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Madrigal v.

Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914.
The marriage was contracted under the provisions of law concerning conjugal
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
Vicente Madrigal was contending that the said declared income does not represent his
income for the year 1914 as it was the income of his conjugal partnership with Paterno.
He said that in computing for his additional income tax, the amount declared should be
divided by 2.
The revenue officer was not satisfied with Madrigals explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08
alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be
divided into 2 in computing for the additional income tax.

No! The point of view of the CIR is that the Income Tax Law, as the name implies,
taxes upon income and not upon capital and property.
The essential difference between capital and income is that capital is a fund; income is
a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of wealth.
As Paterno has no estate and income, actually and legally vested in her and entirely
distinct from her husbands property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in computing for his tax
since he is arguing that he has a conjugal partnership with his wife. However, the court
ruled that the one that should be taxed is the income which is the flow of the capital,
thus it should not be divided into 2.

FACTS:The owner of 80% of the outstanding shares of respondent Filinvest Alabang,
Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding company
which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). FDC
and FAI entered into a Deed of Exchange with FLI whereby the former both transferred
in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for
said parcels which were intended to facilitate development of medium-rise residential
and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and

Later, FLI requested a ruling from the BIR to the effect that no gain or loss should be
recognized in the aforesaid transfer of real properties. Acting on the request, the BIR
issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is
among those contemplated under Section 34 (c) (2) of the old NIRC (Now Section 40,
NIRC) which provides that (n)o gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for a stock in such corporation of
which as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation."With the BIRs reiteration
of the foregoing ruling upon the request for clarification filed by FLI,the latter, together
with FDC and FAI, complied with all the requirements imposed in the ruling.

On various dates during the years 1996 and 1997, in the meantime, FDC also
extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar
Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI). Duly evidenced by
instructional letters as well as cash and journal vouchers, said cash advances amounted
to P2,557,213,942.60 in 1996 and P3,360,889,677.48 in 1997. FDC also entered into a
Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a
Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked
to develop and manage FDCs 50% ownership of its PBCom Office Tower Project (the
Project). With their equity participation in FAC respectively pegged at 60% and 40% in
the Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said
joint venture company to RHPLs subscription worth P433.8 million. Having paid its
subscription by executing a Deed of Assignment transferring to FAC a portion of its
rights and interest in the Project worth P500.7 million, FDC eventually reported a net
loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.

Then, FDC received from the BIR a Formal Notice of Demand to pay deficiency income
and documentary stamp taxes, plus interests and compromise penalties, covered by the
following Assessment Notices, viz.: (a) Assessment Notice for deficiency income taxes in
the sum of P150,074,066.27 for 1996; (b) Assessment Notice for deficiency documentary
stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice for deficiency
income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment for deficiency
documentary stamp taxes in the sum of P5,796,699.40 for 1997. The foregoing
deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the
Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the
Shareholders Agreement FDC executed with RHPL as well as the arms-length
interest rate and documentary stamp taxes imposable on the advances FDC extended to
its affiliates.
FAI similarly received from the BIR a Formal Letter of Demand for deficiency income
taxes in the sum of P1,477,494,638.23 for the year 1997. Covered by Assessment Notice,
said deficiency tax was also assessed on the taxable gain purportedly realized by FAI
from the Deed of Exchange it executed with FDC and FLI. Within the reglementary
period of thirty (30) days from notice of the assessment, both FDC and FAI filed their
respective requests for reconsideration/protest, on the ground that the deficiency
income and documentary stamp taxes assessed by the BIR were bereft of factual and
legal basis. Having submitted the relevant supporting documents pursuant to the 31
January 2000 directive from the BIR Appellate Division, FDC and FAI filed a letter
requesting an early resolution of their request for reconsideration/protest on the ground
that the 180 days prescribed for the resolution thereof under Section 228 of the NIRC
was going to expire on 20 September 2000.
In view of the failure of petitioner CIR to resolve their request for
reconsideration/protest within the aforesaid period, FDC and FAI filed a petition for
review with the CTA. The petition alleged, among other matters, that as previously
opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from
the subject Deed of Exchange since FDC and FAI collectively gained further control of
FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to
impute theoretical interests on the cash advances FDC extended in favor of its affiliates,
the rule is settled that interests cannot be demanded in the absence of a stipulation to
the effect; that not being promissory notes or certificates of obligations, the instructional
letters as well as the cash and journal vouchers evidencing said cash advances were not
subject to documentary stamp taxes; and, that no income tax may be imposed on the
prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a
consequence, FDC and FAC both prayed that the subject assessments for deficiency
income and documentary stamp taxes for the years 1996 and 1997 be cancelled and
CTA decision - went on to render the decision dated 10 September 2002 which, with the
exception of the deficiency income tax on the interest income FDC supposedly realized
from the advances it extended in favor of its affiliates, cancelled the rest of deficiency
income and documentary stamp taxes assessed against FDC and FAI for the years 1996
and 1997. However [FDC] is ordered to pay the amount of P5,691,972.03 as deficiency
income tax for taxable year 1997. In addition, FDC is also ordered to pay 20%
delinquency interest computed from February 16, 2000 until full payment thereof
pursuant to Section 249 (c) (3) of the Tax Code.1

Dissatisfied with the foregoing decision, FDC filed petition for review -- Calling
attention to the fact that the cash advances it extended to its affiliates were interest-free
in the absence of the express stipulation on interest required under Article 1956 of the
Civil Code, FDC questioned the imposition of an arm's-length interest rate thereon on
the ground, among others, that the CIR's authority under Section 43 of the NIRC: (a)
does not include the power to impute imaginary interest on said transactions; (b) is
directed only against controlled taxpayers and not against mother or holding
corporations; and, (c) can only be invoked in cases of understatement of taxable net
income or evident tax evasion.

1[26] Id. at 477.
CA upheld FDCs position and reversed and set aside CTA deicision.

ISSUE:Whether or not the advances extended by FDC to its affiliates are
subject to income tax and also subject to interest.

RATIO: Yes. Section 43 [now Section 50] of the 1993 National Internal Revenue Code
(NIRC) provides that. (i)n case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner of Internal
Revenue [(CIR)] is authorized to distribute, apportion or allocate gross income or
deductions between or among such organization, trade of business, if he determines that
such distribution, apportionment or allocation is necessary in order to prevent evasion
of taxes or clearly to reflect the income of any such organization, trade or business,
Section 179 of Revenue Regulations No. 2 provides in part that (i)n determining the
true net income of a controlled taxpayer, the [CIR] is not restricted to the case of
improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to
the case of a device designed to reduce of avoid tax by shifting or distorting income or

The authority to determine true net income extends to any case in which either by
inadvertence or design the taxable net income in whole or in part, of a controlled
taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs
been an uncontrolled taxpayer dealing at arms length with another uncontrolled
taxpayer. Despite the broad parameters provided, however, the CIRs power of
distribution, apportionment or allocation of gross income and deductions under the
NIRC and Revenue Regulations No. 2 do not include the power to impute theoretical
interests to the taxpayers transactions. Pursuant to Section 28 [now Section 32] of the
NIRC, the term gross income is understood to mean all income from whatever source
derived, including, but not limited to certain items.

While it has been held that the phrase from whatever source derived indicates a
legislative policy to include all income not expressly exempted within the class of taxable
income under Philippine laws, the term income has been variously interpreted to
mean cash received or its equivalent, the amount of money coming to a person within
a specific time or something distinct from principal or capital. Otherwise stated, there
must be proof of the actual or, at the very least, probable receipt or realization by the
controlled taxpayer of the item of gross income sought to be distributed, apportioned or
allocated by the CIR. In this case, there is no evidence of actual or possible showing that
the advances taxpayer extended to its affiliates had resulted to interests subsequently
assessed by the CIR.

Even if the Court were to accord credulity to the CIRs assertion that taxpayer had
deducted substantial interest expense from its gross income, there would still be no
factual basis for the imputation of theoretical interests on the subject advances and
assess deficiency income taxes thereon. Further, pursuant to Article 1959 of the Civil
Code of the Philippines, no interest shall be due unless it has been expressly stipulated
in writing.

ISSUE: Whether or not FDC is subject to documentary stamp tax.

RATIO: Yes. Loan agreements and promissory notes are taxed under Section 180 of
the 1993 National Internal Revenue Code (NIRC) [they are now taxed under Section 179
as evidence of indebtedness]. When read in conjunction with Section 173 of the NIRC,
Section 180 concededly applies to [a]ll loan agreements, whether made or signed in the
Philippines, or abroad when the obligation or right arises from Philippine sources or the
property or object of the contract is located or used in the Philippines.

Section 3 (b) of Revenue Regulations No. 9-94 provides in part that the term loan
agreement shall include credit facilities, which may be evidenced by credit memo,
advice or drawings. Section 6 of the same revenue regulations further provides that
[i]n cases where no formal agreements or promissory notes have been executed to
cover credit facilities, the documentary stamp tax shall be based on the amount of
drawings or availment of the facilities, which may be evidenced by credit/debit memo,
advice or drawings by any form of check or withdrawal slip Applying the foregoing to
the case, the instructional letters as well as the journal and cash vouchers evidencing the
advances taxpayer extended to its affiliates in 1996 and 1997 qualified as loan
agreements upon which documentary stamp taxes may be imposed.

Facts: Relying on the fiscal autonomy granted to LGU's by the Constittuion and the
provisons of the Local Government Code, the Sangguniang Panglunsod of the City of
Butuan enacted an ordinance "Regulating the Operation of Tricycles-for-Hire,
providing mechanism for the issuance of Franchise, Registration and Permit, and
Imposing Penalties for Violations thereof and for other Purposes." The ordinance
provided for, among other things, the payment of franchise fees for the grant of the
franchise of tricycles-for-hire, fees for the registration of the vehicle, and fees for the
issuance of a permit for the driving thereof.

Petitioner LTO explains that one of the functions of the national government that,
indeed, has been transferred to local government units is the franchising authority over
tricycles-for-hire of the Land Transportation Franchising and Regulatory Board
("LTFRB") but not, it asseverates, the authority of LTO to register all motor vehicles and
to issue to qualified persons of licenses to drive such vehicles.

The RTC and CA ruled that the power to give registration and license for driving
tricycles has been devolved to LGU's.
Issue: Whether or not, the registration of tricycles was given to LGU's, hence the
ordinance is a valid exercise of police power.

Ruling: No, based on the-"Guidelines to Implement the Devolution of LTFRBs
Franchising Authority over Tricycles-For-Hire to Local Government units pursuant to
the Local Government Code"- the newly delegated powers to LGU's pertain to the
franchising and regulatory powers exercised by the LTFRB and not to the functions of
the LTO relative to the registration of motor vehicles and issuance of licenses for the
driving thereof. Corollarily, the exercised of a police power must be through a valid
delegation. In this case the police power of registering tricycles was not delegated to the
LGUs, but remained in the LTO.

Clearly unaffected by the Local Government Code are the powers of LTO under R.A.
No.4136 requiring the registration of all kinds of motor vehicles "used or operated on or
upon any public highway" in the country.

The Commissioner of Land Transportation and his deputies are empowered at
anytime to examine and inspect such motor vehicles to determine whether said vehicles
are registered, or are unsightly, unsafe, improperly marked or equipped, or otherwise
unfit to be operated on because of possible excessive damage to highways, bridges and
other infrastructures. The LTO is additionally charged with being the central repository
and custodian of all records of all motor vehicles.
Adds the Court, the reliance made by respondents on the broad taxing power of local
government units, specifically under Section 133 of the Local Government Code, is

Police power and taxation, along with eminent domain, are inherent powers of
sovereignty which the State might share with local government units by delegation given
under a constitutional or a statutory fiat. All these inherent powers are for a public
purpose and legislative in nature but the similarities just about end there. The basic aim
of police power is public good and welfare. Taxation, in its case, focuses on the power of
government to raise revenue in order to support its existence and carry out its legitimate
objectives. Although correlative to each other in many respects, the grant of one does
not necessarily carry with it the grant of the other. The two powers are, by tradition and
jurisprudence, separate and distinct powers, varying in their respective concepts,
character, scopes and limitations.

To construe the tax provisions of Section 133 (1) of the LGC indistinctively would
result in the repeal to that extent of LTO's regulatory power which evidently has not
been intended. If it were otherwise, the law could have just said so in Section 447 and
458 of Book III of the Local Government Code in the same manner that the specific
devolution of LTFRB's power on franchising of tricycles has been provided. Repeal by
implication is not favored.

The power over tricycles granted under Section 458(a)(3)(VI) of the Local
Government Code to LGUs is the power to regulate their operation and to grant
franchises for the operation thereof. The exclusionary clause contained in the tax
provisions of Section 133 (1) of the Local Government Code must not be held to have
had the effect of withdrawing the express power of LTO to cause the registration of all
motor vehicles and the issuance of licenses for the driving thereof. These functions of
the LTO are essentially regulatory in nature, exercised pursuant to the police power of
the State, whose basic objectives are to achieve road safety by insuring the road
worthiness of these motor vehicles and the competence of drivers prescribed by R. A.
4136. Not insignificant is the rule that a statute must not be construed in isolation but
must be taken in harmony with the extant body of laws.

LGUs indubitably now have the power to regulate the operation of tricycles-for-hire
and to grant franchises for the operation thereof, and not to issue registration.

Ergo, the ordinance being repugnant to a statute is void and ultra vires.
Facts: On June 28, 2002, the Board of Directors of respondent Clark Development
Corporation (CDC) issued and approved Policy Guidelines on the Movement of
Petroleum Fuel to and from the Clark Special Economic Zone. In one of its provisions, it
levied royalty fees to suppliers delivering Coastal fuel from outside sources for Php0.50
per liter for those delivering fuel to CSEZ locators not sanctioned by CDC and Php1.00
per litter for those bringing-in petroleum fuel from outside sources. The policy
guidelines were implemented effective July 27, 2002.
The petitioner Chevron Philippines Inc (formerly Caltex Philippines Inc) who is a fuel
supplier to Nanox Philippines, a locator inside the CSEZ, received a Statement of
Account from CDC billing them to pay the royalty fees amounting to Php115,000 for its
fuel sales from Coastal depot to Nanox Philippines from August 1 to September 21,
Petitioner, contending that nothing in the law authorizes CDC to impose royalty fees
based on a per unit measurement of any commodity sold within the special economic
zone, protested against the CDC and Bases Conversion Development Authority (BCDA).
They alleged that the royalty fees imposed had no reasonable relation to the probably
expenses of regulation and that the imposition on a per unit measurement of fuel sales
was for a revenue generating purpose, thus, akin to a tax.
BCDA denied the protest. The Office of the President dismissed the appeal as well for
lack of merit.
Upon appeal, CA dismissed the case. CA held that in imposing the royalty fees, CDC was
exercising its right to regulate the flow of fuel into CSEZ under the vested exclusive right
to distribute fuel within CSEZ pursuant to its Joint Venture Agreement (JVA) with Subic
Bay Metropolitan Authority (SBMA) and Coastal Subic Bay Terminal, Inc. (CSBTI)
dated April 11, 1996. The appellate court also found that royalty fees were assessed on
fuel delivered, not on the sale, by petitioner and that the basis of such imposition was
petitioners delivery receipts to Nanox Philippines. The fact that revenue is incidentally
also obtained does not make the imposition a tax as long as the primary purpose of such
imposition is regulation.
When elevated in SC, petitioner argued that: 1) CDC has no power to impose fees on sale
of fuel inside CSEZ on the basis of income generating functions and its right to market
and distribute goods inside the CSEZ as this would amount to tax which they have no
power to impose, and that the imposed fee is not regulatory in nature but rather a
revenue generating measure; 2) even if the fees are regulatory in nature, it is
unreasonable and are grossly in excess of regulation costs.
Respondents contended that the purpose of royalty fees is to regulate the flow of fuel to
and from the CSEZ and revenue (if any) is just an incidental product. They viewed it as a
valid exercise of police power since it is aimed at promoting the general welfare of
public; that being the CSEZ administrator, they are responsible for the safe distribution
of fuel products inside the CSEZ.
Whether the act of CDC in imposing royalty fees can be considered as valid exercise of
the police power.
Yes. SC held that CDC was within the limits of the police power of the State when it
imposed royalty fees.
In distinguishing tax and regulation as a form of police power, the determining factor is
the purpose of the implemented measure. If the purpose is primarily to raise revenue,
then it will be deemed a tax even though the measure results in some form of regulation.
On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation
and an exercise of the police power of the state, even though incidentally, revenue is
In this case, SC held that the subject royalty fee was imposed for regulatory purposes
and not for generation of income or profits. The Policy Guidelines was issued to ensure
the safety, security, and good condition of the petroleum fuel industry within the CSEZ.
The questioned royalty fees form part of the regulatory framework to ensure free flow
or movement of petroleum fuel to and from the CSEZ. The fact that respondents have
the exclusive right to distribute and market petroleum products within CSEZ pursuant
to its JVA with SBMA and CSBTI does not diminish the regulatory purpose of the
royalty fee for fuel products supplied by petitioner to its client at the CSEZ.
However, it was erroneous for petitioner to argue that such exclusive right of respondent
CDC to market and distribute fuel inside CSEZ is the sole basis of the royalty fees
imposed under the Policy Guidelines. Being the administrator of CSEZ, the
responsibility of ensuring the safe, efficient and orderly distribution of fuel products
within the Zone falls on CDC. Addressing specific concerns demanded by the nature of
goods or products involved is encompassed in the range of services which respondent
CDC is expected to provide under Sec. 2 of E.O. No. 80, in pursuance of its general
power of supervision and control over the movement of all supplies and equipment into
the CSEZ.
There can be no doubt that the oil industry is greatly imbued with public interest as it
vitally affects the general welfare. Fuel is a highly combustible product which, if left
unchecked, poses a serious threat to life and property. Also, the reasonable relation
between the royalty fees imposed on a per liter basis and the regulation sought to be
attained is that the higher the volume of fuel entering CSEZ, the greater the extent and
frequency of supervision and inspection required to ensure safety, security, and order
within the Zone.
Respondents submit that the increased administrative costs were triggered by security
risks that have recently emerged, such as terrorist strikes. The need for regulation is
more evident in the light of 9/11 tragedy considering that what is being moved from one
location to another are highly combustible fuel products that could cause loss of lives
and damage to properties.
As to the issue of reasonableness of the amount of the fees, SC held that no evidence was
adduced by the petitioner to show that the fees imposed are unreasonable.
Administrative issuances have the force and effect of law. They benefit from the same
presumption of validity and constitutionality enjoyed by statutes. These two precepts
place a heavy burden upon any party assailing governmental regulations. Petitioners
plain allegations are simply not enough to overcome the presumption of validity and
reasonableness of the subject imposition.
WHEREFORE, the petition is DENIED for lack of merit and the Decision of the Court
of Appeals dated November 30, 2005 in CA-G.R. SP No. 87117 is hereby AFFIRMED.
Facts: Citibank N.A. Philippine Branch (CITIBANK) is a foreign corporation doing
business in the Philippines. In 1979 and 1980, its tenants withheld and paid to the
Bureau of Internal Revenue the taxes on rents due to Citibank, pursuant to Section 1(c)
of the Expanded Withholding Tax Regulations.

On April 15, 1980, Citibank field its corporate income tax returns for the year and ended
December 31, 1979 showing a net loss of P74,854,916.00 and its tax credits totaled
P6,257,780.00, even without including the amounts withheld on rental income under
the Expanded Withholding Tax System, the same not having been utilized or applied for
the reason that the years operation resulted in a loss. The taxes thus withheld by the
tenants from rentals paid to Citibank in 1979 were not included as tax credits although a
rental income amounting to P7,796,811.00 was included in its income declared for the
year ended December 31, 1979.

For the year ended December 31, 1980, Citibanks corporate income tax returns, filed on
April 15, 1981, showed a net loss P77,071,790.00 for income tax purposes. Its available
tax credit at the end of 1980 amounting to P11,532,855.00 was not utilized or applied.
The said available tax credits did not include the amounts withheld by Citibanks tenants
from rental payment sin 1980 but the rental payments for that year were declared as
part of its gross income included in its annual income tax returns.

On October 31, 1981, Citibank submitted its claim for refund of the aforesaid amounts of
P270,160.56 and P298,829.29, respectively or a total of P568,989.85; and on October
12, 1981 filed a petition for review with the Court of Tax Appeals concerning subject
claim for tax refund.

On August 30, 1981, the CTA adjudged Citibanks entitlement to the tax refund sought
for, representing the 5% tax withheld and paid on Citibanks rental income for 1979 and
1980. The Court of Tax Appeals, rejected Respondent CIRs argument that the claim was
not seasonably filed. Not satisfied the Commissioner appealed to the Court of Appeals,
CA ruled that Citibank N.A. Philippine branch, entitled to a tax refund/credit in the
amount of P569,989.85, representing the 5% withheld tax in Citibanks rental income
for the years 1979 and 1980 is REVERSED. Motion for Reconsideration of the petitioner
bank was denied. Hence, this petition.

Issue: Whether or not income taxes remitted partially on a periodic or quarterly basis
should be credited or refunded to the taxpayer on the basis of the taxpayers final
adjusted returns.

Held: In several cases, we have already ruled that income taxes remitted partially on a
periodic or quarterly basis should be credited or refunded to the taxpayer on the basis of
the taxpayers final adjusted returns, not on such periodic or quarterly basis. When
applied to taxpayers filing income tax returns on a quarterly basis, the date of payment
mentioned in Sec. 230 must be deemed to be qualified by Sec. 68 and 69 of the present.
Tax Code. It may be observed that although quarterly taxes due are required to be paid
within 60 days from the close of each quarter, the fact that the amount shall be deducted
from the tax due for the succeeding quarter shows that until a final adjustment return
shall have been filed, the taxes paid in the preceding quarters are merely partial taxes
due from a corporation. Neither amount can serve as the final figure to quantify what is
due the government nor what should be refunded to be corporation. This interpretation
may be gleaned from the last paragraph of Sec. 69 of the Tax Code which provides that
the refundable amount, in case a refund is due a corporation, is that amount which is
shown on its final adjustment return and not on its quarterly returns.
No. 189999, June 27, 2012
Facts: Angeles University was converted into a non-stock, non-profit education
foundation under the provisions of Republic Act(R.A.) No. 6055. Petitioner filed with
the Office of the City Building Official an application for a building permit for the
construction of an 11-storey building of the Angeles University Foundation Medical
Center in its main campus the said office issue a Building permit fee and Locational
Clearance Fee. Petitioner make a letter to respondent City Tresurer JulietG. Quinssat
and City Building Official Donato Z. Dizon alleging that it is exempt from payment of the
building permit and locational clearance fee. Petitioner also reminded the respondent
that they have previously issued building permit acknowledging such exemption from
payment of building permit fees. The DOJ and trial court render decision in favor to
petitioner for exempting in payment. But the CA reverse the decision of court in favor to
respondent. Petitioner file a MR but it was denied by CA.
Issue: WON the Angeles University is exempted in Building permit fee and Locational
Clearance Fee.
Ruling: No.
Under R.A. No. 6055, petitioner was granted exemption only from income tax derived
from its educational activities and real property used exclusively for educational
purposes. Regardless of the repealing clause in the National Building Code, the CA held
that petitioner is still not exempt because a building permit cannot be considered as the
other charges mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the
nature of tax, import duties, assessments and other collections for revenue purposes,
following the ejusdem generis rule. The CA further stated that petitioner has not shown
that the fees collected were excessive and more than the cost of surveillance, inspection
and regulation. And while petitioner may be exempt from the payment of real property
tax, petitioner in this case merely alleged that the subject property is to be used
actually, directly and exclusively for educational purposes, declaring merely that such
premises is intended to house the sports and other facilities of the university but by
reason of the occupancy of informal settlers on the area, it cannot yet utilize the same
for its intended use. Thus, the CA concluded that petitioner is not entitled to the refund
of building permit and related fees, as well as real property tax it paid under protest.
R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which
converted to non-stock, non-profit educational foundations. Section 8 of said law
provides: SECTION 8. The Foundation shall be exempt from the payment of all taxes,
import duties, assessments, and other charges imposed by the Government on all
income derived from or property, real or personal, used exclusively for the educational
activities of the Foundation.(Emphasis supplied.)
A charge is broadly defined as the price of, or rate for, something, while the word
fee pertains to a charge fixed by law for services of public officers or for use of a
privilege under control of government.
As used in the Local Government Code of 1991 (R.A. No. 7160), charges refers to
pecuniary liability, as rents or fees against persons or property, while fee means a charge
fixed by law or ordinance for the regulation or inspection of a business or activity.
Facts: To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue
Regulations No. 1-97, 2 which classified the existing brands of cigarettes as those duly
registered or active brands prior to January 1, 1997. New brands, or those registered
after January 1, 1997, shall be initially assessed at their suggested retail price until such
time that the appropriate survey to determine their current net retail price is conducted.
In June 2001 British American Tobacco introduced into the market Lucky Strike Filter,
Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail
price of P9.90 per pack. 3 Pursuant to Sec. 145 (c) quoted above, the Lucky Strike
brands were initially assessed the excise tax at P8.96 per pack. On February 17, 2003,
Revenue Regulations No. 9-2003, amended Revenue Regulations No. 1-97 by providing,
among others, a periodic review every two years or earlier of the current net retail price
of new brands and variants thereof for the purpose of establishing and updating their
tax classification. Pursuant thereto, Revenue Memorandum Order No. 6-2003 5 was
issued on March 11, 2003, prescribing the guidelines and procedures in establishing
current net retail pricesof new brands of cigarettes and alcohol products. Subsequently,
Revenue Regulations No. 22-2003 6 was issued on August 8, 2003 to implement the
revised tax classification of certain new brands introduced in the market after January 1,
1997, based on the survey of their current net retail price. The survey revealed that
Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights, are sold at the
current net retail price of P22.54, P22.61 and P21.23, per pack, respectively. Respondent
Commissioner of the Bureau of Internal Revenue thus recommended the applicable tax
rate of P13.44 per pack inasmuch as Lucky Strike's average net retail price is above
P10.00 per pack. Thus filed before the Regional Trial Court (RTC) of Makati, Branch 61,
a petition for injunction with prayer for the issuance of a temporary restraining order
(TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 03-1032. Said
petition soughtto enjoin the implementation of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003
on the ground that they discriminate against new brands of cigarettes, in violation of the
equal protection and uniformity provisions of the Constitution. The trial court rendered
a decision upholding the constitutionality of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003
Issue/ Held: W/N the classification freeze provision violates the equal protection and
uniformity of taxation clauses of the Constitution.- NO
Ratio: In the instant case, there is no question that the classification freeze provision
meets the geographical uniformity requirement because the assailed law applies to all
cigarette brands in the Philippines. And, for reasons already adverted to in our August
20, 2008 Decision, the four-fold test has been met in the present case. As held in the
assailed Decision, the instant case neither involves a suspect classification nor impinges
on a fundamental right. Consequently, the rational basis test was properly applied to
gauge the constitutionality of the assailed law in the face of an equal protection
challenge. It has been held that "in the areas of social and economic policy, a statutory
classification that neither proceeds along suspect lines nor infringes constitutional
rights must be upheld against equal protection challenge if there is any reasonably
conceivable state of facts that could provide a rational basis for the classification."
Under the rational basis test, it is sufficient that the legislative classification is rationally
related to achieving some legitimate State interest. Petitioner's reliance on Ormoc Sugar
Co. is misplaced. In said case, the controverted municipal ordinance specifically named
and taxed only the Ormoc Sugar Company, and excluded any subsequently established
sugar central from its coverage. Thus, the ordinance was found unconstitutional on
equal protection grounds because its terms do not apply to future conditions as well.
This is not the case here. The classification freeze provision uniformly applies to all
cigarette brands whether existing or to be introduced in the market at some future time.
It does not purport to exempt any brand from its operation nor single out a brand for
the purpose of imposition of excise taxes.
NPC vs City of Cabanatuan
Fact: NAPOCOR, the petitioner, is a government-owned and controlled corporation
created under Commonwealth Act 120. It is tasked to undertake the development of
hydroelectric generations of power and the production of electricity from nuclear,
geothermal, and other sources, as well as, the transmission of electric power on a
nationwide basis.
For many years now, NAPOCOR sells electric power to the resident Cabanatuan City.
Pursuant to Sec. 37 of Ordinance No. 165-92, the respondent assessed the petitioner a
franchise tax representing 75% of 1% of the formers gross receipts for the preceding
Petitioner, whose capital stock was subscribed and wholly paid by the Philippine
Government, refused to pay the tax assessment. It argued that the respondent has no
authority to impose tax on government entities. Petitioner also contend that as a non-
profit organization, it is exempted from the payment of all forms of taxes, charges,
duties or fees in accordance with Sec. 13 of RA 6395, as amended.
(1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its
stocks are wholly owned by the National Government and its charter characterized is as
a non-profit organization?
(2) Is the NAPOCORs exemption from all forms of taxes repealed by the provisions of
the Local Government Code (LGC)?
(1) NO. To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is the
corporation which exercises the franchise, and not the individual stockholders. By virtue
of its charter, petitioner was created as a separate and distinct entity from the National
Government. It can sue and be sued under its own name, and can exercise all the powers
of a corporation under the Corporation Code.
To be sure, the ownership by the National Government of its entire capital stock does
not necessarily imply that petitioner is not engaged in business.
(2) YES. One of the most significant provisions of the LGC is the removal of the blanket
exclusion of instrumentalities and agencies of the National Government from the
coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees,
or charges of any kind on the National Government, its agencies and instrumentalities,
this rule now admits an exception, i.e. when specific provisions of the LGC authorize the
LGUs to impose taxes, fees, or charges on the aforementioned entities. The legislative
purpose to withdraw tax privileges enjoyed under existing laws or charter is clearly
manifested by the language used on Sec. 137 and 193 categorically withdrawing such
exemption subject only to the exceptions enumerated. Since it would be tedious and
impractical to attempt to enumerate all the existing statutes providing for special tax
exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of
such exemptions or privileges. No more unequivocal language could have been used.
Lifeblood Theory:
Taxes are the lifeblood of the government, for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state whose social contract with its
citizens obliges it to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity; without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well
as public welfare and similar objectives. Taxation assumes even greater significance with
the ratification of the 1987 Constitution.

CIR vs Filipinas
Facts: Respondent Filipinas Compaia de Seguros, an insurance company, is also
engaged in business as a real estate dealer. On January 4, 1956, respondent, in
accordance with the single rate then prescribed under Section 182 of the National
Internal Revenue Code. paid the amount of P150.00 as real estate dealer's fixed annual
tax for the year 1956. Subsequently said Section 182 of the Code was amended by
Republic Act No. 1612, which took effect on August 24, 1956, by providing a small of
graduated rates: P150 if the annual income of the real estate dealer from his business as
such is P4,000, but does not exceed P10,000; P300, if such annual income exceeds
P10,000 but does not exceed P30,000; and P500 if such annual income exceeds
On June 17, 1957, petitioner Commissioner of Internal Revenue assessed and demanded
from respondent (whose annual income exceeded P30,000.00) the amount of P350.00
as additional real estate dealer's fixed annual tax for the year 1956. Respondent wrote a
letter to petitioner stating that the "records will show that the real estate dealer's fixed
tax for 1956 of this Company was fully paid by us prior to the effectivity of Republic Act
No. 1612 which amended, among other things, Sections 178 and 192 of the National
Internal Revenue Code." And, as to the retroactive effect of said Republic Act No. 1612,
respondent added that the Republic Act No. 1856 which, among other things, amended
Section 182 of the National Internal Revenue Code, Congress has clearly shown its
intention when it provided that the increase in rates of taxes envisioned by Republic Act
No. 1612 is to be made effective as of 1 January 1957
the Court of Tax Appeals rendered a decision sustaining the contention of respondent
company and ordering the petitioner Commissioner of Internal Revenue to desist from
collecting the P350.00 additional assessment
Issue: WON the Act should have a retroactive effect
Held: No.As a rule, laws have no retroactive effect, unless the contrary is provided.
(Art. 4, Civil Code of the Philippines; Manila Trading and Supply Co. vs. Santos, et al.,
66 Phil., 237; La Provisora Filipina vs. Ledda, 66 Ph 573.) Otherwise stated, a state
should be consider as prospective in its operation whether it enacts, amen or repeals a
tax, unless the language of the statute clearly demands or expresses that it shall have a
retroactive effect.The rule applies with greater force to the case bar, considering that
Republic Act No. 1612, which imposes the new and higher rates of real estate dealer's
annual fixed tax, expressly provides in Section 21 thereof the said Act "shall take effect
upon its approval" on August 24, 1956.
The instant case involves the fixed annual real estat dealer's tax for 1956. There is no
dispute that before the enactment of Republic Act No. 1612 on August 2 1956, the
uniform fixed annual real estate dealer's was P150.00 for all owners of rental properties
receiving an aggregate amount of P3,000.00 or more a year in the form of rentalsand
that. "the yearly fixed taxes are due on the first of January of each year" unless tendered
in semi-annual or quarterly installments. Since the petitioner indisputably paid in full
on January 4, 1956, the total annual tax then prescribed for the year 1956, require it to
pay an additional sum of P350.00 to complete the P500.00 provided in Republic Act
No. 1612 which became effective by its very terms only on August 24 1956, would, in the
language of the Court of Tax Appeals result in the imposition upon respondent of a tax
burden to which it was not liable before the enactment of said amendatory act, thus
rendering its operation retroactive rather than prospective, which cannot be done, as it
would contravene the aforecited Section 21 of Republic Act No. 1612 as well as the
established rule regarding prospectivity of operation of statutes.
It is also to be observed that said House Bill No. 5819 as originally presented, was
expressly intended to amend certain provisions of the National Internal Revenue Code
dealing on fixed taxes on business. The provisions in respect of fixed tax on
occupation were merely subsequently added. This would seem to indicate that the
proviso in question was intended to cover not only fixed taxes on occupation, but also
fixed taxes on business. The fact that said proviso was placed only at the end of
paragraph "(B) On occupation" is not, therefore, view of the circumstances, decisive and
unmistakable indication that Congress limited the proviso to occupation taxes.
Lim vs CA/PP
GRN L- 48134-37 October 18, 1990
Fernan, J.:
Petitioner spouses Emilio E. Lim,Sr. and Antonia Sun Lim were engaged in the
dealership of various household appliances.
They filed income tax returns for years 1958 and 1959. On October 5, 1959 a raid was
conducted by virtue of a search warrant in their business address in Manila
andanotherin their address inQuezonCity.
On October 14, 1960, the Chief of the Investigation Division of the BIR informed
petitioners that revenue examiners had been authorized to examine their books of
On September 30, 1964 Senior Revenue Examiner Raphael S. Daet submitted a
memorandum with the findings that the income tax returns filed by petitioners for the
years 1958 and 1959 were false or fraudulent.
Acting Commissioner of the BIR, Benjamin M. Tabios informed petitioners that there
deficiencies in their taxes on 1958 and 1959, giving them until May 7, 1965 to pay the
On April 10, 1965, petitioner Emilio E. Lim, Sr., requested for a reinvestigation. The BIR
expressed willingness to grant such request but on condition that within ten days from
notice, Lim would accomplish a waiver of defense of prescription under the Statute of
Limitations and that one half of the deficiency income tax would be deposited with the
BIR and the other half secured by a surety bond. If within the ten-day period the BIR
did not hear from petitioners, then it would be presumed that the request for
reinvestigation had been abandoned.
Petitioner Emilio E. Lim, Sr. refused to comply with the above conditions and reiterated
his request for another investigation.
the BIR Commissioner informed petitioners that their deficiency income tax liabilities
for 1958 and 1959. Petitioners were given until March 7, 1967 to submit their objections
with the admonition that if they failed to do so, it would be assumed that they were
agreeable to the assessment and a formal demand would issue.
On March 15, 1967, petitioners wrote the BIR to protest the latest assessment and
repeated their request for a reinvestigation.
On October 10, 1967, the BIR rendered a final decision holding that there was no cause
for reversal of the assessment against the Lim couple. Petitioners were required to pay
deficiency income taxes for 1958 and 1959. The final notice and demand for payment
was served on petitioners through their daughter-in-law on July 3, 1968.
RTC found spouses guilty but Emilio Lim died and CA resolved that counsel petitioners
should inform the court as to who are the heirs of Emilio.
1. Whetherornot the filing for Criminal Casesshouldbetime-barred.
2. Whetheror not the crime has been prescribed.
No. Preliminarily, it must be made clear that what we are dealing here are criminal
prosecutions for filing fraudulent income tax returns and for refusing to pay deficiency
taxes. The governing penal provision of the National Internal Revenue Codesis Section
73 in conjunction with Section 354. The dispute centers on the interpretation of Section
354 because in an effort to exculpate themselves, petitioners have raised the defense of
prescription. On the five-year prescriptive period, both parties are in agreement.
Petitioners maintain that the five-year period of limitation under Section 354 should be
reckoned from April 7, 1965, the date of the original assessment while the Government
insists that it should be counted from July 3, 1968 when the final notice and demand
was served on petitioners' daughter-in-law.
Inasmuch as the final notice and demand for payment of the deficiency taxes was served
on petitioners on July 3, 1968, it was only then that the cause of action on the part of the
BIR accrued. This is so because prior to the receipt of the letter-assessment, no violation
has yet been committed by the taxpayers. The offense was committed only after receipt
was coupled with the wilful refusal to pay the taxes due within the alloted period. The
two criminal informations, having been filed on June 23, 1970, are well-within the five-
year prescriptive period and are not time-barred.
No. the fact of discovery, there must be a judicial proceeding for the investigation and
punishment of the tax offense before the five-year limiting period begins to run. It was
on September 1, 1969 that the offenses subject of Criminal Cases Nos. 1790 and 1791
were indorsed to the Fiscal's Office for preliminary investigation. Inasmuch as a
preliminary investigation is a proceeding for investigation and punishment of a crime, it
was only on September 1, 1969 that the prescriptive period commenced.
As Section 354 stands in the statute book (and to this day it has remained unchanged) it
would indeed seem that tax cases, such as the present ones, are practically
imprescriptible for as long as the period from the discovery and institution of judicial
proceedings for its investigation and punishment, up to the filing of the information in
court does not exceed five (5) years.

Villanueva vs. Iloilo City
GR L-26521, 28 December 1968
En Banc, Castro (J): 8 concur
Facts: On 30 September 1946, the Municipal Board of Iloilo City enacted Ordinance 86
imposing license taxfees upon tenement house (P25); tenemen house partly engaged or
wholly engaged in and dedicated tobusiness in Baza, Iznart, and Aldeguer Streets (P24
per apartment); and tenement house, padtly or whollyengaged in business in other
streets (P12 per apartment). The validity of such ordinance was challenged byEusebio
and Remedios Villanueva, owners of four tenement houses containing 34 apartments.
The SupremeCourt held the ordinance to be ultra vires. On 15 January 1960, however,
the municipal board, believing that itacquired authority to enact an ordinance of the
same nature pursuant to the Local Autonomy Act, enactedOrdinance 11 (series of 1960),
Eusebio and Remedios Villaniueva assailed the ordinance anew.
Issue: Whether Ordinance 11 violate the rule of uniformity of taxation.
Held: The Court has ruled that tenement houses constitute a distinct class of property;
and that taxes areuniform and equal when imposed upon all property of the same class
or character within the taxing authority.The fact that the owners of the other classes of
buildings in Iloilo are not imposed upon by the ordinance, orthat tenement taxes are
imposed in other cities do not violate the rule of equality and uniformity. The ruledoes
not require that taxes for the same purpose should be imposed in different territorial
subdivisions at thesame time. So long as the burden of tax falls equally and impartially
on all owners or operators of tenementhouses similarly classified or situated, equality
and uniformity is accomplished. The presumption that taxstatutes are intended to
operate uniformly and equally was not overthrown herein.
CIR VS SC JOHNSON & SON, INCS AND CA [G.R. No. 127105. June 25,
Respondent,JOHNSON AND SON, INC 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.
The said License Agreement was duly registered with the Technology Transfer Board of
the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of
Registration No. 8064 . For the use of the trademark or technology, SC JOHNSON AND
SON, INC was obliged to pay SC Johnson and Son, USA royalties based on a percentage
of net sales and subjected the same to 25% withholding tax on royalty payments which
respondent paid for the period covering July 1992 to May 1993.00 On October 29,
1993, SC JOHNSON AND SON, USA filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing
that, since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the respondent. Respondent submits that
royalties paid 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 in relation to the
RP-West Germany Tax Treaty. The Internal Tax Affairs Division of the BIR ruled against
SC Johnson and Son, Inc. and an appeal was filed by the former to the Court of tax
The CTA ruled against CIRand ordered that a tax credit be issued in favor of SC Johnson
and Son, Inc. Unpleased with the decision, the CIR filed an appeal to the CA which
subsequently affirmed in toto the decision of the CTA. Hence, an appeal on certiorari
was filed to the SC.



The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty
could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two
taxes imposed under the two tax treaties are not paid under similar circumstances,
they are not containing similar provisions on tax crediting.

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. Furthermore, the method employed to give relief from
double taxation is the allowance of a tax credit to citizens or residents of the United
Statesagainst the United States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year. 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 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 RPGermany 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.

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.

What is the most favored nation clause?

The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the most
favored among other countries. It 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. 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.

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


What is the purpose of a tax treaty?

The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions.

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 thiscase, 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.Otherwise, the tax which could
havebeen 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
investorwould remain unrelieved. If the state of residence does not grant some form of
tax relief to the investor, no benefit would redound to the Philippines, i.e., increased
investment resulting from a favorable tax regime, should it impose a lower tax rate on
the royalty earnings of the investor, and it would be better to impose the regular rate
rather than lose much-needed revenues to another country.

What is international double taxation and the rationale for doing away with

International juridical double taxation is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods; The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust and dynamic

When is there double taxation?

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.

What are the methods of eliminating double taxation?

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

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. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double

What are the methods of relief under the second method?

There are two methods of reliefthe exemption method and the credit method.
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 taxpayers
remaining income or capital.
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.

What is the rationale of reducing tax rates in negotiating tax treaties?

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.

What are tax refunds?

Tax refunds are in the nature of tax exemptions, and as such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the
person or entity claiming the exemption.

Who has the burden of proof in tax exemption?

The burden of proof is upon him who claims the exemption in his favor and he must be
able to justify his claim by the clearest grant of organic or statute law.

G.R. No. 173594, February 6, 2008
- Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under
the laws of Singapore which has a Philippine representative office, is an online
international air carrier operating the Singapore-Cebu-Davao-Singapore,
Singapore-Davao-Cebu-Singapore, and Singapore-Cebu-Singapore routes.
- On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a
written application for the refund of P4,567,450.79 excise taxes it claimed to have
paid on its purchases of jet fuel from Petron Corporation from January to June
- CTA denied Silkairs petition on the ground that as the excise tax was imposed on
Petron Corporation as the manufacturer of petroleum products, any claim for
refund should be filed by the latter; and where the burden of tax is shifted to the
purchaser, the amount passed on to it is no longer a tax but becomes an added
cost of the goods purchased.
- The liability for excise tax on petroleum products that are being removed from its
refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of
- The right to claim for the refund of excise taxes paid on petroleum products lies
with Petron Corporation who paid and remitted the excise tax to the BIR.
Respondent, on the other hand, may only claim from Petron Corporation the
reimbursement of the tax burden shifted to the former by the latter. The excise
tax partaking the nature of an indirect tax, is clearly the liability of the
manufacturer or seller who has the option whether or not to shift the burden of
the tax to the purchaser. Where the burden of the tax is shifted to the
[purchaser], the amount passed on to it is no longer a tax but becomes an added
cost on the goods purchased which constitutes a part of the purchase price.
Issue: Whether or not the petitioner is the proper party to claim for refund or tax
Ruling: No, The proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to another.

Section 130 (A) (2) of the NIRC
provides that "unless otherwise specifically allowed, the return shall be filed and the
excise tax paid by the manufacturer or producer before removal of domestic products
from place of production." Thus, Petron Corporation, not Silkair, is the statutory
taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997
and Article 4(2) of the Air Transport Agreement between RP and Singapore.
Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997
which reads
Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of
Agencies. Petroleum products sold to the following are exempt from excise tax:
(b) Exempt entities or agencies covered by tax treaties, conventions, and other
international agreements for their use and consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities or agencies; and
Article 4(2) of the Air Transport Agreement between the Government of the Republic of
the Philippines and the Government of the Republic of Singapore (Air Transport
Agreement between RP and Singapore)
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the
Air Transport Agreement between RP and Singapore cannot, without a clear showing of
legislative intent, be construed as including indirect taxes. Statutes granting tax
exemptions must be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority, and if an exemption is found to exist, it must not be
enlarged by construction.
Tax avoidance and tax evasion are the two ways by which tax payers try to reduce the
amount they have to pay to the Bureau of Internal Revenue. While both these terms
have the same objective, tax avoidance and tax evasion differ in the means by which the
purpose of paying lesser amount of tax is obtained.
What is tax avoidance?
This is the means by which tax payers try to reduce tax within the means allowed by law.
Tax avoidance should me made in good faith and at arms length, otherwise it will not be
regarded as such.
What is an example of tax avoidance?
A good example of tax avoidance is the use of the depreciation method in claiming
deductible expenses to lessen the income tax.
What are the elements of tax evasion?
Tax evasion connotes the integration of three factors: (1) end to be achieved, i.e. the
payment of less than that known by the taxpayer to be legally due, or the non-payment
of tax when it is shown that the tax is due; (2) an accompanying state of mind which is
known as evil, in bad faith, willful, or deliberate and not accidental; and (3) a
course of action or a failure of action which is unlawful.
What is tax evasion?
Tax evasion is the opposite of tax avoidance. Under this scheme, the taxpayer employs
means outside the lawful means and will merit the tax payer civil and even criminal
sanctions for his fraudulent acts.
What is an example of tax evasion?
A simple example of this method is the understatement by the tax payer of his revenues
in order to minimize or reduce the taxes which will be imposed thereon. As an
illustration, Mr. Salazar reported only Php1 million as his income when in truth he was
able to earn Php10 million.
The case of Commissioner of Internal Revenue vs. The Estate of Benigno P. Toda et
al, decided by the Supreme Court on 14 September 2004, is illustrative of the concepts
of tax evasion and tax avoidance. In the said case Cibeles Insurance Corporation (CIC)
authorized Benigno P. Toda, ?President and owner of 99.9% of its issued and
outstanding capital stock to sell the Cibeles Building, located in Ayala Avenue, to a
certain Rafael Altonaga for Php100 million. The latter sold the building to RMI for
Php200 million. This transaction was evidenced by Deeds of Absolute Sale notarized by
the same notary public on the same day.
The Court noted that Mr. Altonaga was a mere dummy and that the transaction was
actually between CIC and RMI. CIC sought to avoid the payment of corporate income
tax on the additional Php100 million by changing the income from income structure
from corporate income tax to individual capital gain. Thus, the whole transaction was
considered as tax evasion and not a mere tax avoidance.
G.R. No. 147188 September 14, 2004
P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan
and Mario Luza Bautista
FACTS: CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of
land on which the building stands for an amount of not less than P90 million. Toda
purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for P200 million. These
two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by
the same notary public.

For the sale of the property to RMI, Altonaga paid capital gains
tax in the amount of P10 million.
CIC filed its corporate annual income tax return for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount of P75,728.021. After
crediting withholding taxes ofP254,497.00, it paid P26,341,207 for its net taxable
income of P75,987,725. Toda sold his entire shares of stocks in CIC to Le Hun T. Choa
for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks. Three and a half
years later, Toda died. Subsequently, Bureau of Internal Revenue (BIR) sent an
assessment notice and demand letter to the CIC for deficiency income tax for the year
1989. The new CIC asked for a reconsideration, asserting that the assessment should be
directed against the old CIC, and not against the new CIC, which is owned by an entirely
different set of stockholders; moreover, Toda had undertaken to hold the buyer of his
stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. The
estate of Toda then received a Notice of Assessment for the deficiency of income tax in
the amount of P79,099,999.22. The Estate thereafter filed a letter of protest.
The Commissioner dismissed the protest. The Estate filed a petition for review

with the
CTA. CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. The CTA also denied the motion for
reconsideration. The Court of Appeals affirmed the decision of the CTA.
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed?
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year
1989, if any?
HELD: 1. Tax evasion. Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside
of those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer to be legally due, or the non-payment
of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental";
and (3) a course of action or failure of action which is unlawful.

All these factors are present in the instant case. It is significant to note that as early as 4
May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30
August 1989, CIC received P40 million from RMI, and not from Altonaga. That P40
million was debited by RMI and reflected in its trial balance as "other inv. Cibeles
Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs
trial balance as "other inv. Cibeles Bldg." This would show that the real buyer of the
properties was RMI, and not the intermediary Altonaga.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely
petitioner cannot be faulted for wanting to reduce the tax from 35% to 5%. The
scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be
considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its
general sense, "is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another."
Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by CIC to RMI. Accordingly, the tax
liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27
(A) of the Tax Reform Act of 1997). CIC is therefore liable to pay a 35% corporate tax for
its taxable net income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 1986
(now 6% under Section 24 (D) (1) of the Tax
Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax
issued by the BIR must be upheld.
2. No. (Legal basis: Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform
Act of 1997).
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade
tax; and (3) failure to file a return, the period within which to assess tax is ten years
from discovery of the fraud, falsification or omission, as the case may be. The
prescriptive period to assess the correct taxes in case of false returns is ten years from
the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.The assessment for
the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the
issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.
3. Yes. A corporation has a juridical personality distinct and separate from the persons
owning or composing it. Thus, the owners or stockholders of a corporation may not
generally be made to answer for the liabilities of a corporation and vice versa. There are,
however, certain instances in which personal liability may arise. It has been held in a
number of cases that personal liability of a corporate director, trustee, or officer along,
albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from
any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he
thereby voluntarily held himself personally liable therefor. Respondent estate cannot,
therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual
undertaking, as contained in the Deed of Sale of Shares of Stock.

FACTS: In 1977, Victoria Javier (wife of Melchor), received from the Prudential Bank
and Trust Co. US$999,973.70 remitted by her sister, Dolores Ventosa, through some
banks in the United States, among them Mellon Bank NA. Mellon Bank filed suit to
recover the excess amount of US$9999,000 as the remittance of US$ 1 million was a
clerical error and should have been US $1,000 only (Compare facts in Mellon Bank vs.
Magsino, GR 71479, 18 October 1990). In 1978, Melchor Javier filed his income tax
return for 1977showing a gross income of P53,053.38 and a net income of P48,053.38
and stating in the footnote of the return that taxpayer was recepient of some money
received from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation. In 1980, the Commissioner assessed and demanded from
Javier deficiency assessment of P9,287,297.51 for 1977. Javier protested such
assessment, where the Commissioner in turn imposed a 50% fraud penalty against
ISSUE: Whether Javier is liable for the 50% fraud penalty.
HELD: Under the then Section 72 of the Tax Code, a taxpayer who files a false return is
liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in
case payment has been made on the basis of the return filed before the discovery of the
falsity or fraud. The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and deliberately done or
resorted to in order to induce another to give up some legal right. Fraud is never
imputed and the courts never sustain findings of fraud upon circumstances, which, at
most created only suspicion. A fraudulent return is always an attempt to evade a tax,
but a merely false return may not be. Herein, there was no actual and intentional fraud
through willful and deliberate misleading of the government agency concerned (BIR)
committed by Javire. Javier did not conceal anything to induce the government to give
some legal right and place itself at a disadvantage. Error or mistake of law is not fraud.
As ruled by the Court of Tax Appeals, the 50% surcharge imposed as fraud penalty in the
deficiency assessment should be deleted.