MANILA ELECTRIC COMPANY, petitioner, vs. MISAEL P. VERA,
in his capacity as Commissioner of Internal Revenue, respondent. G.R. No. L-29987 October 22, 1975 FACTS:
CTA: MERALCO is not exempt from paying the compensating tax provided for in Section 190 of the National Internal Revenue Code, the purpose of which is to "place casual importers, who are not merchants on equal putting with established merchants who pay sales tax on articles imported by them." The court further stated that MERALCO's claim for exemption from the payment of the compensating tax is not clear or expressed, contrary to the cardinal rule in taxation that "exemptions from taxation are highly disfavored in law, and he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law.
MERALCO FRANCHISE: The grantee shall be liable to pay the same taxes upon its real estate, buildings, plant (not including poles, wires, transformers, and insulators), machinery, and personal property as other persons are or may be hereafter by law to pay
ISSUE: Is Manila Electric Company (MERALCO for short) exempt from payment of a compensating tax on poles, wires, transformers, and insulators imported by it for use in the operation of its electric light, heat, and power system? MERALCO answers the query in the affirmative while the Commissioner of Internal Revenue asserts the contrary.
HELD: NO MERIT.
One who claims to be exempt from the payment of a particular tax must do so under clear and unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer, they being highly disfavored and may almost be said "to be odious to the law." He who claims an exemption must be able to print to some positive provision of law creating the right; it cannot be allowed to exist upon a mere vague implication or inference.
We do not see in paragraph 9 of its petitioner's franchise, on the assumption that it does exist as worded, what may be considered as "plain and unambiguous terms" declaring petitioner MERALCO exempt from paying a compensating tax on its imports of poles, wires, transformers, and insulators. What MERALCO really wants Us to do, but which We cannot under the principles enumerated earlier, is to infer and imply that there is such an exemption from the following phrase: "... the grantee shall pay to the City of Manila five per centum of the gross earnings received from its business ... and shall be in lieu of all taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted." Note that what the above provision exempts petitioner from, is the payment of property, tax on its poles, wires, transformers, and insulators; it does not exempt it from payment of taxes like the one in question which, by mere necessity or consequence alone, fall upon property.
It is a well-settled rule or principle in taxation that a compensating tax is not a property tax but is an excise tax. 5 Generally stated, an excise tax is one that is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. A tax upon property because of its ownership its a direct tax, whereas one levied upon property because of its use is an excise duty.
If it had been the legislative intent to exempt MERALCO from paying a tax on the use of imported equipment, the legislative body could have easily done so by expanding the provision of paragraph 9 and adding to the exemption such words as "compensating tax" or "purchases from abroad for use in its business," and the like. We cannot ignore the principle that express mention in a statute of one exemption precludes reading others into it.
The broad statement that the tax upon the gross earning of telephone companies shall be "in lieu of all other taxation" upon them is not necessarily to be given a literal meaning. "In construing the act it is our duty to seek the real intent of the legislature, even though by so doing we may limit the literal meaning of the broad language used."
The rationale of Republic Act 901 is "to encourage the establishment or exploitation of new and necessary industries to promote the economic growth of the country," and because "an entrepreneur engaging in a new and necessary industry faces uncertainty and assumes a risk bigger than one engaging in a venture already known and developed ... the law grants him tax exemption to lighten onerous financial burdens and reduce losses."
AFFIRM CTA.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION, plaintiff-appellant, vs. THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL, defendant-appellee. G.R. No. L-24265 December 28, 1979 FACTS: Plaintiff is engaged in the manufacture of soap, edible oil, margarine and other similar products, and for this purpose maintains a "bodega" in defendant Municipality where it stores copra purchased in the municipality and therefrom ships the same for its manufacturing and other operations. ORDINANCE: Any person, firm or corporation having a deposit of exportable copra in the bodega, within the jurisdiction of the Municipality of Jagna Bohol, shall pay to the Municipal Treasury a storage fee of TEN (P0.10) CENTAVOS FOR EVERY HUNDRED (100) kilos For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under protest, storage fees in the total sum of 1142,265.13. Plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it prayed that 1) Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and void for being beyond the power of the Municipality to enact; and 2) that defendant Municipality be ordered to refund to it the amount of P42,265.13 which it had paid under protest ISSUE: Whether defendant Municipality was authorized to impose and collect the storage fee provided for in the challenged Ordinance under the laws then prevailing. HELD: The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon municipalities by Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing law when the Ordinance was enacted. TAX 1 CASE DIGESTS BATCH 2 2
A municipality is authorized to impose three kinds of licenses: (1) a license for regulation of useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or enterprises; and (3) license for revenue.
The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on persons, firms and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within the Municipality's territorial jurisdiction.
For it has been held that a warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration because the oil content of the copra when ignited is difficult to put under control by water and the use of chemicals is necessary to put out the fire.
And as the Ordinance itself states, all exportable copra deposited within the municipality is "part of the surveillance and lookout of municipal authorities. The question of whether appellant is engaged in that business or not is irrelevant because the storage fee, as previously mentioned, is an imposition on the privilege of storing copra in a bodega within defendant municipality by persons, firms or corporations. Section 1 of the Ordinance in question does not state that said persons, firms or corporations should be engaged in the business or occupation of buying or selling copra. Moreover, by plaintiff's own admission that it is a consolidated corporation with its trading company, it will be hard to segregate the copra it uses for trading from that it utilizes for manufacturing.
Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not amount to double taxation. For double taxation to exist, the same property must be taxed twice, when it should be taxed but once. Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the same thing. Surely, a tax on plaintiff's products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality. AFFIRM JUDGMENT. DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF THE PHILIPPINES, respondents. G.R. No. 78780 July 23, 1987 FACTS: Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively, of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme Court, from making any deduction of withholding taxes from their salaries SUBMIT: Any tax withheld from their emoluments or compensation as judicial officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of the 1987 Constitution mandating that "during their continuance in office, their salary shall not be decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in and by said Constitution." HELD: It was further expressly made clear, specially with regard to Commissioner Joaquin F. Bernas' accepted amendment to the amendment of Commissioner Rigos, that the salaries of members of the Judiciary would be subject to the general income tax applied to all taxpayers. The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973 Constitution, for which reason, petitioners claim that the intent of the framers is to revert to the original concept of "non-diminution "of salaries of judicial officers. And I know right now, for instance, there are many people who have accepted employment in the government involving a reduction of income and yet are still subject to income tax. So, they are not the only citizens whose income is reduced by accepting service in government. It is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a strained construction to read into the provision an exemption from taxation in the light of the discussion in the Constitutional Commission. Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations of their representatives, in the spirit that all citizens should bear their aliquot part of the cost of maintaining the government and should share the burden of general income taxation equitably. PETITION DISMISSED. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. L-54908 January 22, 1990 FACTS: Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government TAX 1 CASE DIGESTS BATCH 2 3 ISSUE: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code. HELD: The nature of the above contract shows that the same is not just a simple contract of loan. It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be produced by the installed concentrator. It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be the party in interest in this case. Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion. CTA REVERSED. REPUBLIC BANK, Petitioner, v. COURT OF TAX APPEALS AND THE COMMISSIONER OF INTERNAL REVENUE, Respondents. G.R. Nos. 62554-55 September 2, 1992 FACTS: Commissioner assessed petitioner the amount of P1,060,615.06, plus 25% surcharge in the amount of P265,153.76, or a total of P1,325,768.82, as 1% monthly bank reserve deficiency tax for taxable year 1969 Petitioner contends that Section 249 of the Tax Code is no longer enforceable, because Section 126 of Act 1459, which was allegedly the basis for the imposition of the 1% reserve deficiency tax, was repealed by Section 90 of Republic Act 337, the General Banking Act, and by Sections 100 and 101 of Republic Act 265 Both petitioner and public respondent agree that:
The requirement on the maintenance of bank reserves, previously found in Section 126 of Act 1459 (The Corporation Law), remained prescribed, after its repeal, in
a. Sec. 26, RA 337 4 subjecting the deposit liabilities of commercial banks including the Philippine National Bank to the reserve requirements and other conditions prescribed by the Monetary Board in accordance with the authority granted to 1t under the Central Bank Act.
b. Sec. 100, RA 265 5 requiring banks to maintain reserves against their deposit liabilities;
c. Sec. 101, RA 265 6 authorizing the Monetary Board to prescribe and to modify the minimum reserved ratios applicable to each class of peso deposits;
d. Sec. 106, RA 265 7 imposing a penalty of 1/10 of 1% for violation of the Banking Law."
Petitioner Republic argues then that in case of a reserve deficiency, the violating bank would be liable at the same time for a tax of 1% a month (Second paragraph, Section 249, NIRC) payable to the Bureau of Internal Revenue as well as a penalty of 1/10 of 1% a day (Section 106, Central Bank Act) payable to the Central Bank
HELD: DENY PETITION.
Dura lex sed lex!
While petitioner might have a point, the wisdom of this legislation is not the province of the Court. 11 It is clear from the statutes then in force that there was no double taxation involved one was a penalty and the other was a tax. At any rate, We have upheld the validity of double taxation. 12 The payment of 1/10 of 1% for incurring reserve deficiencies (Section 106, Central Bank Act) is a penalty as the primary purpose involved is regulation, 13 while the payment of 1% for the same violation (Second Paragraph, Section 249, NIRC) is a tax for the generation of revenue which is the primary purpose in this instance. 14 Petitioner should not complain that it is being asked to pay twice for incurring reserve deficiencies. It can always avoid this predicament by not having reserve deficiencies. Petitioners case is covered by two special laws one a banking law and the other, a tax law. These two laws should receive such construction as to make them harmonize with each other and with the other body of pre-existing laws. TAXATION; DOUBLE TAXATION DEFINED; NOT PRESENT WHEN ONE IS A PENALTY AND THE OTHER IS A TAX; CASE AT BAR.
The wisdom of this is not the province of the Court. It is clear from the statutes then in force that there was no double taxation involved one was a penalty and the other was a tax. At any rate, We have upheld the validity of double taxation. (Double taxation: when the same person is taxed by the same jurisdiction for the same purpose. [San Miguel Brewery, Inc. v. City of Cebu 43 SCRA 275, 280]) The payment of 1/10 of 1% for incurring reserve deficiencies (Section 106, Central Bank Act) is a penalty as the primary purpose involved is regulation, while the payment of 1% for the same violation (Second Paragraph, Section 249, NIRC) is a tax for the generation of revenue which is the primary purpose in this instance. Petitioner should not complain that it is being asked to pay twice for incurring reserve deficiencies. It can always avoid this predicament by not having reserve deficiencies. Petitioners case is covered by two special laws one a banking law and the other, a tax law. These two laws should receive such construction as to make them harmonize with each other and with the other body of pre-existing laws.
NATIONAL POWER CORPORATION, petitioner, vs. PROVINCE OF LANAO DEL SUR, LANAO DEL SUR GOVERNOR SAIDAMEN B. PANGARUNGAN and LANAO DEL SUR PROVINCIAL TREASURER HADJI MACMOD L. DALIDIG, respondents. G.R. No. 96700 November 19, 1996
FACTS: TAX 1 CASE DIGESTS BATCH 2 4
Petitioner National Power Corporation is the owner of certain real properties situated in Saguiaran, Lanao del Sur
Said properties comprised petitioner's Agus II Hydroelectric Power Plant Complex. Petitioner was assessed real estate taxes on said properties in the amount of one hundred fifty four million one hundred fourteen thousand eight hundred fifty four pesos and eighty two centavos (P154,114,854.82) covering the period from June 14, 1984 to December 31, 1989, allegedly because petitioners exemption from realty taxes had been withdrawn. Anent the tax exempt status of petitioner for the period up to December 31, 1989, the following are the relevant laws and resolutions: (1) Commonwealth Act No. 120, which became effective on November 3, 1936, created the petitioner as a non-profit public corporation wholly owned by the government of the Republic of the Philippines tasked to undertake the development of hydraulic power and the production of power from other sources. Section 13 thereof exempted it from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedes bonds, in any court or administrative proceedings to enable the Corporation to pay its indebtedness and obligations. (2) Section 2 of Republic Act No. 358, which took effect on June 4, 1949, exempted petitioner from all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and municipalities in order to facilitate payment of its indebtedness. (3) Republic Act No. 6395, which took effect on September 10, 1971, revised the charter of the petitioner ISSUE: Is petitioner National Power Corporation liable for real property taxes for the period June 14, 1984 to December 31, 1989 amounting to more than P154 million? To compel payment of petitioners alleged delinquency in its realty taxes, did respondents act correctly in selling at public auction petitioners real properties on which is situated its hydroelectric power plant complex? HELD:
Pivotal issue: whether or not petitioner has ceased to enjoy its tax and duty exemption privileges, including its exemption from payment of real property taxes. Petitioners position, simply put, is that it has never been effectively deprived of its tax and duty exemption privileges granted under CA 120, as amended, and RA 6395, as amended, and which, although temporarily withdrawn, were just as quickly restored, such that at no time did it lose its tax-exempt status. Hence, never did it become liable for realty taxes, and therefore, the subject properties were wrongfully levied upon and sold at auction. On the other hand, respondents position is that the petitioners exemption from payment of realty taxes had been withdrawn or revoke by virtue of PD 1931, and had never been validly restored by the FIRB Resolutions aforementioned, nor by the memorandum of Exec. Sec. Macaraig, Jr., thereby rendering petitioner liable for realty taxes for the period June 14, 1984 up to December 31, 1989
By virtue of FIRB Resolution No. 1-86, Hon. Virata fully restored the tax exemption as of July 1, 1985, to continue for an indefinite period. He also signed the same in his dual capacities as Minister of Finance and as Chairman of the FIRB. The resolution specifically provided that: 2. The NPC as a government corporation is exempt from the real property tax on land and improvements owned by it x x x pursuant to the provisions of Section 40 (a) of the Real Property Tax Code, as amended. While EO 93 again withdrew the tax exemption of petitioner, through its Section 1, as follows: Section 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except: x x x x x x x x x f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board. Nevertheless. It also stated: Section 2. The Fiscal Incentives Review Board created under PD 776, as amended, is hereby authorized to: (a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part; Pursuant thereto, FIRB Resolution No. 17-87 restored the tax exemption privileges of the petitioner effective March 10, 1987. Again, the resolution was signed by De Roda, Jr. in his dual capacities as Acting Secretary of Finance and as Chairman, FIRB. This resolution was confirmed and approved by then Acting Executive Secretary Macaraig, by the authority of the President. Considering the entire chain of events, it is clear that petitioners tax exemptions for the period in question (1984-1989) had effectively been preserved intact by virtue of their restoration through FIRB resolutions. To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly approved by the Minister of Finance, hence they are valid and effective. To this extent, this decision modifies or supersedes the Courts earlier decision in Albay afore-referred to.
The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its non-delegation the exception. The reason is the increasing complexity of modern life and many technical fields of governmental functions as in matters pertaining to tax exemptions. This is coupled by the growing inability of the legislature to cope directly with the many problems demanding its attention. The growth of society has ramified its activities and created peculiar and sophisticated problems that the legislature cannot be expected reasonably to comprehend. Specialization even in legislation has become necessary. To many of the problems attendant upon present day undertakings, the legislature may not have the competence, let alone the interest and the time, to provide the required direct and efficacious, not to say specific solutions. The inescapable conclusion is that the tax exemption privileges of petitioner had been validly restored and preserved by said FIRB resolutions. SUBJECT PROPERTIES EXEMPT FROM REALTY TAXES
The exemption is not only legally defensible, but also logically unassailable. The properties in question comprise the site of the entire Agus II Hydroelectric Power Plant Complex, which generates and supplies relatively cheap electricity to the island of Mindanao. These are government properties, wholly owned by petitioner and devoted TAX 1 CASE DIGESTS BATCH 2 5 directly and solely for public service and utilized in the implementation of the state policy of bringing about the total electrification of the country at the least cost to the public, through the development of power from all sources to meet the needs of industrial development and rural electrification. It can be noted, from RA 6395, PD 380 and PD 938, that petitioners non-profit character has been maintained throughout its existence, and that petitioner is mandated to devote all its returns from capital investment and excess revenues from operations to its expansion
At this juncture, we hasten to point out that the foregoing ruling is solely with respect to the purported realty tax liabilities of petitioner for the period from June 14, 1984 to December 31, 1989. We shall not, in this Decision, rule upon the effect (if any) of Republic Act No. 7160, otherwise known as the Local Government Code of 1991, upon petitioners tax-exempt status; we merely make mention of the fact that the exemption claimed by petitioner is partly based on PD 464 which, though repealed by the Local Government Code in its paragraph (c), Section 534, Title Four of Book IV, was still good law during the period the exemption was being claimed in the instant case.
A denial of the tax-exempt status of NPC, as sought by respondents, would not only be legally untenable and subversive of doctrinal stability but would also lead to disastrous practical consequences. It should be noted that in this case, respondent province has already auctioned off, purchased and caused to be registered in its name the subject real properties of petitioner on which the Agus II Hydroelectric Power Plant Complex is built. Thus, should the FIRB resolutions be deemed void, then the ownership of the auctioned properties including the hydro-electric plant would be legally vested in respondent province. Additionally, other local government entities might even be induced to covet and grab other properties of the NPC in the guise of collecting local taxes. The far-reaching consequence of such eventuality would not be difficult to imagine. Definitely, it would seriously impair the capacity of the National Power Corporation to fulfill its statutory mandate to carry out the total electrification of the Philippines through the development of power from all sources to meet the needs of industrial development and rural electrification. In the end, the Supreme Court has the constitutional duty not only of interpreting and applying the law in accordance with prior doctrines but also of protecting society from the improvidence and wantonness wrought by needless upheavals in such interpretations and applications. Interest rei publicae ut finis sit litium
PETITION GRANTED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents. G.R. No. 127105 June 25, 1999 FACTS: Respondent, a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP- US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)] The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA)
Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments
ISSUE: WHETHER THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY. HELD: The petition is meritorious. We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty
Private respondent S.C. Johnson avers that the instant petition should be denied (1) because it contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation" clause under the RP- US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances"
The main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a non- resident foreign corporation. The provision states insofar as pertinent that 1) Royalties derived by a resident of one of the Contracting States TAX 1 CASE DIGESTS BATCH 2 6 from sources within the other Contracting State may be taxed by both Contracting States. 2) However, the tax imposed by that Contracting State shall not exceed. a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties; (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related". In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17
The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three rates 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP- Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid
The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable TAX 1 CASE DIGESTS BATCH 2 7 tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country. At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable.
PETITION GRANTED.
BIBIANO V. BAAS, JR., petitioner, vs. COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO TALON, respondents. G.R. No. 102967 February 10, 2000 FACTS: On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight hundred forty- seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal consecutive annual installments, with twelve (12%) percent interest per annum on the outstanding balance. AYALA issued one promissory note covering four equal annual installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February 20, 1977, and every year thereafter, or until February 20, 1980. In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition of capital asset. In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) pesos 4 as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year. Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976. Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00) pesos. On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of one thousand, five hundred twenty-five pesos and sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his sale of land to AYALA was on cash basis. ISSUE: whether P.D. Nos. 1740 and 1840 which granted tax amnesties also granted immunity from criminal prosecution against tax offenses, the pertinent sections of these laws state: HELD: The pertinent sections of these laws state: P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT. x x x x x x x x x Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for any or all of the taxable years 1974 to 1979, had failed to file a return is hereby, allowed to file a return for each of the aforesaid taxable years and accurately declare therein the true and correct income, deductions and exemptions and pay the income tax due per return. Likewise, any individual who filed a false or fraudulent return for any taxable year in the period mentioned above may amend his return and pay the correct amount of tax due after deducting the taxes already paid, if any, in the original declaration. (emphasis ours) x x x x x x x x x Sec. 5. Immunity from Penalties. Any individual who voluntarily files a return under this Decree and pays the income tax due thereon shall be immune from the penalties, civil or criminal, under the National Internal Revenue Code arising from failure to pay the correct income tax with respect to the taxable years from which an amended return was filed or for which an original return was filed in cases where no return has been filed for any of the taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in cases where the amount of net taxable income declared under this Decree is understated to the extent of 25% or more of the correct net taxable income. (emphasis ours) P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH. Sec. 1. Coverage. In case of voluntary disclosure of previously untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever, realized here or abroad, by any individual taxpayer, which are taxable under the National Internal Revenue Code, as amended, the assessment and collection of all internal revenue taxes, including the increments or penalties on account of non-payment, as well as all civil, criminal or administrative liabilities arising from or incident thereto under the National Internal Revenue Code, are hereby condoned provided that the individual taxpayer shall pay. (emphasis ours) . . . Sec. 2. Conditions for Immunity. The immunity granted under Section one of this Decree shall apply only under the following conditions: TAX 1 CASE DIGESTS BATCH 2 8 a) Such previously untaxed income and/or wealth must have been earned or realized in any of the years 1974 to 1980; b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax due thereon; c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per taxable year; and d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as required under Section 6 hereof. It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he discounted the promissory note covering the future installments. The discounting seems questionable because ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts a certain percentage from the principal value as its compensation. Here, the discounting was done by the buyer. On July 2, 1981, two weeks after the filing of the tax evasion complaint against him by respondent Larin on June 17, 1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income. 10
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 11 Hence, on this matter, it is our view that petitioner's claim of immunity from prosecution under the shield of availing tax amnesty is untenable. We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly believed that the law allowed him to declare the sale of the land, in installment. We can further grant that the pertinent tax laws needed construction, as we have earlier done. That petitioner was offended by the headlines alluding to him as tax evader is also fully understandable. All these, however, do not justify what amounted to a baseless prosecution of respondent Larin. Petitioner presented no evidence to prove Larin extorted money from him. He even admitted that he never met nor talked to respondent Larin. When the tax investigation against the petitioner started, Larin was not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin's instruction, petitioner's tax assessment was considered one involving a sale of capital asset, the income from which was subjected to only fifty percent (50%) assessment, thus reducing the original tax assessment by half. These circumstances may be taken to show that Larin's involvement in extortion was not indubitable. Yet, petitioner went on to file the extortion cases against Larin in different fora. This is where actual malice could attach on petitioner's part. Significantly, the trial court did not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals. Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of moral and exemplary damages in favor of respondent Larin. The appellate court believed respondent Larin when he said he suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's actions against Larin were found "unwarranted and baseless," and the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all dismissed. 30 Hence, there is adequate support for respondent court's conclusion that moral damages have been proved. CA DECISION IS AFFIRMED WITH MODIFICATION.