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RepublicofthePhilippines
SUPREMECOURT
Manila

SECONDDIVISION

G.R.No.48532August31,1992

HERNANDOB.CONWI,JAIMEE.DYLIACCO,VICENTED.HERRERA,BENJAMINT.ILDEFONSO,
ALEXANDERLACSON,JR.,ADRIANO.MICIANO,EDUARDOA.RIALP,LEANDROG.SANTILLAN,and
JAIMEA.SOQUES,petitioners,
vs.
THEHONORABLECOURTOFTAXAPPEALSandCOMMISSIONEROFINTERNALREVENUE,respondents.

G.R.No.48533August31,1992

ENRIQUER.ABADSANTOS,HERNANDOB.CONWI,TEDDYL.DIMAYUGA,JAIMEE.DYLIACCO,
MELQUIADESJ.GAMBOA,JR.,MANUELL.GUZMAN,VICENTED.HERRERA,BENJAMINT.ILDEFONSO,
ALEXANDERLACSON,JR.,ADRIANO.MICIANO,EDUARDOA.RIALPandJAIMEA.SOQUES,petitioners,
vs.
THEHONORABLECOURTOFTAXAPPEALSandCOMMISSIONEROFINTERNALREVENUE,respondents.

Angara,Abello,Concepcion,Regala&Cruzforpetitioners.

NOCON,J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals, promulgated
September26,19771denyingpetitioners'claimfortaxrefunds,andordertheCommissionerofInternalRevenuetorefund
tothemtheirincometaxeswhichtheyclaimtohavebeenerroneouslyorillegallypaidorcollected.

AssummarizedbytheSolicitorGeneral,thefactsofthecasesareasfollows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a
subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the
years1970and1971petitionerswereassigned,forcertainperiods,toothersubsidiariesofProcter&
Gamble,outsideofthePhilippines,duringwhichpetitionerswerepaidU.S.dollarsascompensationfor
services in their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511
and 2594, Exhs. D, D1 to D19). When petitioners in C.T.A. Case No. 2511 filed their income tax
returnsfortheyear1970,theycomputedthetaxduebyapplyingthedollartopesoconversiononthe
basisofthefloatingrateordainedunderB.I.R.RulingNo.70027datedMay14,1970,asfollows:

FromJanuary1toFebruary20,1970attheconversionrateofP3.90toU.S.$1.00

FromFebruary21toDecember31,1970attheconversionrateofP6.25toU.S.$1.00

PetitionersinC.T.A.CaseNo.2594likewiseusedtheaboveconversionrateinconvertingtheirdollar
incomefor1971toPhilippinepeso.However,onFebruary8,1973andOctober8,1973,petitionersin
saidcasesfiledwiththeofficeoftherespondentCommissioner,amendedincometaxreturnsforthe
abovementioned years, this time using the par value of the peso as prescribed in Section 48 of
RepublicActNo.265inrelationtoSection6ofCommonwealthActNo.265inrelationtoSection6of
Commonwealth Act No. 699 as the basis for converting their respective dollar income into Philippine
pesos for purposes of computing and paying the corresponding income tax due from them. The
aforesaid computation as shown in the amended income tax returns resulted in the alleged
overpayments,refundand/ortaxcredit.Accordingly,claimsforrefundofsaidoverpaymentswerefiled

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with respondent Commissioner. Without awaiting the resolution of the Commissioner of the Internal
Revenueontheirclaims,petitionersfiledtheirpetitionerforreviewintheabovementionedcases.

RespondentCommissionerfiledhisAnswertopetitioners'petitionforreviewinC.T.A.CaseNo.2511
onJuly31,1973,whilehisAnswerinC.T.A.CaseNo.2594wasfiledonAugust7,1974.

Uponjointmotionofthepartiesonthegroundthatthesetwocasesinvolvecommonquestionoflaw
and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision dated
September26,1977,therespondentCourtofTaxAppealsheldthattheproperconversionrateforthe
purposeofreportingandpayingthePhilippineincometaxonthedollarearningsofpetitionersarethe
ratesprescribedunderRevenueMemorandumCircularsNos.771and4171.Accordingly,theclaim
forrefundand/ortaxcreditofpetitionersintheaboveentitledcaseswasdeniedandthepetitionsfor
reviewdismissed,withcostsagainstpetitioners.Hence,thispetitionforreviewoncertiorari.2

PetitionersclaimthatpublicrespondentCourtofTaxAppealserredinholding:

1.Thatpetitioners'dollarearningsarereceiptsderivedfromforeignexchangetransactions.

2.Thattheproperrateofconversionofpetitioners'dollarearningsfortaxpurposesintheprevailingfreemarketrate
ofexchangeandnottheparvalueofthepesoand

3.Thattheuseoftheparvalueofthepesotoconvertpetitioners'dollarearningsfortaxpurposesintoPhilippine
pesosis"unrealistic"and,therefore,theprevailingfreemarketrateshouldbetherateused.

RespondentCommissionerofInternalRevenue,ontheotherhand,refutespetitioners'claimsasfollows:

Attheoutset,itissubmittedthatthesubjectmatterofthesetwocasesarePhilippineincometaxforthe
calendaryears1970(CTACaseNo.2511)and1971(CTACaseNo.2594)and,therefore,shouldbe
governed by the provisions of the National Internal Revenue Code and its implementing rules and
regulations, and not by the provisions of Central Bank Circular No. 42 dated May 21, 1953, as
contendedbypetitioners.

Section21oftheNationalInternalRevenueCode,beforeitsamendmentbyPresidentialDecreesNos.
69 and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax
upon the taxable net income received during each taxable year from all sources by a citizen of the
Philippines,whetherresidinghereorabroad.

Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment.
Thus,intheirtaxreturnsfortheperiodinvolvedherein,theygavetheirlegalresidence/addressasc/o
Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "A8" and Annexes "C" to "C8",
PetitionforReview,CTANos.2511and2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be converted into
Philippine pesos in computing the income tax due therefrom, in accordance with the provisions of
Revenue Memorandum Circular No. 771 dated February 11, 1971 for 1970 income and Revenue
Memorandum Circular No. 4171 dated December 21, 1971 for 1971 income, which reiterated BIR
RulingNo.70027datedMay4,1970,towit:

Forinternalrevenuetaxpurposes,thefreemarkerrateofconversion(RevenueCirculars
Nos.771and4171)shouldbeappliedinordertodeterminethetrueandcorrectvaluein
Philippinepesosoftheincomeofpetitioners.3

Afteracarefulexaminationoftherecords,thelawsinvolvedandthejurisprudenceonthematter,Weareinclinedto
agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus vote to deny the
petition.

Thisbasicallyanincometaxcase.Fortheproperresolutionofthesecasesincomemaybedefinedasanamountof
moneycomingtoapersonorcorporationwithinaspecifiedtime,whetheraspaymentforservices,interestorprofit
frominvestment.Unlessotherwisespecified,itmeanscashoritsequivalent.4Incomecanalsobethoughofasflowof
thefruitsofone'slabor.5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange
transactions. For a foreign exchange transaction is simply that a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of
moneyorcurrencyofanother." 6 When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in said currency. There was no conversion,
therefore,fromonecurrencytoanother.
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Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell under
Section2(f)(g)and(m)ofC.B.CircularNo.42.7

Theissuenowis,whatexchangerateshouldbeusedtodeterminethepesoequivalentoftheforeignearningsof
petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the
classificationofforeignexchangetransactions,thereoccurrednoactualinwardremittances,and,therefore,theyare
notincludedinthecoverageofCentralBankCircularNo.289whichprovidesforthespecificinstanceswhenthepar
valueofthepesoshallnotbetheconversionrateused.Theyconcludethattheirearningsshouldbeconvertedfor
incometaxpurposesusingtheparvalueofthePhilippinepeso.

RespondentCommissionerarguesthatCBCircularNo.289speaksofreceiptsforexportproducts,receiptsofsale
offoreignexchangeorforeignborrowingsandinvestmentsbutnotincometax.Healsoclaimsthathehadtouse
the prevailing free market rate of exchange in these cases because of the need to ascertain the true and correct
amountofincomeinPhilippinepesoofdollarearnersforPhilippineincometaxpurposes.

AcarefulreadingofsaidCBCircularNo.2898showsthatthesubjectmattersinvolvedthereinareexportproducts,invisibles,receiptsofforeign
exchange,foreignexchangepayments,newforeignborrowingand
investmentsnothingbywayofincometaxpayments.Thus,petitionersareinerrorbyconcludingthatsinceC.B.CircularNo.289doesnotapplytothem,the
parvalueofthepesoshouldbetheguidingrateusedforincometaxpurposes.

ThedollarearningsofpetitionersarethefruitsoftheirlaborsintheforeignsubsidiariesofProcter&Gamble.Itwas
adefiniteamountofmoneywhichcametothemwithinaspecifiedperiodoftimeoftwoyeasaspaymentfortheir
services.

Section21oftheNationalInternalRevenueCode,amendeduptoAugust4,1969,statesasfollows:

Sec.21.Ratesoftaxoncitizensorresidents.Ataxisherebyimposeduponthetaxablenetincome
received during each taxable year from all sources by every individual, whether a citizen of the
PhilippinesresidingthereinorabroadoranalienresidinginthePhilippines,determinedinaccordance
withthefollowingschedule:

xxxxxxxxx

AndintheimplementationfortheproperenforcementoftheNationalInternalRevenueCode,Section338thereof
empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its
provisions.9

Pursuant to this authority, Revenue Memorandum Circular Nos. 771 10 and 4171 11 were issued to prescribed a
uniformrateofexchangefromUSdollarstoPhilippinepesosforINTERNALREVENUETAXPURPOSESfortheyears1970
and1971,respectively.SaidrevenuecircularswereavalidexerciseoftheauthoritygiventotheSecretaryofFinancebythe
LegislaturewhichenactedtheInternalRevenueCode.Andthesearepresumedtobeavalidinterpretationofsaidcodeuntil
revokedbytheSecretaryofFinancehimself.12

PetitionersarguethatsincetherewerenoremittancesandacceptancesoftheirsalariesandwagesinUSdollars
intothePhilippines,theyareexemptfromthecoverageofsuchcirculars.Petitionersforgetthattheyarecitizensof
the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax.
Sec.21,NIRC,asamended,doesnotbrookanyexemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribedundertheaforestatedRevenueMemorandumCirculars,thereisnoreasonforrespondentCommissioner
torefundanytaxestopetitionerassaidRevenueMemorandumCirculars,beingoflongstandingandnotcontraryto
law,arevalid.13

Althoughithasbecomeawornoutcliche,thefactstillremainsthat"taxesarethelifebloodofthegovernment"and
oneofthedutiesofaFilipinocitizenistopayhisincometax.

WHEREFORE,thepetitionersaredeniedforlackofmerit.ThedismissalbytherespondentCourtofTaxAppealsof
petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED. Costs against
petitioners.

SOORDERED.

Narvasa,C.J.,PadillaandRegalado,JJ.,concur.

Melo,J.,tooknopart.

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Footnotes

1JudgeAmanteFiller,ponente,concurredinbyJudgeConstantinoC.Roaquin.

2Rollo,pp.98100.

3Id.,pp.100101.

4Fishervs.Trinidad,43Phil.973.

5Madrigalvs.Rafferty,38Phil.414.

6Jandavs.LepantoConsolidatedMiningCo.,99Phil.197,204.

7Sec.2.ThefollowingareforeignexchangetransactionsandasrequiredbyCentralBankCircular
No.20aresubjecttopriorlicensingbyoronbehalfoftheCentralBank:

xxxxxxxxx

(f)Anytransactionbywhicharesidentperformsanyserviceforanonresidentotherthantouristsor
temporaryvisitors.Iftheproperlicenseisobtained,theformershalldemandandobtainpaymentfor
suchservicewithinninetydaysinU.S.dollarsorinanyotherforeigncurrencyacceptabletothe
CentralBank

(g)Anytransactionbywhicharesidentperformsforanotherresidentservicerenderedinabusinessor
professionofthelatterlocatedoutsidethePhilippines.Ifproperlicenseisobtained,theformershall
demandandobtainpaymentofthefairvalueofsuchservicewithinninetydaysfromthedateofthe
performanceoftheaforesaidservice,inU.S.dollarorinanyotherforeigncurrencyacceptabletothe
CentralBank

xxxxxxxxx

(m)Anyothertransactionsinvolvinginternationalfinancialimplications.

8PursuanttotheprovisionsofRepublicActNo.265,theMonetaryBoard,byunanimousvoteandwith
theapprovalofthePresidentofthePhilippines,andinaccordancewithexistingexecutiveand
internationalagreementtowhichtheRepublicofthePhilippinesisaparty,herebypromulgatesthe
followingregulationsonforeignexchangetransactions.

Sec.1.Eighty(80)percentofallreceiptsfromtheleadingexportproducts,i.e.,exportswhoseannual
averagevalueexceeded$75millioninthebaseperiod196668,shallbesurrenderedtotheCentral
Bankattheparvalue.Theparvalueshallnotapplytotheremainingtwenty(20)percent,whichshall
beheldtoauthorizedagentbanksattheprevailingfreemarketrate.Forpurposesofthissection,the
followingareconsideredastheleadingexportproducts:logs,centrifugalsugar,copraandcopper(ore
orconcentrates).

Sec.2.Theparvaluelikewiseshallnotapplytoallreceiptsfromallotherexportproductsaswellas
frominvisibles,whichshallbesoldtoauthorizedagentsoftheCentralBankofthePhilippinesatthe
prevailingfreemarketrate.

Sec.3.Allreceiptsofforeignexchangebyresidentpersons,firms,companiesorcorporationsshall
representnotlessthanthefullvalueofthetransactionsinvolved.Allsuchreceiptsshallbesoldto
authorizedagentsoftheCentralBankofthePhilippinesbytherecipientswithinthreebusinessdays
followingthereceiptofsuchforeignexchangeandmustbereceivedincurrenciesprescribedtoform
partoftheinternationalreserve.Residentpersons,firms,companiesorcorporationsshallnotdelay
takingownershipoftheirforeignexchangeearningsexceptwhensuchdelayiscustomary.

Sec.4.Theparvaluelikewiseshallnotapplytoallforeignexchangepayments,whichshallbe
negotiatedattheprevailingfreemarketrate,exceptforoutstandingforeignobligationsandlettersof
creditcoveredbyforwardexchangecontracts.Onlyauthorizedagentbanksmaysellforeignexchange
forimportsandinvisibledisbursements.

Sec.5.AuthorizedagentbanksmaysellforeignexchangeforimportsexceptthosefallingunderUC,
SUCandNECcategories,withoutpriorspecificapprovaloftheCentralBank.Suchimportsmaybe
financedbylettersofcredit,orunderD/Aandopenaccountarrangementssubjectorrulestobe
promulgatedbytheMonetaryBoard.Monthlyceilingonforeigncurrencylettersofcreditandspecial
timedepositrequirements(STD)areherebylifted.ExistingSTDSshallbereleasedastheymature.

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Sec.6.Thesaleofforeignexchangeforcurrentinvisiblepaymentsbyauthorizedagentbanksshallbe
allowed,withoutpriorspecificapprovaloftheCentralBank,providedthatamountsofmorethan
$100.00aresubstantiatedbydocumentaryevidenceattestingtotheveracityofthepurposeandthe
amountappliedfor,andprovidedfurtherthattravel,remittanceforeducationalexpensesandstudent
maintenance,maintenanceofdependentsabroadofPhilippineresidents,remittanceofprofits,
dividends,andinterests,royalties,filmandotherrentalsshallbesubjecttotheregulationstobe
promulgatedbytheMonetaryBoard.

Sec.7.Newforeignborrowingandinvestments,andtransferofassetsbyemigrantsshallbesubjectto
regulationstobepromulgatedbytheMonetaryBoard.

Sec.8.Thefreemarketrateshallnotbeadministrativelyfixedbutshallbedeterminedthrough
transactionsintheforeignexchangemarketonadaytodaybasis.Theauthoritiesshallnotintervene
inthemarketexcepttotheextentnecessarytocompensateforexcessivefluctuationsbutshallnot
operateagainstthetrendinthemarket.

Sec.9.Allprovisionsofexistingcirculars,memorandumandregulationsoftheCentralBankgoverning
transactionsinforeignexchangeinconsistentwiththeprovisionshereafterareherebyrevoked.

Sec.10.StrictobservanceoftheprovisionsofthisCircularisherebyenjoined,andanyperson,firm,
companyorcorporation,whetherresidingand/orlocatedinthePhilippinesornot,who,beingboundto
theobservanceofsaidprovisions,orofsuchotherrules,termsandconditions,ordirectiveswhichmay
beissuedbytheCentralBankintheimplementationofthisCircular,shallfailorrefusetocomplywith
orabideby,orshallviolatethesame,shallbesubjecttothepenalsanctionsoftheCentralBankAct.

Sec.11.ThisCircularshalltakeeffectimmediately.

FORTHEMONETARY
BOARD:
(SGD)G.S.LICAROS
Governor

February21,1970.

9Section338,NationalInternalRevenueCode(1970),asamendedPhilippineLawyer'sAssociation
vs.Agrava,105Phil.173.

10SUBJECT:PrescribingauniformrateforU.S.DollarstoPhilippinePesosforInternalRevenueTax
Purposes.

TO:AllInternalRevenueOfficersandotherconcerned:

ForthePurposeofestablishingauniformrateofexchangetoU.S.dollarstoPhilippinepesosfor
internalrevenuetaxpurposesfortheyear1970,thefollowingscheduleofexchangeratesarehereby
prescribedforreferenceandguidelinesofallconcerned

ScheduleofExchangeRates

1.InallcasesoftransactionsinvolvingremittancesandacceptanceofU.S.dollarsoccurringduringthe
periodfromJanuary1toFebruary20,1970,theofficialrateofexchangeofP3.90to$1.00shallbe
used.

2.InthecaseoftransactionsinvolvingremittancesoracceptanceofU.S.dollarsoccurringafter
February20,1970thefollowingrulesshallgovern:

(a)Inthecaseofregularorhabitualtransactionsinvolvingremittancesandacceptances
ofU.S.dollars,suchassalaries,royaltypaymentsandthelike,theuniformrateofP6.25
toU.S.$1.00shallbeusedprovidedhowever,thatinthecaseoftransactionsinvolving
thecomputationofadvancesalesorcompensatingtaxes,theratesusedbytheBureauof
Customsatthetimeofthepaymentofsuchtaxesshallprevail.

(b)Inthecaseofanisolatedorcasualtransactioninvolvingremittancesoracceptanceof
U.S.dollars,suchasdividends,occasionalsalesofpropertyandtheliketheexchange
ratequotedbytheForeignExchangeDepartmentoftheCentralbankofthePhilippines
prevailingatthetimeofsuchremittancesoracceptanceshallbeused.

EnforcementandPublicity

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Allinternalrevenueofficersandotherschargedwiththeenforcementofinternalrevenuelawsare
enjoinedtoenforcetheprovisionsofthiscircularaccordinglyandtogiveaswideapublicityas
possible.

(Sgd.)MISAELP.VERA
CommissionerofInternalRevenue

APPROVED
(Sgd.)CESARVIRATA
SecretaryofFinance

11SUBJECT:PrescribingauniformexchangerateofU.S.dollarstoPhilippinepesosforinternal
revenuetaxpurposes.

TO:AllInternalRevenueOfficersandothersconcerned:

ForthepurposeofestablishingauniformrateofexchangetoU.S.dollarsorotherforeigncurrenciesto
Philippinepesosforinternalrevenuetaxpurposesfortheyear1971,thefollowingscheduleof
exchangeratesareherebyprescribedforreferenceandguidelinesofallconcerned:

ScheduleofExchangeRates

InallcasesoftransactionsinvolvingremittancesandacceptanceofU.S.dollarsandotherforeign
currenciesoccurringduringtheyear1971,thefollowingrulesshallgovern:

(a)Inthecaseofregularorhabitualtransactionsinvolvingremittancesoracceptancesof
USdollarsorotherforeigncurrenciessuchassalaries,wages,feesorother
renominationsforpersonalservices,royalties,rents,interestsorotherfixedor
determinableannualorperiodicalincome,theuniformrateofP6.25toU.S.$1.00shallbe
used.

(b)Inthecaseoftransactionsinvolvingthecomputationofadvancesalesor
compensatingtaxes,therateofexchangeusedbytheBureauofCustomsatthetimeof
thepaymentofsuchtaxesshallprevail.

(c)Inthecaseofanisolatedorcasualtransactioninvolvingremittancesofacceptancesof
U.S.dollarsorotherforeigncurrenciessuchasdividends,interests,capitalgainsorother
gainsfromoccasionalsalesofpropertyandthelike,theexchangeratequotedbythe
ForeignExchangeDepartmentoftheCentralBankofthePhilippinesprevailingatthetime
ofsuchremittancesoracceptanceshallbeused.

(d)WherethecurrencyinvolvedisotherthanU.S.dollars,theforeigncurrencyshallfirst
beconvertedtoU.S.dollarsattheprevailingrateofexchangebetweenthetwo
currencies.TheresultingamountshallthenbeconvertedtoPhilippinepesosin
accordancewiththeabovepromulgatedrules.

Allinternalrevenueofficersandotherschargedwiththeenforcementofinternalrevenuelaws
areenjoinedtoenforcetheprovisionsofthiscircularaccordinglyandtogiveitaswideapublicity
aspossible.

(SGD.)MISAELP.VERA
CommissionerofInternalRevenue

APPROVED:
(SGD.)CESARVIRATA
SecretaryofFinance

12Hiladovs.CollectorofInternalRevenue,100Phil.288.

13CommissionerofInternalRevenuevs.Ledesma,31SCRA95.

TheLawphilProjectArellanoLawFoundation

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