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.
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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
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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
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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
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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
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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