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Aliens
Domestic Corporations

Garrison v CA, July 19, 1990

CIR v British Overseas Airways, April 30, 1987
NV Reederij Amsterdam and Royal Interocean Lines v CIR, June 23, 1988
Marubeni Corp v CIR, Sept 14, 1989
Accenture v Cir, July 11, 2012
Gatchalian v CIR
Pascual v CIR
CIR v SC Johnson and Son, June 25, 1999
Reyes v CIR
Evangelista v CIR
Royal Interocean Lines v CIR, June 23, 1988
Oa v CIR, May 25, 1972

Partnerships

G.R. Nos. L-44501-05 July 19, 1990

JOHN L. GARRISON, FRANK ROBERTSON, ROBERT H. CATHEY, JAMES W. ROBERTSON, FELICITAS DE
GUZMAN and EDWARD McGURK, petitioners,
vs. COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES, respondents.
NARVASA, J.:
Sought to be overturned in these appeals is the judgment of the Court of Appeals, 1 which affirmed the decision of
the Court of First Instance of Zambales at Olongapo City convicting the petitioners "of violation of Section 45 (a)
(1) (b) of the National Internal Revenue Code, as amended, by not filing their respective income tax returns for the
year 1969" and sentencing "each of them to pay a fine of Two Thousand (P2,000.00) Pesos, with subsidiary
imprisonment in case of insolvency, and to pay the costs proportionately. 2
The petitioners have adopted the factual findings of the Court of Appeals,

viz.:

1. JOHN L. GARRISON "was born in the Philippines and . . . lived in this country since birth up to
1945, when he was repatriated and returned to the United States. He stayed in the United States
for the following twenty years until May 5, 1965, when he entered the Philippines through the Clark
Air Base. The said accused lived in the Philippines since his return on May 6, 1965. He lives with his
Filipino wife and their children at No. 4 Corpus Street, West Tapinac, Olongapo City, and they own
the house and lot on which they are presently residing. His wife acquired by inheritance six
hectares of agricultural land in Quezon Province."
2. JAMES W. ROBERTSON "was born on December 22, 1915 in Olongapo, Zambales and he grew up
in this country. He and his family were repatriated to the United States in 1945. They stayed in
Long Beach, California until the latter part of 1946 or the early part of 1947, when he was reassigned overseas, particularly to the Pacific area with home base in Guam. His next arrival in the
Philippines was in 1958 and he stayed in this country from that time up to the present. He is
presently residing at No. 25 Elicao, Street, East Bajac-Bajac, Olongapo City, and his house and lot
are declared in his name for tax purposes."
3. FRANK W. ROBERTSON "was born in the Philippines and he lived in this country up to 1945, when
he was repatriated to the United States along with his brother, his co-accused James W. Robertson.
He stayed in the United States for about one year, during which time he resided in Magnolia
Avenue, Long Beach, California. Sometime in 1946 or early 1947, he was assigned to work in the
Pacific Area, particularly Hawaii. At that time he had been visiting the Philippines off and on in
connection with his work. In 1962, he returned once more to the Philippines and he has been
residing here ever since. He is married to a Filipino citizen named Generosa Juico and they live at
No. 3 National Road, Lower Kalaklan, Olongapo City. The residential lot on which they are presently
residing is declared in his wife's name for tax purposes, while the house constructed thereon was
originally declared in his name and the same was transferred in his wife's name only in February,
1971."
4. ROBERT H. CATHEY was born in Tennessee, United States, on April 8, 1917; his first arrival in the
Philippines, as a member of the liberation forces of the United States, was in 1944. He stayed in the
Philippines until April, 1950, when he returned to the United States, and he came back to the
Philippines in 1951. He stayed in the Philippines since 1951 up to the present."
5. FELICITAS DE GUZMAN "was born in the Philippines in 1935 and her father was a naturalized
American citizen. While she was studying at the University of Sto. Tomas, Manila, she was recruited

2
to work in the United States Naval Base, Subic Bay, Philippines. Afterwards, she left the Philippines
to work in the United States Naval Base, Honolulu, Hawaii, and she returned to the Philippines on or
about April 21, 1967. The said accused has not left the Philippines since then. She is married to
Jose de Guzman, a Filipino citizen, and they and their children live at No. 96 Fendler Street, East
Tapinac, Olongapo City. Her husband is employed in the United States Naval Base, Olongapo City,
and he also works as an insurance manager of the Traveller's Life."
6. EDWARD McGURK "came to the Philippines on July 11, 1967 and he stayed in this country
continuously up to the present time."
ALL THE PETITIONERS "are United States citizens, entered this country under Section 9 (a) of the Philippine
Immigration Act of 1940, as amended, and presently employed in the United States Naval Base, Olongapo City. For
the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey, $9,855.20;
James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and Edward McGurk $12,407.99 . . .
ALL SAID PETITIONERS "received separate notices from Ladislao Firmacion, District Revenue Officer, stationed at
Olongapo City, informing them that they had not filed their respective income tax returns for the year 1969, as
required by Section 45 of the National Internal Revenue Code, and directing them to file the said returns within ten
days from receipt of the notice. But the accused refused to file their income tax returns, claiming that they are not
resident aliens but only special temporary visitors, having entered this country under Section 9 (a) of the Philippine
Immigration Act of 1940, as amended. The accused also claimed exemption from filing the return in the Philippines
by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement."
The petitioners contend that given these facts, they may not under the law be deemed resident aliens required to
file income tax returns. Hence, they argue, it was error for the Court of Appeals
1) to consider their "physical or bodily presence" in the country as "sufficient by itself to qualify . . (them) as
resident aliens despite the fact that they were not 'residents' of the Philippines immediately before their
employment by the U.S. Government at Subic Naval Base and their presence here during the period concerned was
dictated by their respective work as employees of the United States Naval Base in the Philippines," and
2) to refuse to recognize their "tax-exempt status . . under the pertinent provisions of the RP-US Military Bases
Agreement."
The provision alleged to have been violated by the petitioners, Section 45 of the National Internal Revenue Code, as
amended, reads as follows:
SEC. 45. Individual returns. (a) Requirements. (1) The following individuals are required to file
an income tax return, if they have a gross income of at least One Thousand Eight Hundred Pesos for
the taxable
year; . . .
(b) If alien residing in the Philippines, regardless of whether the gross income was derived from
sources within or outside the Philippines.
The sanction for breach thereof is prescribed by Section 73 of the same code, to wit:
SEC. 73. Penalty for failure to file return nor to pay tax. Anyone liable to pay the tax, to make a
return or to supply information required under this code, who refuses or neglects to pay such tax,
to make such return or to supply such information at the time or times herein specified each year,
shall be punished by a fine of not more than Two Thousand Pesos or by imprisonment for not more
than six months, or
both . . .
The provision under which the petitioners claim exemption, on the other hand, is contained in the Military Bases
Agreement between the Philippines and the United States, 4 reading as follows:
2. No national of the United States serving in or employed in the Philippines in connection with
construction, maintenance, operation or defense of the bases and reside in the Philippines by
reason only of such employment, or his spouse and minor children and dependents, parents or her
spouse, shall be liable to pay income tax in the Philippines except in regard to income derived from
Philippine sources or sources other than the US sources.

3
The petitioners claim that they are covered by this exempting provision of the Bases Agreement since, as is
admitted on all sides, they are all U.S. nationals, all employed in the American Naval Base at Subic Bay (involved in
some way or other in "construction, maintenance, operation or defense" thereof), and receive salary therefrom
exclusively and from no other source in the Philippines; and it is their intention, as is shown by the unrebutted
evidence, to return to the United States on termination of their employment.
That claim had been rejected by the Court of Appeals with the terse statement that the Bases Agreement "speaks
of exemption from the payment of income tax, not from the filing of the income tax returns . ." 5
To be sure, the Bases Agreement very plainly Identifies the persons NOT "liable to pay income tax in the Philippines
except in regard to income derived from Philippine sources or sources other than the US sources." They are the
persons in whom concur the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with construction, maintenance, operation or defense of the
bases;"
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from "U.S. sources."
Now, there is no question (1) that the petitioners are U.S. nationals serving or employed in the Philippines; (2) that
their employment is "in connection with construction, maintenance, operation or defense" of a base, Subic Bay
Naval Base; (3) they reside in the Philippines by reason only of such employment since, as is undisputed, they all
intend to depart from the country on termination of their employment; and (4) they earn no income from Philippine
sources or sources other than the U.S. sources. Therefore, by the explicit terms of the Bases Agreement, none of
them "shall be liable to pay income tax in the Philippines . . ." Indeed, the petitioners' claim for exemption pursuant
to this Agreement had been sustained by the Court of Tax Appeals which set aside and cancelled the assessments
made against said petitioners by the BIR for deficiency income taxes for the taxable years 1969-1972. 6 The
decision of the Court of Tax Appeals to this effect was contested in this Court by the Commissioner of Internal
Revenue, 7 but the same was nonetheless affirmed on August 12, 1986. 8
But even if exempt from paying income tax, said petitioners were, it is contended by the respondents, not excused
from filing income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the filing of an income tax
return also by any "alien residing in the Philippines, regardless of whether the gross income was derived from
sources within or outside the Philippines;" and since the petitioners, although aliens residing within the Philippines,
had failed to do so, they had been properly prosecuted and convicted for having thus violated the Code.
"What the law requires," states the challenged judgment of the Court of Appeals, "is merely physical or bodily
presence in a given place for a period of time, not the intention to make it a permanent place of abode. It is on this
proposition, taken in the light of the established facts on record to the effect that almost all of the appellants were
born here, repatriated to the US and to come back, in the latest in 1967, and to stay in the Philippines up to the
present time, that makes appellants resident aliens not merely transients or sojourners which residence for quite a
long period of time, coupled with the amount and source of income within the Philippines, renders immaterial, for
purposes of filing the income tax returns as contra-distinguished from the payment of income tax, their intention to
go back to the United States."
Each of the petitioners does indeed fall within the letter of the codal precept that an "alien residing in the
Philippines" is obliged "to file an income tax return." None of them may be considered a non-resident alien, "a mere
transient or sojourner," who is not under any legal duty to file an income tax return under the Philippine Tax Code.
This is made clear by Revenue Relations No. 2 of the Department of Finance of February 10, 1940, 9 which lays
down the relevant standards on the matter:
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of
the Philippines for purposes of income tax. Whether he is a transient or not is determined by his
intentions with regards to the length and nature of his stay. A mere floating intention indefinite as
to time, to return to another country is not sufficient to constitute him as transient. If he lives in the
Philippines and has no definite intention as to his stay, he is a resident. One who comes to the
Philippines for a definite purpose which in its nature may be promptly accomplished is a transient.
But if his purpose is of such a nature that an extended stay may be necessary to its
accomplishment, and to that end the alien makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at all times to return to his domicile abroad
when the purpose for which he came has been consummated or abandoned.

4
The petitioners concede that the foregoing standards have been "a good yardstick," and are in fact not at
substantial variance from American jurisprudence. 10 They acknowledge, too, that "their exemption under the Bases
Agreement relates simply to non-liability for the payment of income tax, not to the filing of . . . (a return)." But,
they argue 11
. . . after having expressly recognized that petitioners need not pay income tax here, there appears
to be no logic in requiring them to file income tax returns which anyhow would serve no practical
purpose since their liability on the amounts stated thereon can hardly be exacted. The more
practical view, taking into account policy considerations that prompted the Government of the
Republic of the Philippines to exempt the petitioners, as well as other American citizens similarly
situated, from the payment of income tax here, is to recognize the lesser act of filing within the
exemption granted. This is simply being consistent with the reason behind the grant of tax-exempt
status to petitioners.
Pointing out further to what they consider "the administrative implementation of that (tax-exemption)
provision (of the Bases Agreement) by both governments for about 22 years (which did not require the
filing of income tax returns by American citizen-employees holding 9-A special visas like petitioners), and to
"the higher plane of political realities which prompted the Philippine Government to partially surrender its
inherent right to tax," petitioners submit that "the particular problem involved in these cases is a matter
that has to find solution and ought to be dealt with in conference tables rather than before the court of law.
" 12
Quite apart from the evidently distinct and different character of the requirement to pay income tax in contrast to
the requirement to file a tax return, it appears that the exemption granted to the petitioners by the Bases
Agreement from payment of income tax is not absolute. By the explicit terms of the Bases Agreement, it exists only
as regards income derived from their employment "in the Philippines in connection with construction, maintenance,
operation or defense of the bases;" it does not exist in respect of other income, i.e., "income derived from
Philippine sources or sources other than the US sources." Obviously, with respect to the latter form of income, i.e.,
that obtained or proceeding from "Philippine sources or sources other than the US sources," the petitioners, and all
other American nationals who are residents of the Philippines, are legally bound to pay tax thereon. In other words,
so that American nationals residing in the country may be relieved of the duty to pay income tax for any given year,
it is incumbent on them to show the Bureau of Internal Revenue that in that year they had derived income
exclusively from their employment in connection with the U.S. bases, and none whatever "from Philippine sources
or sources other than the US sources." They have to make this known to the Government authorities. It is not in
the first instance the latter's duty or burden to make unaided verification of the sources of income of American
residents. The duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt
status. It cannot simply be presumed that they earned no income from any other sources than their employment in
the American bases and are therefore totally exempt from income tax. The situation is no different from that of
Filipino and other resident income-earners in the Philippines who, by reason of the personal exemptions and
permissible deductions under the Tax Code, may not be liable to pay income tax year for any particular year; that
they are not liable to pay income tax, no matter how plain or irrefutable such a proposition might be, does not
exempt them from the duty to file an income tax return.
These considerations impel affirmance of the judgments of the Court of Appeals and the Trial Court.
WHEREFORE, the petition for review on certiorari is DENIED, and the challenged decision of the Court of Appeals is
AFFIRMED. Costs against petitioners. SO ORDERED.
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of
Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's
assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the
fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983
denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United
Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport
Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of
the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had

5
no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not
carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it
maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways
which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate
amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by
BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years
1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the
CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the Tax Court on
27 January 1972, assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years
1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16
February 1972, however, the CIR not only denied the BOAC request for refund in the First Case but also re-issued in
the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was denied
by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court praying that it be
absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that
the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by
Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said
income is not subject to Philippine income tax. The CTA position was that income from transportation is income
from services so that the place where services are rendered determines the source. Thus, in the dispositive portion
of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the
deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to
1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation
(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights
here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing
business in the Philippines or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation
but a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirtyfive per cent (35%) of its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein.

6
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade
or business within the Philippines and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what
constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must
be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the
functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood
of the airline business, the generation of sales being the paramount objective. There should be no doubt then that
BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the
preceding taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any
foreign country, except a foreign fife insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation
for personal service of whatever kind and in whatever form paid, or from profession, vocations,
trades,business, commerce, sales, or dealings in property, whether real or personal, growing out of
the ownership or use of or interest in such property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or profile, or gains, profits,
and income derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words
'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within
the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the amount of
money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to
P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the source of income to
be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government.

7
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the
fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set
forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all
the elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines,
namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for international transportation. However, that
does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend
the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will show that it does not state that it is an allinclusive enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with
the result that the place where the services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under
review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site
of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test
of taxability is the "source"; and the source of an income is that activity ... which produced the
income. 11Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12it cannot alter the fact
that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential
idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the
questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For,
pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as
follows:
... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross
Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross
Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2 % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage tax it
would have been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal
inJAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present
case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax.
As elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by the State only when the acts,
privileges or businesses are done or performed within the jurisdiction of the Philippines. The subject matter of the
case under consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind
and in whatever form derived from any source." Since the two cases treat of a different subject matter, the decision
in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the
British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency
income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16,

8
1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for refund in the
amount of P858,307.79 is hereby denied. Without costs. SO ORDERED.
G.R. No. L-46029 June 23, 1988
N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,
vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
GANCAYCO, J.:
The issue posed in this petition is the income tax liability of a foreign shipping corporation which called on Philippine
ports to load cargoes for foreign destination on two occasions in 1963 and 1964, respectively, and which collected
freight fees on these transactions.
From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964, MV "Amstelkroon,
" both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports to load cargoes for
foreign destination. The freight fees for these transactions were paid abroad in the amount of US $98,175.00 in
1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean Lines acted as husbanding
agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding income tax returns
for and in behalf of the former under Section 15 of the National Internal Revenue Code. Applying the then
prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij
"Amsterdam" for 1963 and 1964 amounted to P382,882.50 and P535,052.00, respectively. On June 30, 1967,
respondent Commissioner assessed said petitioner in the amounts of P193,973.20 and P262,904.94 as deficiency
income tax for 1963 and 1964, respectively, as "a non-resident foreign corporation not engaged in trade or
business in the Philippines under Section 24 (b) (1) of the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines,
on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels
computed at the exchange rate of P2.00 to USs1.00 1 and paid the tax thereon in the amount of P1,835.52 and
P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the National Internal
Revenue Code and Section 163 of Revenue Regulations No. 2. On the same two dates, petitioner Royal Interocean
Lines as the husbanding agent of petitioner N.V. Reederij "AMSTERDAM" filed a written protest against the
abovementioned assessment made by the respondent Commissioner which protest was denied by said respondent
in a letter dated March 3, 1969: On March 31, 1969, petitioners filed a petition for review with the respondent
Court of Tax Appeals praying for the cancellation of the subject assessment. After due hearing, the respondent
court, on December 1, 1976, rendered a decision modifying said assessments by eliminating the 50% fraud
compromise penalties imposed upon petitioners. Petitioners filed a motion for reconsideration of said decision but
this was denied by the respondent court.
Hence, this petition for review where petitioners raised the following issues:
A. WHETHER N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY OFFICE OR PLACE OF BUSINESS IN
THE PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS FOR THE PURPOSE OF
LOADING CARGOES ONLY TWICE-ONE IN 1963 AND ANOTHER IN 1964 SHOULD BE TAXED AS A
FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER
SECTION 24(b) (1) OF THE TAX CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION
TO SECTION 37 (e) OF THE SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ "AMSTERDAM" SHOULD BE
CONVERTED INTO PHILI PINE PESOS AT THE OFFICIAL RATE OF P2.00 TO US $1.00, OR AT P3.90
TO US $1.00.
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij "AMSTERDAM" is a nonresident foreign corporation because it allegedly disregarded Section 163 of Revenue Regulations No. 2 (providing
for the determination of the net income of foreign corporations doing business in the Philippines) and in holding
that the foreign exchange ang e receipts of said petitioner for purposes of computing its income tax should be
converted into Philippine pesos at the rate of P3.90 to US $1.00 instead of P2.00 to US $1.00.
The petition is devoid of merit.

9
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do business in the
Philippines. It does not have a branch office in the Philippines and it made only two calls in Philippine ports, one in
1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation, as
in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent court
A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax,
corporations are classified into (a) domestic corporations and (b) foreign corporations. (Sec. 24(a)
and (b), Tax Code.) Foreign corporations are further classified into (1) resident foreign corporations
and (2) non-resident foreign corporations. (Sec. 24(b) (1) and (2). Tax Code.) A resident foreign
corporation is a foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein (Sec. 84(g), Tax Code) while a non- resident foreign corporation
is a foreign corporation not engaged in trade or business within the Philippines and not having any
office or place of business therein. (Sec. 84(h), Tax Code.)
A domestic corporation is taxed on its income from sources within and without the Philippines, but a
foreign corporation is taxed only on its income from sources within the Philippines. (Sec. 24(a), Tax
Code; Sec. 16, Rev. Regs. No. 2.) However, while a foreign corporation doing business in the
Philippines is taxable on income solely from sources within the Philippines, it is permitted to
deductions from gross income but only to the extent connected with income earned in the
Philippines. (Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreign corporations not doing
business in the Philippines are taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income
and capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.)
At the time material to this case, certain corporations were given special treatment, namely,
building and loan associations operating as such in accordance with Section 171 of the Corporation
Law, educational institutions, domestic life insurance companies and for" foreign life insurance
companies doing business in the Philippines. (Sec. 24(a) & (c), Tax Code.) It bears emphasis,
however, that foreign life insurance companies which were not doing business in the Philippines
were taxable as other foreign corporations not authorized to do business in the Philippines. (Sec.
24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a non-resident foreign
corporation, organized and existing under the laws of The Netherlands with principal office in
Amsterdam and not licensed to do business in the Philippines. (pp. 8-81, CTA records.) As a nonresident foreign corporation, it is thus a foreign corporation, not engaged in trade or business within
the Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.) As
stated above, it is therefore taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits and income
and capital gains, and the tax is equal to thirty per centum of such amount, under Section 24(b) (1)
of the Tax Code. The accent is on the words of--`such amount." Accordingly, petitioner N. V.
Reederij "Amsterdam" being a non-resident foreign corporation, its taxable income for purposes of
our income tax law consists of its gross income from all sources within the Philippines.
The law seems clear and specific. It thus calls for its application as worded as it leaves no leeway
for interpretation. The applicable provision imposes a tax on foreign corporations falling under the
classification of non-resident corporations without any exceptions or conditions, unlike in the case of
foreign corporations engaged in trade or business within the Philippines which contained (at the
time material to this case) an exception with respect to foreign life insurance companies. Adherence
to the provision of the law, which specifies and determines the taxable income of, and the rate of
income tax applicable to, non-resident foreign corporations, without mentioning any exceptions,
would therefore lead to the conclusion that petitioner N.V. Reederij "Amsterdam" is subject to
income tax on gross income from all sources within the Philippines.
A foreign corporation engaged in trade or business within the Philippines, or which has an office or place of business
therein, is taxed on its total net income received from all sources within the Philippines at the rate of 25% upon the
amount but which taxable net income does not exceed P100,000.00, and 35% upon the amount but which taxable
net income exceeds P100,000.00. 2 On the other hand, a foreign corporation not engaged in trade or business
within the Philippmes and which does not have any office or place of business therein is taxed on income received
from all sources within the Philippines at the rate of 35% of the gross income. 3

10
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing Section 163 of the
Income Tax Regulations but these provisions refer to a foreign corporation engaged in trade or business in the
Philippines and not to a foreign corporation not engaged in trade or business in the Philippines like petitioner-shipowner herein. Thus, the respondent court aptly ruled:
It must be stressed, however, that Section 37 (e) of the Code, as implemented by Section 163 of
the Regulations, provides the rule of the determination of the net income taxable in the Philippines
of a foreign steamship company doing business in the Philippines. To assure that non-resident
foreign steamship companies not engaged in business in the Philippines and not having any office
or place of business herein are not covered therein, the regulations explicitly and clearly provide
that "the net income of a foreign steamship co company doing business in or from this country is
ascertained," under the formula contained therein, "for the purpose of the income tax.! The reason
is easily discernible. As stated above, the taxable income of non-resident foreign corporations
consists of its gross income from all sources within the Philippines. Accordingly, a foreign
steamgship corporation derives income partly from sources within and partly from sources without
the Philippines if it iscarrying on a business of transportation service between points in the
Philippines and points outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.) Only then
does Section 37 (e) of the Tax Code, are implemented by Section 163 of the Regulations, apply in
computing net income subject to tax. There is no basis therefore for an assertion "that Section 37
(e) does not distinguish between a foreign corporation engaged in business in the Philippines and a
foreign corporation not engaged in business in the Philippines."" (p. 84, CTA records.) (Decision, pp.
11-12.)
The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable to the income of petitioners
for income tax purposes instead of P3.90 to s1.00 is likewise untenable. The transactions involved in this case are
for the taxable years 1963 and 1964. Under Rep. Act No. 2609, the monetary board was authorized to fix the legal
conversion rate for foreign exchange. The free market conversion rate during those years was P3.90 to US $1.00.
This conversion rate issue was definitely settled by this Court in the case of Commissioner of Internal Revenue vs.
Royal Interocean Lines and the Court of Tax Appeals 4 to wit:
It should be noted that on July 1 6, 1959, the policy incorporated in Circular No. 20 and
implemented in subsequent circulars was relaxed with the enactment of Republic Act No. 2609
which directed the monetary authorities to take steps for the adoption of a four-year program of
gradual decontrol, during which the Monetary Board, with the approval of the President, could and
did fix the conversion rate of the Philippine peso to the US dollar at a ratio other than that
prescribed in Section 48 of Republic Act 265. During the period involved in the case at bar, the free
market conversion rate ranged from P3.47 to P3.65 to a US dollar at which rate the freight fees in
question were computed in the contested assessment. Inasmuch said frees were revenues derived
from foreign exchange transactions, it follows necessarily that the petitioner was fully justified in
computing the taxpayer's receipts at Id free market rates.
xxx xxx xxx
The case of the United States Lines, on which the appealed decision of the Court of Tax Appeals is
anchored, refers to transactions that took place before the approval of Republic Act 2609 on July
16, 1959 when the only legal rate of exchange obtaining in the Philippines was P2 to US $1, and all
foreign exchange had to be surrendered to the Central Bank subject to its disposition pursuant to
its own rules and regulations. Upon the other hand, the present case refers to transactions that
took place during the effectivity of Republic Act 2609 when there was, apart from the parity rate, a
legal free market conversion rate for foreign exchange transactions, which rate had been fixed in
open trading, such as those involved in the case at bar.
Indeed, in the course of the investigation conducted by the Commissioner on the accounting records of petitioner
Royal Interocean Lines, it was verified that when said petitioner paid its agency fees for services rendered as
husbanding agent of the said vessels, it used the conversion rate of P3.90 to US $1.00. 5 It is now estopped from
claiming otherwise in this case. WHEREFORE, the petition is DENIED with costs against petitioners. This decision is
immediately executory and no extension of time to file motion for reconsideration shall be entertained. SO
ORDERED.

11
G.R. No. 76573 September 14, 1989
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing under the
laws of Japan and duly licensed to engage in business under Philippine laws with branch office at the 4th Floor,
FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court of Tax
Appeals 1 dated February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40
representing alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and
Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For
the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of
P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981
ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final
dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit
remittance tax based on the remittable amount after deducting the final withholding tax of 10%. A schedule of
dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate
dividend tax and the 15% branch profit remittance tax paid thereon, is shown below:

1981

FIRST
QUARTER
(three months
ended 3.31.81)
(In Pesos)

THIRD
QUARTER
(three months
ended 9.30.81)

TOTAL OF
FIRST and
THIRD quarters

849,720.44

849,720.00

1,699,440.00

84,972.00

84,972.00

169,944.00

Cash Dividend net of

10% Dividend Tax
Withheld

764,748.00

764,748.00

1,529,496.00

15% Branch Profit

Remittance Tax Withheld

114,712.20

114,712.20

229,424.40

Net Amount Remitted to

Petitioner

650,035.80

650,035.80

1,300,071.60

Cash Dividends Paid

10% Dividend Tax

Withheld

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first
quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt
No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
P114,712 for the third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981
under Central Bank Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit remittance on
cash dividends declared and remitted to petitioner at its head office in Tokyo in the total amount of P229,424.40 on
April 20 and August 4, 1981. 5

12
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company,
sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P
are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject
to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as
amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a
branch office to its head office which are effectively connected with its trade or business in the
Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not
necessary that the income be derived from the actual operation of taxpayer-corporation's trade or
business; it is sufficient that the income arises from the business activity in which the corporation is
engaged. For example, if a resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividends thus earned are not considered 'effectively connected' with its
trade or business in this country. (Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are
not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24
(b) (2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on
September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing
profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P)
on April 20 and August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of
P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit remittance tax as
the same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and
neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a
non-resident stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to
Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25
% tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit
remittance tax totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to
be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of
Internal Revenue in its assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in
question are income taxable to the Marubeni Corporation of Tokyo, Japan. The said dividends were
distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its
profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation.
The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly remitted to and
received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch
has no participation or intervention, directly or indirectly, in the investments and in the receipt of
the dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not
come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the
remittance of the foreign exchange equivalent of (sic) the dividends in question, treated the
Marubeni Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company
based on the supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it.
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan,
and hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine
Branch is duly licensed to engage in business under Philippine laws, such dividends are not the
income of the Philippine Branch and are not taxable to the said Philippine branch. We see no
significance thereto in the identity concept or principal-agent relationship theory of petitioner
because such dividends are the income of and taxable to the Japanese corporation in Japan and not
to the Philippine branch. 10
Hence, the instant petition for review.

13
It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is
likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from
a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1)
Shall be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid
as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign
corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned from
Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the
gross income received during each taxable year from all sources within the Philippines as ...
dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded
between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident
of the other Contracting State may be taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident, and according to the laws of that Contracting State, but if the
recipient is the beneficial owner of the dividends the tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is therefore the
determination of whether it is a resident or a non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the
Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through its
Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the
Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P,
Manila does not matter at all. A single corporate entity cannot be both a resident and a non-resident corporation
depending on the nature of the particular transaction involved. Accordingly, whether the dividends are paid directly
to the head office or coursed through its local branch is of no moment for after all, the head office and the office
branch constitute but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and
corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal agent relationship theory.
It is understood that the branch becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch, the principal-agent relationship is
set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter becomes
the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in
Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other
logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares including that of
nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but
certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent
investment attributable only to the head office, cannot now claim the increments as ordinary consequences of its
trade or business in the Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 %
profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder,
they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld
totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).

14
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has
a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon
which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax Treaty
as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum
rates as reflected in the phrase "shall not exceed." This means that any tax imposable by the contracting state
concerned should not exceed the 25 % limitation and that said rate would apply only if the tax imposed by our laws
exceeds the same. In other words, by reason of our bilateral negotiations with Japan, we have agreed to have our
right to tax limited to a certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable
provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said
section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On dividends received
from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20 % which represents the difference between the regular tax
(35 %) on corporations and the tax (15 %) on dividends as provided in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a
general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P)
on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of
the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident
foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received
from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
-----------------Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
------------------Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 %
of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring under the
impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the Judiciary
Reorganization Act of 1980. He alleges that the instant petition for review was not perfected in accordance with
Batas Pambansa Blg. 129 which provides that "the period of appeal from final orders, resolutions, awards,
judgments, or decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final
order, resolution, award, judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been
created by virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts specifically
mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of the
Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling, or
decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund on
April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on November 17, 1986, and notice of which was

15
received by petitioner on November 26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously
filed a notice of appeal with the Court of Tax Appeals and a petition for review with the Supreme Court. 14 From the
foregoing, it is evident that the instant appeal was perfected well within the 30-day period provided under R.A. No.
1125, the whole 30-day period to appeal having begun to run again from notice of the denial of petitioner's motion
for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed
the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is
hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of
petitioner the amount of P144,452.40 representing overpayment of taxes on dividends received. No costs. So
ordered.

G.R. No. 190102

July 11, 2012

ACCENTURE, INC., Petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
SERENO, J.:
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the Decision of
the Court of Tax Appeals En Banc (CTA En Banc ) dated 22 September 2009 and its subsequent Resolution dated 23
October 2009.1
Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting, business
strategies development, and selling and/or licensing of software. 2 It is duly registered with the Bureau of Internal
Revenue (BIR) as a Value Added Tax (VAT) taxpayer or enterprise in accordance with Section 236 of the National
Internal Revenue Code (Tax Code).3
On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st
period). Its Quarterly VAT Return for the fourth quarter of 2002, which covers the 1st period, was filed on 17
September 2002; and an Amended Quarterly VAT Return, on 21 June 2004. 4 The following are reflected in
Accentures VAT Return for the fourth quarter of 2002: 5
1wphi1
Purchases

Amount

Input VAT

Domestic Purchases- Capital Goods

P12,312,722.00

P1,231,272.20

Domestic Purchases- Goods other than capital Goods

P64,789,507.90

P6,478,950.79

Domestic Purchases- Services

P16,455,868.10

P1,645,586.81

Total Input Tax

P9,355,809.80

Zero-rated Sales

P316,113,513.34

Total Sales

P335,640,544.74

Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for October
2002, on 12 November 2002. These returns were amended on 9 January 2003. Accentures Quarterly VAT Return
for the first quarter of 2003, which included the period 1 September 2002 to 30 November 2002 (2nd period), was
filed on 17 December 2002; and the Amended Quarterly VAT Return, on 18 June 2004. The latter contains the
following information:6
Purchases
Domestic Purchases- Capital Goods
Domestic Purchases- Goods other than capital Goods
Domestic Purchases-Services
Total Input Tax

Amount

Input VAT

P80,765,294.10

P8,076,529.41

P132,820,541.70

P13,282,054.17

P63,238,758.00

P6,323,875.80
P27,682,459.38

16

Zero-rated Sales
Total Sales

P545,686,639.18
P

P572,880,982.68

The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input VAT
credits earned from its zero-rated transactions against its output VAT liabilities, it still had excess or unutilized input
VAT credits. These VAT credits are in the amounts of P9,355,809.80 for the 1st period and P27,682,459.38 for the
2nd period, or a total of P37,038,269.18.7
Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accentures "domestic
purchases of taxable goods which cannot be directly attributed to its zero-rated sale of services." 8 This allocated
input VAT was broken down to P8,811,301.66 for the 1st period and P26,367,542.55 for the 2nd period. 9
The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter when the
amount was earnedor to any of the succeeding quarters. Instead, it was carried forward to petitioners 2nd
Quarterly VAT Return for 2003.10
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the refund
or the issuance of a Tax Credit Certificate (TCC). The DoF did not act on the claim of Accenture. Hence, on 31
August 2004, the latter filed a Petition for Review with the First Division of the Court of Tax Appeals (Division),
praying for the issuance of a TCC in its favor in the amount of P35,178,844.21.
The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:
1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.
2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove that it is
entitled to a refund, because its claim has not been fully substantiated or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that the
latters sale of services to the alleged foreign clients qualified for zero percent VAT.13
In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in the
amount of P35,178,844.21,14 the Division ruled that Accenture had failed to present evidence to prove that the
foreign clients to which the former rendered services did business outside the Philippines. 15 Ruling that Accentures
services would qualify for zero-rating under the 1997 National Internal Revenue Code of the Philippines (Tax Code)
only if the recipient of the services was doing business outside of the Philippines, 16 the Division cited Commissioner
of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (Burmeister) 17 as basis.
Accenture appealed the Divisions Decision through a Motion for Reconsideration (MR). 18 In its MR, it argued that
the reliance of the Division on Burmeister was misplaced 19 for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the
recipient of its service was doing business in the Philippines; it was not an issue of failure of the applicant to
present evidence to prove the fact that the recipient of its services was a foreign corporation doing business
outside the Philippines.20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be doing
business outside the Philippines, and Accenture had successfully established that. 21
3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the Division,
Burmeister cannot be made to apply to this case.22
Accenture also cited Commissioner of Internal Revenue v. American Express (Amex) 23 in support of its position. The
MR was denied by the Division in its 12 March 2009 Resolution. 24
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by Republic Act
No. (R.A.) 9337, 25 there was no requirement that the services must be rendered to a person engaged in business
conducted outside the Philippines to qualify for zero-rating. The CTA En Banc agreed that because the case
pertained to the third and the fourth quarters of taxable year 2002, the applicable law was the 1997 Tax Code, and
not R.A. 9337.26 Still, it ruled that even though the provision used in Burmeister was Section 102(b)(2) of the
earlier 1977 Tax Code, the pronouncement therein requiring recipients of services to be engaged in business
outside the Philippines to qualify for zero-rating was applicable to the case at bar, because Section 108(B)(2) of the
1997 Tax Code was a mere reenactment of Section 102(b)(2) of the 1977 Tax Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latters allegation that its
clients were foreign-based.27

17
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Divisions Decision
and Resolution.28 A subsequent MR was also denied in a Resolution dated 23 October 2009.
Hence, the present Petition for Review29 under Rule 45.
In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following issues
for resolution:
1. Whether or not Petitioners sales of goods and services are zero-rated for VAT purposes under Section
108(B)(2)(3) of the 1997 Tax Code.
2. Whether or not petitioners claim for refund/tax credit in the amount of P35,178,884.21 represents
unutilized input VAT paid on its domestic purchases of goods and services for the period commencing from
1 July 2002 until 30 November 2002.
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged
unutilized input VAT paid on its domestic purchases of goods and services for the period commencing from
1 July 2002 until 30 November 2002, and applied the same fully to its output VAT liability for the said
period.
4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the
unutilized input VAT on domestic purchases of goods and services for the period commencing from 1 July
2002 until 30 November 2002, from its sales of services to various foreign clients.
5. Whether or not Petitioners claim for refund/tax credit in the amount of P35,178,884.21, as alleged
unutilized input VAT on domestic purchases of goods and services for the period covering 1 July 2002 until
30 November 2002 are duly substantiated by proper documents. 30
For consideration in the present Petition are the following issues:
1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to be
zero-rated under Section 108(B)(2) of the 1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business outside the Philippines?
Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of unutilized
input VAT earned from zero-rated or effectively zero-rated sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108
(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where
the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed
to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. Section
108(B) referred to in the foregoing provision was first seen when Presidential Decree No. (P.D.) 1994 31 amended
Title IV of P.D. 1158,32 which is also known as the National Internal Revenue Code of 1977. Several Decisions have
referred to this as the 1986 Tax Code, even though it merely amended Title IV of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 273 33 further amended provisions of Title
IV. E.O. 273 by transferring the old Title IV provisions to Title VI and filling in the former title with new provisions
that imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716. 34 This law, which
was approved on 5 May 1994, widened the tax base. Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as
follows:
"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x
xxx

xxx

xxx

18
"(b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered
persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).
"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP)."
Essentially, Section 102(b) of the 1977 Tax Codeas amended by P.D. 1994, E.O. 273, and R.A. 7716provides
that if the consideration for the services provided by a VAT-registered person is in a foreign currency, then this
transaction shall be subjected to zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It reads:
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VATregistered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied)
The meat of Accentures argument is that nowhere does Section 108(B) of the 1997 Tax Code state that services,
to be zero-rated, should be rendered to clients doing business outside the Philippines, the requirement introduced
by R.A. 9337.35 Required by Section 108(B), prior to the amendment, is that the consideration for the services
rendered be in foreign currency and in accordance with the rules of the Bangko Sentral ng Pilipinas (BSP). Since
Accenture has complied with all the conditions imposed in Section 108(B), it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B) reveals a
clear intent on the part of the legislators not to impose the condition of being "consumed abroad" in order for the
services performed in the Philippines to be zero-rated. 36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirementthat the client
must be doing business outside the Philippinescan be disregarded, because this requirement is expressly provided
in Article 108(2) of the Tax Code.37
Accenture questions the Divisions application to this case of the pronouncements made in Burmeister. According to
petitioner, the provision applied to the present case was Section 102(b) of the 1977 Tax Code, and not Section
108(B) of the 1997 Tax Code, which was the law effective when the subject transactions were entered into and a
refund was applied for.

19
In refuting Accentures theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a mere
reproduction of Section 102(b) of the 1977 Tax Code, this Courts interpretation of the latter may be used in
interpreting the former, viz:
In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977 Tax
Code, as amended, pertaining to zero-rated transactions. A parallel approach should be accorded to the
renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997 NIRC. This means that Section 108(B)(2)
must be read in conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a) services other than
processing, manufacturing or repacking rendered by VAT registered persons in the Philippines; and b) the
transaction paid for in acceptable foreign currency duly accounted for in accordance with BSP rules and regulations.
The same provision made reference to Section 108(B)(1) further imposing the requisite c) that the recipient of
services must be performing business outside of Philippines. Otherwise, if both the provider and recipient of service
are doing business in the Philippines, the sale transaction is subject to regular VAT as explained in the Burmeister
case x x x.
xxx

xxx

xxx

Clearly, the Supreme Courts pronouncements in the Burmeister case requiring that the recipient of the services
must be doing business outside the Philippines as mandated by law govern the instant case. 38
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to apply to
Burmeister this Courts interpretation of Section 102(b) of the 1977 Tax Code, because the Petition of Accenture
had already been filed before the case was even promulgated on 22 January 2007, 39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the statute
itself, however, the same cannot be applied retroactively against the Petitioner because to do so will be prejudicial
to the latter.40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the Supreme
Court, whose interpretation of the law is part of that law as of the date of its enactment. 41
We rule that the recipient of the service must be doing business outside the Philippines for the transaction to qualify
for zero-rating under Section 108(B) of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a
verbatim copy of Section 102(b) of the 1977 Tax Code, any interpretation of the latter holds true for the former.
Moreover, even though Accentures Petition was filed before Burmeister was promulgated, the pronouncements
made in that case may be applied to the present one without violating the rule against retroactive application.
When this Court decides a case, it does not pass a new law, but merely interprets a preexisting one. 42 When this
Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this interpretation became part of the law
from the moment it became effective. It is elementary that the interpretation of a law by this Court constitutes part
of that law from the date it was originally passed, since this Court's construction merely establishes the
contemporaneous legislative intent that the interpreted law carried into effect. 43
Accenture questions the CTAs application of Burmeister, because the provision interpreted therein was Section
102(b) of the 1977 Tax Code. In support of its position that Section 108 of the 1997 Tax Code does not require that
the services be rendered to an entity doing business outside the Philippines, Accenture invokes this Courts
pronouncements in Amex. However, a reading of that case will readily reveal that the provision applied was Section
102(b) of the 1977 Tax Code, and not Section 108 of the 1997 Tax Code. As previously mentioned, an
interpretation of Section 102(b) of the 1977 Tax Code is an interpretation of Section 108 of the 1997 Tax Code, the
latter being a mere reproduction of the former.
This Court further finds that Accentures reliance on Amex is misplaced.
We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed abroad to
be zero-rated. However, nowhere in that case did this Court discuss the necessary qualification of the recipient of
the service, as this matter was never put in question. In fact, the recipient of the service in Amex is a nonresident
foreign client.
The aforementioned case explains how the credit card system works. The issuance of a credit card allows the holder
thereof to obtain, on credit, goods and services from certain establishments. As proof that this credit is extended by
the establishment, a credit card draft is issued. Thereafter, the company issuing the credit card will pay for the
purchases of the credit card holders by redeeming the drafts. The obligation to collect from the card holders and to
bear the lossin case they do not payrests on the issuer of the credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from
establishments located in the Philippines and forwarding them to its parent company's regional operating centers
outside the country. It facilitated in the Philippines the collection and payment of receivables belonging to its Hong
Kong-based foreign client.

20
The Court explained how the services rendered in Amex were considered to have been performed and consumed in
the Philippines, to wit:
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the
performance or "successful completion of a contractual duty, usually resulting in the performers release from any
past or future liability x x x." The services rendered by respondent are performed or successfully completed upon
its sending to its foreign client the drafts and bills it has gathered from service establishments here. Its services,
having been performed in the Philippines, are therefore also consumed in the Philippines. 44
The effect of the place of consumption on the zero-rating of the transaction was not the issue in
Burmeister.1wphi1Instead, this Court addressed the squarely raised issue of whether the recipient of services
should be doing business outside the Philippines for the transaction to qualify for zero-rating. We ruled that it
should. Thus, another essential condition for qualification for zero-rating under Section 102(b)(2) of the 1977 Tax
Code is that the recipient of the business be doing that business outside the Philippines. In clarifying that there is
no conflict between this pronouncement and that laid down in Amex, we ruled thus:
x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine
Branch), the place of payment is immaterial, much less is the place where the output of the service is ultimately
used. An essential condition for entitlement to 0% VAT under Section 102 (b) (1) and (2) is that the recipient of the
services is a person doing business outside the Philippines. In this case, the recipient of the services is the
Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to
operate and maintain NAPOCORs two 100-megawatt power barges in Mindanao. (Emphasis in the original) 45
In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In Burmeister, the
Court found that, although the place of the consumption of the service does not affect the entitlement of a
transaction to zero-rating, the place where the recipient conducts its business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax Code
and consequently Section 108(B)(2) of the 1997 Tax Codewas intended to operate, the two aforementioned cases
should be taken together. The zero-rating of the services performed by respondent in Amex was affirmed by the
Court, because although the services rendered were both performed and consumed in the Philippines, the recipient
of the service was still an entity doing business outside the Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is the
only logical interpretation of Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:
This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the "other
services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those
subject to the regular VAT under Section 102 (a) can avoid paying the VAT by simply stipulating payment in foreign
currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2) to apply to a payerrecipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102
(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or
avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation
removes Section 102 (a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
xxx

xxx

xxx

Further, when the provider and recipient of services are both doing business in the Philippines, their transaction
falls squarely under Section 102 (a) governing domestic sale or exchange of services. Indeed, this is a purely local
sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other
provisions of Section 102 (b).
Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the preceding subparagraph,"
the legislative intent is that only the services are different between subparagraphs 1 and 2. The requirements for
zero-rating, including the essential condition that the recipient of services is doing business outside the Philippines,
remain the same under both subparagraphs. (Emphasis in the original) 46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified the intent
behind Sections 102(b)(2) of the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending the earlier
provision. R.A. 9337 added the following phrase: "rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are
performed."
Accenture has failed to establish that the recipients of its services do business outside the Philippines.
Accenture argues that based on the documentary evidence it presented, 47 it was able to establish the following
circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that Accentures clients have not
established any branch office in which to do business in the Philippines.

21
2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which is
likewise a foreign corporation with no "presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP rules to pay in acceptable
currency for their purchase of goods and services from the Philippines. Thus, in a domestic transaction,
where the provider and recipient of services are both doing business in the Philippines, the BSP cannot
require any party to make payment in foreign currency.48
Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel Mendoza,
the Court-commissioned Independent Certified Public Accountant. He ascertained that Accentures gross billings
pertaining to zero-rated sales were all supported by zero-rated Official Receipts and Billing Statements. These
documents show that these zero-rated sales were paid in foreign exchange currency and duly accounted for in the
rules and regulations of the BSP.49
In the CTAs opinion, however, the documents presented by Accenture merely substantiate the existence of the
sales, receipt of foreign currency payments, and inward remittance of the proceeds of these sales duly accounted
for in accordance with BSP rules. Petitioner presented no evidence whatsoever that these clients were doing
business outside the Philippines.50
Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations doing
business outside the Philippines, unlike in Burmeister, which allegedly involved a foreign corporation doing business
in the Philippines.51
We deny Accentures Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are foreign.1wphi1 This fact does not
automatically mean, however, that these clients were doing business outside the Philippines. After all, the Tax Code
itself has provisions for a foreign corporation engaged in business within the Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx

xxx

xxx

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business
within the Philippines.
(I) The term nonresident foreign corporation applies to a foreign corporation not engaged in trade or
business within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service be
proven to be a foreign corporation; rather, it must be specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We ruled
thus in Commissioner of Internal Revenue v. British Overseas Airways Corporation: 52
x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each
case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous business, such
as the appointment of a local agent, and not one of a temporary character." 53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that
claim.1wphi1 Tax refunds, like tax exemptions, are construed strictly against the taxpayer.54
Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients were
foreign entities. However, as found by both the CTA Division and the CTA En Banc, no evidence was presented by
Accenture to prove the fact that the foreign clients to whom petitioner rendered its services were clients doing
business outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements, Memo
Invoices-Receivable, Memo Invoices-Payable, and Bank Statements presented by Accenture merely substantiated
the existence of sales, receipt of foreign currency payments, and inward remittance of the proceeds of such sales
duly accounted for in accordance with BSP rules, all of these were devoid of any evidence that the clients were
doing business outside of the Philippines.55
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009 Resolution
of the Court of Tax Appeals En Banc in C.T.A. EB No. 477, dismissing the Petition for the refund of the excess or
unutilized input VAT credits of Accenture, Inc., are AFFIRMED. SO ORDERED.

22
G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of P1,863.44,
with legal interest thereon, which they paid under protest by way of income tax. They appealed from the decision
rendered in the case on October 23, 1936 by the Court of First Instance of the City of Manila, which dismissed the
action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective undersigned attorneys, and
hereby agree to respectfully submit to this Honorable Court the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the Collector
of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes ticket
valued at two pesos (P2), subscribed and paid therefor the amounts as follows:
1. Jose Gatchalian ....................................................................................................

P0.18

2. Gregoria Cristobal ...............................................................................................

.18

3. Saturnina Silva ....................................................................................................

.08

4. Guillermo Tapia ...................................................................................................

.13

5. Jesus Legaspi ......................................................................................................

.15

6. Jose Silva .............................................................................................................

.07

7. Tomasa Mercado ................................................................................................

.08

8. Julio Gatchalian ...................................................................................................

.13

9. Emiliana Santiago ................................................................................................

.13

10. Maria C. Legaspi ...............................................................................................

.16

11. Francisco Cabral ...............................................................................................

.13

12. Gonzalo Javier ....................................................................................................

.14

13. Maria Santiago ...................................................................................................

.17

14. Buenaventura Guzman ......................................................................................

.13

15. Mariano Santos .................................................................................................

.14

Total ........................................................................................................

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the ordinary course
of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one ticket
bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in the name of
Jose Gatchalian and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned ticket
bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the corresponding check
covering the above-mentioned prize of P50,000 was drawn by the National Charity Sweepstakes Office in
favor of Jose Gatchalian & Company against the Philippine National Bank, which check was cashed during
the latter part of December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to file
the corresponding income tax return covering the prize won by Jose Gatchalian & Company and that on
December 29, 1934, the said return was signed by Jose Gatchalian, a copy of which return is enclosed as
Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company
requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan,

23
giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said amount of
P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of
which marked Exhibit C is attached and made a part hereof, requesting exemption from payment of the
income tax to which reply there were enclosed fifteen (15) separate individual income tax returns filed
separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to D15, respectively, in order of their names listed in the caption of this case and made parts hereof; a
statement of sale signed by Jose Gatchalian showing the amount put up by each of the plaintiffs to cover up
the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose
Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is enclosed,
denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and reiterated his
demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10, 1935
within which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on
March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a
warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked Exhibit I
is enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said
plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under
protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan, Bulacan,
as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part
hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance of the tax and
penalties by monthly installments;
11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant subject to
the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee prompt
payment of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and made a
part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly installments at
the rate of P118.70 a month, the first payment under protest to be effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of P602.51,
a copy of which protest is attached and marked Exhibit L, but that defendant in his letter dated August 1,
1935 overruled the protest and denied the request for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with the terms
and conditions of bond filed by them, the defendant in his letter dated July 23, 1935, copy of which is
attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to execute within five
days the warrant of distraint and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the
plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano
Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan the sum of P1,260.93
representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced by
income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and that on
September 3, 1936, the plaintiffs formally protested to the defendant against the payment of said amount
and requested the refund thereof, copy of which is attached and marked Exhibit O and made part hereof;
but that on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of
which is attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight hundred
and sixty three pesos and forty-four centavos (P1,863.44) paid under protest by them but that defendant
refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of
August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the amount indicated
below and the part of may share remaining is also shown to wit:

24
Purchaser

Amount

1. Mariano Santos ...........................................

Address

P0.14

Pulilan, Bulacan.

2. Buenaventura Guzman ...............................

.13

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

8. Julio Gatchalian ............................................

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose Gatchalian ............................................

.18

- Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of whatever prize that might
be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED JANUARY 19, 1935
SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

Name

Exhibit
No.

Purchase
Price

Price
Won

Net
prize

Expenses

1. Jose
Gatchalian ..........................................

D-1

P0.18

P4,425

P 480

3,945

2. Gregoria
Cristobal ......................................

D-2

.18

4,575

2,000

2,575

3. Saturnina
Silva .............................................

D-3

.08

1,875

360

1,515

4. Guillermo
Tapia ..........................................

D-4

.13

3,325

360

2,965

5. Jesus Legaspi by Maria Cristobal ......... D-5

.15

3,825

720

3,105

6. Jose
Silva ................................................... D-6
.

.08

1,875

360

1,515

7. Tomasa
Mercado .......................................

D-7

.07

1,875

360

1,515

8. Julio Gatchalian by Beatriz

Guzman .......

D-8

.13

3,150

240

2,910

9. Emiliana
Santiago ......................................

D-9

.13

3,325

360

2,965

10. Maria C.
Legaspi ......................................

D-10

.16

4,100

960

3,140

11. Francisco

D-11

.13

3,325

360

2,965

25
Cabral ......................................
12. Gonzalo
Javier ..........................................

D-12

.14

3,325

360

2,965

13. Maria
Santiago ..........................................

D-13

.17

4,350

360

3,990

14. Buenaventura
Guzman ...........................

D-14

.13

3,325

360

2,965

15. Mariano
Santos ........................................

D-15

.14

3,325

360

2,965

2.00

<="" td="" style="font-size:

14px; text-decoration: none;
50,000 color: rgb(0, 0, 128); fontfamily: arial, verdana;">

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two
following: (1) Whether the plaintiffs formed a partnership, or merely a community of property without a personality
of its own; in the first case it is admitted that the partnership thus formed is liable for the payment of income tax,
whereas if there was merely a community of property, they are exempt from such payment; and (2) whether they
should pay the tax collectively or whether the latter should be prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by section 2
of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income
received in the preceding calendar year from all sources by every corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association or insurance company, organized in the
Philippine Islands, no matter how created or organized, but not including duly registered general
copartnership (compaias colectivas), a tax of three per centum upon such income; and a like tax shall be
levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar
year from all sources within the Philippine Islands by every corporation, joint-stock company, partnership,
joint account (cuenta en participacion), association, or insurance company organized, authorized, or
existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise: Provided, however, That nothing in this section shall be
construed as permitting the taxation of the income derived from dividends or net profits on which the
normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock company,
partnership, joint account (cuenta en participacion), association, or insurance company, or property, real,
personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of section two of Act
Numbered Two thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-nine
hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock
company, partnership, joint account (cuenta en participacion), association, or insurance company in the
calendar year nineteen hundred and twenty and in each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the
payment of income tax under the law. But according to the stipulation facts the plaintiffs organized a partnership of
a civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing
equally the prize which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The
partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such
collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs
organized and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income
tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of
Act No. 3761. There is no merit in plaintiff's contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs
appellants. So ordered.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs. THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

26
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is
the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28,
1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to
Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the
amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said
years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable
as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of
the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to individual income tax; and that
the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In
due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken
by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed
by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the
partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of
this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income
tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW
THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE
SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF
OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista.

27
In the said case, petitioners borrowed a sum of money from their father which together with their own personal
funds they used in buying several real properties. They appointed their brother to manage their properties with full
power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for
several years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue
demanded the payment of income tax on a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code,
as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect
to the tax on corporations, the issue hinges on the meaning of the terms corporation and
partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships (companies collectives), a tax
upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement
to contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all
the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same among themselves,
because:
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transcations undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the aforementioned common
fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot
but perceive a character of habituality peculiar to business transactions engaged in for purposes of
gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to
said properties have been handled as if the same belonged to a corporation or business enterprise
operated for profit.

28
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to
offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are
not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property
or industry to a common fund, and that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that
the purpose was not limited to the conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain
was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances
are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down the
rule for determining when a transaction should be deemed a partnership or a co-ownership. Said
article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners
or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership share or do
not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership, the
existence of a juridical personality different from that of the individual partners, and the freedom to
transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or

29
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p.
74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does
an agreement to share the profits and losses on the sale of land create a partnership; the parties
are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding
as tenants in common, and to divide the profits of disposing of it, the brother and the other not
being entitled to share in plaintiffs commission, no partnership existed as between the three
parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673,
233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming partners,
agree among themselves as to the management, and use of such property and the application of
the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence
of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign
the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners.
They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of
the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held
liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30,
1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without pronouncement as to costs. SO ORDERED.
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the
Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax
Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine laws, entered
into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident
foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to
use the trademark, patents and technology owned by the latter including the right to manufacture,

30
package and distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of the Bureau
of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh.
"A").
For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son,
USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax
on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the
total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the
BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts
attending [respondent's] case fall squarely within the same circumstances under which
said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We
therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only
subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty
[Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]"
(Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund
of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance

July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson)
then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No.
5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.

31
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing
overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the
decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA
ruling. 3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO
THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX
TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored
nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of
the United States from sources within the Philippines only if the circumstances of the resident of the United States
are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit"
provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RPUS Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even
assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as
held by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a
tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter,
these must necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C.
Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the
application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly
against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it
contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation"
clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to
tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to
the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the
RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also
contends that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar
circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in
Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in
1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor
are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RPWest Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer
pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's
counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to
original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should
be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor
General as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not
taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a
material circumstance to such payment and would be determinative of the said clause's application.1wphi1.nt
We address first the objection raised by private respondent that the certification against forum shopping was not
executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its
Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS
FILED WITH THE SUPREME COURT AND THE COURT
OF APPEALS TO PREVENT FORUM SHOPPING OR
MULTIPLE FILING OF PETITIONS AND COMPLAINTS

32
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints involving
the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the
result that said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals,
the petitioner aside from complying with pertinent provisions of the Rules of Court and existing
circulars, must certify under oath to all of the following facts or undertakings: (a) he has not
theretofore commenced any other action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for
the summary dismissal of the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before
this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions
and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which
is to prevent multiple petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other
action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are
inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to
be represented only by the Solicitor General, the certification executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article
13 (2) (b) (iii) of the 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 from sources
within the other Contracting State may be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross amount
of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties,
where the royalties are paid by a corporation
registered with the Philippine Board of Investments
and engaged in preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under
similar circumstances to a resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the
concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which
provides:

33
(2) However, such royalties may also be taxed in the Contracting State in which
they arise, and according to the law of that State, but the tax so charged shall not
exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the use
of, or the right to use, any patent, trademark, design or model,
plan, secret formula or process, or from the use of or the right to
use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or scientific
experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation
of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the
Philippines, only apply if the contract giving rise to such royalties has been approved by the
Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of
such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties
where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states

1) Tax shall be determined in the case of a resident of the Federal Republic of

Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit for
foreign tax, there shall be allowed as a credit against German
income and corporation tax payable in respect of the following items
of income arising in the Republic of the Philippines, the tax paid
under the laws of the Philippines in accordance with this Agreement
on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of Article
12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b) the
Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is
reduced to 10 or 15 per cent according to paragraph
2 of Article 12, 20 percent of the gross amount of
such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances
similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in
the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most
favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income
from sources within the Philippines is allowed as a credit against German income and corporation
tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent
according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20%
of the gross amount of such royalty. To illustrate, the royalty income of a German resident from

34
sources within the Philippines arising from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit against the German income
and corporation tax on said royalty is allowed in favor of the German resident. That means the rate
of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and
corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of
double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West
Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most
favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the
provisions of the RP-US Tax Treaty. 5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that
the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be
interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid
under similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held
that "Words are to be understood in the context in which they are used", and since what is paid to a resident of a
third state is not a tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties of
the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account the
purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the
payment of royalties, and none has been brought to our attention, which provides for the payment of royalties
under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same
for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such
payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in
the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the
contracting parties.8 As will be shown later, this dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the
avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions.10 More precisely, the tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away
with double taxation is of encourage the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign
investments will only thrive in a fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states impose tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of
the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or
capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of
source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given a full or
limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state
of residence to allow relief in order to avoid double taxation. There are two methods of relief the exemption
method and the credit method. In the exemption method, the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the
credit method, although the income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between
the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit
method focuses upon the tax. 15

35
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. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the
general principle thereof), the United States shall allow to a citizen or resident of
the United States as a credit against the United States tax the appropriate amount
of taxes paid or accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year, shall allow credit
for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine corporation paying such dividends with respect to the profits out of which
such dividends are paid. Such appropriate amount shall be based upon the amount
of tax paid or accrued to the Philippines, but the credit shall not exceed the
limitations (for the purpose of limiting the credit to the United States tax on income
from sources within the Philippines or on income from sources outside the United
States) provided by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RPUS Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental
purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same
time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be
achieved and that the general purpose is a more important aid to the meaning of a law than any rule which
grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be
remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will
best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in
the light of its object and
purpose. 22

36
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the
Philippines a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax
burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source,
in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to
grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which
could have been collected by the Philippine government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of
residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e.,
increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty
earnings of the investor, and it would be better to impose the regular rate rather than lose 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 purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than
that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation
clause is intended to establish the principle of equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored
nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the
subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax
Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement
of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the
design behind the most grant equality of international treatment since the tax burden laid upon the income of the
investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition
for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20
percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that
there is no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law. 28 Private respondent is claiming for a refund of the alleged overpayment of
tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US
Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of
Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE. SO
ORDERED.
G.R. Nos. L-24020-21

July 29, 1968

FLORENCIO REYES and ANGEL REYES, petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX APPEALS, respondents.
FERNANDO, J.:
Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of P46,647.00 as
income tax, surcharge and compromise for the years 1951 to 1954, an assessment subsequently reduced to
P37,528.00. This assessment sought to be reconsidered unsuccessfully was the subject of an appeal to respondent
Court of Tax Appeals. Thereafter, another assessment was made against petitioners, this time for back income
taxes plus surcharge and compromise in the total sum of P25,973.75, covering the years 1955 and 1956. There
being a failure on their part to have such assessments reconsidered, the matter was likewise taken to the
respondent Court of Tax Appeals. The two cases 1 involving as they did identical issues and ultimately traceable to
facts similar in character were heard jointly with only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954 was reduced to
P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the partnership formed" by

37
petitioners.2 The reduction was due to the elimination of surcharge, the failure to file the income tax return being
accepted as due to petitioners honest belief that no such liability was incurred as well as the compromise penalties
for such failure to file.3 A reconsideration of the aforesaid decision was sought and denied by respondent Court of
Tax Appeals. Hence this petition for review.
The facts as found by respondent Court of Tax Appeals, which being supported by substantial evidence, must be
respected4 follow: "On October 31, 1950, petitioners, father and son, purchased a lot and building, known as the
Gibbs Building, situated at 671 Dasmarias Street, Manila, for P835,000.00, of which they paid the sum of
P375,000.00, leaving a balance of P460,000.00, representing the mortgage obligation of the vendors with the
China Banking Corporation, which mortgage obligations were assumed by the vendees. The initial payment of
P375,000.00 was shared equally by petitioners. At the time of the purchase, the building was leased to various
tenants, whose rights under the lease contracts with the original owners, the purchasers, petitioners herein, agreed
to respect. The administration of the building was entrusted to an administrator who collected the rents; kept its
books and records and rendered statements of accounts to the owners; negotiated leases; made necessary repairs
and disbursed payments, whenever necessary, after approval by the owners; and performed such other functions
necessary for the conservation and preservation of the building. Petitioners divided equally the income of operation
and maintenance. The gross income from rentals of the building amounted to about P90,000.00 annually." 5
From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the National
Internal Revenue Code, the first of which imposes an income tax on corporations "organized in, or existing under
the laws of the Philippines, no matter how created or organized but not including duly registered general copartnerships (companias colectivas), ...,"6 a term, which according to the second provision cited, includes
partnerships "no matter how created or organized, ...,"7 and applying the leading case of Evangelista v. Collector of
Internal Revenue,8 sustained the action of respondent Commissioner of Internal Revenue, but reduced the tax
liability of petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is
dissimilar.1wph1.tConsequently they allege that the reliance by respondent Court of Tax Appeals was
unwarranted and the decision should be set aside. If their interpretation of the authoritative doctrine therein set
forth commands assent, then clearly what respondent Court of Tax Appeals did fails to find shelter in the law. That
is the crux of the matter. A perusal of the Evangelista decision is therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether petitioners are
subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as
the National Internal Revenue Code, ..."9 After referring to another section of the National Internal Revenue Code,
which explicitly provides that the term corporation "includes partnerships" and then to Article 1767 of the Civil Code
of the Philippines, defining what a contract of partnership is, the opinion goes on to state that "the essential
elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed to and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, ..." 10
In support of the above conclusion, reference was made to the following circumstances, namely, the common fund
being created purposely not something already found in existence, the investment of the same not merely in one
transaction but in a series of transactions; the lots thus acquired not being devoted to residential purposes or to
other personal uses of petitioners in that case; such properties having been under the management of one person
with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts and to
endorse notes and checks; the above conditions having existed for more than 10 years since the acquisition of the
above properties; and no testimony having been introduced as to the purpose "in creating the set up already
adverted to, or on the causes for its continued existence." 11 The conclusion that emerged had all the imprint of
inevitability. Thus: "Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of
said intent in petitioners herein."12
It may be said that there could be a differentiation made between the circumstances above detailed and those
existing in the present case. It does not suffice though to preclude the applicability of the Evangelista decision.
Petitioners could harp on these being only one transaction. They could stress that an affidavit of one of them found
in the Bureau of Internal Revenue records would indicate that their intention was to house in the building acquired
by them the respective enterprises, coupled with a plan of effecting a division in 10 years. It is a little surprising
then that while the purchase was made on October 31, 1950 and their brief as petitioners filed on October 20,
1965, almost 15 years later, there was no allegation that such division as between them was in fact made.
Moreover, the facts as found and as submitted in the brief made clear that the building in question continued to be

38
leased by other parties with petitioners dividing "equally the income ... after deducting the expenses of operation
and maintenance ..."13 Differences of such slight significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be deemed
successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of an authoritative
decision; it recognized its binding character. There is clearly no merit to the second error assigned by petitioners,
who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in acquiring the
Gibbs Building, established a partnership subject to income tax as a corporation under the National Internal
Revenue Code is likewise untenable. In their discussion in their brief of this alleged error, stress is laid on their
being co-owners and not partners. Such an allegation was likewise made in the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was correctly rejected
by the Court of Tax Appeals."14 Then came the explanation why: "To begin with, the tax in question is one imposed
upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal
Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must
allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships", which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise,
as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be
deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among others, "joint accounts, (cuentas en participacion)" and "associations", none of which
has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have
regarded that personality as a condition essential to the existence of the partnerships therein referred to. In fact,
as above stated, "duly registered general copartnerships" which are possessed of the aforementioned personality
- have been expressly excluded by law (sections 24 and 84[b]) from the connotation of the term
"corporation"."15 The opinion went on to summarize the matter aptly: "For purposes of the tax on corporations,our
National Internal Revenue Code, include these partnerships with the exception only of duly registered general
co-partnerships within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations."16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the matter incorrectly.
There is no warrant for the assertion that it failed to apply the settled law to uncontroverted facts. Its decision
cannot be successfully assailed. Moreover, an observation made in Alhambra Cigar & Cigarette Manufacturing Co. v.
Commissioner of Internal Revenue,17 is well-worth recalling. Thus: "Nor as a matter of principle is it advisable for
this Court to set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very
nature of its functions, dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless, as did not happen here, there has been an abuse or improvident
exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the sums of
P37,128.00 as income tax due from the partnership formed by herein petitioners for the years 1951 to 1954 and
P20,619.00 for the years 1955 and 1956 within thirty days from the date this decision becomes final, plus the
corresponding surcharge and interest in case of delinquency," is affirmed. With costs against petitioners.
G.R. No. L-9996

October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,

vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a
decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax
and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's
assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for
review filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:

39
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with
their personal monies was used by them for the purpose of buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq.
m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of
P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area
of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value
of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including
improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including
improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage
their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of
such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in
their behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the same rented or
leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as
rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving
them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was
deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted
the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and

compromise

P6,157.09

40

REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75

1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954,
whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the
respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved
from the payment of the taxes in question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a
petition for reconsideration and new trial having been subsequently denied, the case is now before Us for review at
the instance of the petitioners.

41
The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence
tax for corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges
on the meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the
pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding taxable year from all sources by every corporation organized
in, or existing under the laws of the Philippines, no matter how created or organized but not including duly
registered general co-partnerships (compaias colectivas), a tax upon such income equal to the sum of the
following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not
include duly registered general copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money, properly, or
industry to a common fund, with the intention of dividing the profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties.
The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they
did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves,
because:
1. Said common fund was not something they found already in existence. It was not property inherited by
them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots
(24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the
last three purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property acquired by the
petitioners in February, 1943. In other words, one cannot but perceive a character of habitually peculiar to
business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person, namely Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became
the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in
petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed
by them, a legal entity, with a personality independent of that of its members, did not come into existence, and
some of the characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by
the Court of Tax Appeals.

42
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject
to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily
"partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical forms
of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture
need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again,
pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal personality of its own, independent of that of its
members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated, "duly registered general copartnerships"
which are possessed of the aforementioned personality have been expressly excluded by law (sections 24 and
84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners' allegation to the
effect that their liability in connection with the leasing of the lots above referred to, under the management of one
person even if true, on which we express no opinion tends to increase the similarity between the nature of
their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of said tax
on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed
affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its
members or participants change, and the affairs of which, like corporate affairs, are conducted by a single
individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial
whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts'
trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the management type), an
interinsuarance exchange operating through an attorney in fact, a partnership association, and any other
type of organization (by whatever name known) which is not, within the meaning of the Code, a trust or an
estate, or a partnership. (7A Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other
unincorporated organizations which carries on any business financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal
Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on, . . ..
( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with
the exception only of duly registered general copartnerships within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and
are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic
or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five
pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with
the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas
en participacion), association or insurance company, no matter how created or organized. (emphasis
supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National
Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day
immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a
period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged

43
from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal
Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or
renting property or his own account as principal and holding himself out as a full or part time dealer in real
estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of
three thousand pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered.

G.R. No. L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B. OA, LUZ B.
OA, VIRGINIA B. OA and LORENZO B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of
the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for
the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from
December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said court denying
petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her
five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for
the settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed
Oa, were still minors when the project of partition was approved, Lorenzo T. Oa, their father and
administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of
Manila for appointment as guardian of said minors. On November 14, 1949, the Court appointed
him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00,
six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected
from the War Damage Commission. Later, they received from said Commission the amount of
P50,000.00, more or less. This amount was not divided among them but was used in the
rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land
aforementioned, two were acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter
with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oa who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceeds from the sales thereof in real properties
and securities. As a result, petitioners' properties and investments gradually increased from
P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:

Invest

Lan

Buil

44

e
a
r

ment

din
g

Accou
nt

Acc
ou
nt

Acc
oun
t

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment
sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of
Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account
kept by Lorenzo T. Oa where the corresponding shares of the petitioners in the net income for the
year are also known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions involving them
(Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the
yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo
T. Oa who, as heretofore pointed out, invested them in real properties and securities. (See Exhibit
3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for
1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the ruling of
respondent that they have formed an unregistered partnership. Finding no merit in petitioners'
request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:

45
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of
the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so
that the questioned assessment refers solely to the income tax proper for the years 1955 and 1956
and the "Compromise for non-filing," the latter item obviously referring to the compromise in lieu of
the criminal liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS
OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM
(sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM
THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE
PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court
of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the
deceased Julia Buales and the profits derived from transactions involving the same, or, must they be deemed to
have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal
Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the sense
that they invested as a common fund the profits earned by the properties owned by them in common and the loans
granted to them upon the security of the said properties, with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the
unregistered partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not

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the various amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their
respective shares of the profits accruing from the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the respondent
Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early
as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since
those dates admittedly under the administration or management of the head of the family, the widower and father
Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing in the record indicating
that an earlier assessment had already been made. Such being the case, and We see no reason how it could be
otherwise, it is easily understandable why petitioners' position that they are co-owners and not unregistered copartners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find
comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to
the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oa who
used said properties in business by leasing or selling them and investing the income derived therefrom and the
proceed from the sales thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in
1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956. And all these became possible because, admittedly, petitioners never actually received any share
of the income or profits from Lorenzo T. Oa and instead, they allowed him to continue using said shares as part of
the common fund for their ventures, even as they paid the corresponding income taxes on the basis of their
respective shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding
the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the
said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oa,
in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were
divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these
circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared
by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of
the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as coowners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to
all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs,
for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue
holding said shares under the common management of the administrator or executor or of anyone chosen by them
and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in
any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not something
they found already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly
far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not
actually divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the coownership of inherited properties is automatically converted into an unregistered partnership the moment the said
common properties and/or the incomes derived therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common
with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The
sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the returns are derived," and, for that matter, on any
other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the
concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as

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"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion,
now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that
a joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation"
includes, among others, "joint accounts,(cuentas en participacion)" and "associations", none of
which has a legal personality of its own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general co-partnerships"
which are possessed of the aforementioned personality have been expressly excluded by law
(sections 24 and 84[b]) from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a syndicate,
group, pool, joint venture, or other unincorporated organization which carries on
any business, financial operation, or venture, and which is not, within the meaning
of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal
Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation,
p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes
in question, of their inherited properties from those acquired by them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership,
the holding should be limited to the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the inherited properties
and the income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must include not only the
income derived from the purchase and sale of other properties but also the income of the inherited
properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned,
but the moment their respective known shares are used as part of the common assets of the heirs to be used in
making profits, it is but proper that the income of such shares should be considered as the part of the taxable
income of an unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently,
the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:

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Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be
taxed as such, it might be recalled that the petitioners in their individual income tax
returns reported their shares of the profits of the unregistered partnership. We think
it only fair and equitable that the various amounts paid by the individual petitioners
as income tax on their respective shares of the unregistered partnership should be
deducted from the deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other way around. The partnership profits distributable
to the partners (petitioners herein) should be reduced by the amounts of income tax assessed
against the partnership. Consequently, each of the petitioners in his individual capacity overpaid his
income tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as
individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to
sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and,
worse, considering the time that has lapsed since they paid their individual income taxes, they may already be
barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it, the
case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has
the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim and action for
such reimbursement are subject to the bar of prescription. And since the period for the recovery of the excess
income taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make
the proper return and payment of the corporate taxes legally due from them. In principle, it is but proper not to
allow any relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-avis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs
against petitioners.