is
that taxes are not in the nature of contracts
between the party and party but grow out of a
duty to, and are the positive acts of the
government, to the making and enforcing of
which, the personal consent of individual
taxpayers is not required. * * * If the taxpayer
can properly refuse to pay his tax when called
upon by the Collector, because he has a claim
against the governmental body which is not
included in the tax levy, it is plain that some
legitimate and necessary expenditure must be
curtailed. If the taxpayer’s claim is disputed, the
collection of the tax must await and abide the
result of a lawsuit, and meanwhile the financial
affairs of the government will be thrown into
great confusion. (47 Am. Jur. 766–767.)135
(Emphasis supplied)
In Francia, this court did not allow legal
compensation since not all requisites of legal
compensation provided under Article 1279
were present.136 In that case, a portion of
Francia’s property in Pasay was expropriated by
the national government,137 which did not
immediately pay Francia. In the meantime, he
failed to pay the real property tax due on his
remaining property to the local government of
Pasay, which later on would auction the
property on account of such delinquency.138
He then moved to set aside the auction sale and
argued, among others, that his real property tax
delinquency was extinguished by legal
compensation on account of his unpaid claim
against the national government.139 This court
ruled against Francia:
There is no legal basis for the contention. By
legal compensation, obligations of persons, who
in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case
do not satisfy the requirements provided by
Article 1279, to wit:
(1) that each one of the obligors be bound
principally and that he be at the same time a
principal creditor of the other;
xxx
xxx
xxx
(3) that the two debts be due.
xxx
xxx
xxx
This principal contention of the petitioner has
no merit. We have consistently ruled that there
can be no off-setting of taxes against the claims
that the taxpayer may have against the
government. A person cannot refuse to pay a
tax on the ground that the government owes
him an amount equal to or greater than the tax
being collected. The collection of a tax cannot
await the results of a lawsuit against the
government.
....
There are other factors which compel us to rule
against the petitioner. The tax was due to the
city government while the expropriation was
effected by the national government.
Moreover, the amount of ₱4,116.00 paid by the
national government for the 125 square meter
portion of his lot was deposited with the
Philippine National Bank long before the sale at
public auction of his remaining property. Notice
of the deposit dated September 28, 1977 was
received by the petitioner on September 30,
1977. The petitioner admitted in his testimony
that he knew about the ₱4,116.00 deposited
with the bank but he did not withdraw it. It
would have been an easy matter to withdraw
₱2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at
public auction.140
The ruling in Francia was applied to the
subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit141and Philex Mining
Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the
claims that he may have against the
government. Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is
allowed to be set-off.143(Citations omitted)
Philex Mining ruled that "[t]here is a material
distinction between a tax and debt. Debts are
due to the Government in its corporate
capacity, while taxes are due to the
Government in its sovereign capacity."144
Rejecting Philex Mining’s assertion that the
imposition of surcharge and interest was
unjustified because it had no obligation to pay
the excise tax liabilities within the prescribed
period since, after all, it still had pending claims
for VAT input credit/refund with the Bureau of
Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the
payment of its tax liabilities on the ground that
it has a pending tax claim for refund or credit
against the government which has not yet been
granted. It must be noted that a distinguishing
feature of a tax is that it is compulsory rather
than a matter of bargain. Hence, a tax does not
depend upon the consent of the taxpayer. If any
tax payer can defer the payment of taxes by
raising the defense that it still has a pending
claim for refund or credit, this would adversely
affect the government revenue system. A
taxpayer cannot refuse to pay his taxes when
they fall due simply because he has a claim
against the government or that the collection of
the tax is contingent on the result of the lawsuit
it filed against the government. Moreover,
Philex’s theory that would automatically apply
its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and
abuse, depriving the government of authority
over the manner by which taxpayers credit and
offset their tax liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the
effect that the taxpayer cannot simply refuse to
pay tax on the ground that the tax liabilities
were off-set against any alleged claim the
taxpayer may have against the government.
Such would merely be in keeping with the basic
policy on prompt collection of taxes as the
lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s
refund claim on account of the Court of Tax
Appeals’ finding of its liability for another tax in
lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.
Squarely applicable is South African Airways
where this court rejected similar arguments on
the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of
Tax Appeals, however, granted the offsetting of
a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of
Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration
alleging bringing to said court’s attention the
existence of the deficiency income and business
tax assessment against Citytrust. The fact of
such deficiency assessment is intimately related
to and inextricably intertwined with the right of
respondent bank to claim for a tax refund for
the same year. To award such refund despite
the existence of that deficiency assessment is
an absurdity and a polarity in conceptual
effects. Herein private respondent cannot be
entitled to refund and at the same time be
liable for a tax deficiency assessment for the
same year.
The grant of a refund is founded on the
assumption that the tax return is valid, that is,
the facts stated therein are true and correct.
The deficiency assessment, although not yet
final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the
facts stated in said return which, by itself and
without unquestionable evidence, cannot be
the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal
Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was
filed, provides that "(w)hen an assessment is
made in case of any list, statement, or return,
which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or
contained
any
understatement
or
undervaluation, no tax collected under such
assessment shall be recovered by any suits
unless it is proved that the said list, statement,
or return was not false nor fraudulent and did
not
contain
any
understatement
or
undervaluation; but this provision shall not
apply to statements or returns made or to be
made in good faith regarding annual
depreciation of oil or gas wells and mines."
Moreover, to grant the refund without
determination of the proper assessment and
the tax due would inevitably result in
multiplicity of proceedings or suits. If the
deficiency assessment should subsequently be
upheld, the Government will be forced to
institute anew a proceeding for the recovery of
erroneously refunded taxes which recourse
must be filed within the prescriptive period of
ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return
involved. This would necessarily require and
entail additional efforts and expenses on the
part of the Government, impose a burden on
and a drain of government funds, and impede
or delay the collection of much-needed revenue
for governmental operations.
Thus, to avoid multiplicity of suits and
unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that
the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its
claim for tax refund, to determine once and for
all in a single proceeding the true and correct
amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has
heretofore conceded, it would be only just and
fair that the taxpayer and the Government alike
be given equal opportunities to avail of
remedies under the law to defeat each other’s
claim and to determine all matters of dispute
between them in one single case. It is important
to note that in determining whether or not
petitioner is entitled to the refund of the
amount paid, it would [be] necessary to
determine how much the Government is
entitled to collect as taxes. This would
necessarily include the determination of the
correct liability of the taxpayer and, certainly, a
determination of this case would constituteres
judicata on both parties as to all the matters
subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now
Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable
today.
Here, petitioner's similar tax refund claim
assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA
that petitioner, although not liable under Sec.
28(A)(3)(a) of the 1997 NIRC, is liable under Sec.
28(A)(l), the correctness of the return filed by
petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.146
(Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v.
Commissioner of Internal Revenue, 147 this
court upheld the denial of the claim for refund
based on the Court of Tax Appeals' finding that
the taxpayer had, through erroneous
deductions on its gross income, underpaid its
Gross Philippine Billing tax on cargo revenues
for 1999, and the amount of underpayment was
even greater than the refund sought for
erroneously paid Gross Philippine Billings tax on
passenger revenues for the same taxable
period.148
In this case, 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 t.axable 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.
WHEREFORE, the Petition is DENIED. The
Decision dated August 26, 2005 and Resolution
dated April 8, 2005 of the Court of Tax Appeals
En Banc are AFFIRMED.
SO ORDERED.
FIRST DIVISION
[G.R. No. 148191. November 25, 2003]
COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. SOLIDBANK CORPORATION,
respondent.
DECISION
PANGANIBAN, J.:
Under the Tax Code, the earnings of banks from
passive income are subject to a twenty percent
final withholding tax (20% FWT). This tax is
withheld at source and is thus not actually and
physically received by the banks, because it is
paid directly to the government by the entities
from which the banks derived the income.
Apart from the 20% FWT, banks are also subject
to a five percent gross receipts tax (5% GRT)
which is imposed by the Tax Code on their gross
receipts, including the passive income.
Since the 20% FWT is constructively received by
the banks and forms part of their gross receipts
or earnings, it follows that it is subject to the 5%
GRT. After all, the amount withheld is paid to
the government on their behalf, in satisfaction
of their withholding taxes. That they do not
actually receive the amount does not alter the
fact that it is remitted for their benefit in
satisfaction of their tax obligations.
Stated otherwise, the fact is that if there were
no withholding tax system in place in this
country, this 20 percent portion of the passive
income of banks would actually be paid to the
banks and then remitted by them to the
government in payment of their income tax.
The institution of the withholding tax system
does not alter the fact that the 20 percent
portion of their passive income constitutes part
of their actual earnings, except that it is paid
directly to the government on their behalf in
satisfaction of the 20 percent final income tax
due on their passive incomes.
The Case
Before us is a Petition for Review[1] under Rule
45 of the Rules of Court, seeking to annul the
July 18, 2000 Decision[2] and the May 8, 2001
Resolution[3] of the Court of Appeals[4] (CA) in
CA-GR SP No. 54599. The decretal portion of
the assailed Decision reads as follows:
WHEREFORE, we AFFIRM in toto the assailed
decision and resolution of the Court of Tax
Appeals.[5]
The challenged Resolution denied petitioners
Motion for Reconsideration.
The Facts
Quoting petitioner, the CA[6] summarized the
facts of this case as follows:
For the calendar year 1995, [respondent]
seasonably filed its Quarterly Percentage Tax
Returns reflecting gross receipts (pertaining to
5% [Gross Receipts Tax] rate) in the total
amount
of
P1,474,691,693.44
with
corresponding gross receipts tax payments in
the sum of P73,734,584.60, broken down as
follows:
Period Covered Gross Receipts Gross Receipts
Tax
January to March 1994 P 188,406,061.95 P
9,420,303.10
April
to
June
1994
370,913,832.70
18,545,691.63
July to September 1994 481,501,838.98
24,075,091.95
October to December 1994 433,869,959.81
21,693,497.98
Total P 1,474,691,693.44 P 73,734,584.60
[Respondent] alleges that the total gross
receipts in the amount of P1,474,691,693.44
included the sum of P350,807,875.15
representing gross receipts from passive
income which was already subjected to 20%
final withholding tax.
On January 30, 1996, [the Court of Tax Appeals]
rendered a decision in CTA Case No. 4720
entitled
Asian
Bank
Corporation
vs.
Commissioner of Internal Revenue[,] wherein it
was held that the 20% final withholding tax on
[a] banks interest income should not form part
of its taxable gross receipts for purposes of
computing the gross receipts tax.
On June 19, 1997, on the strength of the
aforementioned decision, [respondent] filed
with the Bureau of Internal Revenue [BIR] a
letter-request for the refund or issuance of [a]
tax credit certificate in the aggregate amount of
P3,508,078.75, representing allegedly overpaid
gross receipts tax for the year 1995, computed
as follows:
Gross Receipts Subjected to the Final Tax
Derived
from
Passive
[Income]
P
350,807,875.15
Multiply by Final Tax rate 20%
20% Final Tax Withheld at Source P
70,161,575.03
Multiply by [Gross Receipts Tax] rate 5%
Overpaid [Gross Receipts Tax] P 3,508,078.75
Without waiting for an action from the
[petitioner], [respondent] on the same day filed
[a] petition for review [with the Court of Tax
Appeals] in order to toll the running of the twoyear prescriptive period to judicially claim for
the refund of [any] overpaid internal revenue
tax[,] pursuant to Section 230 [now 229] of the
Tax Code [also National Internal Revenue Code]
x x x.
xxxxxxxxx
After trial on the merits, the [Court of Tax
Appeals], on August 6, 1999, rendered its
decision ordering x x x petitioner to refund in
favor of x x x respondent the reduced amount
of P1,555,749.65 as overpaid [gross receipts
tax] for the year 1995. The legal issue x x x was
resolved by the [Court of Tax Appeals], with
Hon. Amancio Q. Saga dissenting, on the
strength of its earlier pronouncement in x x x
Asian Bank Corporation vs. Commissioner of
Internal Revenue x x x, wherein it was held that
the 20% [final withholding tax] on [a] banks
interest income should not form part of its
taxable gross receipts for purposes of
computing the [gross receipts tax].[7]
Ruling of the CA
The CA held that the 20% FWT on a banks
interest income did not form part of the taxable
gross receipts in computing the 5% GRT,
because the FWT was not actually received by
the bank but was directly remitted to the
government. The appellate court curtly said
that while the Tax Code does not specifically
state any exemption, x x x the statute must
receive a sensible construction such as will give
effect to the legislative intention, and so as to
avoid an unjust or absurd conclusion.[8]
Hence, this appeal.[9]
Issue
Petitioner raises this lone issue for our
consideration:
Whether or not the 20% final withholding tax
on [a] banks interest income forms part of the
taxable gross receipts in computing the 5%
gross receipts tax.[10]
The Courts Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on
respondents interest income was not actually
received by respondent because it was remitted
directly to the government, the fact that the
amount redounded to the banks benefit makes
it part of the taxable gross receipts in
computing the 5% GRT. Respondent, on the
other hand, maintains that the CA correctly
ruled otherwise.
We agree with petitioner. In fact, the same
issue has been raised recently in China Banking
Corporation v. CA,[11] where this Court held
that the amount of interest income withheld in
payment of the 20% FWT forms part of gross
receipts in computing for the GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 119[12] of
the Tax Code,[13] which provides:
SEC. 119. Tax on banks and non-bank financial
intermediaries. There shall be collected a tax on
gross receipts derived from sources within the
Philippines by all banks and non-bank financial
intermediaries in accordance with the following
schedule:
(a) On interest, commissions and discounts
from lending activities as well as income from
financial leasing, on the basis of remaining
maturities of instruments from which such
receipts are derived.
Short-term maturity not in excess of two (2)
years5%
Medium-term maturity over two (2) years
but not exceeding four (4) years....3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years1%
(ii) Over seven (7) years..0%
(b) On dividends...0%
(c) On royalties, rentals of property, real or
personal, profits from exchange and all other
items treated as gross income under Section
28[14]
of
this
Code....................................................................
5%
Provided, however, That in case the maturity
period referred to in paragraph (a) is shortened
thru pretermination, then the maturity period
shall be reckoned to end as of the date of
pretermination for purposes of classifying the
transaction as short, medium or long term and
the correct rate of tax shall be applied
accordingly.
Nothing in this Code shall preclude the
Commissioner from imposing the same tax
herein provided on persons performing similar
banking activities.
The 5% GRT[15] is included under Title V. Other
Percentage Taxes of the Tax Code and is not
subject to withholding. The banks and non-bank
financial intermediaries liable therefor shall,
under Section 125(a)(1),[16] file quarterly
returns on the amount of gross receipts and pay
the taxes due thereon within twenty (20)[17]
days after the end of each taxable quarter.
The 20% FWT,[18] on the other hand, falls
under Section 24(e)(1)[19] of Title II. Tax on
Income. It is a tax on passive income, deducted
and withheld at source by the payorcorporation and/or person as withholding agent
pursuant to Section 50,[20] and paid in the
same manner and subject to the same
conditions as provided for in Section 51.[21]
A perusal of these provisions clearly shows that
two types of taxes are involved in the present
controversy: (1) the GRT, which is a percentage
tax; and (2) the FWT, which is an income tax. As
a bank, petitioner is covered by both taxes.
A percentage tax is a national tax measured by
a certain percentage of the gross selling price or
gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings
derived by any person engaged in the sale of
services.[22] It is not subject to withholding.
An income tax, on the other hand, is a national
tax imposed on the net or the gross income
realized in a taxable year.[23] It is subject to
withholding.
In a withholding tax system, the payee is the
taxpayer, the person on whom the tax is
imposed; the payor, a separate entity, acts as
no more than an agent of the government for
the collection of the tax in order to ensure its
payment. Obviously, this amount that is used to
settle the tax liability is deemed sourced from
the proceeds constitutive of the tax base.[24]
These proceeds are either actual or
constructive. Both parties herein agree that
there is no actual receipt by the bank of the
amount withheld. What needs to be
determined is if there is constructive receipt
thereof. Since the payee -- not the payor -- is
the real taxpayer, the rule on constructive
receipt can be easily rationalized, if not made
clearly manifest.[25]
Constructive Receipt
Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR)
No. 17-84,[26] petitioner contends that there is
constructive receipt of the interest on deposits
and yield on deposit substitutes.[27]
Respondent, however, claims that even if there
is, it is Section 4(e) of RR 12-80[28] that
nevertheless governs the situation.
Section 7 of RR 17-84 states:
SEC. 7. Nature and Treatment of Interest on
Deposits and Yield on Deposit Substitutes.
(a) The interest earned on Philippine Currency
bank deposits and yield from deposit
substitutes subjected to the withholding taxes
in accordance with these regulations need not
be included in the gross income in computing
the depositors/investors income tax liability in
accordance with the provision of Section
29(b),[29] (c)[30] and (d) of the National
Internal Revenue Code, as amended.
(b) Only interest paid or accrued on bank
deposits, or yield from deposit substitutes
declared for purposes of imposing the
withholding taxes in accordance with these
regulations shall be allowed as interest expense
deductible for purposes of computing taxable
net income of the payor.
(c) If the recipient of the above-mentioned
items of income are financial institutions, the
same shall be included as part of the tax base
upon which the gross receipt[s] tax is imposed.
Section 4(e) of RR 12-80, on the other hand,
states that the tax rates to be imposed on the
gross receipts of banks, non-bank financial
intermediaries, financing companies, and other
non-bank
financial
intermediaries
not
performing quasi-banking activities shall be
based on all items of income actually received.
This provision reads:
SEC. 4. x x x x x x x x x
(e) Gross receipts tax on banks, non-bank
financial intermediaries, financing companies,
and other non-bank financial intermediaries not
performing quasi-banking activities. The rates of
tax to be imposed on the gross receipts of such
financial institutions shall be based on all items
of income actually received. Mere accrual shall
not be considered, but once payment is
received on such accrual or in cases of
prepayment, then the amount actually received
shall be included in the tax base of such
financial institutions, as provided hereunder x x
x.
Respondent argues that the above-quoted
provision is plain and clear: since there is no
actual receipt, the FWT is not to be included in
the tax base for computing the GRT. There is
supposedly no pecuniary benefit or advantage
accruing to the bank from the FWT, because the
income is subjected to a tax burden
immediately upon receipt through the
withholding process. Moreover, the earlier RR
12-80 covered matters not falling under the
later RR 17-84.[31]
We are not persuaded.
By analogy, we apply to the receipt of income
the rules on actual and constructive possession
provided in Articles 531 and 532 of our Civil
Code.
Under Article 531:[32]
Possession is acquired by the material
occupation of a thing or the exercise of a right,
or by the fact that it is subject to the action of
our will, or by the proper acts and legal
formalities established for acquiring such right.
Article 532 states:
Possession may be acquired by the same person
who is to enjoy it, by his legal representative, by
his agent, or by any person without any power
whatever; but in the last case, the possession
shall not be considered as acquired until the
person in whose name the act of possession
was executed has ratified the same, without
prejudice to the juridical consequences of
negotiorum gestio in a proper case.[33]
The last means of acquiring possession under
Article 531 refers to juridical acts -- the
acquisition of possession by sufficient title to
which the law gives the force of acts of
possession.[34] Respondent argues that only
items of income actually received should be
included in its gross receipts. It claims that since
the amount had already been withheld at
source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly
provides that the acquisition of the right of
possession is through the proper acts and legal
formalities
established
therefor.
The
withholding process is one such act. There may
not be actual receipt of the income withheld;
however, as provided for in Article 532,
possession by any person without any power
whatsoever shall be considered as acquired
when ratified by the person in whose name the
act of possession is executed.
In our withholding tax system, possession is
acquired by the payor as the withholding agent
of the government, because the taxpayer
ratifies the very act of possession for the
government. There is thus constructive receipt.
The processes of bookkeeping and accounting
for interest on deposits and yield on deposit
substitutes that are subjected to FWT are
indeed -- for legal purposes -- tantamount to
delivery, receipt or remittance.[35] Besides,
respondent itself admits that its income is
subjected to a tax burden immediately upon
receipt, although it claims that it derives no
pecuniary benefit or advantage through the
withholding process. There being constructive
receipt of such income -- part of which is
withheld -- RR 17-84 applies, and that income is
included as part of the tax base upon which the
GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue
regulations on interest income constructively
received.
In general, rules and regulations issued by
administrative or executive officers pursuant to
the procedure or authority conferred by law
upon the administrative agency have the force
and effect, or partake of the nature, of a
statute.[36] The reason is that statutes express
the policies, purposes, objectives, remedies and
sanctions intended by the legislature in general
terms. The details and manner of carrying them
out are oftentimes left to the administrative
agency entrusted with their enforcement.
In the present case, it is the finance secretary
who promulgates the revenue regulations,
upon
recommendation
of
the
BIR
commissioner. These regulations are the
consequences of a delegated power to issue
legal provisions that have the effect of law.[37]
A revenue regulation is binding on the courts as
long as the procedure fixed for its promulgation
is followed. Even if the courts may not be in
agreement with its stated policy or innate
wisdom, it is nonetheless valid, provided that its
scope is within the statutory authority or
standard granted by the legislature.[38]
Specifically, the regulation must (1) be germane
to the object and purpose of the law;[39] (2)
not contradict, but conform to, the standards
the law prescribes;[40] and (3) be issued for the
sole purpose of carrying into effect the general
provisions of our tax laws.[41]
In the present case, there is no question about
the regularity in the performance of official
duty. What needs to be determined is whether
RR 12-80 has been repealed by RR 17-84.
A repeal may be express or implied. It is express
when there is a declaration in a regulation -usually in its repealing clause -- that another
regulation, identified by its number or title, is
repealed. All others are implied repeals.[42] An
example of the latter is a general provision that
predicates the intended repeal on a substantial
conflict between the existing and the prior
regulations.[43]
As stated in Section 11 of RR 17-84, all
regulations, rules, orders or portions thereof
that are inconsistent with the provisions of the
said RR are thereby repealed. This declaration
proceeds on the premise that RR 17-84 clearly
reveals such an intention on the part of the
Department of Finance. Otherwise, later RRs
are to be construed as a continuation of, and
not a substitute for, earlier RRs; and will
continue to speak, so far as the subject matter
is the same, from the time of the first
promulgation.[44]
There are two well-settled categories of implied
repeals: (1) in case the provisions are in
irreconcilable conflict, the later regulation, to
the extent of the conflict, constitutes an implied
repeal of an earlier one; and (2) if the later
regulation covers the whole subject of an
earlier one and is clearly intended as a
substitute, it will similarly operate as a repeal of
the earlier one.[45] There is no implied repeal
of an earlier RR by the mere fact that its subject
matter is related to a later RR, which may
simply be a cumulation or continuation of the
earlier one.[46]
Where a part of an earlier regulation embracing
the same subject as a later one may not be
enforced without nullifying the pertinent
provision of the latter, the earlier regulation is
deemed impliedly amended or modified to the
extent of the repugnancy.[47] The unaffected
provisions or portions of the earlier regulation
remain in force, while its omitted portions are
deemed repealed.[48] An exception therein
that is amended by its subsequent elimination
shall now cease to be so and instead be
included within the scope of the general
rule.[49]
Section 4(e) of the earlier RR 12-80 provides
that only items of income actually received shall
be included in the tax base for computing the
GRT, but Section 7(c) of the later RR 17-84
makes no such distinction and provides that all
interests earned shall be included. The
exception having been eliminated, the clear
intent is that the later RR 17-84 includes the
exception within the scope of the general rule.
Repeals by implication are not favored and will
not be indulged, unless it is manifest that the
administrative agency intended them. As a
regulation is presumed to have been made with
deliberation and full knowledge of all existing
rules on the subject, it may reasonably be
concluded that its promulgation was not
intended to interfere with or abrogate any
earlier rule relating to the same subject, unless
it is either repugnant to or fully inclusive of the
subject matter of an earlier one, or unless the
reason for the earlier one is beyond
peradventure removed.[50] Every effort must
be exerted to make all regulations stand -- and
a later rule will not operate as a repeal of an
earlier one, if by any reasonable construction,
the two can be reconciled.[51]
RR 12-80 imposes the GRT only on all items of
income actually received, as opposed to their
mere accrual, while RR 17-84 includes all
interest income in computing the GRT. RR 12-80
is superseded by the later rule, because Section
4(e) thereof is not restated in RR 17-84. Clearly
therefore, as petitioner correctly states, this
particular provision was impliedly repealed
when the later regulations took effect.[52]
Reconciling the Two Regulations
Granting that the two regulations can be
reconciled, respondents reliance on Section 4(e)
of RR 12-80 is misplaced and deceptive. The
accrual referred to therein should not be
equated with the determination of the amount
to be used as tax base in computing the GRT.
Such accrual merely refers to an accounting
method that recognizes income as earned
although not received, and expenses as
incurred although not yet paid.
Accrual should not be confused with the
concept of constructive possession or receipt as
earlier discussed. Petitioner correctly points out
that income that is merely accrued -- earned,
but not yet received -- does not form part of the
taxable gross receipts; income that has been
received, albeit constructively, does.[53]
The word actually, used confusingly in Section
4(e), will be clearer if removed entirely. Besides,
if actually is that important, accrual should have
been eliminated for being a mere surplusage.
The inclusion of accrual stresses the fact that
Section 4(e) does not distinguish between
actual and constructive receipt. It merely
focuses on the method of accounting known as
the accrual system.
Under this system, income is accrued or earned
in the year in which the taxpayers right thereto
becomes fixed and definite, even though it may
not be actually received until a later year; while
a deduction for a liability is to be accrued or
incurred and taken when the liability becomes
fixed and certain, even though it may not be
actually paid until later.[54]
Under any system of accounting, no duty or
liability to pay an income tax upon a transaction
arises until the taxable year in which the event
constituting
the
condition
precedent
occurs.[55] The liability to pay a tax may thus
arise at a certain time and the tax paid within
another given time.[56]
In reconciling these two regulations, the earlier
one includes in the tax base for GRT all income,
whether actually or constructively received,
while the later one includes specifically interest
income. In computing the income tax liability,
the only exception cited in the later regulations
is the exclusion from gross income of interest
income, which is already subjected to
withholding. This exception, however, refers to
a different tax altogether. To extend
mischievously such exception to the GRT will
certainly lead to results not contemplated by
the legislators and the administrative body
promulgating the regulations.
Manila Jockey Club
Inapplicable
In Commissioner of Internal Revenue v. Manila
Jockey Club,[57] we held that the term gross
receipts shall not include money which,
although delivered, has been especially
earmarked by law or regulation for some
person other than the taxpayer.[58]
To begin, we have to nuance the definition of
gross receipts[59] to determine what it is
exactly. In this regard, we note that US cases
have persuasive effect in our jurisdiction,
because Philippine income tax law is patterned
after its US counterpart.[60]
[G]ross receipts with respect to any period
means the sum of: (a) The total amount
received or accrued during such period from the
sale, exchange, or other disposition of x x x
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 its trade
or business, and (b) The gross income,
attributable to a trade or business, regularly
carried on by the taxpayer, received or accrued
during such period x x x.[61]
x x x [B]y gross earnings from operations x x x
was intended all operations xxx including
incidental,
subordinate,
and
subsidiary
operations, as well as principal operations.[62]
When we speak of the gross earnings of a
person or corporation, we mean the entire
earnings or receipts of such person or
corporation from the business or operations to
which we refer.[63]
From these cases, gross receipts[64] refer to the
total, as opposed to the net, income.[65] These
are therefore the total receipts before any
deduction[66]
for
the
expenses
of
management.[67] Websters New International
Dictionary, in fact, defines gross as whole or
entire.
Statutes taxing the gross receipts, earnings, or
income of particular corporations are found in
many jurisdictions.[68] Tax thereon is generally
held to be within the power of a state to
impose; or constitutional, unless it interferes
with interstate commerce or violates the
requirement as to uniformity of taxation.[69]
Moreover, we have emphasized that the BIR
has consistently ruled that gross receipts does
not admit of any deduction.[70] Following the
principle
of
legislative
approval
by
reenactment,[71] this interpretation has been
adopted by the legislature throughout the
various reenactments of then Section 119 of the
Tax Code.[72]
Given that a tax is imposed upon total receipts
and not upon net earnings,[73] shall the income
withheld be included in the tax base upon
which such tax is imposed? In other words, shall
interest income constructively received still be
included in the tax base for computing the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case.
Earmarking is not the same as withholding.
Amounts earmarked do not form part of gross
receipts, because, although delivered or
received, these are by law or regulation
reserved for some person other than the
taxpayer. On the contrary, amounts withheld
form part of gross receipts, because these are in
constructive possession and not subject to any
reservation, the withholding agent being merely
a conduit in the collection process.
The Manila Jockey Club had to deliver to the
Board on Races, horse owners and jockeys
amounts that never became the property of the
race track.[74] Unlike these amounts, the
interest income that had been withheld for the
government became property of the financial
institutions upon constructive possession
thereof. Possession was indeed acquired, since
it was ratified by the financial institutions in
whose name the act of possession had been
executed. The money indeed belonged to the
taxpayers; merely holding it in trust was not
enough.[75]
The government subsequently becomes the
owner of the money when the financial
institutions pay the FWT to extinguish their
obligation to the government. As this Court has
held before, this is the consideration for the
transfer of ownership of the FWT from these
institutions to the government.[76] It is
ownership that determines whether interest
income forms part of taxable gross receipts.[77]
Being originally owned by these financial
institutions as part of their interest income, the
FWT should form part of their taxable gross
receipts.
Besides, these amounts withheld are in
payment of an income tax liability, which is
different from a percentage tax liability.
Commissioner of Internal Revenue v. Tours
Specialists, Inc. aptly held thus:[78]
x x x [G]ross receipts subject to tax under the
Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong
to them and do not redound to the taxpayers
benefit; and it is not necessary that there must
be a law or regulation which would exempt
such monies and receipts within the meaning of
gross receipts under the Tax Code.[79]
In the construction and interpretation of tax
statutes and of statutes in general, the primary
consideration is to ascertain and give effect to
the intention of the legislature.[80] We ought to
impute to the lawmaking body the intent to
obey the constitutional mandate, as long as its
enactments
fairly
admit
of
such
construction.[81] In fact, x x x no tax can be
levied without express authority of law, but the
statutes are to receive a reasonable
construction with a view to carrying out their
purpose and intent.[82]
Looking again into Sections 24(e)(1) and 119 of
the Tax Code, we find that the first imposes an
income tax; the second, a percentage tax. The
legislature clearly intended two different taxes.
The FWT is a tax on passive income, while the
GRT is on business.[83] The withholding of one
is not equivalent to the payment of the other.
Non-Exemption of FWT from GRT:
Neither Unjust nor Absurd
Taxing the people and their property is essential
to the very existence of government. Certainly,
one of the highest attributes of sovereignty is
the power of taxation,[84] which may
legitimately be exercised on the objects to
which it is applicable to the utmost extent as
the government may choose.[85] Being an
incident of sovereignty, such power is
coextensive with that to which it is an
incident.[86] The interest on deposits and yield
on deposit substitutes of financial institutions,
on the one hand, and their business as such, on
the other, are the two objects over which the
State has chosen to extend its sovereign power.
Those not so chosen are, upon the soundest
principles, exempt from taxation.[87]
While courts will not enlarge by construction
the governments power of taxation,[88] neither
will they place upon tax laws so loose a
construction as to permit evasions, merely on
the basis of fanciful and insubstantial
distinctions.[89] When the legislature imposes a
tax on income and another on business, the
imposition must be respected. The Tax Code
should be so construed, if need be, as to avoid
empty declarations or possibilities of crafty tax
evasion schemes. We have consistently ruled
thus:
x x x [I]t is upon taxation that the [g]overnment
chiefly relies to obtain the means to carry on its
operations, and it is of the utmost importance
that the modes adopted to enforce the
collection of the taxes levied should be
summary and interfered with as little as
possible. x x x.[90]
Any delay in the proceedings of the officers,
upon whom the duty is devolved of collecting
the taxes, may derange the operations of
government, and thereby cause serious
detriment to the public.[91]
No government could exist if all litigants were
permitted to delay the collection of its
taxes.[92]
A taxing act will be construed, and the intent
and meaning of the legislature ascertained,
from its language.[93] Its clarity and implied
intent must exist to uphold the taxes as against
a taxpayer in whose favor doubts will be
resolved.[94] No such doubts exist with respect
to the Tax Code, because the income and
percentage taxes we have cited earlier have
been imposed in clear and express language for
that purpose.[95]
This Court has steadfastly adhered to the
doctrine that its first and fundamental duty is
the application of the law according to its
express terms -- construction and interpretation
being called for only when such literal
application is impossible or inadequate without
them.[96] In Quijano v. Development Bank of
the Philippines,[97] we stressed as follows:
No process of interpretation or construction
need be resorted to where a provision of law
peremptorily calls for application. [98]
A literal application of any part of a statute is to
be rejected if it will operate unjustly, lead to
absurd results, or contradict the evident
meaning of the statute taken as a whole.[99]
Unlike the CA, we find that the literal
application of the aforesaid sections of the Tax
Code and its implementing regulations does not
operate unjustly or contradict the evident
meaning of the statute taken as a whole.
Neither does it lead to absurd results. Indeed,
our courts are not to give words meanings that
would lead to absurd or unreasonable
consequences.[100] We have repeatedly held
thus:
x x x [S]tatutes should receive a sensible
construction, such as will give effect to the
legislative intention and so as to avoid an unjust
or an absurd conclusion.[101]
While it is true that the contemporaneous
construction placed upon a statute by executive
officers whose duty is to enforce it should be
given great weight by the courts, still if such
construction is so erroneous, x x x the same
must be declared as null and void.[102]
It does not even matter that the CTA, like in
China Banking Corporation,[103] relied
erroneously on Manila Jockey Club. Under our
tax system, the CTA acts as a highly specialized
body specifically created for the purpose of
reviewing tax cases.[104] Because of its
recognized expertise, its findings of fact will
ordinarily not be reviewed, absent any showing
of gross error or abuse on its part.[105] Such
findings are binding on the Court and, absent
strong reasons for us to delve into facts, only
questions
of
law
are
open
for
determination.[106]
Respondent claims that it is entitled to a refund
on the basis of excess GRT payments. We
disagree.
Tax refunds are in the nature of tax
exemptions.[107] Such exemptions are strictly
construed against the taxpayer, being highly
disfavored[108] and almost said to be odious to
the law. Hence, those who claim to be exempt
from the payment of a particular tax must do so
under clear and unmistakable terms found in
the statute. They must be able to point to some
positive provision, not merely a vague
implication,[109] of the law creating that
right.[110]
The right of taxation will not be surrendered,
except in words too plain to be mistaken. The
reason is that the State cannot strip itself of this
highest attribute of sovereignty -- its most
essential power of taxation -- by vague or
ambiguous language. Since tax refunds are in
the nature of tax exemptions, these are
deemed to be in derogation of sovereign
authority and to be construed strictissimi juris
against the person or entity claiming the
exemption.[111]
No less than our 1987 Constitution provides for
the
mechanism
for
granting
tax
exemptions.[112] They certainly cannot be
granted by implication or mere administrative
regulation. Thus, when an exemption is
claimed, it must indubitably be shown to exist,
for every presumption is against it,[113] and a
well-founded doubt is fatal to the claim.[114] In
the instant case, respondent has not been able
to satisfactorily show that its FWT on interest
income is exempt from the GRT. Like China
Banking Corporation, its argument creates a tax
exemption where none exists.[115]
No exemptions are normally allowed when a
GRT is imposed. It is precisely designed to
maintain simplicity in the tax collection effort of
the government and to assure its steady source
of revenue even during an economic
slump.[116]
No Double Taxation
We have repeatedly said that the two taxes,
subject of this litigation, are different from each
other. The basis of their imposition may be the
same, but their natures are different, thus
leading us to a final point. Is there double
taxation?
The Court finds none.
Double taxation means taxing the same
property twice when it should be taxed only
once; that is, x x x taxing the same person twice
by the same jurisdiction for the same
thing.[117] It is obnoxious when the taxpayer is
taxed twice, when it should be but once.[118]
Otherwise described as direct duplicate
taxation,[119] the two taxes must be imposed
on the same subject matter, for the same
purpose, by the same taxing authority, within
the same jurisdiction, during the same taxing
period; and they must be of the same kind or
character.[120]
First, the taxes herein are imposed on two
different subject matters. The subject matter of
the FWT is the passive income generated in the
form of interest on deposits and yield on
deposit substitutes, while the subject matter of
the GRT is the privilege of engaging in the
business of banking.
A tax based on receipts is a tax on business
rather than on the property; hence, it is an
excise[121] rather than a property tax.[122] It is
not an income tax, unlike the FWT. In fact, we
have already held that one can be taxed for
engaging in business and further taxed
differently
for
the
income
derived
therefrom.[123] Akin to our ruling in Velilla v.
Posadas,[124] these two taxes are entirely
distinct and are assessed under different
provisions.
Second, although both taxes are national in
scope because they are imposed by the same
taxing authority -- the national government
under the Tax Code -- and operate within the
same Philippine jurisdiction for the same
purpose of raising revenues, the taxing periods
they affect are different. The FWT is deducted
and withheld as soon as the income is earned,
and is paid after every calendar quarter in
which it is earned. On the other hand, the GRT
is neither deducted nor withheld, but is paid
only after every taxable quarter in which it is
earned.
Third, these two taxes are of different kinds or
characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax
not subject to withholding.
In short, there is no double taxation, because
there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the
same purpose, in different taxing periods, some
of the property in the territory.[125] Subjecting
interest income to a 20% FWT and including it in
the computation of the 5% GRT is clearly not
double taxation.
WHEREFORE, the Petition is GRANTED. The
assailed Decision and Resolution of the Court of
Appeals are hereby REVERSED and SET ASIDE.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago,
Carpio, and Azcuna, JJ., concur.
G.R. No. 180651
July 30, 2014
NURSERY CARE CORPORATION; SHOEMART,
INC.; STAR APPLIANCE CENTER, INC.; H&B, INC.;
SUPPLIES STATION, INC.; and HARDWARE
WORKSHOP, INC., Petitioners,
vs.
ANTHONY ACEVEDO, in his capacity as THE
TREASURER OF MANILA; and THE CITY OF
MANILA, Respondents.
DECISION
BERSAMIN, J.:
The issue here concerns double taxation. There
is double taxation when the same taxpayer is
taxed twice when he should be taxed only once
for the same purpose by the same taxing
authority within the same jurisdiction during
the same taxing period, and the taxes are of the
same kind or character. Double taxation is
obnoxious.
Section 21. Tax on Business Subject to the
Excise, Value-Added or Percentage Taxes under
the NIRC - On any of the following businesses
and articles of commerce subject to the excise,
value-added or percentage taxes under the
National Internal Revenue Code, hereinafter
referred to as NIRC, as amended, a tax of FIFTY
PERCENT (50%) OF ONE PERCENT (1%) per
annum on the gross sales or receipts of the
preceding calendar year is hereby imposed:
A) On person who sells goods and services in
the course of trade or businesses; x x x
PROVIDED, that all registered businesses in the
City of Manila already paying the
aforementioned tax shall be exempted from
payment thereof.
To comply with the City of Manila’s
assessmentof taxes under Section 21, supra, the
petitioners paid under protest the following
amounts corresponding to the first quarter of
1999,5 to wit:
The Case
(a) Nursery Care Corporation ₱595,190.25
Under review are the resolution promulgated in
CA-G.R. SP No. 72191 on June 18, 2007,1
whereby the Court of Appeals (CA) denied
petitioners' appeal for lack of jurisdiction; and
the resolution promulgated on November 14,
2007,2 whereby the CA denied their motion for
reconsideration for its lack of merit.
(b) Shoemart Incorporated ₱3,283,520.14
Antecedents
(f) Hardware Work Shop, Inc. ₱609,953.24
The City of Manila assessed and collected taxes
from the individual petitioners pursuant to
Section 15 (Tax on Wholesalers, Distributors, or
Dealers) and Section 17 (Tax on Retailers) of the
Revenue Code of Manila.3 At the same time,
the City of Manila imposed additional taxes
upon the petitioners pursuant to Section 21
ofthe Revenue Code of Manila,4 as amended, as
a condition for the renewal of their respective
business licenses for the year 1999. Section 21
of the Revenue Code of Manila stated:
By letter dated March 1, 1999, the petitioners
formally requested the Office of the City
Treasurer for the tax credit or refund of the
local business taxes paid under protest.6
However, then City Treasurer Anthony Acevedo
(Acevedo) denied the request through his letter
of March 10, 1999.7
(c) Star Appliance Center ₱236,084.03
(d) H & B, Inc. ₱1,271,118.74
(e) Supplies Station, Inc. ₱239,501.25
On April 8, 1999, the petitioners, through their
representative, Cecilia R. Patricio, sought the
reconsideration of the denial of their request.8
Still, the City Treasurer did not reconsider.9 In
the meanwhile, Liberty Toledo succeeded
Acevedo as the City Treasurer of Manila.10
On April 29, 1999, the petitioners filed their
respective petitions for certiorariin the Regional
Trial Court (RTC) in Manila. The petitions,
docketed as Civil Cases Nos. 99-93668 to 9993673,11 were initially raffled to different
branches, but were soon consolidated in Branch
34.12 After the presiding judge of Branch 34
voluntarily inhibited himself, the consolidated
cases were transferred to Branch 23,13 but
were again re-raffled to Branch 19 upon the
designation of Branch 23 as a special drugs
court.14
The parties agreed on and jointly submitted the
following issues for the consideration and
resolution of the RTC, namely:
(a) Whether or not the collection of taxes under
Section 21 of Ordinance No. 7794, as amended,
constitutes double taxation.
(b) Whether or not the failure of the petitioners
to avail of the statutorily provided remedy for
their tax protest on the ground of
unconstitutionality,
illegality
and
oppressiveness under Section 187 of the Local
Government Code renders the present action
dismissible for non-exhaustion of administrative
remedy.15
Decision of the RTC
On April 26, 2002, the RTC rendered its
decision, holding thusly:
The Court perceives of no instance of the
constitutionally proscribed double taxation, in
the strict, narrow or obnoxious sense, imposed
upon the petitioners under Section 15 and 17,
on the one hand, and under Section 21, on the
other, of the questioned Ordinance. The tax
imposed under Section 15 and 17, as against
that imposed under Section 21, are levied
against different tax objects or subject matter.
The tax under Section 15 is imposed upon
wholesalers, distributors or dealers, while that
under Section 17 is imposedupon retailers. In
short, taxes imposed under Section 15 and 17 is
a tax on the business of wholesalers,
distributors, dealers and retailers. On the other
hand, the tax imposed upon herein petitioners
under Section 21 is not a tax against the
business of the petitioners (as wholesalers,
distributors, dealers or retailers)but is rather a
tax against consumers or end-users of the
articles sold by petitioners. This is plain from a
reading of the modifying paragraph of Section
21 which says:
"The tax shall be payable by the person paying
for the services rendered and shall be paid to
the person rendering the services who is
required to collect and pay the tax within
twenty (20) days after the end of each quarter."
(Underscoring supplied)
In effect, the petitioners only act as the
collection or withholding agent of the City while
the ones actually paying the tax are the
consumers or end-users of the articles being
sold by petitioners. The taxes imposed under
Sec. 21 represent additional amounts added by
the business establishment to the basic prices
of its goods and services which are paid by the
end-users to the businesses. It is actually not
taxes on the business of petitioners but on the
consumers. Hence, there is no double taxation
in the narrow, strict or obnoxious
sense,involved in the imposition of taxes by the
City of Manila under Sections 15, 17 and 21 of
the questioned Ordinance. This in effect
resolves infavor of the constitutionality of the
assailed sections of Ordinance No. 7807 of the
City of Manila.
Petitioners, likewise, pray the Court to direct
respondents to cease and desist from
implementing Section 21 of the questioned
Ordinance. That the Court cannot do, without
doing away with the mandatory provisions of
Section 187 of the Local Government Code
which distinctly commands that an appeal
questioning the constitutionality or legality of a
tax ordinance shall not have the effectof
suspending the effectivity of the ordinance and
the accrual and payment of the tax, fee or
charge levied therein. This is so because an
ordinance carries with it the presumption of
validity.
xxx
With the foregoing findings, petitioners’ prayer
for the refund of the amounts paid by them
under protest must, likewise, fail.
Wherefore, the petitions are dismissed.
Without pronouncement as to costs.
SO ORDERED.16
The petitioners appealed to the CA.17
Section 2,Rule 50 of the 1997 Rules on Civil
Procedure which states:
"Sec. 2. Dismissal of improper appeal to the
Court of Appeals. – An appeal under Rule 41
taken from the Regional Trial Court to the Court
of Appeals raising only questions of law shall be
dismissed, issues purely of law not being
reviewable by said court. similarly, an appeal by
notice of appeal instead of by petition for
review from the appellate judgment of a
Regional Trial Court shall be dismissed.
An appeal erroneously taken tothe Court of
Appeals shall not be transferred to the
appropriate court but shall be dismissed
outright.
WHEREFORE, the foregoing considered, the
appeal is DISMISSED.
Ruling of the CA
SO ORDERED.18
On June 18, 2007, the CA deniedthe petitioners’
appeal, ruling as follows:
The six (6) cases were consolidated on a
common question of fact and law, that is,
whether the act ofthe City Treasurer of Manila
of assessing and collecting business taxes under
Section 21of Ordinance 7807, on top of other
business taxes alsoassessed and collected under
the previous sections of the same ordinance is a
violation of the provisions of Section 143 of the
Local Government Code.
Clearly, the disposition of the present appeal in
these consolidated cases does not necessitate
the calibration of the whole evidence as there is
no question or doubt as to the truth or the
falsehood of the facts obtaining herein, as both
parties agree thereon. The present case
involves a question of law that would not lend
itself to an examination or evaluation by this
Court of the probative value of the evidence
presented.
Thus the Court is constrained todismiss the
instant petition for lack of jurisdiction under
The petitioners moved for reconsideration, but
the CA denied their motion through the
resolution promulgated on November 14,
2007.19
Issues
The petitioners now appeal, raising the
following grounds, to wit:
A.
THE COURT OF APPEALS, IN DISMISSING THE
APPEAL OF THE PETITIONERS AND DENYING
THEIR MOTION FOR RECONSIDERATION, ERRED
INRULING THAT THE ISSUE INVOLVED IS A
PURELY LEGAL QUESTION.
B.
THE COURT OF APPEALS ERRED IN NOT
REVERSING THE DECISION OF BRANCH 19 OF
THE REGIONAL TRIAL COURT OF MANILA DATED
26 APRIL 2002 DENYING PETITIONERS’ PRAYER
FOR REFUND OF THE AMOUNTS PAID BY THEM
UNDER PROTEST AND DISMISSING THE
PETITION FOR CERTIORARI FILED BY THE
PETITIONERS.
appeal is brought to the CA on questions of fact,
of law, or mixed questions of fact and law.22
The third mode of appeal is elevated to the
Supreme Court only on questions of law.23
C.
THE COURT OF APPEALS ERRED IN NOT RULING
THAT THE ACT OF THE CITY TREASURER OF
MANILA IN IMPOSING, ASSESSING AND
COLLECTING THE ADDITIONAL BUSINESS TAX
UNDER SECTION 21 OFORDINANCE NO. 7794,
AS AMENDED BY ORDINANCE NO. 7807, ALSO
KNOWN AS THE REVENUE CODE OF THE CITY
OFMANILA, IS CONSTITUTIVE OF DOUBLE
TAXATION AND VIOLATIVE OF THE LOCAL
GOVERNMENT CODE OF 1991.20
The main issues for resolution are, therefore,
(1) whether or not the CA properly denied due
course to the appeal for raising pure questions
of law; and (2) whether or not the petitioners
were entitled to the tax credit or tax refund for
the taxes paid under Section 21, supra.
Ruling
The appeal is meritorious.
1.
The CA did not err in dismissing the appeal;
but the rules should be liberally applied
for the sake of justice and equity
The Rules of Courtprovides three modes of
appeal from the decisions and final orders of
the RTC, namely: (1) ordinary appeal or appeal
by writ of error under Rule 41, where the
decisionsand final orders were rendered in civil
or criminal actions by the RTC in the exercise of
original jurisdiction; (2) petition for review
under Rule 42, where the decisions and final
orders were rendered by the RTC in the
exerciseof appellate jurisdiction; and (3)
petition for review on certiorarito the Supreme
Court under Rule 45.21 The first mode of appeal
is taken to the CA on questions of fact, or mixed
questions of fact and law. The second mode of
The distinction between a question oflaw and a
question of fact is well established. On the one
hand, a question of law ariseswhen there is
doubt as to what the law is on a certain state of
facts; on the other, there is a question of fact
when the doubt arises asto the truth or falsity
of the alleged facts.24 According to Leoncio v.
De Vera:25
x x x For a question to beone of law, the same
must not involve an examination of the
probative value ofthe evidence presented by
the litigants or any of them. The resolution of
the issue must restsolely on what the law
provides on the given set of circumstances.
Once it is clear that the issue invites a review of
the evidence presented, the question posed is
one of fact. Thus, the test of whether a question
isone of law or offact is not the appellation
given to such question by the party raising the
same; rather, it is whether the appellate court
can determine the issue raised without
reviewing or evaluating the evidence, in which
case, it is a question oflaw; otherwise it is a
question of fact.26
The nature of the issues to be raised on appeal
can be gleaned from the appellant’s notice of
appeal filed in the trial court, and from the
appellant’s brief submitted to the appellate
court.27 In this case, the petitioners filed a
notice of appeal in which they contended that
the April 26, 2002 decision and the order of July
17, 2002 issued by the RTC denying their
consolidated motion for reconsideration were
contrary to the facts and law obtaining in the
consolidated cases.28 In their consolidated
memorandum filed in the CA, they essentially
assailed the RTC’s ruling that the taxes imposed
on and collected from the petitioners under
Section 21 of the Revenue Code of Manila
constituted double taxation in the strict, narrow
or obnoxious sense. Considered together,
therefore, the notice of appeal and
consolidated memorandum evidently did
notraise issues that required the reevaluation of
evidence or the relevance of surrounding
circumstances.
The CA rightly concluded that the petitioners
thereby raised only a question of law. The
dismissal of their appeal was proper, strictly
speaking, because Section 2, Rule 50 of the
Rules of Court provides that an appeal from the
RTC to the CA raising only questions of law shall
be dismissed;
and that an appeal erroneously taken to the CA
shall be outrightly dismissed.29
2.
Collection of taxes pursuant to Section 21 of the
Revenue Code of Manila constituted double
taxation
The foregoing notwithstanding, the Court, given
the circumstances obtaining herein and in light
of jurisprudence promulgated subsequent to
the filing of the petition, deems it fitting and
proper to adopt a liberal approach in order to
render a justand speedy disposition of the
substantive issue at hand. Hence, we resolve,
bearing inmind the following pronouncement in
Go v. Chaves:30
Our rules of procedure are designed to facilitate
the orderly disposition of cases and permit the
prompt disposition of unmeritorious cases
which clog the court dockets and do little more
than waste the courts’ time. These technical
and procedural rules, however, are intended to
ensure, rather than suppress, substantial
justice. A deviation from their rigid enforcement
may thus be allowed, as petitioners should be
given the fullest opportunity to establish the
merits of their case, rather than lose their
property on mere technicalities. We held in Ong
Lim Sing, Jr. v. FEB Leasing and Finance
Corporation that:
Courts have the prerogative to relax procedural
rules of even the most mandatory character,
mindful of the duty to reconcile both the need
to speedily put an end to litigation and the
parties' right to due process.In numerous cases,
this Court has allowed liberal construction of
the rules when to do so would serve the
demands of substantial justice and equity.
The petitioners point out that although Section
21 of the Revenue Code of Manila was not itself
unconstitutional or invalid, its enforcement
against the petitioners constituted double
taxation because the local business taxes under
Section 15 and Section 17 of the Revenue Code
of Manila were already being paid by them.31
They contend that the proviso in Section 21
exempted all registered businesses in the City of
Manila from paying the tax imposed under
Section 21;32 and that the exemption was more
in accord with Section 143 of the Local
Government Code,33 the law that vested in the
municipal and city governments the power to
impose business taxes.
The respondents counter, however, that double
taxation did not occur from the imposition and
collection of the tax pursuant to Section 21 of
the Revenue Code of Manila;34 that the taxes
imposed pursuant to Section 21 were in the
concept of indirect taxes upon the consumers
of the goods and services sold by a business
establishment;35 and that the petitioners did
not exhaust their administrative remedies by
first appealing to the Secretary of Justice to
challenge the constitutionalityor legality of the
tax ordinance.36
In resolving the issue of double taxation
involving Section 21 of the Revenue Code of
Manila, the Court is mindful of the ruling in City
of Manila v. Coca-Cola Bottlers Philippines,
Inc.,37 which has been reiterated in Swedish
Match Philippines, Inc. v. The Treasurer of the
City of Manila.38 In the latter, the Court has
held:
x x x [T]he issue of double taxation is not novel,
as it has already been settled by this Court in
The City of Manila v. Coca-Cola Bottlers
Philippines, Inc.,in this wise:
Petitioners obstinately ignore the exempting
proviso in Section 21 of Tax Ordinance No.
7794, to their own detriment.1âwphi1 Said
exempting proviso was precisely included in
said section so as to avoid double taxation.
Double taxation means taxingthe same
property twice when it should be taxed only
once; that is, "taxing the same person twice by
the same jurisdictionfor the same thing." It is
obnoxious when the taxpayer is taxed twice,
when it should be but once. Otherwise
described as "direct duplicate taxation," the
two taxes must be imposed on the same subject
matter, for the same purpose, by the same
taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes
must be of the same kind or character.
Using the aforementioned test, the Court finds
that there is indeed double taxation if
respondent is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794,
since these are being imposed: (1) on the same
subject matter – the privilege of doing business
in the City of Manila; (2) for the same purpose –
to make persons conducting business within the
City of Manila contribute tocity revenues; (3) by
the same taxing authority – petitioner Cityof
Manila; (4) within the same taxing jurisdiction –
within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods – per
calendar year; and (6) of the same kind or
character – a local business tax imposed on
gross sales or receipts of the business.
The distinction petitioners attempt to make
between the taxes under Sections 14 and 21 of
Tax Ordinance No. 7794 is specious. The Court
revisits Section 143 of the LGC, the very source
of the power of municipalities and cities to
impose a local business tax, and to which any
local business tax imposed by petitioner City of
Manila must conform. It is apparent from a
perusal thereof that when a municipality or city
has already imposed a business tax on
manufacturers, etc.of liquors, distilled spirits,
wines, and any other article of commerce,
pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the
same manufacturers, etc.to a business tax
under Section 143(h) of the same Code. Section
143(h) may be imposed only on businesses that
are subject to excise tax, VAT, or percentagetax
under the NIRC, and that are "not otherwise
specified in preceding paragraphs." In the same
way, businesses such as respondent’s, already
subject to a local business tax under Section 14
of Tax Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be
made liable for local business tax under Section
21 of the same Tax Ordinance [which is based
on Section 143(h) of the LGC].
Based on the foregoing reasons, petitioner
should not have been subjected to taxes under
Section 21 of the ManilaRevenue Code for the
fourth quarter of 2001, considering thatit had
already been paying local business tax under
Section 14 of the same ordinance.
xxxx
Accordingly, respondent’s assessment under
both Sections 14 and 21 had no basis. Petitioner
is indeed liable to pay business taxes to the City
of Manila; nevertheless, considering that the
former has already paid these taxes under
Section 14 of the Manila Revenue Code, it is
exempt from the same payments under Section
21 of the same code. Hence, payments made
under Section 21 must be refunded in favor of
petitioner.
It is undisputed thatpetitioner paid business
taxes based on Sections 14 and 21 for the
fourth quarter of 2001 in the total amount of
₱470,932.21. Therefore, it is entitled to a
refund of ₱164,552.04 corresponding to the
payment under Section 21 of the Manila
Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers
Philippines, Inc. and Swedish Match Philippines,
Inc., the Court now holds that all the elements
of double taxation concurred upon the Cityof
Manila’s assessment on and collection from the
petitioners of taxes for the first quarter of 1999
pursuant to Section 21 of the Revenue Code of
Manila.
Firstly, because Section 21 of the Revenue Code
of Manila imposed the tax on a person who sold
goods and services in the course of trade or
business based on a certain percentage ofhis
gross sales or receipts in the preceding calendar
year, while Section 15 and Section 17 likewise
imposed the tax on a person who sold goods
and services in the course of trade or business
but only identified such person with
particularity,
namely,
the
wholesaler,
distributor or dealer (Section 15), and the
retailer (Section 17), all the taxes – being
imposed on the privilege of doing business in
the City of Manila in order to make the
taxpayers contributeto the city’s revenues –
were imposed on the same subject matter and
for the same purpose.
Secondly, the taxes were imposed by the same
taxing authority (the City of Manila) and within
the same jurisdiction in the same taxing period
(i.e., per calendar year).
Thirdly, the taxes were all in the nature of local
business taxes.
We note that although Coca-Cola Bottlers
Philippines, Inc. and Swedish Match Philippines,
Inc. involved Section 21 vis-à-vis Section 14 (Tax
on Manufacturers, Assemblers and Other
Processors)39 of the Revenue Code of Manila,
the legal principlesenunciated therein should
similarly apply because Section 15 (Tax on
Wholesalers, Distributors, or Dealers)and
Section 17 (Tax on Retailers) of the Revenue
Code of Manila imposed the same nature of tax
as that imposed under Section 14, i.e., local
business tax, albeit on a different subject
matter or group of taxpayers.
In fine, the imposition of the tax under Section
21 of the Revenue Code of Manila constituted
double taxation, and the taxes collected
pursuant thereto must be refunded.
WHEREFORE, the Court GRANTS the petition for
review on certiorari; REVERSES and SETS ASIDE
the resolutions promulgated on June 18, 2007
and November 14, 2007 in CA-G.R. SP No.
72191; and DIRECTS the City of Manila to
refund the payments made by the petitioners of
the taxes assessed and collected for the first
quarter of 1999 pursuant to Section 21 of the
Revenue Code of Manila.
No pronouncement on costs of suit.
SO ORDERED.
G.R. No. 127105
June 25, 1999
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under
Rule 45 of the Rules of Court seeking to set
aside the decision of the Court of Appeals dated
November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax
Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of
Tax Appeals are not disputed, to wit:
[Respondent],
a
domestic
corporation
organized and operating under the Philippine
laws, entered into a license agreement with SC
Johnson and Son, United States of America
(USA), a non-resident foreign corporation based
in the U.S.A. pursuant to which the
[respondent] was granted the right to use the
trademark, patents and technology owned by
the latter including the right to manufacture,
package and distribute the products covered by
the Agreement and secure assistance in
management, marketing and production from
SC Johnson and Son, U. S. A.
The said License Agreement was duly registered
with the Technology Transfer Board of the
Bureau of Patents, Trade Marks and Technology
Transfer under Certificate of Registration No.
8064 (Exh. "A").
For the use of the trademark or technology,
[respondent] was obliged to pay SC Johnson
and Son, USA royalties based on a percentage
of net sales and subjected the same to 25%
withholding tax on royalty payments which
[respondent] paid for the period covering July
1992 to May 1993 in the total amount of
P1,603,443.00 (Exhs. "B" to "L" and
submarkings).
On October 29, 1993, [respondent] filed with
the International Tax Affairs Division (ITAD) of
the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, "the
antecedent facts attending [respondent's] case
fall squarely within the same circumstances
under which said MacGeorge and Gillete rulings
were issued. Since the agreement was approved
by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the
[respondent]. We therefore submit that
royalties paid by the [respondent] to SC
Johnson and Son, USA is only subject to 10%
withholding tax pursuant to the most-favored
nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West
Germany Tax Treaty [Article 12 (2) (b)]"
(Petition for Review [filed with the Court of
Appeals], par. 12). [Respondent's] claim for
there fund of P963,266.00 was computed as
follows:
Gross 25%
10%
Month/ Royalty Withholding
Withholding
Year Fee
Tax Paid
Tax
Balance
——— ——— ——— ——— ———
July 1992
559,878
55,988 83,982
August 567,935
85,190
139,970
141,984
56,794
September
595,956
59,596 89,393
148,989
October
634,405
63,441 95,161
158,601
November
620,885
62,089 93,133
155,221
December
383,276
57,491
95,819 36,328
Jan 1993
602,451
68,245 102,368
170,630
February
565,845
56,585 84,877
141,461
March 547,253
82,088
136,813
54,725
April
660,810
99,122
165,203
66,081
May
603,076
90,461
150,769
60,308
————
————
———
————
P6,421,770
P1,605,443
P963,2661
P642,177
========
========
========
========
The Commissioner did not act on said claim for
refund. Private respondent S.C. Johnson & Son,
Inc. (S.C. Johnson) then filed a petition for
review before the Court of Tax Appeals (CTA)
where the case was docketed as CTA Case No.
5136, to claim a refund of the overpaid
withholding tax on royalty payments from July
1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals
rendered its decision in favor of S.C. Johnson
and ordered the Commissioner of Internal
Revenue to issue a tax credit certificate in the
amount of P963,266.00 representing overpaid
withholding tax on royalty payments, beginning
July, 1992 to May, 1993.2
The Commissioner of Internal Revenue thus
filed a petition for review with the Court of
Appeals which rendered the decision subject of
this appeal on November 7, 1996 finding no
merit in the petition and affirming in toto the
CTA ruling.3
This petition for review was filed by the
Commissioner of Internal Revenue raising the
following issue:
THE COURT OF APPEALS ERRED IN RULING THAT
SC JOHNSON AND SON, USA IS ENTITLED TO
THE "MOST FAVORED NATION" TAX RATE OF
10% ON ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b)
(iii) of the RP-US Tax Treaty, which is known as
the "most favored nation" clause, the lowest
rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of
the United States from sources within the
Philippines only if the circumstances of the
resident of the United States are similar to
those of the resident of West Germany. Since
the RP-US Tax Treaty contains no "matching
credit" provision as that provided under Article
24 of the RP-West Germany Tax Treaty, the tax
on royalties under the RP-US Tax Treaty is not
paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty.
Even assuming that the phrase "paid under
similar circumstances" refers to the payment of
royalties, and not taxes, as held by the Court of
Appeals, still, the "most favored nation" clause
cannot be invoked for the reason that when a
tax
treaty
contemplates
circumstances
attendant to the payment of a tax, or royalty
remittances for that matter, these must
necessarily refer to circumstances that are taxrelated. Finally, petitioner argues that since S.C.
Johnson's invocation of the "most favored
nation" clause is in the nature of a claim for
exemption from the application of the regular
tax rate of 25% for royalties, the provisions of
the treaty must be construed strictly against it.
In its Comment, private respondent S.C.
Johnson avers that the instant petition should
be denied (1) because it contains a defective
certification against forum shopping as required
under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner
herself but by her counsel; and (2) that the
"most favored nation" clause under the RP-US
Tax Treaty refers to royalties paid under similar
circumstances as those royalties subject to tax
in other treaties; that the phrase "paid under
similar circumstances" does not refer to
payment of the tax but to the subject matter of
the tax, that is, royalties, because the "most
favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal
provisions contained in another tax treaty
wherein the country of residence of such
taxpayer is also a party thereto, subject to the
basic condition that the subject matter of
taxation in that other tax treaty is the same as
that in the original tax treaty under which the
taxpayer is liable; thus, the RP-US Tax Treaty
speaks of "royalties of the same kind paid under
similar circumstances". S.C. Johnson also
contends that the Commissioner is estopped
from insisting on her interpretation that the
phrase "paid under similar circumstances"
refers to the manner in which the tax is paid, for
the reason that said interpretation is embodied
in Revenue Memorandum Circular ("RMC") 3992 which was already abandoned by the
Commissioner's predecessor in 1993; and was
expressly revoked in BIR Ruling No. 052-95
which stated that royalties paid to an American
licensor are subject only to 10% withholding tax
pursuant to Art 13(2)(b)(iii) of the RP-US Tax
Treaty in relation to the RP-West Germany Tax
Treaty. Said ruling should be given retroactive
effect except if such is prejudicial to the
taxpayer pursuant to Section 246 of the
National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that
the certification against forum shopping was
signed by petitioner's counsel is not a fatal
defect as to warrant the dismissal of this
petition since Circular No. 28-91 applies only to
original actions and not to appeals, as in the
instant case. Moreover, the requirement that
the certification should be signed by petitioner
and not by counsel does not apply to petitioner
who has only the Office of the Solicitor General
as statutory counsel. Petitioner reiterates that
even if the phrase "paid under similar
circumstances" embodied in the most favored
nation clause of the RP-US Tax Treaty refers to
the payment of royalties and not taxes, still the
presence or absence of a "matching credit"
provision in the said RP-US Tax Treaty would
constitute a material circumstance to such
payment and would be determinative of the
said clause's application.1âwphi1.nêt
We address first the objection raised by private
respondent that the certification against forum
shopping was not executed by the petitioner
herself but by her counsel, the Office of the
Solicitor General (O.S.G.) through one of its
Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT:
ADDITIONAL REQUISITES FOR
PETITIONS FILED WITH THE SUPREME COURT
AND THE COURT OF APPEALS TO PREVENT
FORUM SHOPPING OR MULTIPLE FILING OF
PETITIONS AND COMPLAINTS
TO:
xxx
xxx
xxx
The attention of the Court has been called to
the filing of multiple petitions and complaints
involving the same issues in the Supreme Court,
the Court of Appeals or other tribunals or
agencies, with the result that said courts,
tribunals or agencies have to resolve the same
issues.
(1)
To avoid the foregoing, in every petition
filed with the Supreme Court or the Court of
Appeals, the petitioner aside from complying
with pertinent provisions of the Rules of Court
and existing circulars, must certify under oath
to all of the following facts or undertakings: (a)
he has not theretofore commenced any other
action or proceeding involving the same issues
in the Supreme Court, the Court of Appeals, or
any tribunal or
agency; . . .
(2)
Any violation of this revised Circular will
entail the following sanctions: (a) it shall be a
cause for the summary dismissal of the multiple
petitions or complaints; . . .
The circular expressly requires that a certificate
of non-forum shopping should be attached to
petitions filed before this Court and the Court of
Appeals. Petitioner's allegation that Circular No.
28-91 applies only to original actions and not to
appeals as in the instant case is not supported
by the text nor by the obvious intent of the
Circular which is to prevent multiple petitions
that will result in the same issue being resolved
by different courts.
Anent the requirement that the party, not
counsel, must certify under oath that he has not
commenced any other action involving the
same issues in this Court or the Court of
Appeals or any other tribunal or agency, we are
inclined to accept petitioner's submission that
since the OSG is the only lawyer for the
petitioner, which is a government agency
mandated under Section 35, Chapter 12, title III,
Book IV of the 1987 Administrative Code4 to be
represented only by the Solicitor General, the
certification executed by the OSG in this case
constitutes substantial compliance with Circular
No. 28-91.
With respect to the merits of this petition, the
main point of contention in this appeal is the
interpretation of Article 13 (2) (b) (iii) of the RPUS Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties
received by a non-resident foreign corporation.
The provision states insofar as pertinent
that —
1)
Royalties derived by a resident of one
of the Contracting States from sources within
the other Contracting State may be taxed by
both Contracting States.
2)
However, the tax imposed by that
Contracting State shall not exceed.
a)
In the case of the United States, 15
percent of the gross amount of the royalties,
and
b)
In the case of the Philippines, the least
of:
(i)
25 percent of the gross amount of the
royalties;
(ii)
15 percent of the gross amount of the
royalties, where the royalties are paid by a
corporation registered with the Philippine
Board of Investments and engaged in preferred
areas of activities; and
(iii)
the lowest rate of Philippine tax that
may be imposed on royalties of the same kind
paid under similar circumstances to a resident
of a third State.
xxx
xxx
xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims
that on the basis of the quoted provision, it is
entitled to the concessional tax rate of 10
percent on royalties based on Article 12 (2) (b)
of the RP-Germany Tax Treaty which provides:
(2)
However, such royalties may also be
taxed in the Contracting State in which they
arise, and according to the law of that State, but
the tax so charged shall not exceed:
xxx
xxx
xxx
b)
10 percent of the gross amount of
royalties arising from the use of, or the right to
use, any patent, trademark, design or model,
plan, secret formula or process, or from the use
of or the right to use, industrial, commercial, or
scientific equipment, or for information
concerning industrial, commercial or scientific
experience.
For as long as the transfer of technology, under
Philippine law, is subject to approval, the
limitation of the tax rate mentioned under b)
shall, in the case of royalties arising in the
Republic of the Philippines, only apply if the
contract giving rise to such royalties has been
approved by the Philippine competent
authorities.
Unlike the RP-US Tax Treaty, the RP-Germany
Tax Treaty allows a tax credit of 20 percent of
the gross amount of such royalties against
German income and corporation tax for the
taxes payable in the Philippines on such
royalties where the tax rate is reduced to 10 or
15 percent under such treaty. Article 24 of the
RP-Germany Tax Treaty states —
1)
Tax shall be determined in the case of a
resident of the Federal Republic of Germany as
follows:
xxx
xxx
xxx
b)
Subject to the provisions of German tax
law regarding credit for foreign tax, there shall
be allowed as a credit against German income
and corporation tax payable in respect of the
following items of income arising in the
Republic of the Philippines, the tax paid under
the laws of the Philippines in accordance with
this Agreement on:
xxx
xxx
xxx
dd)
royalties, as defined in paragraph 3 of
Article 12;
xxx
xxx
xxx
c)
For the purpose of the credit referred in
subparagraph; b) the Philippine tax shall be
deemed to be
xxx
xxx
xxx
cc)
in the case of royalties for which the tax
is reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the
gross amount of such royalties.
xxx
xxx
xxx
According to petitioner, the taxes upon
royalties under the RP-US Tax Treaty are not
paid under circumstances similar to those in the
RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in
the former convention and private respondent
cannot invoke the concessional tax rate on the
strength of the most favored nation clause in
the RP-US Tax Treaty. Petitioner's position is
explained thus:
Under the foregoing provision of the RP-West
Germany Tax Treaty, the Philippine tax paid on
income from sources within the Philippines is
allowed as a credit against German income and
corporation tax on the same income. In the case
of royalties for which the tax is reduced to 10 or
15 percent according to paragraph 2 of Article
12 of the RP-West Germany Tax Treaty, the
credit shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a
German resident from sources within the
Philippines arising from the use of, or the right
to use, any patent, trade mark, design or model,
plan, secret formula or process, is taxed at 10%
of the gross amount of said royalty under
certain conditions. The rate of 10% is imposed if
credit against the German income and
corporation tax on said royalty is allowed in
favor of the German resident. That means the
rate of 10% is granted to the German taxpayer
if he is similarly granted a credit against the
income and corporation tax of West Germany.
The clear intent of the "matching credit" is to
soften the impact of double taxation by
different jurisdictions.
The RP-US Tax Treaty contains no similar
"matching credit" as that provided under the
RP-West Germany Tax Treaty. Hence, the tax on
royalties under the RP-US Tax Treaty is not paid
under similar circumstances as those obtaining
in the RP-West Germany Tax Treaty. Therefore,
the "most favored nation" clause in the RPWest Germany Tax Treaty cannot be availed of
in interpreting the provisions of the RP-US Tax
Treaty.5
The petition is meritorious.
We are unable to sustain the position of the
Court of Tax Appeals, which was upheld by the
Court of Appeals, that the phrase "paid under
similar circumstances in Article 13 (2) (b), (iii) of
the RP-US Tax Treaty should be interpreted to
refer to payment of royalty, and not to the
payment of the tax, for the reason that the
phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third
state". The respondent court held that "Words
are to be understood in the context in which
they are used", and since what is paid to a
resident of a third state is not a tax but a royalty
"logic instructs" that the treaty provision in
question should refer to royalties of the same
kind paid under similar circumstances.
The above construction is based principally on
syntax or sentence structure but fails to take
into account the purpose animating the treaty
provisions in point. To begin with, we are not
aware of any law or rule pertinent to the
payment of royalties, and none has been
brought to our attention, which provides for the
payment of royalties under dissimilar
circumstances. The tax rates on royalties and
the circumstances of payment thereof are the
same for all the recipients of such royalties and
there is no disparity based on nationality in the
circumstances of such payment.6 On the other
hand, a cursory reading of the various tax
treaties will show that there is no similarity in
the provisions on relief from or avoidance of
double taxation7 as this is a matter of
negotiation between the contracting parties.8
As will be shown later, this dissimilarity is true
particularly in the treaties between the
Philippines and the United States and between
the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of
bilateral treaties which the Philippines has
entered into for the avoidance of double
taxation.9 The purpose of these international
agreements is to reconcile the national fiscal
legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation
in two different jurisdictions. 10 More precisely,
the tax conventions are drafted with a view
towards the elimination of international
juridical double taxation, which is defined as the
imposition of comparable taxes in two or more
states on the same taxpayer in respect of the
same subject matter and for identical periods.
11 The apparent rationale for doing away with
double taxation is of encourage the free flow of
goods and services and the movement of
capital, technology and persons between
countries, conditions deemed vital in creating
robust and dynamic economies. 12 Foreign
investments will only thrive in a fairly
predictable and reasonable international
investment climate and the protection against
double taxation is crucial in creating such a
climate. 13
Double taxation usually takes place when a
person is resident of a contracting state and
derives income from, or owns capital in, the
other contracting state and both states impose
tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts
to several methods. First, it sets out the
respective rights to tax of the state of source or
situs and of the state of residence with regard
to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on
one of the contracting states; however, for
other items of income or capital, both states are
given the right to tax, although the amount of
tax that may be imposed by the state of source
is limited. 14
The second method for the elimination of
double taxation applies whenever the state of
source is given a full or limited right to tax
together with the state of residence. In this
case, the treaties make it incumbent upon the
state of residence to allow relief in order to
avoid double taxation. There are two methods
of relief — the exemption method and the
credit method. In the exemption method, the
income or capital which is taxable in the state of
source or situs is exempted in the state of
residence, although in some instances it may be
taken into account in determining the rate of
tax applicable to the taxpayer's remaining
income or capital. On the other hand, in the
credit method, although the income or capital
which is taxed in the state of source is still
taxable in the state of residence, the tax paid in
the former is credited against the tax levied in
the latter. The basic difference between the
two methods is that in the exemption method,
the focus is on the income or capital itself,
whereas the credit method focuses upon the
tax.
In negotiating tax treaties, the underlying
rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the
expectation that the tax given up for this
particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined
that the phrase "royalties paid under similar
circumstances" in the most favored nation
clause of the US-RP Tax Treaty necessarily
contemplated "circumstances that are taxrelated".
In the case at bar, the state of source is the
Philippines because the royalties are paid for
the right to use property or rights, i.e.
trademarks, patents and technology, located
within the Philippines. 17 The United States is
the state of residence since the taxpayer, S. C.
Johnson and Son, U. S. A., is based there. Under
the RP-US Tax Treaty, the state of residence and
the state of source are both permitted to tax
the royalties, with a restraint on the tax that
may be collected by the state of source. 18
Furthermore, the method employed to give
relief from double taxation is the allowance of a
tax credit to citizens or residents of the United
States (in an appropriate amount based upon
the taxes paid or accrued to the Philippines)
against the United States tax, but such amount
shall not exceed the limitations provided by
United States law for the taxable year. 19 Under
Article 13 thereof, the Philippines may impose
one of three rates — 25 percent of the gross
amount of the royalties; 15 percent when the
royalties are paid by a corporation registered
with the Philippine Board of Investments and
engaged in preferred areas of activities; or the
lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid
under similar circumstances to a resident of a
third state.
Given the purpose underlying tax treaties and
the rationale for the most favored nation
clause, the concessional tax rate of 10 percent
provided for in the RP-Germany Tax Treaty
should apply only if the taxes imposed upon
royalties in the RP-US Tax Treaty and in the RPGermany Tax Treaty are paid under similar
circumstances. This would mean that private
respondent must prove that the RP-US Tax
Treaty grants similar tax reliefs to residents of
the United States in respect of the taxes
imposable upon royalties earned from sources
within the Philippines as those allowed to their
German counterparts under the RP-Germany
Tax Treaty.
The RP-US and the RP-West Germany Tax
Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax
Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of
the gross amount of royalties paid under the
law of the Philippines. On the other hand,
Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for
double taxation, does not provide for similar
crediting of 20% of the gross amount of
royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in
the following manner:
1)
In accordance with the provisions and
subject to the limitations of the law of the
United States (as it may be amended from time
to time without changing the general principle
thereof), the United States shall allow to a
citizen or resident of the United States as a
credit against the United States tax the
appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United
States corporation owning at least 10 percent of
the voting stock of a Philippine corporation
from which it receives dividends in any taxable
year, shall allow credit for the appropriate
amount of taxes paid or accrued to the
Philippines by the Philippine corporation paying
such dividends with respect to the profits out of
which such dividends are paid. Such appropriate
amount shall be based upon the amount of tax
paid or accrued to the Philippines, but the
credit shall not exceed the limitations (for the
purpose of limiting the credit to the United
States tax on income from sources within the
Philippines or on income from sources outside
the United States) provided by United States
law for the taxable year. . . .
The reason for construing the phrase "paid
under similar circumstances" as used in Article
13 (2) (b) (iii) of the RP-US Tax Treaty as
referring to taxes is anchored upon a logical
reading of the text in the light of the
fundamental purpose of such treaty which is to
grant an incentive to the foreign investor by
lowering the tax and at the same time crediting
against the domestic tax abroad a figure higher
than what was collected in the Philippines.
In one case, the Supreme Court pointed out
that laws are not just mere compositions, but
have ends to be achieved and that the general
purpose is a more important aid to the meaning
of a law than any rule which grammar may lay
down. 20 It is the duty of the courts to look to
the object to be accomplished, the evils to be
remedied, or the purpose to be subserved, and
should give the law a reasonable or liberal
construction which will best effectuate its
purpose. 21 The Vienna Convention on the Law
of Treaties states that a treaty shall be
interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of
the treaty in their context and in the light of its
object and
purpose. 22
As stated earlier, the ultimate reason for
avoiding double taxation is to encourage
foreign investors to invest in the Philippines — a
crucial economic goal for developing countries.
23 The goal of double taxation conventions
would be thwarted if such treaties did not
provide for effective measures to minimize, if
not completely eliminate, the tax burden laid
upon the income or capital of the investor.
Thus, if the rates of tax are lowered by the state
of source, in this case, by the Philippines, there
should be a concomitant commitment on the
part of the state of residence to grant some
form of tax relief, whether this be in the form of
a tax credit or exemption. 24 Otherwise, the tax
which could have been collected by the
Philippine government will simply be collected
by another state, defeating the object of the tax
treaty since the tax burden imposed upon the
investor would remain unrelieved. If the state
of residence does not grant some form of tax
relief to the investor, no benefit would redound
to the Philippines, i.e., increased investment
resulting from a favorable tax regime, should it
impose a lower tax rate on the royalty earnings
of the investor, and it would be better to
impose the regular rate rather than lose muchneeded revenues to another country.
At the same time, the intention behind the
adoption of the provision on "relief from double
taxation" in the two tax treaties in question
should be considered in light of the purpose
behind the most favored nation clause.
The purpose of a most favored nation clause is
to grant to the contracting party treatment not
less favorable than that which has been or may
be granted to the "most favored" among other
countries. 25 The most favored nation clause is
intended to establish the principle of equality of
international treatment by providing that the
citizens or subjects of the contracting nations
may enjoy the privileges accorded by either
party to those of the most favored nation. 26
The essence of the principle is to allow the
taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to
which the country of residence of such taxpayer
is also a party provided that the subject matter
of taxation, in this case royalty income, is the
same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US
Tax Treaty and Article 12 (2) (b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of
tax on royalties for the use of trademark,
patent, and technology. The entitlement of the
10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would
derogate from the design behind the most
grant equality of international treatment since
the tax burden laid upon the income of the
investor is not the same in the two countries.
The similarity in the circumstances of payment
of taxes is a condition for the enjoyment of
most favored nation treatment precisely to
underscore the need for equality of treatment.
We accordingly agree with petitioner that since
the RP-US Tax Treaty does not give a matching
tax credit of 20 percent for the taxes paid to the
Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the
10 percent rate granted under the latter treaty
for the reason that there is no payment of taxes
on royalties under similar circumstances.
It bears stress that tax refunds are in the nature
of tax exemptions. As such they are regarded as
in derogation of sovereign authority and to be
construed strictissimi juris against the person or
entity claiming the exemption. 27 The burden of
proof is upon him who claims the exemption in
his favor and he must be able to justify his claim
by the clearest grant of organic or statute law.
28 Private respondent is claiming for a refund of
the alleged overpayment of tax on royalties;
however, there is nothing on record to support
a claim that the tax on royalties under the RPUS Tax Treaty is paid under similar
circumstances as the tax on royalties under the
RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant
petition is GRANTED. The decision dated May 7,
1996 of the Court of Tax Appeals and the
decision dated November 7, 1996 of the Court
of Appeals are hereby SET ASIDE.
SO ORDERED.
G.R. No. 188550
August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH,
PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche
Bank AG Manila Branch (petitioner) under Rule
45 of the 1997 Rules of Civil Procedure assailing
the Court of Tax Appeals En Banc (CTA En Banc)
Decision2 dated 29 May 2009 and Resolution3
dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
issuance of its tax credit certificate for the
amount of PHP 22,562,851.17 representing the
alleged excess BPRT paid on branch profits
remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second
Division found that petitioner indeed paid the
total
amount
of
PHP
67,688,553.51
representing the 15% BPRT on its RBU profits
amounting to PHP 451,257,023.29 for 2002 and
prior taxable years. Records also disclose that
for the year 2003, petitioner remitted to DB
Germany the amount of EURO 5,174,847.38 (or
PHP 330,175,961.88 at the exchange rate of
PHP 63.804:1 EURO), which is net of the 15%
BPRT.
In accordance with Section 28(A)(5)4 of the
National Internal Revenue Code (NIRC) of 1997,
petitioner withheld and remitted to respondent
on 21 October 2003 the amount of PHP
67,688,553.51, which represented the fifteen
percent (15%) branch profit remittance tax
(BPRT) on its regular banking unit (RBU) net
income remitted to Deutsche Bank Germany
(DB Germany) for 2002 and prior taxable
years.5
However, the claim of petitioner for a refund
was denied on the ground that the application
for a tax treaty relief was not filed with ITAD
prior to the payment by the former of its BPRT
and actual remittance of its branch profits to DB
Germany, or prior to its availment of the
preferential rate of ten percent (10%) under the
RP-Germany Tax Treaty provision. The court a
quo held that petitioner violated the fifteen (15)
day period mandated under Section III
paragraph (2) of Revenue Memorandum Order
(RMO) No. 1-2000.
Believing that it made an overpayment of the
BPRT, petitioner filed with the BIR Large
Taxpayers Assessment and Investigation
Division on 4 October 2005 an administrative
claim for refund or issuance of its tax credit
certificate in the total amount of PHP
22,562,851.17. On the same date, petitioner
requested from the International Tax Affairs
Division (ITAD) a confirmation of its entitlement
to the preferential tax rate of 10% under the
RP-Germany Tax Treaty.6
Further, the CTA Second Division relied on
Mirant (Philippines) Operations Corporation
(formerly
Southern
Energy
Asia-Pacific
Operations [Phils.], Inc.) v. Commissioner of
Internal Revenue9 (Mirant) where the CTA En
Banc ruled that before the benefits of the tax
treaty may be extended to a foreign
corporation wishing to avail itself thereof, the
latter should first invoke the provisions of the
tax treaty and prove that they indeed apply to
the corporation.
Alleging the inaction of the BIR on its
administrative claim, petitioner filed a Petition
for Review7 with the CTA on 18 October 2005.
Petitioner reiterated its claim for the refund or
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second
Division’s Decision dated 29 August 2008 and
Resolution dated 14 January 2009. Citing
Mirant, the CTA En Banc held that a ruling from
the ITAD of the BIR must be secured prior to the
availment of a preferential tax rate under a tax
treaty. Applying the principle of stare decisis et
non quieta movere, the CTA En Banc took into
consideration that this Court had denied the
Petition in G.R. No. 168531 filed by Mirant for
failure to sufficiently show any reversible error
in the assailed judgment.11 The CTA En Banc
ruled that once a case has been decided in one
way, any other case involving exactly the same
point at issue should be decided in the same
manner.
The court likewise ruled that the 15-day rule for
tax treaty relief application under RMO No. 12000 cannot be relaxed for petitioner, unlike in
CBK Power Company Limited v. Commissioner
of Internal Revenue.12 In that case, the rule
was relaxed and the claim for refund of excess
final withholding taxes was partially granted.
While it issued a ruling to CBK Power Company
Limited after the payment of withholding taxes,
the ITAD did not issue any ruling to petitioner
even if it filed a request for confirmation on 4
October 2005 that the remittance of branch
profits to DB Germany is subject to a
preferential tax rate of 10% pursuant to Article
10 of the RP-Germany Tax Treaty.
ISSUE
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.
THE COURT’S RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit
remitted to its head office shall be subject to a
tax of 15% based on the total profits applied for
or earmarked for remittance without any
deduction of the tax component. However,
petitioner invokes paragraph 6, Article 10 of the
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.
On the other hand, the BIR issued RMO No. 12000, which requires that any availment of the
tax treaty relief must be preceded by an
application with ITAD at least 15 days before
the transaction. The Order was issued to
streamline the processing of the application of
tax treaty relief in order to improve efficiency
and service to the taxpayers. Further, it also
aims to prevent the consequences of an
erroneous interpretation and/or application of
the treaty provisions (i.e., filing a claim for a tax
refund/credit for the overpayment of taxes or
for
deficiency
tax
liabilities
for
underpayment).13
The crux of the controversy lies in the
implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has
met all the conditions under Article 10 of the
RP-Germany Tax Treaty, the CTA erred in
denying its claim solely on the basis of RMO No.
1-2000. The filing of a tax treaty relief
application is not a condition precedent to the
availment of a preferential tax rate. Further,
petitioner posits that, contrary to the ruling of
the CTA, Mirant is not a binding judicial
precedent to deny a claim for refund solely on
the basis of noncompliance with RMO No. 12000.
Respondent counters that the requirement of
prior application under RMO No. 1-2000 is
mandatory in character. RMO No. 1-2000 was
issued pursuant to the unquestioned authority
of the Secretary of Finance to promulgate rules
and
regulations
for
the
effective
implementation of the NIRC. Thus, courts
cannot ignore administrative issuances which
partakes the nature of a statute and have in
their favor a presumption of legality.
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.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on
Mirant is not a binding precedent. The Court
has clarified this matter in Philippine Health
Care Providers, Inc. v. Commissioner of Internal
Revenue14 as follows:
It is true that, although contained in a minute
resolution, our dismissal of the petition was a
disposition of the merits of the case. When we
dismissed the petition, we effectively affirmed
the CA ruling being questioned. As a result, our
ruling in that case has already become final.
When a minute resolution denies or dismisses a
petition for failure to comply with formal and
substantive requirements, the challenged
decision, together with its findings of fact and
legal conclusions, are deemed sustained. But
what is its effect on other cases?
previously disposed of by the Court thru a
minute resolution dated February 17, 2003
sustaining the ruling of the CA. Nonetheless, the
Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two
cases involved different subject matters as they
were concerned with the taxable income of
different taxable years.
Besides, there are substantial, not simply
formal, distinctions between a minute
resolution and a decision. The constitutional
requirement under the first paragraph of
Section 14, Article VIII of the Constitution that
the facts and the law on which the judgment is
based must be expressed clearly and distinctly
applies only to decisions, not to minute
resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices,
unlike a decision. It does not require the
certification of the Chief Justice. Moreover,
unlike decisions, minute resolutions are not
published in the Philippine Reports. Finally, the
proviso of Section 4(3) of Article VIII speaks of a
decision. Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute
binding precedent in a decision duly signed by
the members of the Court and certified by the
Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the
doctrine laid down in that Decision cannot bind
this Court in cases of a similar nature. There are
differences in parties, taxes, taxable periods,
and treaties involved; more importantly, the
disposition of that case was made only through
a minute resolution.
Tax Treaty vs. RMO No. 1-2000
With respect to the same subject matter and
the same issues concerning the same parties, it
constitutes res judicata. However, if other
parties or another subject matter (even with
the same parties and issues) is involved, the
minute resolution is not binding precedent.
Thus, in CIR v. Baier-Nickel, the Court noted that
a previous case, CIR v. Baier-Nickel involving the
same parties and the same issues, was
Our Constitution provides for adherence to the
general principles of international law as part of
the law of the land.15 The time-honored
international principle of pacta sunt servanda
demands the performance in good faith of
treaty obligations on the part of the states that
enter into the agreement. Every treaty in force
is binding upon the parties, and obligations
under the treaty must be performed by them in
good faith.16 More importantly, treaties have
the force and effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the
national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid
simultaneous taxations in two different
jurisdictions."18 CIR v. S.C. Johnson and Son,
Inc. further clarifies that "tax conventions are
drafted with a view towards the elimination of
international juridical double taxation, which is
defined as the imposition of comparable taxes
in two or more states on the same taxpayer in
respect of the same subject matter and for
identical periods. The apparent rationale for
doing away with double taxation is to
encourage the free flow of goods and services
and the movement of capital, technology and
persons between countries, conditions deemed
vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international
investment climate and the protection against
double taxation is crucial in creating such a
climate."19
Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of
international juridical double taxation, which is
why they are also known as double tax treaty or
double tax agreements.
"A state that has contracted valid international
obligations is bound to make in its legislations
those modifications that may be necessary to
ensure the fulfillment of the obligations
undertaken."20 Thus, laws and issuances must
ensure that the reliefs granted under tax
treaties are accorded to the parties entitled
thereto. The BIR must not impose additional
requirements that would negate the availment
of the reliefs provided for under international
agreements. More so, when the RP-Germany
Tax Treaty does not provide for any prerequisite for the availment of the benefits
under said agreement.
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 15day period. We recognize the clear intention of
the BIR in implementing RMO No. 1-2000, but
the 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. The denial of the availment of tax
relief for the failure of a taxpayer to apply
within the prescribed period under the
administrative issuance would impair the value
of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely
operate to confirm the entitlement of the
taxpayer to the relief.
The obligation to comply with a tax treaty must
take precedence over the objective of RMO No.
1-2000.1âwphi1 Logically, noncompliance with
tax treaties has negative implications on
international relations, and unduly discourages
foreign investors. While the consequences
sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may
be
remedied
through
other
system
management processes, e.g., the imposition of
a fine or penalty. But we cannot totally deprive
those who are entitled to the benefit of a treaty
for failure to strictly comply with an
administrative
issuance
requiring
prior
application for tax treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to
obviate any erroneous interpretation and/or
application of the treaty provisions. The
objective of the BIR is to forestall assessments
against corporations who erroneously availed
themselves of the benefits of the tax treaty but
are not legally entitled thereto, as well as to
save such investors from the tedious process of
claims for a refund due to an inaccurate
application of the tax treaty provisions.
However, as earlier discussed, noncompliance
with the 15-day period for prior application
should not operate to automatically divest
entitlement to the tax treaty relief especially in
claims for refund.
The underlying principle of prior application
with the BIR becomes moot in refund cases,
such as the present case, where the very basis
of the claim is erroneous or there is excessive
payment arising from non-availment of a tax
treaty relief at the first instance. In this case,
petitioner should not be faulted for not
complying with RMO No. 1-2000 prior to the
transaction. It could not have applied for a tax
treaty relief within the period prescribed, or 15
days prior to the payment of its BPRT, precisely
because it erroneously paid the BPRT not on the
basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular
rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical.
Therefore, the fact that petitioner invoked the
provisions of the RP-Germany Tax Treaty when
it requested for a confirmation from the ITAD
before filing an administrative claim for a
refund should be deemed substantial
compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC
provides the taxpayer a remedy for tax recovery
when there has been an erroneous payment of
tax.1âwphi1 The outright denial of petitioner’s
claim for a refund, on the sole ground of failure
to apply for a tax treaty relief prior to the
payment of the BPRT, would defeat the purpose
of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner
applied – though belatedly – for a tax treaty
relief, in substantial compliance with RMO No.
1-2000. A ruling by the BIR would have
confirmed whether petitioner was entitled to
the lower rate of 10% BPRT pursuant to the RPGermany Tax Treaty.
Nevertheless, even without the BIR ruling, the
CTA Second Division found as follows:
Based on the evidence presented, both
documentary and testimonial, petitioner was
able to establish the following facts:
a. That petitioner is a branch office in the
Philippines of Deutsche Bank AG, a corporation
organized and existing under the laws of the
Federal Republic of Germany;
b. That on October 21, 2003, it filed its Monthly
Remittance Return of Final Income Taxes
Withheld under BIR Form No. 1601-F and
remitted the amount of ₱67,688,553.51 as
branch profits remittance tax with the BIR; and
c. That on October 29, 2003, the Bangko Sentral
ng Pilipinas having issued a clearance, petitioner
remitted to Frankfurt Head Office the amount
of EUR5,174,847.38 (or ₱330,175,961.88 at
63.804 Peso/Euro) representing its 2002 profits
remittance.22
The amount of PHP 67,688,553.51 paid by
petitioner represented the 15% BPRT on its RBU
net income, due for remittance to DB Germany
amounting to PHP 451,257,023.29 for 2002 and
prior taxable years.23
Likewise, both the administrative and the
judicial actions were filed within the two-year
prescriptive period pursuant to Section 229 of
the NIRC.24
Clearly, there is no reason to deprive petitioner
of the benefit of a preferential tax rate of 10%
BPRT in accordance with the RP-Germany Tax
Treaty.
Petitioner is liable to pay only the amount of
PHP 45,125,702.34 on its RBU net income
amounting to PHP 451,257,023.29 for 2002 and
prior taxable years, applying the 10% BPRT.
Thus, it is proper to grant petitioner a refund
ofthe
difference
between
the
PHP
67,688,553.51
(15%
BPRT)
and
PHP
45,125,702.34 (10% BPRT) or a total of PHP
22,562,851.17.
WHEREFORE, premises considered, the instant
Petition is GRANTED. Accordingly, the Court of
Tax Appeals En Banc Decision dated 29 May
2009 and Resolution dated 1 July 2009 are
REVERSED and SET ASIDE. A new one is hereby
entered ordering respondent Commissioner of
Internal Revenue to refund or issue a tax credit
certificate in favor of petitioner Deutsche Bank
AG Manila Branch the amount of TWENTY TWO
MILLION FIVE HUNDRED SIXTY TWO THOUSAND
EIGHT HUNDRED FIFTY ONE PESOS AND
SEVENTEEN CENTAVOS (PHP 22,562,851.17),
Philippine
currency,
representing
the
erroneously paid BPRT for 2002 and prior
taxable years.
SO ORDERED.