Re: Tax Exemption; National Government Exemption from Local Taxation Manila International Airport Authority v. CA, City of Parañaque (July 20, 2006) Facts: On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of Parañaque for the taxable years 1992 to 2001. The City of Parañaque issued notices of levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency. The City of Parañaque invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption privileges of “government-owned andcontrolled corporations.” Issue: Are the airport lands and buildings of Manila International Airport Authority (MIAA) exempt from real estate tax imposed by the City of Parañaque? Ruling: MIAA’s Airport Lands and Buildings are exempt from real estate tax imposed by local governments. First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. MIAA is Not a Government-Owned or Controlled Corporation There is no dispute that a government-owned or controlled corporation is not exempt from real estate tax. However, MIAA is not a government-owned or controlled corporation. The Administrative Code provides that a governmentowned or controlled corporation must be “organized as a stock or non-stock corporation.” MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. Section 3 of the Corporation Code defines a stock corporation as one whose “capital stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends x x x.” MIAA has capital but it is not divided into shares of stock. MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code defines a non-stock corporation as “one where no part of its income is distributable as dividends to its members, trustees or officers.” A nonTax Case Digest stock corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. The MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from qualifying as a non-stock corporation. MIAA is a government instrumentality MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers. The Administrative Code defines a government “instrumentality” as follows: SEC. 2. General Terms Defined. –– x x x x (10) Instrumentality refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. x x x When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police authority and the levying of fees and charges. At the same time, MIAA exercises powers of a corporation under the Corporation Law. Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality remains part of the National Government machinery although not integrated with the department framework. The MIAA Charter expressly states that transforming MIAA into a “separate and autonomous body” will make its operation more “financially viable.” Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a government-owned or controlled corporation. Examples are the Mactan International Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as required by the BATAS TOMASINO 1 Administrative Code. These government instrumentalities are sometimes loosely called government corporate entities. However, they are not government-owned or controlled corporations in the strict sense as understood under the Administrative Code. Airport Lands and Buildings of MIAA are Owned by the Republic The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the State or the Republic of the Philippines. Government instrumentalities are generally exempt from local taxes A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which states: SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units. (Emphasis and underscoring supplied) Section 133 of the Local Government Code states that “unless otherwise provided” in the Code, local governments cannot tax national government instrumentalities. Section 133(o) recognizes the basic principle that local governments cannot tax the national government, which historically merely delegated to local governments the power to tax. While the 1987 Constitution now includes taxation as one of the powers of local governments, local governments may only exercise such power “subject to such guidelines and limitations as the Congress may provide.” When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation. This rule applies with greater force when local governments seek to tax national government instrumentalities. Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption. However, when Congress grants an exemption to a national government instrumentality from local taxation, such exemption is construed liberally in favor of the national government instrumentality. The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. Tax Case Digest No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like “roads, canals, rivers, torrents, ports and bridges constructed by the State,” are owned by the State. The term “ports” includes seaports and airports. The MIAA Airport Lands and Buildings constitute a “port” constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines. The charging of fees to the public does not determine the character of the property whether it is of public dominion or not. Article 420 of the Civil Code defines property of public dominion as one “intended for public use.” The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use. Such fees are often termed user’s tax. This means taxing those among the public who actually use a public facility instead of taxing all the public including those who never use the particular public facility. A user’s tax is more equitable — a principle of taxation mandated in the 1987 Constitution. The City of Parañaque cannot auction the properties of MIAA As properties of public dominion, the Airport Lands and Buildings are outside the commerce of man. Property of public dominion, being outside the commerce of man, cannot be the subject of an auction sale. Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy. Essential public services will stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale. This will happen if the City of Parañaque can foreclose and compel the auction sale of the 600-hectare runway of the MIAA for non-payment of real estate tax. BATAS TOMASINO 2 Real Property Owned by the Republic is Not Taxable Section 234(a) of the Local Government Code exempts from real estate tax any “[r]eal property owned by the Republic of the Philippines.” Section 234(a) provides: SEC. 234. Exemptions from Real Property Tax. — The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; x x x. (Emphasis supplied) This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local governments from imposing “[t]axes, fees or charges of any kind on the National Government, its agencies and instrumentalities x x x.” The real properties owned by the Republic are titled either in the name of the Republic itself or in the name of agencies or instrumentalities of the National Government. MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. The Administrative Code allows instrumentalities like MIAA to hold title to real properties owned by the Republic. Properties leased to private entities are not exempt from real property tax However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land area for a consideration to a taxable person and therefore such land area is subject to real estate tax. Conclusion Under the Administrative Code, which governs the legal relation and status of government units, agencies and offices within the entire government machinery, MIAA is a government instrumentality and not a government-owned or controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality is not a taxable person because it is not subject to “[t]axes, fees or charges of any kind” by local governments. The only exception is Tax Case Digest when MIAA leases its real property to a “taxable person” as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Parañaque. Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public use, are properties of public dominion and thus owned by the State or the Republic of the Philippines. Article 420 specifically mentions “ports x x x constructed by the State,” which includes public airports and seaports, as properties of public dominion and owned by the Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of public dominion are not subject to execution or foreclosure sale. Re: Tax Exemption; National Government Exemption from Local Taxation (Nota Bene: The following case upheld and reiterated the doctrine laid down in the case of MIAA v. City of Parañaque). Philippine Fisheries Development Authority v. CA, Iloilo (July 31, 2007) Facts: The government built Iloilo Fishing Port Complex (IFPC) from land it reclaimed from the sea. The port complex is owned by the Republic of the Philippines but operated and governed by the Philippine Fisheries Development Authority. The Authority leased portions of IFPC to private firms and individuals engaged in fishing related businesses. Sometime in May 1988, the City of Iloilo assessed the entire IFPC for real property taxes. The assessment remained unpaid until the alleged total tax delinquency of the Authority for the fiscal years 1988 and 1989 amounted to P5,057,349.67, inclusive of penalties and interests. To satisfy the tax delinquency, the City of Iloilo scheduled on August 30, 1990, the sale at public auction of the IFPC. Issue: Is the Philippine Fisheries Development Authority liable to pay real property tax to the City of Iloilo? If the answer is in the affirmative, may the IFPC be sold at public auction to satisfy the tax delinquency? BATAS TOMASINO 3 Ruling: The Philippine Fisheries Development Authority is not a GOCC but an instrumentality of the national government which is generally exempt from payment of real property tax. However, said exemption does not apply to the portions of the IFPC which the Authority leased to private entities. With respect to these properties, the Authority is liable to pay real property tax. Nonetheless, the IFPC, being a property of public dominion cannot be sold at public auction to satisfy the tax delinquency. built by the State in the Iloilo fishing complex is a property of the public dominion and cannot therefore be sold at public auction. This means that the City of Iloilo has to satisfy the tax delinquency through means other than the sale at public auction of the IFPC. An instrumentality of the national government is generally exempt from payment of real property tax, except those portions which have been leased to private entities. (Nota Bene: The following case upheld and reiterated the doctrine laid down in the case of MIAA v. City of Parañaque and Phil. Fisheries v. Iloilo). For an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for non-stock corporations, they must have members and must not distribute any part of their income to said members. Philippine Fisheries Development Authority v. CA, Navotas (Oct. 2, 2007) The Authority is not a GOCC but an instrumentality of the government. The Authority has a capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares. Hence, it is not a stock corporation. Neither is it a non-stock corporation because it has no members. Properties leased to taxable persons are subject to real property tax Re: Tax Exemption; National Government Exemption from Local Taxation Facts: The Municipality of Navotas assessed the real estate taxes allegedly due from Philippine Fisheries Development Authority (PFDA) for the period 1981-1990 on properties under its jurisdiction, management and operation located inside the Navotas Fishing Port Complex (NFPC). The assessed taxes had remained unpaid despite the demands made by the municipality which prompted it to give notice to petitioner on October 29, 1990 that the NFPC will be sold at public auction on November 30, 1990 in order that the municipality will be able to collect on petitioner’s delinquent realty taxes which, as of June 30, 1990, amounted to P23,128,304.51, inclusive of penalties. Issue: Is Philippine Fisheries Development Authority liable to pay real property tax? Unlike GOCCs, instrumentalities of the national government are exempt from local taxes pursuant to Section 133(o) of the Local Government Code. This exemption, however, admits of an exception with respect to real property taxes. When an instrumentality of the national government grants to a taxable person the beneficial use of a real property owned by the Republic, said instrumentality becomes liable to pay real property tax. Ruling: As a rule, PFDA, being an instrumentality of the national government, is exempt from real property tax but the exemption does not extend to the portions of the NFPC that were leased to taxable or private persons and entities for their beneficial use. The leased portions of the IFPC, being a property of public domain, cannot be sold at public auction Being a property of public dominion, the Navotas Fishing Port Complex cannot be subject to execution or foreclosure sale. The NFPC cannot be sold at public auction in satisfaction of the tax delinquency assessments made by the Municipality of Navotas on the entire complex. The real property tax assessments issued by the City of Iloilo should be upheld only with respect to the portions leased to private persons. In case the Authority fails to pay the real property taxes due thereon, said portions cannot be sold at public auction to satisfy the tax delinquency. Additionally, the land on which the NFPC property sits is a reclaimed land, which belongs to the State. Reclaimed lands are lands of the public domain and cannot, without Congressional fiat, be subject of a sale, public or private. Reclaimed lands are lands of the public domain and cannot, without Congressional fiat, be subject of a sale, public or private. In the same vein, the port Tax Case Digest BATAS TOMASINO 4 Re: Tax Deduction; Senior Citizen’s Discount; Police Power 3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11 that makes “essential goods, health and other social services available to all people at affordable cost.” Carlos Superdrug v. DSWD (June 29, 2007) Facts: On February 26, 2004, “Expanded Senior Citizens Act of 2003” (R.A. No. 9257), amending R.A. No. 7432, was signed into law by President Gloria Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act states: SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following: (a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior citizens; xxx The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. The drugstores assailed the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the following grounds: 1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that private property shall not be taken for public use without just compensation; 2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states that “no person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied of the equal protection of the laws;” and Tax Case Digest Ruling: The State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program. The drugstores assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. Examining the drugstores’ arguments, it is apparent that what they are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. The tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation. BATAS TOMASINO 5 Re: Tax Credit; Senior Citizen’s Discount; Power of Eminent Domain Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program. The Court believes so. (Nota Bene: The rule that the 20% discount extended to senior citizens may be claimed as tax credit, under R.A. No. 7432, is no longer controlling. R.A. No. 9257 amended the rule, providing that the same may be claimed as tax deduction). The Senior Citizens Act is a legitimate exercise of police power CIR v. Central Luzon Drug Corp. (July 21, 2006) The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our society. Facts: From January to December 1996, Central Luzon Drug granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to R.A. No. 7432. On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor. Given these, it is incorrect for the drugstores to insist that the grant of the senior citizen discount is unduly oppressive to their business, because they have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights, the drugstores must accept the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process. On January 16, 1998, Central Luzon Drug filed with the Commissioner of Internal Revenue a claim for tax refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens. The Commissioner of Internal Revenue asserts that the 20% sales discount may not be claimed as a tax credit instead it must be claimed as a deduction from gross income or gross sales. Issue: May Central Luzon Drug, despite incurring a net loss, still claim the 20% sales discount as a tax credit? Ruling: Central Luzon Drug may claim the 20% sales discount as tax credit despite net loss. Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any private establishment in the country. The latter may then claim the cost of the discount as a tax credit. Such credit can be claimed, even though an establishment operates at a loss. Tax credit differs from a tax deduction Although the term is not specifically defined in our Tax Code, tax credit generally refers to an amount that is “subtracted directly from one’s total tax liability.” It is an “allowance against the tax itself” or “a deduction from what is owed” by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits. Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a subtraction “from income for tax purposes,” or an amount that is “allowed by law to reduce income prior to the application of the tax Tax Case Digest BATAS TOMASINO 6 rate to compute the amount of tax which is due.” An example of a tax deduction is any of the allowable deductions enumerated in Section 34 of the Tax Code. A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before. Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 is erroneous First, the definition given by the BIR is erroneous. Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and cannot be deducted again, even for purposes of computing the income tax. Tax liability required for tax credit Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not. If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously be no tax liability against which any tax credit can be applied. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments. Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes. Prior tax payments not required for tax credit While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid. There are also tax treaties and special laws that grant or allow tax credits, even though no prior tax payments have been made. Tax Case Digest When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -which is not even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down. Second, the law cannot be amended by a mere regulation. In fact, a regulation that “operates to create a rule out of harmony with the statute is a mere nullity”; it cannot prevail. In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it administers The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law. Tax credit benefit deemed just compensation Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments BATAS TOMASINO 7 concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use. The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues. Re: Tax Credit; Senior Citizen’s Discount (Nota Bene: The rule that the 20% discount extended to senior citizens may be claimed as tax credit, under R.A. No. 7432, is no longer controlling. R.A. No. 9257 amended the rule, providing that the same may be claimed as tax deduction. The following case was filed before the passage of R.A. No. 9257 but was decided after it was passed and already effective). CIR v. Bicolandia Drug Corp. (July 21, 2006) Facts: In 1992, Republic Act No. 7432, otherwise known as “An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and For Other Purposes,” granted senior citizens several privileges, one of which was obtaining a 20 percent discount from all establishments relative to the use of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country. The law also provided that the private establishments giving the discount to senior citizens may claim the cost as tax credit. In compliance with the law, the Bureau of Internal Revenue issued Revenue Regulations No. 2-94, which defined “tax credit” as follows: Tax Credit – refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes. Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are but “enforced contributions exacted on pain of penal sanctions” and “clearly imposed for a public purpose.” In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social justice “cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our Constitution is not intended to take away rights from a person and give them to another who is not entitled thereto.” For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact. On December 27, 1996, Bicolandia Drug filed a claim for tax refund or credit with the Bureau of Internal Revenue—because its net losses for the year 1995 prevented it from benefiting from the treatment of sales discounts as a deduction from gross sales during the said taxable year. It alleged that the petitioner Commissioner of Internal Revenue erred in treating the 20 percent sales discount given to senior citizens as a deduction from its gross income for income tax purposes or other percentage tax purposes rather than as a tax credit. Issue: May Bicolandia Drug claim the 20 percent sales discount it granted to qualified senior citizens pursuant to R.A. No. 7432 as a tax credit, instead of a deduction from gross income or gross sales? Tax Case Digest BATAS TOMASINO 8 Ruling: In cases of conflict between the law and the rules and regulations implementing the law, the law shall always prevail. Should Revenue Regulations deviate from the law they seek to implement, they will be struck down. Act of 2003.” In this, the term “tax credit” is no longer used, it instead used the term “tax deduction.” The problem stems from the issuance of Revenue Regulations No. 2-94, which was supposed to implement R.A. No. 7432, and the radical departure it made when it defined the “tax credit” that would be granted to establishments that give 20 percent discount to senior citizens. It equated “tax credit” with “tax deduction,” contrary to the definition in Black’s Law Dictionary, which defined tax credit as: Re: VAT; No-Amendment Rule; Exclusive Origination of Revenue Bills; Nondelegation of Power of Taxation; Uniformity and Equitability of Taxation; Due Process; Progressive Taxation An amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer’s liability x x x, compared to a deduction which reduces taxable income upon which the tax liability is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax while the latter is subtracted from income before the tax is computed. Facts: On May 24, 2005 the President signed R.A. No. 9337 into law. Before its effectivity on July 01, 2005 several persons challenged the validity of the law before the Supreme Court. ABAKADA Guro v. Executive Secretary (Sept. 01, 2005) Issue 1: Does R.A. No. 9337 violate Article VI, Section 26(2) of the Constitution on the “no-amendment rule?” Ruling 1: R.A. No. 9337 does not violate the “no-amendment rule.” The interpretation of an administrative government agency, which is tasked to implement the statute, is accorded great respect and ordinarily controls the construction of the courts. Be that as it may, the definition laid down in the questioned Revenue Regulations can still be subjected to scrutiny. Courts will not hesitate to set aside an executive interpretation when it is clearly erroneous. There is no need for interpretation when there is no ambiguity in the rule, or when the language or words used are clear and plain or readily understandable to an ordinary reader. The definition of the term “tax credit” is plain and clear, and the attempt of Revenue Regulations No. 2-94 to define it differently is the root of the conflict. Article VI, Sec. 26 (2) of the Constitution, states: No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal. Revenue Regulations No. 2-94 Null and Void It must be concluded that Revenue Regulations No. 2-94 is null and void for failing to conform to the law it sought to implement. In case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond the terms and provisions of the basic law. Revenue Regulations No. 2-94 being null and void, it must be ruled then that under R.A. No. 7432, which was effective at the time, Bicolandia Drug is entitled to its claim of a tax credit. But even as this particular case is decided in this manner, it must be noted that the concerns of the Commissioner regarding tax credits granted to private establishments giving discounts to senior citizens have been addressed. R.A. No. 7432 has been amended by Republic Act No. 9257, the “Expanded Senior Citizens Tax Case Digest Petitioners’ argument that the practice where a bicameral conference committee is allowed to add or delete provisions in the House bill and the Senate bill after these had passed three readings is in effect a circumvention of the “no amendment rule” The Court reiterates here that the “no-amendment rule” refers only to the procedure to be followed by each house of Congress with regard to bills initiated in each of said respective houses, before said bill is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of Congress would be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of BATAS TOMASINO 9 amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited. x -------------------------------------- x Issue 2: Does R.A. No. 9337 violate Article VI, Section 24 of the Constitution on the doctrine of exclusive origination of revenue bills? Ruling 2: R.A. No. 9337 does not violate the doctrine of exclusive origination of revenue bills. Petitioners claim that the amendments made regarding the NIRC provisions on corporate income taxes and percentage, excise taxes did not at all originate from the House. They argue that since the proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24 of the Constitution. . Article VI, Section 24 of the Constitution reads: The sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to supplement our country’s fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments. x -------------------------------------- x Issue 3: Does the stand-by authority given to the President to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax? Ruling 3: There is no undue delegation of legislative power. ABAKADA GURO Party List questioned the constitutionality of provisions of R.A. No. 9337 authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments. Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill. Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the government to supplement our country’s serious financial problems, and improve tax administration and control of the leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments within the purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of the consumers. Tax Case Digest (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). ABAKADA GURO argues that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution. They allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides: The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government. The powers which Congress is prohibited from delegating are those which are strictly legislative The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in BATAS TOMASINO 10 matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata non delegari potest which means “what has been delegated, cannot be delegated.” This doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another. prescribe sufficient standards, policies or limitations on their authority. While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends. The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative function, but is simply ancillary to legislation. With respect to the Legislature, Section 1 of Article VI of the Constitution provides that “the Legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives.” The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and to determine the expediency of its enactment. The stand-by authority given to the President is not a delegation of legislative power Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions: (1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution; (2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution; (3) Delegation to the people at large; (4) Delegation to local governments; and (5) Delegation to administrative bodies. In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate; and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to which the delegate must conform in the performance of his functions. A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative. The legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must Tax Case Digest The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. It is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward. In making his recommendation to the President, the Secretary of Finance is not acting as the alter ego of the President, rather he is acting as the agent of Congress The Court finds no merit to the contention of ABAKADA GURO that the law effectively nullified the President’s power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of Finance he is the assistant and agent of the Chief Executive. BATAS TOMASINO 11 In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter. Issue 4: Does R.A. No. 9337 violate the due process and equal protection clause? Ruling 4: R.A. No. 9337 does not violate the due process and equal protection clause. Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Sections 8 and 12 of R.A. No. 9337 are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the Constitution. Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law. Section 8 of R.A. No. 9337 imposes a limitation on the amount of input tax that may be credited against the output tax. It limits the creditable input tax to 70%. The philosophy behind the two alternative conditions The philosophy behind these alternative conditions, as explained by respondents: 1. x -------------------------------------- x VAT/GDP Ratio > 2.8% The input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise: The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual. 2. First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no payment is required; Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR); and Nat’l Gov’t Deficit/GDP >1.5% The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.[62] That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue. Tax Case Digest Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayer’s option.] Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the extent of 70% of the output tax. In layman’s term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is the seller. What only needs to be done is BATAS TOMASINO 12 for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes. With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads: Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law. SEC. 114. Return and Payment of Value-added Tax. – (C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent. The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege. The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights. Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides: SEC. 110. Tax Credits. – (A) Creditable Input Tax. – … Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee. The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners’ argument is without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax. Tax Case Digest The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made. Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. The government in this case is constituted as a withholding agent with respect to their payments for goods and services. x -------------------------------------- x Issue 5: Does R.A. No. 9337 violate the uniformity and equitability of taxation clause? Ruling 5: R.A. No. 9337 does not violate the uniformity and equitability of taxation clause. Article VI, Section 28(1) of the Constitution reads: BATAS TOMASINO The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. 13 Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions, while granting exemptions to other transactions. x -------------------------------------- x Discussion of Justice Sandoval-Gutierrez on Exclusive Origination In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class. R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00. Also, basic marine and agricultural food products in their original state are still not subject to the tax, thus ensuring that prices at the grassroots level will remain accessible. (Nota Bene: Portions of her separate opinion which are inconsistent with the ponencia has been omitted). Section 24, Article VI of the Constitution provides: SEC. 24. All appropriations, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. In Tolentino vs. Secretary of Finance, this Court expounded on the foregoing provision by holding that: “x x x To begin with, it is not the law – but the revenue bill – which is required by the Constitution to ‘originate exclusively in the House of Representatives. It is important to emphasize this, because a bill originating the in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole x x x. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute -- and not only the bill which initiated the legislative process culminating in the enactment of the law – must substantially be the same as the House Bill would be to deny the Senate’s power not only to ‘concur with amendments: but also to ‘propose amendments.’ It would be to violate the co-equality of the legislative power of the two houses of Congress and in fact, make the House superior to the Senate.” x -------------------------------------- x Issue 6: Does R.A. No. 9337 violate the proressivity of taxation clause? Ruling 6: R.A. No. 9337 does not violate the proressivity of taxation clause. Petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the consequences. Progressive taxation is built on the principle of the taxpayer’s ability to pay. Taxation is progressive when its rate goes up depending on the resources of the person affected. The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall “evolve a progressive system of taxation.” Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the Tax Case Digest The case at bar gives us an opportunity to take a second hard look at the efficacy of the foregoing jurisprudence. Section 25, Article VI is a verbatim re-enactment of Section 18, Article VI of the 1935 Constitution. The latter provision was modeled from Section 7 (1), Article I of the United States Constitution, which states: BATAS TOMASINO 14 “All bills for raising revenue shall originate in the House of Representatives, but the Senate may propose or concur with amendments, as on other bills.” Re: Prescriptive Period for Claiming Input VAT Refund/Credit Atlas Consolidated Mining v. CIR (June 08, 2007) The American people, in entrusting what James Madison termed “the power of the purse” to their elected representatives, drew inspiration from the British practice and experience with the House of Commons. As one commentator puts it: “They knew the inestimable value of the House of Commons, as a component branch of the British parliament; and they believed that it had at all times furnished the best security against the oppression of the crown and the aristocracy. While the power of taxation, of revenue, and of supplies remained in the hands of a popular branch, it was difficult for usurpation to exist for any length of time without check, and prerogative must yield of that necessity which controlled at once the sword and the purse.” But while the fundamental principle underlying the vesting of the power to propose revenue bills solely in the House of Representatives is present in both the Philippines and US Constitutions, stress must be laid on the differences between the two quoted provisions. For one, the word “exclusively” appearing in Section 24, Article VI of our Constitution is nowhere to be found in Section 7 (1), Article I of the US Constitution. For another, the phrase “as on other bills,” present in the same provision of the US Constitution, is not written in our Constitution. The adverb “exclusively” means “in an exclusive manner.” The term “exclusive” is defined as “excluding or having power to exclude; limiting to or limited to; single, sole, undivided, whole.” In one case, this Court define the term “exclusive” as “possessed to the exclusion of others; appertaining to the subject alone, not including, admitting, or pertaining to another or others.” As for the term “originate,” its meaning are “to cause the beginning of; to give rise to; to initiate; to start on a course or journey; to take or have origin; to be deprived; arise; begin or start.” With the foregoing definitions in mind, it can be reasonably concluded that when Section 24, Article VI provides that revenue bills shall originate exclusively from the House of Representatives, what the Constitution mandates is that any revenue statute must begin or start solely and only in the House. Not the Senate. Not both Chambers of Congress. But there is more to it than that. It also means that “an act for taxation must pass the House first.” It is no consequence what amendments the Senate adds. Tax Case Digest Facts: Atlas Consolidated Mining is engaged in the business of mining, production, and sale of various mineral products. It is a VAT-registered taxpayer. It filed with the BIR application for the refund/credit of its input VAT on its purchases of capital goods and on its zero-rated sales. The Commissioner of Internal Revenue asserts that the corporation is not entitled to its claims. Issue: (Main issue) Are the claims of Atlas Consolidated Mining for input VAT refund/credit already prescribed? (Other issues) Is Revenue Regulations No. 2-88 imposing upon a corporation, as a requirement for the VAT zero-rating of its sales, the burden of proving that the buyer companies were not just BOI-registered but also exporting 70% of their total annual production applicable to Atlas Consolidated Mining? Is the evidence presented by Atlas Consolidated Mining sufficient to establish that it is indeed entitled to input VAT refund/credit? Should the motion of Atlas Consolidated Mining for re-opening of its cases or holding of new trial before the CTA so it could be given the opportunity to present the required evidence be granted? Ruling: The claims of Atlas Consolidated Mining for input VAT refund/credit have not yet prescribed. The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, which provides that the two-year prescriptive period for filing the application for refund/credit of input VAT on zero-rated sales shall be determined from the close of the quarter when such sales were made. Atlas Consolidated Mining contends, however, that the said two-year prescriptive period should be counted, not from the close of the quarter when the zero-rated sales were made, but from the date of filing of the quarterly VAT return and payment of the tax due 20 days thereafter, in accordance with Section 110(b) of the Tax Code. It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for recovery of corporate income tax erroneously or illegally paid under BATAS TOMASINO 15 Section 230 of the Tax Code of 1977, as amended, was to be counted from the filing of the final adjustment return. It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but is eventually subjected to a final adjustment at the end of the taxable year, VAT is computed and paid on a purely quarterly basis without need for a final adjustment at the end of the taxable year. However, it is also equally true that until and unless the VAT-registered taxpayer prepares and submits to the BIR its quarterly VAT return, there is no way of knowing with certainty just how much input VAT the taxpayer may apply against its output VAT; how much output VAT it is due to pay for the quarter or how much excess input VAT it may carry-over to the following quarter; or how much of its input VAT it may claim as refund/credit. Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it does have refundable or creditable input VAT, and the same has not been applied against its output VAT liabilities – information which are supposed to be reflected in the taxpayer’s VAT returns. Lastly, although the taxpayer’s refundable or creditable input VAT may not be considered as illegally or erroneously collected, its refund/credit is a privilege extended to qualified and registered taxpayers by the very VAT system adopted by the Legislature. Such input VAT, the same as any illegally or erroneously collected national internal revenue tax, consists of monetary amounts which are currently in the hands of the government but must rightfully be returned to the taxpayer. Therefore, whether claiming refund/credit of illegally or erroneously collected national internal revenue tax, or input VAT, the taxpayer must be given equal opportunity for filing and pursuing its claim. not entitled to the re-opening of its cases and/or holding of new trial since the nonpresentation of the required documentary evidence before the BIR and the CTA by its counsel does not constitute excusable negligence or mistake as contemplated in Section 1, Rule 37 of the revised Rules of Court. Re: Remedies in Case of Inaction of the CIR Rizal Banking Corporation v. CIR (April 24, 2007) Facts: Rizal Banking Corporation was served a deficiency assessment for documentary stamp tax. It disputed the assessment. The Commissioner failed to act on the disputed assessment within 180 days from date of submission of documents. RCBC opted to file a petition for review before the Court of Tax Appeals. Unfortunately, the petition for review was filed out of time, i.e., it was filed more than 30 days after the lapse of the 180-day period. Consequently, it was dismissed by the Court of Tax Appeals for late filing. Petitioner did not file a motion for reconsideration or make an appeal. RCBC claims that its former counsel’s failure to file petition for review with the Court of Tax Appeals en banc within the reglementary period was excusable. It alleges that the counsel’s secretary misplaced the Resolution hence the counsel was not aware of its issuance and that it had become final and executory. RCBC now claims that the disputed assessment is not yet final as it remained unacted upon by the Commissioner; that it can still await the final decision of the Commissioner and thereafter appeal the same to the Court of Tax Appeals. For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period for filing a claim for refund/credit of input VAT on zerorated sales from the date of filing of the return and payment of the tax due which, according to the law then existing, should be made within 20 days from the end of each quarter. Issue 1: Is the failure of RCBC’s counsel to file petition for review with the Court of Tax Appeals within the reglementary period excusable? Although this Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that sales to EPZAregistered enterprises operating within economic processing zones were effectively zero-rated and were not covered by Revenue Regulations No. 2-88, it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990 and the first quarter of 1992, for not being established and substantiated by appropriate and sufficient evidence. Petitioner corporation is also Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of petitioner’s counsel. Otherwise, all that a losing party would do to salvage his case would be to invoke neglect or mistake of his counsel as a ground for reversing or setting aside the adverse judgment, thereby putting no end to litigation. Tax Case Digest Ruling 1: The failure of the counsel to file petition for review with the Court of Tax Appeals within the reglementary period is not excusable. Negligence to be “excusable” must be one which ordinary diligence and prudence could not have guarded against and by reason of which the rights of an BATAS TOMASINO 16 aggrieved party have probably been impaired. Petitioner’s former counsel’s omission could hardly be characterized as excusable, much less unavoidable. x -------------------------------------- x Issue 2: Is the disputed assessment not yet final as it remained unacted upon by the Commissioner? Ruling 2: The disputed assessment is already final, demandable and executory. The jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same. The jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same. In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period; or 2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other. Tax Case Digest In the instant case, the Commissioner failed to act on the disputed assessment within 180 days from date of submission of documents. Thus, petitioner opted to file a petition for review before the Court of Tax Appeals. Unfortunately, the petition for review was filed out of time, i.e., it was filed more than 30 days after the lapse of the 180-day period. Consequently, it was dismissed by the Court of Tax Appeals for late filing. Petitioner did not file a motion for reconsideration or make an appeal; hence, the disputed assessment became final, demandable and executory. Based on the foregoing, RCBC can not now claim that the disputed assessment is not yet final as it remained unacted upon by the Commissioner; that it can still await the final decision of the Commissioner and thereafter appeal the same to the Court of Tax Appeals. This legal maneuver cannot be countenanced. After availing the first option, i.e., filing a petition for review which was however filed out of time, petitioner can not successfully resort to the second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the Court of Tax Appeals, on the pretext that there is yet no final decision on the disputed assessment because of the Commissioner’s inaction. Re: Assessment CIR v. Bank of the Philippine Islands (April 17, 2007) Facts: In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63. In a letter dated December 10, 1988, BPI, through counsel, replied in part that the “deficiency assessments are no assessments at all.” On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating the basis of the assessment. On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIR’s May 8, 1991 letter. This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992. On February 18, 1992, BPI filed a petition for review in the CTA. In a decision dated November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time. It denied reconsideration in a resolution dated May 27, 1996. On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to the CTA for a decision on the merits. It ruled that the October 28, 1988 notices were not valid assessments because they did not inform the taxpayer of the BATAS TOMASINO 17 legal and factual bases therefor. It declared that the proper assessments were those contained in the May 8, 1991 letter which provided the reasons for the claimed deficiencies. Thus, it held that BPI filed the petition for review in the CTA on time. The CIR elevated the case to the Supreme Court. Issue: Were the October 28, 1988 notices valid assessments? Ruling: The October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence. The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the precise purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof. He contends that there was no law or jurisprudence then that required notices to state the reasons for assessing deficiency tax liabilities. BPI counters that due process demanded that the facts, data and law upon which the assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228), specifically provides that: “[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.” Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of the tax liabilities and a demand for payment thereof within 30 days after receipt. In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424. Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to “notify” or inform the taxpayer of his “findings.” Nothing in the old law required a written statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less. Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period. Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence. Tax Case Digest The sentence “[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void” was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted sentence. The fact that the amendment was necessary showed that, prior to the introduction of the amendment, the statute had an entirely different meaning. Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation of what the law required under the former Section 270. The amendment introduced by RA 8424 was an innovation and could not be reasonably inferred from the old law. Clearly, the legislature intended to insert a new provision regarding the form and substance of assessments issued by the CIR. Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify as a protest since the letter itself stated that “[a]s soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the assessment.” Hence, by its own declaration, BPI did not regard this letter as a protest against the assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the October 28, 1988 notices as valid or proper assessments. Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to have failed to appeal the CIR’s final decision regarding the disputed assessments within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his “final decision … on the matter.” BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its omission. Re: Refund of Creditable Withholding Tax Banco Filipino v. CIR (March 27, 2007) Facts: In its BIR Form No. 1702 for fiscal year 1995, Banco Filipino declared a net operating loss of P211,476,241.00 and total tax credit of P13,103,918.00, BATAS TOMASINO 18 representing the prior year’s excess tax credit of P11,481,342.00 and creditable withholding taxes of P1,622,576.00. therefrom. The third condition is specifically imposed under Section 10 of Revenue Regulation No. 6-85 (as amended). On February 4, 1998, Banco Filipino filed with the Commissioner of Internal Revenue an administrative claim for refund of creditable taxes withheld for the year 1995 in the amount of P1,622,576.00. There is no doubt that Banco Filipino complied with the first two requirements. The question is whether it complied with the third condition by presenting merely a Certificate of Income Tax Withheld on Compensation or BIR Form No. W-2 (Exhibit “II”) and Monthly Remittance Return of Income Taxes Withheld under BIR Form No. 1743W (Exhibits “C” through “Z”). As the CIR failed to act on its claim, petitioner filed a Petition for Review with the CTA on April 13, 1998. It attached to its Petition several documents, including: 1) Certificate of Income Tax Withheld on Compensation (BIR Form No. W-2) for the Year 1995 executed by Oscar Lozano covering P720.00 as tax withheld on rental income paid to petitioner (Exhibit “II”); and 2) Monthly Remittance Return of Income Taxes Withheld under BIR Form No. 1743W issued by petitioner, indicating various amounts it withheld and remitted to the BIR (Exhibits “C” through “Z”). In his Answer, respondent CIR interposed special and afirmative defenses, specifically that petitioner’s claim is not properly documented. The CTA issued the October 5, 1999 Decision granting only a portion of petitioner’s claim for refund. The CTA allowed the P18,884.40-portion of Banco Filipino’s claim for refund as these are covered by Exhibits “AA” through “HH”, which are all in BIR Form No. 1743-750 (Certificate of Creditable Tax Withheld at Source) issued by various payors and reflecting taxes deducted and withheld on petitioner-payee’s income from the rental of its real properties. On the other hand, the CTA disallowed the P1,603,691.60-portion of petitioner’s claim for tax refund on the ground that its Exhibit “II” and Exhibits “C” through “Z” lack probative value as these are not in BIR Form No. 1743.1, the form required under Revenue Regulations No. 6-85, to support a claim for refund. Issue: Is the disallowance of P1,603,691.60 of Banco Filipino’s claim for tax refund on the ground that the latter’s Exhibit “II” and Exhibits “C” through “Z” lack probative value correct? Ruling: The disallowance is correct. There are three conditions for the grant of a claim for refund of creditable withholding tax: 1) the claim is filed with the CIR within the two-year period from the date of payment of the tax; 2) it is shown on the return of the recipient that the income payment received was declared as part of the gross income; and, 3) the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld Tax Case Digest Banco Filipino argues that its Exhibit “II” and Exhibits “C” through “Z” should be accorded the same probative value as a BIR Form No. 1743.1, for said documents are also official BIR forms and they reflect the fact that taxes were actually withheld and remitted. It appeals for liberality considering that its annual return clearly shows that it is entitled to creditable withholding tax. The document which may be accepted as evidence of the third condition, that is, the fact of withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid. At the time material to this case, the requisite information regarding withholding taxes from the sale of acquired assets can be found in BIR Form No. 1743.1. As described in Section 6 of Revenue Regulations No. 6-85, BIR Form No. 1743.1 is a written statement issued by the payor as withholding agent showing the income or other payments made by the said withholding agent during a quarter or year and the amount of the tax deducted and withheld therefrom. It readily identifies the payor, the income payment and the tax withheld. It is complete in the relevant details which would aid the courts in the evaluation of any claim for refund of creditable withholding taxes. In relation to withholding taxes from rental income, the requisite information can be found in BIR Form No. 1743-750. Petitioner is well aware of this for its own Exhibits “AA” through “HH” are all in BIR Form No. 1743-750. As earlier stated, the CTA approved petitioner’s claim for refund to the extent of P18,884.40, which is the portion of its claim supported by its Exhibits “AA” through “HH.” In the present case, the disputed portions of Banco Filipino’s claim for refund is supported merely by Exhibits “C” through “Z” and Exhibit “II.” Exhibits “C” through “Z” were issued by petitioner as payee purportedly acting as withholding agent, and not by the alleged payors in the transactions covered by the documents. Moreover, the documents do not identify the payors involved or the nature of their transaction. They do not indicate the amount and nature of the income payments upon which the tax was computed or the nature of the transactions BATAS TOMASINO 19 from which the income payments were derived, specifically whether it resulted from the sale of Banco Filipino’s acquired assets. failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. For all its deficiencies, therefore, Banco Filipino’s Exhibits “C” through “Z” cannot take the place of BIR Form No. 1743.1 and its Exhibit “II,” of BIR Form No. 1743750. Banco Filipino cannot fault the CA and CTA for finding said evidence insufficient to support its claim for tax refund. Such finding of both courts, obviously grounded on evidence, will not be so lightly discarded by this Court, not even on a plea for liberality of which Banco Filipino, by its own negligence, is undeserving. Issue: Can Isabela Cultural Corporation, using the accrual method, declare as deductions for the taxable year 1986 expenses that accrued in 1984 and 1985? The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. Re: Deduction; Accrual Method; Tax Exemptions CIR v. Isabela Cultural Corporation (Feb. 12, 2007) Facts: On February 23, 1990, Isabela Cultural Corporation, a domestic corporation, received an Assessment Notice from the BIR for deficiency income tax in the amount of P333,196.86, and another Assessment Notice for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986. On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it received a final notice before seizure demanding payment of the amounts stated in the said notices. Hence, it brought the case to the CTA which held that the petition is premature because the final notice of assessment cannot be considered as a final decision appealable to the tax court. This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore be questioned before the CTA. On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued against ICC. It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time. The Commissioner filed contends that since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have been declared as deductions from income during the said years and the Tax Case Digest Ruling: Under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that: “[t]he deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed x x x”. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. In the instant case, the accounting method used by ICC is the accrual method. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income BATAS TOMASINO 20 or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. legal consultant. It simply relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the term “reasonable accuracy” implies something less than an exact or completely accurate amount. ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed. In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of a law firm. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time Tax Case Digest As to the expenses for security services, the records show that these expenses were incurred by ICC in 1986 and could therefore be properly claimed as deductions for the said year. Re: Prospectivity of Tax Laws; Personal and Additional Exemptions; Tax Exemptions Pansacola v. CIR (Nov. 16, 2006) Facts: Republic Act No. 8424, the National Internal Revenue Code of 1997 (NIRC), which took effect on January 1, 1998 increased amounts of personal and additional exemptions. On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of personal and additional exemptions under Section 35 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions. He claimed a refund of P5,950 with the Bureau of Internal Revenue, which was denied. Later, the Court of Tax Appeals also denied his claim because according to the tax court, “it would be absurd for the law to allow the deduction from a taxpayer’s gross income earned on a certain year of exemptions availing on a different taxable year…” Issue: Could the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997? Ruling: Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayer’s gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the BATAS TOMASINO 21 personal and additional exemptions shall apply on income earned before January 1, 1998. Pansacola argues that the personal and additional exemptions are of a fixed character based on Section 35 (A) and (B) of the NIRC and as ruled by this Court in Umali, these personal and additional exemptions are fixed amounts to which an individual taxpayer is entitled. He contends that unlike other allowable deductions, the availability of these exemptions does not depend on the taxpayer’s profession, trade or business for a particular taxable period. Relying again in Umali, Pansacola alleges that the Court of Appeals erred in ruling that the increased exemptions were meant to be applied beginning taxable year 1998 and were to be reflected in the taxpayers’ returns to be filed on or before April 15, 1999. He reasons that such ruling would postpone the availability of the increased exemptions and literally defer the effectivity of the NIRC to January 1, 1999. He insists that the increased exemptions were already available on April 15, 1998, the deadline for filing income tax returns for taxable year 1997, because the NIRC was already effective. Personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. The income subject to income tax is the taxpayer’s income as derived and computed during the calendar year, his taxable year. What the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. Now comes Section 35 (C) of the NIRC which provides, Sec. 35. Allowance of Personal Exemption for Individual Taxpayer. – xxxx (C) Change of Status. – If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. Tax Case Digest If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer to still claim the corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents’ status took place at the close of the taxable year. Consequently, his correct taxable income and his corresponding allowable deductions e.g. personal and additional deductions, if any, had already been determined as of the end of the calendar year. In the case of Pansacola, the availability of the aforementioned deductions if he is thus entitled, would be reflected on his tax return filed on or before the 15th day of April 1999 as mandated by Section 51 (C) (1). Since the NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayer’s gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998. Pansacola’s reliance in Umali is misplaced. In Umali, we noted that despite being given authority by Section 29 (1) (4) of the National Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made to cover 1989. Note that Rep. Act No. 7167 is entitled “An Act Adjusting the Basic Personal and Additional Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National Internal Revenue Code, As Amended, and For Other Purposes.” Thus, we said in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992, should consider the poverty threshold level in 1991, the time it was enacted. And we observed therein that since the exemptions would especially benefit lower and middle-income taxpayers, the exemption should be made to cover BATAS TOMASINO 22 the past year 1991. To such an extent, Rep. Act No. 7167 was a social legislation intended to remedy the non-adjustment in 1989. This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The policy declarations in its enactment do not indicate it was a social legislation that adjusted personal and additional exemptions according to the poverty threshold level nor is there any indication that its application should retroact. At the time Pansacola filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioner’s taxable income covers his income for the calendar year 1997. The law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. In the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect. Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. Re: Prescription Period of Collection of Taxes; Request for Reinvestigation CIR v. Philippine Global Communications (Oct. 31, 2006) Facts: Philippine Global Communication filed its Annual Income Tax Return for taxable year 1990 on 15 April 1991. On 22 April 1994, respondent received a Formal Assessment Notice, dated 14 April 1994, for deficiency income tax for the year 1990. On 6 May 1994, Philippine Global Communication filed a formal protest letter against the Assessment Notice. Philippine Global Communication filed another protest letter on 23 May 1994. On 16 October 2002, more than eight years after the assessment was presumably issued, Philippine Global Communication received from the CIR a Final Decision dated 8 October 2002 denying the respondent’s protest. Issue: Is CIR’s right to collect Philippine Global Communication’s alleged deficiency income tax barred by prescription? Tax Case Digest Ruling: The right of the government to collect the alleged deficiency tax is barred by prescription. The tax which is the subject of the Decision issued by the CIR on 8 October 2002 affirming the Formal Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its collection. Section 269(c) of the Tax Code of 1977, which reads: Section 269. Exceptions as to the period of limitation of assessment and collection of taxes. – x x x c. Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. The law prescribed a period of three years from the date the return was actually filed or from the last date prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national internal revenue tax. However, the law increased the prescriptive period to assess or to begin a court proceeding for the collection without an assessment to ten years when a false or fraudulent return was filed with the intent of evading the tax or when no return was filed at all. In such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or omission. If the BIR issued this assessment within the three-year period or the ten-year period, whichever was applicable, the law provided another three years after the assessment for the collection of the tax due thereon through the administrative process of distraint and/or levy or through judicial proceedings. The three-year period for collection of the assessed tax began to run on the date the assessment notice had been released, mailed or sent by the BIR. The assessment, in this case, was presumably issued on 14 April 1994 since Philippine Global Communication did not dispute the CIR’s claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax. The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because BATAS TOMASINO 23 tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest, peaceful, lawabiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription should be liberally construed in order to protect taxpayers and that, as a corollary, the exceptions to the law on prescription should be strictly construed. Among the exceptions provided by the NIRC is the instance when the taxpayer requests for a reinvestigation which is granted by the Commissioner. However, this exception does not apply to this case since the Philippine Global Communication never requested for a reinvestigation. More importantly, the CIR could not have conducted a reinvestigation where, as admitted by the CIR in its Petition, Philippine Global Communication refused to submit any new evidence. A request for reinvestigation can suspend the running of the statute of limitations on collection of the assessed tax, while a request for reconsideration cannot The main difference between the two types of protests, i.e. request for reconsideration and request for reinvestigation, lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. Section 271 distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. A reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. Where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation. In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for reconsideration. The CIR’s allegation that there was a request for reinvestigation is inconceivable since respondent consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. Tax Case Digest Re: Retirement Benefits International Broadcasting Corp. v. Amarilla (Oct. 27, 2006) Facts: Quiñones, Lagahit, Otadoy, and Amarilla were employed by IBC at its Cebu station. On March 1, 1986, the government sequestered the station, including its properties, funds and other assets, and took over its management and operations from its owner, Roberto Benedicto. However, in December 1986, the government and Benedicto entered into a temporary agreement under which the latter would retain its management and operation. On November 3, 1990, the Presidential Commission on Good Government (PCGG) and Benedicto executed a Compromise Agreement, where Benedicto transferred and assigned all his rights, shares and interests in petitioner station to the government. In the meantime, the four (4) employees retired from the company and received, on staggered basis, their retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between petitioner and the bargaining unit of its employees. In the meantime, a P1,500.00 salary increase was given to all employees of the company, current and retired, effective July 1994. However, when the four retirees demanded theirs, IBC refused and instead informed them via a letter that their differentials would be used to offset the tax due on their retirement benefits in accordance with the National Internal Revenue Code (NIRC). The four (4) retirees filed separate complaints against IBC TV-13 Cebu and the Station Manager for unfair labor practice and non-payment of backwages before the NLRC. They averred that their retirement benefits are exempt from income tax under Article 32 of the NIRC. For its part, IBC averred that under Section 21 of the NIRC, the retirement benefits received by employees from their employers constitute taxable income. While retirement benefits are exempt from taxes under Section 28(b) of said Code, the law requires that such benefits received should be in accord with a reasonable retirement plan duly registered with the Bureau of Internal Revenue (BIR) after compliance with the requirements therein enumerated. Since its retirement plan in the 1993 CBA was not approved by the BIR, complainants were liable for income tax on their retirement benefits. IBC claimed that it was mandated to withhold the income tax due from the retirement benefits of said complainants. It was not estopped from correcting the mistakes of its former officers. Under the law, the retirees are obliged to return what had been mistakenly delivered to them. BATAS TOMASINO 24 The retirees stated that they availed of the optional retirement because of IBC’s inducement that there would be no tax deductions. Issue: Are the retirement benefits of retirees part of their gross income? Is IBC estopped from reneging on its agreement with the retirees to pay for the taxes on said retirement benefits? Ruling: We agree with IBC’s contention that, under the CBA, it is not obliged to pay for the taxes on the respondents’ retirement benefits. We have carefully reviewed the CBA and find no provision where petitioner obliged itself to pay the taxes on the retirement benefits of its employees. We also agree with IBC’s contention that, under the NIRC, the retirement benefits of respondents are part of their gross income subject to taxes. Section 28 (b) (7) (A) of the NIRC of 1986 provides: Sec. 28. Gross Income. – xxxx (b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxxx (7) Retirement benefits, pensions, gratuities, etc. (A) Retirement benefits received by officials and employees of private firms whether individuals or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this subsection, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, where contributions are made by such employer for officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said official and employees. Tax Case Digest For the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once. Respondents were qualified to retire optionally from their employment with petitioner. However, there is no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of respondents are taxable. Under Section 80 of the NIRC, IBC, as employer, was obliged to withhold the taxes on said benefits and remit the same to the BIR. However, we agree with respondents’ contention that petitioner did not withhold the taxes due on their retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to avail of the optional retirement scheme. Respondents received their retirement benefits from the petitioner in three staggered installments without any tax deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its own funds conformably with its agreement with the retirees. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. IBC used this “failure” as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, IBC is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents’ retirement benefits on the pretext that the “new management” had found the policy disadvantageous. An agreement to pay the taxes on the retirement benefits as an incentive to prospective retirees and for them to avail of the optional retirement scheme is not contrary to law or to public morals. Petitioner had agreed to shoulder such taxes to entice them to voluntarily retire early, on its belief that this would prove advantageous to it. Respondents agreed and relied on the commitment of petitioner. For petitioner to renege on its contract with respondents simply because its new management had found the same disadvantageous would amount to a breach of contract. Estoppel may arise from a making of a promise if it was intended that the promise should be relied upon and, in fact, was relied upon, and if a refusal to sanction the perpetration of fraud would result to injustice. The mere omission by the promisor BATAS TOMASINO 25 to do whatever he promises to do is sufficient forbearance to give rise to a promissory estoppel. close of the taxable quarter when the importation or purchase was made. Capital goods or properties, as defined in Revenue Regulations No. 7-95, the implementing rules on VAT, are “goods and properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services.” Re: Input VAT on Capital Goods and Services CIR v. Mirant Pagbilao Corp. (Oct. 12, 2006) Facts: For the period April 1, 1996 to December 31, 1996, Mirant Pagbilao Corp. seasonably filed its Quarterly VAT Returns reflecting an accumulated input taxes in the amount of P39,330,500.85. These input taxes were allegedly paid by MPC to the suppliers of capital goods and services for the construction and development of the power generating plant and other related facilities in Pagbilao, Quezon. Contrary to the argument of the BIR Commissioner, input VAT on capital goods is among those expressly recognized as creditable input tax by Section 104(a) of the Tax Code of 1986, as amended by Rep. Act No. 7716, to wit – Sec. 104. Tax Credits. - (a) Creditable input tax. - Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 108 hereof on the following transactions shall be creditable against the output tax: (1) Purchase or importation of goods: (A) For sale; or (B) For conversion into or intended to form part of a finished product for sale including packing materials; or (C) For use as supplies in the course of business; or (D) For use as materials supplied in the sale of service; or (E) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except automobiles, aircraft and yachts. [Emphasis supplied.] MPC filed on June 30, 1998 an application for tax credit or refund of the aforementioned unutilized VAT paid on capital goods. Without waiting for an answer from the BIR Commissioner, MPC filed a petition for review before the CTA on July 10, 1998, in order to toll the running of the two-year prescriptive period for claiming a refund under the law. The CTA ruled in favor of MPC, and declared that MPC had overwhelmingly proved, through the VAT invoices and official receipts it had presented, that its purchases of goods and services were necessary in the construction of power plant facilities which it used in its business of power generation and sale. The tax court, however, reduced the amount of refund to which MPC was entitled. Issue: Is Mirant Pagbilao Corp. entitled for tax credit or refund for the unutilized VAT paid on capital goods? Ruling: Mirant Pagbilao Corp. is entitled for tax credit or refund. Input VAT on capital goods and services may be the subject of a claim for refund. The MPC bases its claim for refund of its input VAT on Section 106(b) of the Tax Code of 1986, as amended by Republic Act No. 7716, which provides – Sec. 106. Refunds or tax credits of creditable input tax. – xxxx (b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years, after the Tax Case Digest Thus, goods and properties used by the taxpayer in its VAT-taxable business, subject to depreciation or amortization in accordance with the Tax Code, are considered capital goods. Input VAT on the purchase of such capital goods is creditable against the taxpayer’s output VAT. The taxpayer is further given the option, under Section 106(b) of the Tax Code of 1986, as amended by Republic Act No. 7716, to claim refund of the input VAT on its capital goods, but only to the extent that the said input VAT has not been applied to its output VAT. This Court, likewise, will not give credence to the BIR Commissioner’s contention that the claim for refund of input VAT on capital goods by the MPC should be denied for the latter’s failure to comply with the requirements for the refund of input VAT credits on zero-rated sales provided in Section 16 of Revenue Regulations No. 5-87, as amended by Revenue Regulations No. 3-88. The BIR Commissioner is apparently confused. MPC is claiming refund of the input VAT it has paid on the purchase of capital goods, it is not claiming refund of its input VAT credits BATAS TOMASINO 26 attributable to its zero-rated sales. These are two different input VAT credits, arising from distinct transactions, although both may be the subject of claims for refund by the taxpayer. Indeed, the very same regulation invoked by the BIR Commissioner, Revenue Regulations No. 5-87, as amended, distinguishes between these two refundable input VAT credits and discusses them in two separate paragraphs: Section 16(a) on zero-rated sales of goods and services, and Section 16(b) on capital goods. respondent nor deprive it of the exemption granted by the law. Having chosen to pay its corporate income tax liability, respondent should now be exempt from paying all other taxes including the final withholding tax. Issue: Is the Court of Appeals correct in ruling that the ‘in lieu of all other taxes’ provision in Section 13 of PD No. 1590 applies even if there were in fact no taxes paid under any of subsections (A) and (B) of the said decree? Ruling: The Court of Appeal ruling is correct. Re: Tax Exemptions; Franchise Section 13 of PAL’s franchise, states in part: CIR v. Philippine Airlines (Oct. 9, 2006) “SEC. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: Facts: Presidential Decree 1590 granted Philippine Airlines an option to pay the lower of two alternatives: (a) “the basic corporate income tax based on PAL’s annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code” or (b) “a franchise tax of two percent of gross revenues.” Availment of either of these two alternatives shall exempt the airline from the payment of “all other taxes,” including the 20 percent final withholding tax on bank deposits. ‘(a) The basic corporate income based on the grantee's annual taxable income computed accordance with the provisions of National Internal Revenue Code; or PAL filed with the Office of the Commissioner of Internal Revenue, a written request for refund of the amount of P2,241,527.22 which represents the total amount of 20% final withholding tax withheld from PAL by various withholding agent banks. ‘(b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or nontransport operations; provided, that with respect to international airtransport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax.’ The CIR failed to act on PAL’s request for refund; thus, a petition was filed before the CTA on April 23, 1999. The CTA ruled that Respondent PAL was not entitled to the refund. Section 13 of Presidential Decree No. 1590, PAL’s franchise, allegedly gave respondent the option to pay either its corporate income tax under the provisions of the NIRC or a franchise tax of two percent of its gross revenues. Payment of either tax would be in lieu of all “other taxes.” Had respondent paid the two percent franchise tax, then the final withholding taxes would have been considered as “other taxes.” Since it chose to pay its corporate income tax, payment of the final withholding tax is deemed part of this liability and therefore not refundable. The Court of Appeals reversed the Decision of the CTA. The CA held that PAL was bound to pay only the corporate income tax or the franchise tax. Section 13 of Presidential Decree No. 1590 exempts respondent from paying all other taxes, duties, royalties and other fees of any kind. Respondent chose to pay its basic corporate income tax, which, after considering the factors allowed by law, resulted in a zero tax liability. This zero tax liability should neither be taken against Tax Case Digest tax net in the “The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future, x x x.” Two points are evident from this provision. First, as consideration for the franchise, PAL is liable to pay either a) its basic corporate income tax based on its net taxable BATAS TOMASINO 27 income, as computed under the National Internal Revenue Code; or b) a franchise tax of two percent based on its gross revenues, whichever is lower. Second, the tax paid is “in lieu of all other taxes” imposed by all government entities in the country. Re: Source of Income CIR v. Baier-Nickel (Aug. 29, 2006) PAL availed itself of PD 1590, Section 13, Subsection (a), the crux of which hinged on the terms “basic corporate income tax” and “annual net taxable income.” A corporate income tax liability has two components: the general rate of 35 percent; and the specific final rates for certain passive incomes. PAL’s request for a refund in the present case pertains to the passive income on bank deposits, which is subject to the specific final tax of 20 percent. The CIR argues that the “in lieu of all other taxes” proviso is a mere incentive that applies only when PAL actually pays something; that is, either the basic corporate income tax or the franchise tax. Because of the zero tax liability of respondent under the basic corporate income tax system, it was not eligible for exemption from other taxes. A careful reading of Section 13 rebuts the argument of the CIR that the “in lieu of all other taxes” proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option. The fallacy of the CIR’s argument is evident from the fact that the payment of a measly sum of one peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no substantial distinction between a zero tax and a one-peso tax liability. Facts: Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in the trade of embroidered textile products. Through JUBANITEX’s General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of Baier-Nickel as commission agent. In 1995, Baier-Nickel received the amount of P1,707,772.64, representing her sales commission income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue. On April 14, 1998, Baier-Nickel filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Baier-Nickel contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Issue: Is Baier-Nickel’s sales commission income is taxable in the Philippines? Ruling: For her failure to prove that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, her sales commission income is taxable in the Philippines. Pertinent portion of the National Internal Revenue Code (NIRC), states: While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the taxpayer and in favor of the taxing power, Section 13 of the franchise of respondent leaves no room for interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either the “basic corporate income tax” or the two percent gross revenue tax. Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instance, it has a lower tax liability than that provided by Subsection (b). Tax Case Digest BATAS TOMASINO SEC. 25. Tax on Nonresident Alien Individual. – (A) Nonresident Alien Engaged in Trade or Business Within the Philippines. – (1) In General. – A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days 28 during any calendar year shall be deemed a ‘nonresident alien doing business in the Philippines,’ Section 22(G) of this Code notwithstanding. xxxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. – There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x x Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the income’s “source.” In construing the meaning of “source” in Section 25 of the NIRC, resort must be had on the origin of the provision. The important factor which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered. The Court reiterates the rule that “source of income” relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner’s interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income. The decisive factual consideration here is not the capacity in which Baier-Nickel received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital question posed in this controversy. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation. Tax Case Digest In the instant case, the appointment letter of Baier-Nickel as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are “sales actually concluded and collected through [her] efforts.” What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany. In sum, we find that the faxed documents presented by Baier-Nickel did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied. Re: Refund (Nota Bene: The following case is the continuation of the earlier case of the same title, dated July 21, 1994, where the SC held that “the errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy.” The case was REMANDED to the Court of Tax Appeals for further proceedings and appropriate action, more particularly, the reception of evidence for the Government). CIR v. Citytrust Banking Corp. (Aug. 22, 2006) Facts: The Commissioner of Internal Revenue assails the decision of the Court of Appeals which ordered the refund of P13,314,506.14 to respondent Citytrust BATAS TOMASINO 29 Banking Corporation as its alleged overpaid income taxes for the years 1984 and 1985. assessments are contained in a Delinquency Verification Slip, dated June 5, 1990, which was marked as Exh. “5” for respondent. Due to these deficiency assessments, respondent insisted that petitioner is not entitled to any tax refund. The CIR claims that Citytrust had outstanding deficiency income and business tax liabilities of P4,509,293.71 for 1984, thus, the claim for refund was not in order. The tax court denied both motions. [The CTA] sets aside respondent’s objection and grants to petitioner the refund of the amount of P13,314,506.14 on several grounds. The Supreme Court Court, however, ruled that there was an apparent contradiction between the claim for refund and the deficiency assessments against Citytrust, and that the government could not be held in estoppel due to the negligence of its officials or employees, specially in cases involving taxes. For that reason, the case was remanded to the CTA for further reception of evidence. First, [respondent’s position] violates the order of the Supreme Court in directing [the CTA] to conduct further proceedings for the reception of petitioner’s evidence, and the disposition of the present case. Although the Supreme Court did not specifically mention what kind of petitioner’s evidence should be entertained, [the CTA] is of the opinion that the evidence should pertain only to the 1984 assessments which were the only assessments raised as a defense on appeal to the Court of Appeals and the Supreme Court. The assessments embodied in Exhibit “5” of respondent were never raised on appeal to the higher [c]ourts. Hence, evidence related to said assessments should not be allowed as this will lead to endless litigation. The tax court thereafter conducted the necessary proceedings. From the exhibits presented to it, the CTA determined that: (1) the deficiency and gross receipts taxes had been fully paid and (2) the deficiency income tax was only partially settled. Citytrust considered all its deficiency tax liabilities for 1984 fully settled, hence, it prayed that it be granted a refund. The CIR interposed his objection, however, alleging that Citytrust still had unpaid deficiency income, business and withholding taxes for the year 1985. Due to these deficiency assessments, the CIR insisted that Citytrust was not entitled to any tax refund. Second, [the CTA] has no jurisdiction to try an assessment case which was never appealed to it. With due respect to the Supreme Court’s decision, it is [the CTA’s] firm stand that in hearing a refund case, the CTA cannot hear in the same case an assessment dispute even if the parties involved are the same parties. xxx xxx xxx. (Citations omitted and emphasis supplied) The CTA set aside the CIR’s objections and granted the refund. The CA denied the CIR’s petition for review for lack of merit and affirmed the CTA decision. Issue: Is Citytrust entitled to the refund of its alleged overpaid income taxes for 1984 and 1985? Ruling: Citytrust is entitled to the refund. We uphold the findings and conclusion of the CTA and the CA. The CIR contends that respondent is not entitled to the refund of P13,314,506.14 as alleged overpaid income taxes for 1984 and 1985. The CIR claims that the CA erred in not holding that payment by Citytrust of its deficiency income tax was an admission of its tax liability and, therefore, a bar to its entitlement to a refund of income tax for the same taxable year. Records show that this Court made no previous direct ruling on Citytrust’s alleged failure to substantiate its claim for refund. Instead, the order of this Court addressed the apparent failure of the Bureau of Internal Revenue, by reason of the mistake or negligence of its officials and employees, to present the appropriate evidence to oppose respondent’s claim. In the earlier case, we directed the joint resolution of the issues of tax deficiency assessment and refund due to its particular circumstances. In resolving this case, the CTA did not allow a set-off or legal compensation of the taxes involved. The CTA reasoned: Again, the BIR interposed objection to the grant of such refund. It alleged that there are still deficiency income, business and withholding taxes proposed against petitioner for 1985. These Tax Case Digest The CTA complied with the Court’s order to conduct further proceedings for the reception of the CIR’s evidence in CTA Case No. 4099. In the course thereof, Citytrust paid the assessed deficiencies to remove all administrative impediments to BATAS TOMASINO 30 its claim for refund. But the CIR considered this payment as an admission of a tax liability which was inconsistent with Citytrust’s claim for refund. There is indeed a contradiction between a claim for refund and the assessment of deficiency tax. The CA pointed out that the case was remanded to the CTA for the reception of additional evidence precisely to resolve the apparent contradiction. The CTA dismissed the petition for lack of jurisdiction in a decision dated September 16, 1994, declaring that said petition was filed beyond the thirty (30)-day period reckoned from the time when the demand letter of January 24, 1991 by the Chief of the BIR Accounts Receivable and Billing Division was presumably received by Oceanic Wireless Network. Because of the CTA’s recognized expertise in taxation, its findings are not ordinarily subject to review specially where there is no showing of grave error or abuse on its part. Oceanic Wireless Network challenges the authority of the Chief of the Accounts Receivable and Billing Division of the BIR to decide and/or act with finality on behalf of the Commissioner of Internal Revenue on protests against disputed tax deficiency assessments. This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. Issue: Is a demand letter for tax deficiency assessments issued and signed by a subordinate officer who was acting in behalf of the Commissioner of Internal Revenue, deemed final and executory and subject to an appeal to the Court of Tax Appeals? Re: Assessment; Powers of the CIR; Delegation of Powers of the CIR to Subordinate Officers Oceanic Wireless Network v. CIR (Dec. 9, 2005) Facts: On March 17, 1988, Oceanic Wireless Network received from the Bureau of Internal Revenue (BIR) deficiency tax assessments for the taxable year 1984 in the total amount of P8,644,998.71 Petitioner filed its protest against the tax assessments and requested a reconsideration or cancellation of the same in a letter to the BIR Commissioner dated April 12, 1988. Acting in behalf of the BIR Commissioner, the Chief of the BIR Accounts Receivable and Billing Division, reiterated the tax assessments while denying petitioner’s request for reinvestigation. Upon Oceanic Wireless Network’s failure to pay the subject tax assessments within the prescribed period, the Assistant Commissioner for Collection, acting for the Commissioner of Internal Revenue, issued the corresponding warrants of distraint and/or levy and garnishment. Oceanic Wireless Network filed a Petition for Review with the Court of Tax Appeals to contest the issuance of the warrants to enforce the collection of the tax assessments. Tax Case Digest Ruling: A demand letter for tax deficiency assessments issued and signed by a subordinate officer who was acting in behalf of the Commissioner of Internal Revenue is valid. The authority to make tax assessments may be delegated to subordinate officers. Said assessment has the same force and effect as that issued by the Commissioner himself, if not reviewed or revised by the latter such as in this case. A demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. The determination on whether or not a demand letter is final is conditioned upon the language used or the tenor of the letter being sent to the taxpayer. In this case, the letter of demand dated January 24, 1991, unquestionably constitutes the final action taken by the Bureau of Internal Revenue on Oceanic Wireless Network’s request for reconsideration when it reiterated the tax deficiency assessments due from petitioner, and requested its payment. Failure to do so would result in the “issuance of a warrant of distraint and levy to enforce its collection without further notice.” In addition, the letter contained a notation indicating that petitioner’s request for reconsideration had been denied for lack of supporting documents. The demand letter received by Oceanic Wireless Network verily signified a character of finality. Therefore, it was tantamount to a rejection of the request for reconsideration. As correctly held by the Court of Tax Appeals, “while the denial of the protest was in the form of a demand letter, the notation in the said letter making BATAS TOMASINO 31 reference to the protest filed by petitioner clearly shows the intention of the respondent to make it as [his] final decision.” The demand letter issued and signed by a subordinate officer, acting in behalf of the Commissioner of Internal Revenue, has the same force and effect as that issued by the Commissioner himself, if not reviewed or revised by the latter The general rule is that the Commissioner of Internal Revenue may delegate any power vested upon him by law to Division Chiefs or to officials of higher rank. He cannot, however, delegate the four powers granted to him under the NIRC enumerated in Section 7. As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate under Section 204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. Tax Case Digest It is clear from the above provision that the act of issuance of the demand letter by the Chief of the Accounts Receivable and Billing Division does not fall under any of the exceptions that have been mentioned as non-delegable. A request for reconsideration must be made within thirty (30) days from the taxpayer’s receipt of the tax deficiency assessment, otherwise, the decision becomes final, unappealable and therefore, demandable. Oceanic Wireless Network failed to avail of its right to bring the matter before the Court of Tax Appeals within the reglementary period upon the receipt of the demand letter reiterating the assessed delinquent taxes and denying its request for reconsideration which constituted the final determination by the Bureau of Internal Revenue on petitioner’s protest. Being a final disposition by said agency, the same would have been a proper subject for appeal to the Court of Tax Appeals. Re: Tax Credit CIR v. Philippine National Bank (Oct. 25, 2005) Facts: Philippine National Bank (PNB) issued to the Bureau of Internal Revenue (BIR) PNB Cashier’s Check No. 109435 for P180,000,000.00. The check represented PNB’s advance income tax payment for the bank’s 1991 operations and was remitted in response to then President Corazon C. Aquino’s call to generate more revenues for national development. B requested the issuance of a tax credit certificate (TCC) to be utilized against future tax obligations of the bank but the same was not acted upon. For the first and second quarters of 1991, PNB also paid additional taxes amounting to P6,096,150.00 and P26,854,505.80, respectively, as shown in its corporate quarterly income tax return filed on May 30, 1991. Inclusive of the P180 Million aforementioned, PNB paid and BIR received in 1991 the aggregate amount of P212, 950,656.79. This final figure, if tacked to PNB’s prior year’s excess tax credit (P1,385,198.30) and the creditable tax withheld for 1991 (P3,216,267.29), adds up to P217,552,122.38. By the end of 1991, PNB’s annual income tax liability amounted to P144,253,229.78, which, when compared to its claimed total credits and tax payments of P217,552,122.38, resulted to a credit balance in its favor in the amount of P73,298,892.60. This credit balance was carried-over to cover tax liability for the years 1992 to 1996, but, as PNB alleged, was never applied owing to the bank’s negative tax position for the said inclusive years, having incurred losses during the 4-year period. BATAS TOMASINO 32 On July 28, 1997, PNB wrote the BIR Commissioner to inform her about the above developments and to reiterate its request for the issuance of a TCC, this time for the “unutilized balance of its advance payment made in 1991 amounting to P73,298,892.60”. The BIR decided not to take cognizance of the bank’s claim for tax credit certificate. On August 14, 2001, PNB again wrote the BIR requesting that it be allowed to apply its unutilized advance tax payment of P73,298,892.60 to the bank’s future gross receipts tax liability. The BIR Commissioner denied PNB’s claim for tax credit holding that such claim was time-barred. Issue: Is PNB entitled to tax credit for the unutilized balance of its advance payment made in 1991despite the lapse of more than two years? Ruling: PNB is entitled to tax credit. The two (2)-year prescriptive period is not applicable in this case. Recovery of advance payment is not similar to recovery of sums erroneously, excessively, illegally or wrongfully collected. The core issue in this case pivots on the applicability hereto of the two (2)-year prescriptive period under in Section 230 (now Sec. 229) of the NIRC, reading: “SEC. 230. Recovery of tax erroneously or illegally collected. – No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected , . . , or of any sum, alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two [(2)] years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Underscoring added.) PNB’s request for issuance of a tax credit certificate on the balance of its advance income tax payment cannot be treated as a simple case of excess payment as to be automatically covered by the two (2)-year limitation in Section 230 of the NIRC. Tax Case Digest Section 230 of the Tax Code, as couched, particularly its statute of limitations component, is, in context, intended to apply to suits for the recovery of internal revenue taxes or sums erroneously, excessively, illegally or wrongfully collected. Recovery of advance payment is not similar to recovery of sums erroneously, excessively, illegally or wrongfully collected Black defines the term erroneous or illegal tax as one levied without statutory authority. In the strict legal viewpoint, therefore, PNB’s claim for tax credit did not proceed from, or is a consequence of overpayment of tax erroneously or illegally collected. It is beyond cavil that respondent PNB issued to the BIR the check for P180 Million in the concept of tax payment in advance. What in effect transpired when PNB wrote its July 28, 1997 letter was that respondent sought the application of amounts advanced to the BIR to future annual income tax liabilities, in view of its inability to carry-over the remaining amount of such advance payment to the four (4) succeeding taxable years, not having incurred income tax liability during that period. The instant case ought to be distinguished from a situation where, owing to net losses suffered during a taxable year, a corporation was also unable to apply to its income tax liability taxes which the law requires to be withheld and remitted. In the latter instance, such creditable withholding taxes, albeit also legally collected, are in the nature of “erroneously collected taxes” which entitled the corporate taxpayer to a refund under Section 230 of the Tax Code. Analyzing the underlying reason behind the advance payment made by respondent PNB in 1991, the CA held that it would be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Section 230 of the Tax Code. So that even if the respondent’s inability to carry-over the remaining amount of its advance payment to taxable years 1992 to 1996 resulted in excess credit, it would be inequitable to impose the two (2)-year prescriptive period in Section 230 as to bar PNB’s claim for tax credit to utilize the same for future tax liabilities. PNB’s advance payment which are not “quarterly payments” reflected in the adjusted final return, but a lump sum payment to cover future tax obligations. Neither can such advance lump sum payment be considered overpaid income tax for a given taxable year, so that the carrying forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only. Clearly, limiting the right to carry-over the balance of respondent’s advance payment only to the immediately succeeding taxable year would be unfair and improper considering that, at the time payment was made, BIR was put on due notice of PNB’s intention to apply the entire amount to its future tax obligations. BATAS TOMASINO 33 An availment of a tax credit due for reasons other than the erroneous or wrongful collection of taxes may have a different prescriptive period. Absent any specific provision in the Tax Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code. Even if the two (2)-year prescriptive period, if applicable, had already lapsed, the same is not jurisdictional and may be suspended for reasons of equity and other special circumstances. BIR issued a Warrant of Distraint and/or Levy against petitioner BPI for the assessed deficiency DST for taxable year 1985, in the amount of P27,720.00. It served the Warrant on petitioner BPI only on 23 October 1992. Then again, petitioner BPI did not hear from the BIR until 11 September 1997, when it received a letter, dated 13 August 1997, denying its “request for reconsideration,” and addressing the points raised by petitioner BPI in its protest letter, dated 16 November 1989. Upon receipt of the letter from BPI proceeded to file a Petition for Review with the CTA on 10 October 1997. The suspension of the two (2)-year prescriptive period is warranted not solely by the objective or purpose pursuant to which PNB made the advance income tax payment in 1991. Records show that petitioner’s very own conduct led the bank to believe all along that its original intention to apply the advance payment to its future income tax obligations will be respected by the BIR. Notwithstanding PNB’s failure to request for tax credit after incurring negative tax position in 1992, up to taxable year 1996, there appears to be a valid reason to assume that the agreed carrying forward of the balance of the advance payment extended to succeeding taxable years, and not only in 1992. Thus, upon posting a net income in 1997 and regaining a profitable business operation, respondent bank promptly sought the issuance of a TCC for the reason that its credit balance of P73, 298,892.60 remained unutilized. BPI raised the defense of prescription of the right of respondent BIR Commissioner to enforce collection of the assessed amount. It alleged that respondent BIR Commissioner only had three years to collect on the Assessment, but she waited for seven years and nine months to deny the protest. It bears stressing that respondent PNB remitted the P180 Million in question as a measure of goodwill and patriotism, a gesture noblesse oblige, so to speak, to help the cash-strapped national government. It would be unfair to leave PNB to suffer losing millions of pesos advanced by it for future tax liabilities. The BIR has three years, counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has another three years after the assessment within which to collect the national internal revenue tax due thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer. Re: Assessment; Prescriptive Period of the Right to Collect Taxes; Documentary Stamp Tax Bank of the Philippine Islands v. CIR (Oct. 17, 2005) Facts: BPI on two separate occasions sold United States (US) $500,000.00 to the Central Bank of the Philippines (Central Bank), for the total sales amount of US$1,000,000.00. On 10 October 1989, the Bureau of Internal Revenue issued an Assessment finding petitioner BPI liable for deficiency DST on its afore-mentioned sales of foreign bills of exchange to the Central Bank. Issue: Is the right of respondent BIR Commissioner to collect from BPI the alleged deficiency DST for taxable year 1985 already prescribed? Ruling: The statute of limitations on collection of the deficiency DST has already prescribed. The period for the BIR to assess and collect an internal revenue tax is limited to three years by Section 203 of the Tax Code of 1977. In the present Petition, there is no controversy on the timeliness of the issuance of the Assessment, only on the prescription of the period to collect the deficiency DST following its Assessment. Counting the three-year prescriptive period, for a total of 1,095 days, from 20 October 1989, then the BIR only had until 19 October 1992 within which to collect the assessed deficiency DST. BPI protested the Assessment in a letter dated 16 November 1989. BPI did not receive any immediate reply to its protest letter. However, on 15 October 1992, the Tax Case Digest BATAS TOMASINO 34 SEC. 223. – Exceptions as to period of limitation of assessment and collection of taxes. – ... The earliest attempt of the BIR to collect on Assessment No. FAS-5-85-89-002054 was its issuance and service of a Warrant of Distraint and/or Levy on petitioner BPI. Although the Warrant was issued on 15 October 1992, previous to the expiration of the period for collection on 19 October 1992, the same was served on petitioner BPI only on 23 October 1992. (b) If before the expiration of the time prescribed in the preceding section for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. ... Under Section 223(c) of the Tax Code of 1977, as amended, it is not essential that the Warrant of Distraint and/or Levy be fully executed so that it can suspend the running of the statute of limitations on the collection of the tax. It is enough that the proceedings have validly began or commenced and that their execution has not been suspended by reason of the voluntary desistance of the respondent BIR Commissioner. Existing jurisprudence establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the Warrant and service thereof on the taxpayer. It is only logical to require that the Warrant of Distraint and/or Levy be, at the very least, served upon the taxpayer in order to suspend the running of the prescriptive period for collection of an assessed tax, because it may only be upon the service of the Warrant that the taxpayer is informed of the denial by the BIR of any pending protest of the said taxpayer, and the resolute intention of the BIR to collect the tax assessed. The service of the Warrant of Distraint and/or Levy on petitioner BPI on 23 October 1992 was already beyond the prescriptive period for collection of the deficiency DST, which had expired on 19 October 1992, then the letter of respondent BIR Commissioner, dated 13 August 1997 denying the protest of BPI and requesting payment of the deficiency DST is useless. The protest letter of BPI did not suspend the running of the prescriptive period for collecting the assessed DST Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. These provisions on the statute of limitations on assessment and collection of taxes shall be construed and applied liberally in favor of the taxpayer and strictly against the Government. According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, the prescriptive periods for assessment and collection of national internal revenue taxes, respectively, could be waived by agreement, to wit – Tax Case Digest (d) Any internal revenue tax which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. The agreements so described in the afore-quoted provisions are often referred to as waivers of the statute of limitations. The waiver of the statute of limitations, whether on assessment or collection, should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally. A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. A request for reconsideration or reinvestigation by the taxpayer, without a valid waiver of the prescriptive periods for the assessment and collection of tax, as required by the Tax Code and implementing rules, will not suspend the running thereof. BATAS TOMASINO 35 In the Petition at bar, BPI executed no such waiver of the statute of limitations on the collection of the deficiency DST. Without a valid waiver, the statute of limitations on collection by the BIR of the deficiency DST could not have been suspended. Of particular importance to the present case is one of the circumstances enumerated in Section 224 of the Tax Code of 1977, as amended, wherein the running of the statute of limitations on assessment and collection of taxes is considered suspended “when the taxpayer requests for a reinvestigation which is granted by the Commissioner.” There is a distinction between a request for reconsideration and a request for reinvestigation This Court gives credence to the argument of BPI that there is a distinction between a request for reconsideration and a request for reinvestigation. Revenue Regulations (RR) No. 12-85, issued on 27 November 1985 by the Secretary of Finance, upon the recommendation of the BIR Commissioner, governs the procedure for protesting an assessment and distinguishes between the two types of protest, as follows – PROTEST TO ASSESSMENT SEC. 6. Protest. The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation. . . ... For the purpose of the protest herein – (a) Request for reconsideration. – refers to a plea for a reevaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. (b) Request for reinvestigation. – refers to a plea for re-evaluation of an assessment on the basis of newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both. With the issuance of RR No. 12-85 on 27 November 1985 providing the abovequoted distinctions between a request for reconsideration and a request for reinvestigation, the two types of protest can no longer be used interchangeably and their differences so lightly brushed aside. It bears to emphasize that under Section Tax Case Digest 224 of the Tax Code of 1977, as amended, the running of the prescriptive period for collection of taxes can only be suspended by a request for reinvestigation, not a request for reconsideration. Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter can not. The protest letter of BPI, dated 16 November 1989 not specifically request for either a reconsideration or reinvestigation. A close review of the contents thereof would reveal that it protested the Assessment based on a question of law, in particular, whether or not petitioner BPI was liable for DST on its sales of foreign currency to the Central Bank in taxable year 1985. The same protest letter did not raise any question of fact; neither did it offer to present any new evidence. These considerations would lead this Court to deduce that the protest letter of BPI was in the nature of a request for reconsideration, rather than a request for reinvestigation and, consequently, Section 224 of the Tax Code of 1977, as amended, on the suspension of the running of the statute of limitations should not apply. Even if, for the sake of argument, this Court glosses over the distinction between a request for reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI as a request for reinvestigation, the filing thereof could not have suspended at once the running of the statute of limitations. Article 224 of the Tax Code of 1977, as amended, very plainly requires that the request for reinvestigation had been granted by the BIR Commissioner to suspend the running of the prescriptive periods for assessment and collection. The burden of proof that the taxpayer’s request for reinvestigation had been actually granted shall be on respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or implied from the actions of the respondent BIR Commissioner or his authorized BIR representatives in response to the request for reinvestigation. In the Suyoc case, this Court expressly conceded that a mere request for reconsideration or reinvestigation of an assessment may not suspend the running of the statute of limitations. It affirmed the need for a waiver of the prescriptive period in order to effect suspension thereof. However, even without such waiver, the taxpayer may be estopped from raising the defense of prescription because by his repeated requests or positive acts, he had induced Government authorities to delay collection of the assessed tax. BATAS TOMASINO 36 Conclusion Section 234 of the same Code which withdrew any exemption from realty tax heretofore granted to or enjoyed by all persons, natural or juridical. To summarize all the foregoing discussion, this Court lays down the following rules on the exceptions to the statute of limitations on collection. The statute of limitations on collection may only be interrupted or suspended by a valid waiver executed in accordance with paragraph (d) of Section 223 of the Tax Code of 1977, as amended, and the existence of the circumstances enumerated in Section 224 of the same Code, which include a request for reinvestigation granted by the BIR Commissioner. On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep. Act No. 7633, amending Bayantel’s original franchise. Rep. Act No. 7633 contained the following tax provision: SEC. 11. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code …. xxx. Even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is no request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer may still be held in estoppel and be prevented from setting up the defense of prescription of the statute of limitations on collection when, by his own repeated requests or positive acts, the Government had been, for good reasons, persuaded to postpone collection to make the taxpayer feel that the demand is not unreasonable or that no harassment or injustice is meant by the Government, as laid down by this Court in the Suyoc case. Re: Real Property Tax; Local Taxation; Exemption; Franchise Quezon City v. Bayan Telecommunications (March 6, 2006) Facts: Bayan Telecommunications, Inc. (Bayantel) is a legislative franchise holder under Republic Act No. 3259. Section 14 thereof reads: SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real estate, buildings and personal property, exclusive of the franchise, as other persons or corporations are now or hereafter may be required by law to pay. (b) The grantee shall further pay to the Treasurer of the Philippines each year, within ten days after the audit and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from the business transacted under this franchise by the said grantee Bayantel owned several real properties within Quezon City. In 1993, the government of Quezon City enacted City Ordinance No. SP91, S-93, otherwise known as the Quezon City Revenue Code (QCRC), imposing, under Section 5 thereof, a real property tax on all real properties in Quezon City, and, reiterating in its Section 6, the withdrawal of exemption from real property tax under Section 234 of the LGC. Meanwhile, on March 16, 1995, Rep. Act No. 7925, otherwise known as the “Public Telecommunications Policy Act of the Philippines,” envisaged to level the playing field among telecommunications companies, took effect. Section 23 of the Act provides: On January 1, 1992, Rep. Act No. 7160, otherwise known as the “Local Government Code of 1991” (LGC), took effect. Section 232 of the Code grants local government units within the Metro Manila Area the power to levy tax on real properties. Complementing the aforequoted provision is the second paragraph of Tax Case Digest BATAS TOMASINO SEC. 23. Equality of Treatment in the Telecommunications Industry. – Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. 37 On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the exclusion of its real properties in the city from the roll of taxable real properties. On its firm belief of its exempt status, Bayantel did not pay the real property taxes assessed against it by the Quezon City government. On account thereof, the Quezon City Treasurer sent out notices of delinquency for the total amount of P43,878,208.18, followed by the issuance of several warrants of levy against Bayantel’s properties preparatory to their sale at a public auction set on July 30, 2002. Despite the Constitutional grant of power of taxation to local government units, the power to tax is still primarily vested in the Congress. It does not change the doctrine that municipal corporations do not possess inherent powers of taxation. Issue: Are Bayantel’s real properties in Quezon City, under its franchise, exempt from real property tax? The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. As we explained in Mactan Cebu International Airport Authority: Ruling: Bayantel is exempt form real property tax. The realty tax exemption enjoyed by Bayantel under its original franchise, but subsequently withdrawn by force of Section 234 of the LGC, has been restored by Section 14 of Rep. Act No. 7633. Under Bayantel’s original franchise,the legislative intent expressed in the phrase “exclusive of this franchise” is to distinguish between two (2) sets of properties, be they real or personal, owned by the franchisee, namely, (a) those actually, directly and exclusively used in its radio or telecommunications business, and (b) those properties which are not so used. It is worthy to note that the properties subject of the present controversy are only those which are admittedly falling under the first category. To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or delegate to local governments of Congress’ inherent power to tax the franchisee’s properties belonging to the second group of properties indicated above, that is, all properties which, “exclusive of this franchise,” are not actually and directly used in the pursuit of its franchise. With the LGC’s taking effect on January 1, 1992, Bayantel’s “exemption” from real estate taxes for properties of whatever kind located within the Metro Manila area was, by force of Section 234 of the Code, expressly withdrawn. But, not long thereafter, however, or on July 20, 1992, Congress passed Rep. Act No. 7633 amending Bayantel’s original franchise. Worthy of note is that Section 11 of Rep. Act No. 7633 is a virtual reenacment of the tax provision, i.e., Section 14, supra, of Bayantel’s original franchise under Rep. Act No. 3259. Stated otherwise, Section 14 of Rep. Act No. 3259 which was deemed impliedly repealed by Section 234 of the LGC was expressly revived under Section 14 of Rep. Act No. 7633. In concrete terms, the realty tax exemption heretofore enjoyed by Bayantel under its original franchise, but subsequently withdrawn by force of Section 234 of the LGC, has been restored by Section 14 of Rep. Act No. 7633. Tax Case Digest Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units’ delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, “the power to tax is [still] primarily vested in the Congress.” According to Fr. Joaquin G. Bernas, S.J., Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass. BATAS TOMASINO 38 Congress has the power to grant exemptions over the power of local government units to impose taxes. The grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. The issue in this case no longer dwells on whether Congress has the power to exempt Bayantel’s properties from realty taxes by its enactment of Rep. Act No. 7633 which amended Bayantel’s original franchise. The more decisive question turns on whether Congress actually did exempt Bayantel’s properties at all by virtue of Section 11 of Rep. Act No. 7633. Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that the LGC has already withdrawn Bayantel’s former exemption from realty taxes, Congress opted to pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the same defining phrase “exclusive of this franchise” which was the basis for Bayantel’s exemption from realty taxes prior to the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that “the grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay.” The Court views this subsequent piece of legislation as an express and real intention on the part of Congress to once again remove from the LGC’s delegated taxing power, all of the franchisee’s (Bayantel’s) properties that are actually, directly and exclusively used in the pursuit of its franchise. Re: Exemption to Retroactive Application of BIR Rulings; VAT CIR v. Benguet Corporation (July 08, 2005) Facts: Under Sec. 99 of the National Internal Revenue Code, then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (“zero-rated”) depending on the classification of the transaction under Sec. 100 of the NIRC. Persons registered under the VAT system are allowed to recognize input VAT, or the VAT due from or paid by it in the course of its trade or business on importation of goods or local purchases of goods or service, including lease or use of properties, from a VAT-registered person. Tax Case Digest In January of 1988, Benguet Corporation applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank. On 28 August 1988, VAT Ruling No. 3788-88, which declared that “[t]he sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100 of the Tax Code, as amended by Executive Order No. 273.” Relying on its zero-rated status and the above issuances, Benguet Corporation sold gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT. Benguet Corporation’s applications were either unacted upon or expressly disallowed by petitioner. In addition, BIR issued a deficiency assessment against Benguet Corporation when, after applying Benguet Corporation’s creditable input VAT costs against the retroactive 10% VAT levy, there resulted a balance of excess output VAT. The express disallowance of Benguet Corporation’s application for refunds/credits and the issuance of deficiency assessments against it were based on a BIR ruling BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued subsequent to the consummation of the subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances. The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No. 22-92 which decreed that the revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining companies and, thus, could be applied retroactively. Benguet Corporation argued that a retroactive application of BIR VAT Ruling No. 008-92 would violate Sec. 246 of the NIRC, which mandates the non-retroactivity of rulings or circulars issued by the Commissioner of Internal Revenue that would operate to prejudice the taxpayer. The CIR on the other hand, maintained that BIR VAT Ruling No. 008-92 may validly be given retroactive effect since it was not prejudicial to Benguet Corporation. Issue: Is BIR VAT Ruling No. 008-92 not prejudicial Benguet Corporation, and consequently may validly be given retroactive? Ruling: BIR VAT Ruling No. 008-92 may not be validly given retrospective effect as against Benguet Corporation since it would suffer economic prejudice from such retroactive application. BATAS TOMASINO 39 This Court need not invalidate the BIR issuances, which have the force and effect of law, unless the issue of validity is so crucially at the heart of the controversy that the Court cannot resolve the case without having to strike down the issuances. Clearly, whether the subject VAT ruling may validly be given retrospective effect is the lis mota in the case. The sole issue to be addressed is whether Benguet Corporation’s sale of gold to the Central Bank during the period when such was classified by BIR issuances as zero-rated could be taxed validly at a 10% rate after the consummation of the transactions involved. VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of goods or properties and rendition of services in the course of trade or business, or the importation of goods. It is an indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or services. However, the party directly liable for the payment of the tax is the seller. In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters. On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer. To illustrate, in a zero-rated transaction, when a VAT-registered person (“taxpayer”) purchases materials from his supplier at P80.00, P7.30 of which was passed on to him by his supplier as the latter’s 10% output VAT, the taxpayer is allowed to recover P7.30 from the BIR, in addition to other input VAT he had incurred in relation to the zero-rated transaction, through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated transaction, say, for P110.00, he is not required to pay any output VAT thereon. In the case of a transaction subject to 10% VAT, the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier and his output VAT of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer. Thus, the buyer pays the total 10% VAT cost, in this case P10.00 on the product. In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental similarity between the two types of VAT ratings in that the taxpayer has the option Tax Case Digest not to take on any VAT payment for his transactions by simply exercising his right to pass on the VAT costs in the manner discussed above. Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of gold to the Central Bank from a 0% to 10% VAT rate provided that Benguet Corporation would be allowed the choice to pass on its VAT costs to the Central Bank. In the instant case, the retroactive application of VAT Ruling No. 008-92 unilaterally forfeited or withdrew this option of Benguet Corporation. The adverse effect is that Benguet Corporation became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that respondent suffered economic prejudice when its consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of Benguet Corporation’s transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank. The CIR posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial effect when viewed in relation to several available options to recoup whatever liabilities respondent may have incurred, i.e., respondent’s input VAT may still be used (1) to offset its output VAT on the sales of gold to the Central Bank or on its output VAT on other sales subject to 10% VAT, and (2) as deductions on its income tax under Sec. 29 of the Tax Code. On petitioner’s first suggested recoupment modality, Benguet Corporation counters that its other sales subject to 10% VAT are so minimal that this mode is of little value. Moreover, Benguet Corporation points out that after having been imposed with 10% VAT sans the opportunity to pass on the same to the Central Bank, it was issued a deficiency tax assessment because its input VAT tax credits were not enough to offset the retroactive 10% output VAT. The prejudice then experienced by Benguet Corporation lies in the fact that the tax refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output VAT liability. The second recourse that the CIR has suggested to offset any resulting prejudice to Benguet Corporation as a consequence of giving retroactive effect to BIR VAT Ruling No. 008-92 is to constituted Benguet Corporation as the final entity against which the costs of the tax passes-on shall legally stop; hence, the input taxes may be converted as costs available as deduction for income tax purposes. BATAS TOMASINO 40 Even assuming that the right to recover Benguet Corporation’s excess payment of income tax has not yet prescribed, this relief would only address Benguet Corporation’s overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for Benguet Corporation because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice enough. Moreover, there is in fact nothing left to claim as a deduction from income taxes. At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by Benguet Corporation ordained that gold sales to the Central Bank were zero-rated. Benguet Corporation should not be faulted for relying on the BIR’s interpretation of the said laws and regulations. While it is true that government is not estopped from collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of justice and fairplay, as has been done in the instant matter. For, it is primordial that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Before Benguet Corporation was entitled to tax refunds or credits based on BIR’s own issuances. Then suddenly, it found itself instead being made to pay deficiency taxes with BIR’s retroactive change in the VAT categorization of respondent’s transactions with the Central Bank. This is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids. Tax Case Digest BATAS TOMASINO 41