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16.) G.R. No.

180356 February 16, 2010 Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District
Office No. 47, a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross
SOUTH AFRICAN AIRWAYS vs. COMMISSIONER OF INTERNAL REVENUE Philippine Billings (GPB) for the taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003,
petitioner filed a Petition for Review with the CTA for the refund of the abovementioned amount. The case
DECISION
was docketed as CTA Case No. 6656.
VELASCO, JR., J.:
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA
The Case ruled that petitioner is a resident foreign corporation engaged in trade or business in the Philippines. It
further ruled that petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision1 and Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of
October 30, 2007 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, 32% on its income derived from the sales of passage documents in the Philippines. On this ground, the
entitled South African Airways v. Commissioner of Internal Revenue. The assailed decision affirmed the CTA denied petitioners claim for a refund.
Decision dated May 10, 20063and Resolution dated August 11, 20064 rendered by the CTA First Division.
Petitioners Motion for Reconsideration of the above decision was denied by the CTA First Division in a
The Facts Resolution dated August 11, 2006.
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its
the laws of the Republic of South Africa. Its principal office is located at Airways Park, Jones Road, tax payment on its GPB. This was denied by the CTA in its assailed decision. A subsequent Motion for
Johannesburg International Airport, South Africa. In the Philippines, it is an internal air carrier having no Reconsideration by petitioner was also denied in the assailed resolution of the CTA En Banc.
landing rights in the country. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Corporation (Aerotel). Aerotel sells passage documents for compensation or commission for petitioners Hence, petitioner went to us.
off-line flights for the carriage of passengers and cargo between ports or points outside the territorial
The Issues
jurisdiction of the Philippines. Petitioner is not registered with the Securities and Exchange Commission
as a corporation, branch office, or partnership. It is not licensed to do business in the Philippines. Whether or not petitioner, as an off-line international carrier selling passage documents through an
independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to
For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line
the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.
flights, summarized as follows:
Whether or not the income derived by petitioner from the sale of passage documents covering
2.5% Gross petitioners off-line flights is Philippine-source income subject to Philippine income tax.
Period Date Filed
Phil. Billings
Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross
Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38. 5
1st Quarter May 30, 2000 222,531.25
2nd Quarter August 29, 2000 424,046.95 The Courts Ruling
For Passenger PhP
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91 This petition must be denied.

Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income
Sub-total PhP 1,522,227.11
Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale
of passage documents in the Philippines. Petitioner, however, failed to sufficiently prove such
1st Quarter May 30, 2000 81,531.00 contention.
2nd Quarter August 29, 2000 50,169.65
For Cargo PhP
3rd Quarter November 29, 2000 36,383.74 In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,6 we held, "Since an
4th Quarter April 16, 2000 37,454.88 action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted
in the most explicit and categorical language, it is strictly construed against the claimant who must
discharge such burden convincingly."
Sub-total PhP 205,539.27
Petitioner has failed to overcome such burden.
TOTAL 1,727,766.38
In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec. Philippines. Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an
28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioners contention that, with the new definition of international carrier that does not maintain flights to or from the Philippines, thereby having no GPB as
GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax defined, it is exempt from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a)
on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax. according to petitioner precludes the application of Sec. 28(A)(1) to it.

Sec. 28(b)(2) of the 1939 NIRC provided: Its argument has no merit.

(2) Resident Corporations. A corporation organized, authorized, or existing under the laws of a foreign First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection off-line air carriers is more apparent than real.
(a) of this section upon the total net income received in the preceding taxable year from all sources within
the Philippines: Provided, however, that international carriers shall pay a tax of two and one-half percent We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all
on their gross Philippine billings. international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislatures
intentions been to completely exclude all international air carriers from the application of the general rule
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows: under Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not.
Thus, the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer,
"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply,
international carrier doing business in the Philippines of passage documents sold therein, whether for a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under
passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. Sec. 28(A)(1).
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read: Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner
claims that the former case does not apply. Thus, British Overseas Airways applies to the instant case.
"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the world
The findings therein that an off-line air carrier is doing business in the Philippines and that income from
and excess baggage, cargo and mail originating from the Philippines, covered by passage documents
the sale of passage documents here is Philippine-source income must be upheld.
sold in the Philippines.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided
is to exempt off-line air carriers from income tax by citing the pronouncements made by Senator Juan
that the passage documents were sold in the Philippines. Legislature departed from such concept in the
Ponce Enrile during the deliberations on the provisions of the 1997 NIRC. Such pronouncements,
1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
however, are not controlling on this Court. We said in Espino v. Cleofe:8
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight,
must be sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary,
irrespective of the place of sale or issue and the place of payment of the ticket or passage document.
commonly-accepted and most obvious significations, according to good and approved usage and without
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or resorting to forced or subtle construction. Courts, therefore, as a rule, cannot presume that the law-making
from the Philippines, income is included in GPB. body does not know the meaning of words and rules of grammar. Consequently, the grammatical reading
of a statute must be presumed to yield its correct sense. x x x It is also a well-settled doctrine in this
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, jurisdiction that statements made by individual members of Congress in the consideration of a bill do not
it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of
petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded law. (Emphasis supplied.)
from paying any other income tax for its sale of passage documents in the Philippines.
Moreover, an examination of the subject provisions of the law would show that petitioners interpretation
Such position is untenable. of those provisions is erroneous.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Sec. 28(A)(1) and (A)(3)(a) provides:
Airways),7 which was decided under similar factual circumstances, this Court ruled that off-line air carriers
having general sales agents in the Philippines are engaged in or doing business in the Philippines and SEC. 28. Rates of Income Tax on Foreign Corporations. -
that their income from sales of passage documents here is income from within the Philippines. Thus, in
(A) Tax on Resident Foreign Corporations. -
that case, we held the off-line air carrier liable for the 32% tax on its taxable income.
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it
existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall
does not apply to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that
be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the
the 1939 NIRC taxes resident foreign corporations, such as itself, on all income from sources within the
preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998, On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify
the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty- a taxpayer from claiming a tax refund since a refund claim can proceed independently of a tax assessment
three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent and that the assessment cannot be offset by its claim for refund.
(32%).
Petitioners argument is erroneous. Petitioner premises its argument on the existence of an assessment.
xxxx In the assailed Decision, this Court did not, in any way, assess petitioner of any deficiency corporate
income tax. The power to make assessments against taxpayers is lodged with the respondent. For an
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two assessment to be made, respondent must observe the formalities provided in Revenue Regulations No.
and one-half percent (2 1/2%) on its Gross Philippine Billings as defined hereunder: 12-99. This Court merely pointed out that petitioner is liable for the regular corporate income tax by virtue
of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to speak of. 12
(a) International Air Carrier. Gross Philippine Billings refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their
and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket liability under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation
or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another under the latter provision. Petitioner argues that such offsetting is in the nature of legal compensation,
international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or which cannot be applied under the circumstances present in this case.
point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on another airline, only the Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings. Art. 1279. In order that compensation may be proper, it is necessary:

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
on all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule. of the other;

An exception is defined as "that which would otherwise be included in the provision from which it is (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
excepted. It is a clause which exempts something from the operation of a statue by express kind, and also of the same quality if the latter has been stated;
words."9 Further, "an exception need not be introduced by the words except or unless. An exception
(3) That the two debts be due;
will be construed as such if it removes something from the operation of a provision of law." 10
(4) That they be liquidated and demandable;
In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income
tax on their income from within the Philippines, except for resident foreign corporations that are (5) That over neither of them there be any retention or controversy, commenced by third persons and
international carriers that derive income "from carriage of persons, excess baggage, cargo and mail communicated in due time to the debtor.
originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no flights originating from the Philippines, does not fall under And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,13 thus:
the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot
maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must
be subject to compensation for the simple reason that the government and the taxpayer are not creditors
be regarded as coming within the purview of the general rule.11
and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.
maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine We find no cogent reason to deviate from the aforementioned distinction.
Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes
earn income from other activities in the country will be taxed at the rate of 32% of such income.
cannot be subject to set-off or compensation, thus:
As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that petitioner is
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer
liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether
may have against the government. A person cannot refuse to pay a tax on the ground that the government
the existence of such liability would preclude their claim for a refund of tax paid on the basis of Sec.
owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await
28(A)(3)(a). In answer to petitioners motion for reconsideration, the CTA First Division ruled in its
the results of a lawsuit against the government.
Resolution dated August 11, 2006, thus:
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission
on Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes important to note that in determining whether or not petitioner is entitled to the refund of the amount paid,
cannot be the subject of compensation because the government and taxpayer are not mutually creditors it would [be] necessary to determine how much the Government is entitled to collect as taxes. This would
and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination
allowed to be set-off. of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily
involved therein. (Emphasis supplied.)
Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency is
unavailing under Art. 1279 of the Civil Code. Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Commissioner of Internal Revenue v. Court of Tax Appeals, 14 however, granted the offsetting of a tax
refund with a tax deficiency in this wise: Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt.
motion for reconsideration alleging bringing to said courts attention the existence of the deficiency income As such, we cannot grant the prayer for a refund.
and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately
related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc
same year. To award such refund despite the existence of that deficiency assessment is an absurdity and on the outright denial of petitioners claim for a refund. Even though petitioner is not entitled to a refund
a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same due to the question on the propriety of petitioners tax return subject of the instant controversy, it would
time be liable for a tax deficiency assessment for the same year. not be proper to deny such claim without making a determination of petitioners liability under Sec.
28(A)(1).
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based
constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed
and without unquestionable evidence, cannot be the basis for the grant of the refund. that petitioners liabilities under the two provisions would be the same. There is a need to make a
determination of petitioners liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law or that a tax deficiency exists. The assailed decision fails to mention having computed for the tax due
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish petitioners taxable
statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent income. There is a necessity to receive evidence to establish such amount vis--vis the claim for refund.
or contained any understatement or undervaluation, no tax collected under such assessment shall be It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.
recovered by any suits unless it is proved that the said list, statement, or return was not false nor
fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc
statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells in CTA E.B. Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En Banc for
and mines." further proceedings and appropriate action, more particularly, the reception of evidence for both parties
and the corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment
Moreover, to grant the refund without determination of the proper assessment and the tax due would in this Decision.
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently
be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously SO ORDERED.
refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of
the falsity, fraud or omission in the false or fraudulent return involved.This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue for governmental
operations.1avvphi1

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary
and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly
with its claim for tax refund, to determine once and for all in a single proceeding the true and correct
amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded,it would be only just and fair that the
taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to
defeat each others claim and to determine all matters of dispute between them in one single case. It is
17.) G.R. No. L-65773-74 April 30, 1987 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.
COMMISSIONER OF INTERNAL REVENUE vs. BRITISH OVERSEAS AIRWAYS CORPORATION and
COURT OF TAX APPEALS This case was subsequently tried jointly with the First Case.

MELENCIO-HERRERA, J.: 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
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC
the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set income from Philippine sources "since no service of carriage of passengers or freight was performed by
aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its position was that income from transportation is income from services so that the place where services
Resolution of 18 November, 1983 denying reconsideration. 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
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
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 Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
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 1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation
in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here,
passengers and/or cargo to or from the Philippines, although during the period covered by the constitute income of BOAC from Philippine sources, and, accordingly, taxable.
assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company,
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business
Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers
in the Philippines or has an office or place of business in the Philippines.
and cargoes. 1
3. In the alternative that private respondent may not be considered a resident foreign corporation but a
G.R. No. 65773 (CTA Case No. 2373, the First Case)
non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the (35%) of its gross income received from all sources within the Philippines.
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This
Under Section 20 of the 1977 Tax Code:
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 (h) the term resident foreign corporation engaged in trade or business within the Philippines or having an
assessment under protest. office or place of business therein.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with business within the Philippines and not having any office or place of business therein
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount
paid. 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
G.R. No. 65774 (CTA Case No. 2561, the Second Case) 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
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
some of the functions normally incident to, and in progressive prosecution of commercial gain or for the
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
purpose and object of the business organization. 2 "In order that a foreign corporation may be regarded
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
as doing business within a State, there must be continuity of conduct and intention to establish a
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
continuous business, such as the appointment of a local agent, and not one of a temporary character. 3
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
Case but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for
(2) breaking down the whole trip into series of trips each trip in the series corresponding to a different
the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code.
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
BOAC's request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to
airline companies on the basis of their participation in the services rendered through the mode of interline government. In consideration of such protection, the flow of wealth should share the burden of supporting
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities the government.
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 A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
main activity, is the very lifeblood of the airline business, the generation of sales being the paramount contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
a local agent during the period covered by the assessments. Accordingly, it is a resident foreign terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
corporation subject to tax upon its total net income received in the preceding taxable year from all sources general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties
within the Philippines. 5 entering into the relationship. 9

Sec. 24. Rates of tax on corporations. ... 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
(b) Tax on foreign corporations. ... 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
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs
foreign country, except a foreign fife insurance company, engaged in trade or business within the that the types of income listed therein be treated as income from sources within the Philippines. A cursory
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no
received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied) other kind of income may be so considered. " 10
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in BOAC, however, would impress upon this Court that income derived from transportation is income for
the Philippines constitutes income from Philippine sources and, accordingly, taxable under our income services, with the result that the place where the services are rendered determines the source; and since
tax laws. 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
The Tax Code defines "gross income" thus:
stand in the joint Decision under review.
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for
The absence of flight operations to and from the Philippines is not determinative of the source of income
personal service of whatever kind and in whatever form paid, or from profession, vocations,
or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent
trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the
to this case. The test of taxability is the "source"; and the source of an income is that activity ... which
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the
the transactions of any business carried on for gain or profile, or gains, profits, and income derived from
Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines.
any source whatever (Sec. 29[3]; Emphasis supplied)
business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the
words 'income from any source whatever' disclose a legislative policy to include all income not expressly Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income
exempted within the class of taxable income under our laws." Income means "cash received or its herein is the Philippines. 13
equivalent"; it is the amount of money coming to a person within a specific time ...; it means something
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years
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 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,
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 international carriers are now taxed as follows:
amounted to P10,428,368 .00. 7
... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine
Did such "flow of wealth" come from "sources within the Philippines", billings. (Sec. 24[b] [21, Tax Code).

The source of an income is the property, activity or service that produced the income. 8 For the source of Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
income to be considered as coming from the Philippines, it is sufficient that the income is derived from "gross Philippine billings," thus:
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any
produces the income. The tickets exchanged hands here and payments for fares were also made here in
international carrier doing business in the Philippines of passage documents sold therein, whether for
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded
passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ...
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
The foregoing provision ensures that international airlines are taxed on their income from Philippine FELICIANO, J., dissenting:
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. With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.
appeal in JAL 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 The fundamental issue raised in this petition for review is whether the British Overseas Airways
of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer Corporation (BOAC), a foreign airline company which does not maintain any flight operations to and from
therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the common the Philippines, is liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines
carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers through a general sales agent, relating to the carriage of passengers and cargo between two points both
and cargo from one place to another. It purports to tax the business of transportation. 14 Being an excise outside the Philippines.
tax, the same can be levied by the State only when the acts, privileges or businesses are done or
1. The Solicitor General has defined as one of the issue in this case the question of:
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 2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
form derived from any source." Since the two cases treat of a different subject matter, the decision in one business in the Philippines or [had] an office or place of business in the Philippines.
cannot be res judicata to the other.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on
1% monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the whether or not such income is derived from "source within the Philippines."
Tax Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or
SO ORDERED. having an office or place of business in the Philippines is subject to Philippine income taxation only in
respect of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it
Fernan, J., took no part. existed up to 3 August 1969, read as follows:

(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines
(expect foreign life insurance companies) shall be taxable as provided in subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:


Separate Opinions
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied,
collected, and paid annually upon the total net income received in the preceeding taxable year from all
sources within the Philippines by every corporation organized, authorized, or existing under the laws of
TEEHANKEE, C.J., concurring: any foreign country: ... . (Emphasis supplied)
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed once more Section 24 (b) (2) of the Tax Code so as to read as follows:
joint decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the
majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income (2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any
derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its foreign counrty, except foreign life insurance company, engaged in trade or business within the
general sales agent in the Philippines gas become moot after November 24, 1972. Booth opinions state Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
that by amendment through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
Tax Code providing dor the rate of income tax on foreign corporations, international carriers such as
respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign
billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as to corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as
the present 2-% tax on their gross Philippine billings charged against such international carriers as follows:
herein respondent foreign corporation.
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and income is from labor (services) the place where the labor is done should be decisive; if it is done in this
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount counrty, the income should be from "source within the United States." If the income is from capital, the
received by every foreign corporation not engaged in trade or business within the Philippines, from all place where the capital is employed should be decisive; if it is employed in this country, the income should
sources within the Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, be from "source within the United States". If the income is from the sale of capital assets, the place where
compensations, remunerations, emoluments, or other fixed or determinative annual or periodical gains, the sale is made should be likewise decisive. Much confusion will be avoided by regarding the term
profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums "source" in this fundamental light. It is not a place; it is an activity or property. As such, it has a situs or
shall not include reinsurance premiums. 2 location; and if that situs or location is within the United States the resulting income is taxable to
nonresident aliens and foreign corporations. The intention of Congress in the 1916 and subsequent
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign and to make the test of taxability the "source", or situs of the activities or property which produce the
corporation, it is liable to income tax only to the extent that it derives income from sources within the income . . . . Thus, if income is to taxed, the recipient thereof must be resident within the jurisdiction,
Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference or the property or activities out of which the income issue or is derived must be situated within the
that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign jurisdiction so that the source of the income may be said to have a situs in this country. The underlying
corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine theory is that the consideration for taxation is protection of life and property and that the income rightly to
source income creates no presumption that the recipient foreign corporation is a resident of the be levied upon to defray the burdens of the United States Government is that income which is created by
Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income activities and property protected by this Government or obtained by persons enjoying that protection. 5
from sources within the Philippines.
3. We turn now to the question what is the source of income rule applicable in the instant case. There are
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in
physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
or service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local Where a contract for the rendition of service is involved, the applicable source rule may be simply stated
insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The as follows: the income is sourced in the place where the service contracted for is rendered. Section 37
Court said: (a) (3) of our Tax Code reads as follows:

The source of an income is the property, activity or services that produced the income. The reinsurance Section 37. Income for sources within the Philippines.
premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source
the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the (a) Gross income from sources within the Philippines. The following items of gross income shall be
activity that produced the reinsurance premiums, and the same took place in the Philippines. [T]he treated as gross income from sources within the Philippines:
reinsurance, the liabilities insured and the risk originally underwritten by Commonwealth Insurance Co.,
xxx xxx xxx
upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. 4
(3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
supplied)
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
was the indemnification of the local insurance company. Such indemnification could take place only in the Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the
Philippines where the risks were located and where payment from the foreign reinsurance (in case the Philippines in the following manner:
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums
paid by the local insurance companies constituted Philippine source income of the foreign reinsurances. (c) Gross income from sources without the Philippines. The following items of gross income shall be
treated as income from sources without the Philippines:
The concept of "source of income" for purposes of income taxation originated in the United States income
tax system. The phrase "sources within the United States" was first introduced into the U.S. tax system (3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax supplied)
Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of
seems useful to refer to a standard U.S. text on federal income taxation:
services rendered by individual natural persons; they also apply to services rendered by or through the
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived medium of a juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax
from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful as follows:
guides in any inquiry into whether a particular item is from "source within the United States" and suggest
an investigation into the nature and location of the activities or property which produce the income. If the
(e) Income form sources partly within and partly without the Philippines. Items of gross income, We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section to the purchase and sale of personal property, upon the other hand.
shall be allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation We consider first sales of personal property. Income from the sale of personal property by the producer
or other services rendered partly within and partly without the Philippines, or (2) from the sale of personnel or manufacturer of such personal property will be regarded as sourced entirely within or entirely
property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced without the Philippines or as sourced partly within and partly without the Philippines, depending upon two
(in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived factors: (a) the place where the sale of such personal property occurs; and (b) the place where such
partly from sources within and partly from sources without the Philippines. ... (Emphasis supplied) personal property was produced or manufactured. If the personal property involved was both produced
or manufactured and sold outside the Philippines, the income derived therefrom will be regarded as
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. sourced entirely outside the Philippines, although the personal property had been produced outside the
Tax Code which "was based upon a recognition that transportation was a service and that the source of Philippines, or if the sale of the property takes place outside the Philippines and the personal was
the income derived therefrom was to be treated as being the place where the service of transportation produced in the Philippines, then, the income derived from the sale will be deemed partly as income
was rendered. 7 sourced without the Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the Philippines. Thus, Section
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income 37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of (e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first (1) transportation or other services rendered partly within and partly without the Philippines; or (2) from
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the
No. 2 (implementing Section 37 of the Tax Code) provides in part as follows: Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall
be treated as derived partly from sources within and partly from sources without the Philippines. ...
Section 155. Compensation for labor or personnel services. Gross income from sources within the (Emphasis supplied)
Philippines includes compensation for labor or personal services within the Philippines regardless of the
residence of the payer, of the place in which the contract for services was made, or of the place of In contrast, income derived from the purchase and sale of personal property i. e., trading is, under
payment (Emphasis supplied) the Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37
(e) of the Tax Code provides in part as follows:
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies i.e., foreign steamship companies deriving (e) Income from sources partly within and partly without the Philippines ... Gains, profits and income
income from sources partly within and partly without the Philippines: derived from the purchase of personal property within and its sale without the Philippines or from the
purchase of personal property without and its sale within the Philippines, shall be treated as derived
Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels entirely from sources within the country in which sold. (Emphasis supplied)
touch parts of the Philippines should include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus ascertained, the ratio existing Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
between it and the gross income from all ports, both within and without the Philippines of all vessels,
whether touching of the Philippines or not, should be determined as the basis upon which allowable Section 159. Sale of personal property. Income derived from the purchase and sale of personal property
deductions may be computed, . (Emphasis supplied) shall be treated as derived entirely from the country in which sold. The word "sold" includes "exchange."
The "country" in which "sold" ordinarily means the place where the property is marketed. This Section
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 does not apply to income from the sale personal property produced (in whole or in part) by the taxpayer
(again implementing Section 37 of the Tax Code) with provides as follows: within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold
within the Philippines. (See Section 162 of these regulations). (Emphasis supplied)
Section 164. Telegraph and cable services. A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside the 4. It will be seen that the basic problem is one of characterization of the transactions entered into by
Philippines derives income partly form source within and partly from sources without the Philippines. BOAC in the Philippines. Those transactions may be characterized either as sales of personal property
(i. e., "sales of airline tickets") or as entering into a lease of services or a contract of service or
... (Emphasis supplied) carriage. The applicable "source of income" rules differ depending upon which characterization is given
to the BOAC transactions.
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2
that steamship and telegraph and cable services rendered between points both outside the The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts
Philippines give rise to income wholly from sources outside the Philippines, and therefore not subject to of service, i.e., carriage of passengers or cargo between points located outside the Philippines.
Philippine income taxation.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct or other services rendered partly within and partly without the Philippines, or wholly without the
as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The Philippines, has been set aside. in place of Philippine income taxation, the Tax Code now imposes this
value of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a 2 per cent tax computed on the basis of billings in respect of passengers and cargo originating from the
prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the Philippines regardless of where embarkation and debarkation would be taking place. This 2- per cent
one point to another outside the Philippines. The ticket is really the evidence of the contract of tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby,
carriage entered into between BOAC and the passenger. The money paid by the passenger changes the Government has done away with the difficulties attending the allocation of income and related
hands in the Philippines. But the passenger does not receive undertaken to be delivered by BOAC. The expenses, losses and deductions. Because taxes are the very lifeblood of government, the resulting
"purchase price of the airline ticket" is quite different from the purchase price of a physical good or potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
commodity such as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid of consciousness, considered in choosing from among competing possible characterizations under or
for the undertaking of BOAC to transport the passenger or cargo outside the Philippines. interpretation of tax statutes. It is hence perhaps useful to point out that the determination of the
appropriate characterization here that of contracts of air carriage rather than sales of airline tickets
The characterization of the BOAC transactions either as sales of personal property or as purchases and entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government
sales of personal property, appear entirely inappropriate from other viewpoint. Consider first purchases takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of
and sales: is BOAC properly regarded as engaged in trading in the purchase and sale of personal international carriers.
property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal property produced or I would vote to affirm the decision of the Court of Tax Appeals.
manufactured by it? In a popular or journalistic sense, BOAC might be described as "selling" "a product"
its service. However, for the technical purposes of the law on income taxation, BOAC is in fact entering
into contracts of service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source rules" applying
generally to sales, and purchases and sales, of personal property which can be invoked only by the grace
of popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized
as derived from a "service", rather than from an "activity" (a broader term than service and including the Separate Opinions
activity of selling) or from the here involved is income taxation, and not a sales tax or
TEEHANKEE, C.J., concurring:
an excise or privilege tax.
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree
joint decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the
No. 1355, promulgated on 21 April 1978, in the following manner:
majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its
foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in general sales agent in the Philippines gas become moot after November 24, 1972. Booth opinions state
subsection (a) of this section upon the total net income received in the preceeding taxable year from all that by amendment through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the
sources within the Philippines: Provided, however, That international carriers shall pay a tax of two and Tax Code providing dor the rate of income tax on foreign corporations, international carriers such as
one-half per cent on their gross Philippine billings. "Gross Philippines of passage documents sold therein, respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine
whether for passenger, excess baggege or mail, provide the cargo or mail originates from the Philippines. billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as to
The gross revenue realized from the said cargo or mail shall include the gross freight charge up to final the present 2-% tax on their gross Philippine billings charged against such international carriers as
destination. Gross revenues from chartered flights originating from the Philippines shall likewise form part herein respondent foreign corporation.
of "gross Philippine billings" regardless of the place of sale or payment of the passage documents. For
FELICIANO, J., dissenting:
purposes of determining the taxability to revenues from chartered flights, the term "originating from the
Philippines" shall include flight of passsengers who stay in the Philippines for more than forty-eight (48) With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
hours prior to embarkation. (Emphasis supplied) Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed. The fundamental
Under the above-quoted proviso international carriers issuing for compensation passage documentation
issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC), a
in the Philippines for uplifts from any point in the world to any other point in the world, are not charged
foreign airline company which does not maintain any flight operations to and from the Philippines, is liable
any Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo
for Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales
originating from the Philippines). Under this new approach, international carriers who service port or points
agent, relating to the carriage of passengers and cargo between two points both outside the Philippines.
in the Philippines are treated in exactly the same way as international carriers not serving any port or
point in the Philippines. Thus, the source of income rule applicable, as above discussed, to transportation 1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing source income creates no presumption that the recipient foreign corporation is a resident of the
business in the Philippines or [had] an office or place of business in the Philippines. Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income
from sources within the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of 2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the
BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity
"resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on or service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
whether or not such income is derived from "source within the Philippines." court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or Court said:
having an office or place of business in the Philippines is subject to Philippine income taxation only in
respect of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal The source of an income is the property, activity or services that produced the income. The reinsurance
Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it premiums remitted to appellants by virtue of the reinsurance contract, accordingly, had for their source
existed up to 3 August 1969, read as follows: the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the
activity that produced the reinsurance premiums, and the same took place in the Philippines. [T]he
(2) Resident corporations. A foreign corporation engaged in trade or business with in the Philippines reinsurance, the liabilities insured and the risk originally underwritten by Commonwealth Insurance Co.,
(expect foreign life insurance companies) shall be taxable as provided in subsection (a) of this section. upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. 4
Section 24 (a) of the Tax Code in turn provides: The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall be livied,
was the indemnification of the local insurance company. Such indemnification could take place only in the
collected, and paid annually upon the total net income received in the preceeding taxable year from all
Philippines where the risks were located and where payment from the foreign reinsurance (in case the
sources within the Philippines by every corporation organized, authorized, or existing under the laws of
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums
any foreign country: ... . (Emphasis supplied)
paid by the local insurance companies constituted Philippine source income of the foreign reinsurances.
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended
The concept of "source of income" for purposes of income taxation originated in the United States income
once more Section 24 (b) (2) of the Tax Code so as to read as follows:
tax system. The phrase "sources within the United States" was first introduced into the U.S. tax system
(2) Resident Corporations. A corporation, organized, authorized or existing under the laws of any in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax
foreign counrty, except foreign life insurance company, engaged in trade or business within the Code (Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income seems useful to refer to a standard U.S. text on federal income taxation:
received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital assets. While
corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful
follows: guides in any inquiry into whether a particular item is from "source within the United States" and suggest
an investigation into the nature and location of the activities or property which produce the income. If the
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied, collected and income is from labor (services) the place where the labor is done should be decisive; if it is done in this
paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon the amount counrty, the income should be from "source within the United States." If the income is from capital, the
received by every foreign corporation not engaged in trade or business within the Philippines, from all place where the capital is employed should be decisive; if it is employed in this country, the income should
sources within the Philippines, as interest, dividends, rents, salaries, wages, premium, annuities, be from "source within the United States". If the income is from the sale of capital assets, the place where
compensations, remunerations, emoluments, or other fixed or determinative annual or periodical gains, the sale is made should be likewise decisive. Much confusion will be avoided by regarding the term
profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums "source" in this fundamental light. It is not a place; it is an activity or property. As such, it has a situs or
shall not include reinsurance premiums. 2 location; and if that situs or location is within the United States the resulting income is taxable to
nonresident aliens and foreign corporations. The intention of Congress in the 1916 and subsequent
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a
statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign
and to make the test of taxability the "source", or situs of the activities or property which produce the
corporation, it is liable to income tax only to the extent that it derives income from sources within the
income . . . . Thus, if income is to taxed, the recipient thereof must be resident within the jurisdiction,
Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference
or the property or activities out of which the income issue or is derived must be situated within the
that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign
jurisdiction so that the source of the income may be said to have a situs in this country. The underlying
corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine
theory is that the consideration for taxation is protection of life and property and that the income rightly to Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
be levied upon to defray the burdens of the United States Government is that income which is created by derived from transportation or other services rendered entirely outside the Philippines must be treated as
activities and property protected by this Government or obtained by persons enjoying that protection. 5 derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
3. We turn now to the question what is the source of income rule applicable in the instant case. There are promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations
two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in No. 2 (implementing Section 37 of the Tax Code) provides in part as follows:
respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Section 155. Compensation for labor or personnel services. Gross income from sources within the
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated Philippines includes compensation for labor or personal services within the Philippines regardless of the
as follows: the income is sourced in the place where the service contracted for is rendered. Section 37 residence of the payer, of the place in which the contract for services was made, or of the place of
(a) (3) of our Tax Code reads as follows: payment (Emphasis supplied)
Section 37. Income for sources within the Philippines. Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies i.e., foreign steamship companies deriving
(a) Gross income from sources within the Philippines. The following items of gross income shall be
income from sources partly within and partly without the Philippines:
treated as gross income from sources within the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship companies whose vessels
xxx xxx xxx
touch parts of the Philippines should include as gross income, the total receipts of all out-going
(3) Services. Compensation for labor or personal services performed in the Philippines;... (Emphasis business whether freight or passengers. With the gross income thus ascertained, the ratio existing
supplied) between it and the gross income from all ports, both within and without the Philippines of all vessels,
whether touching of the Philippines or not, should be determined as the basis upon which allowable
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the deductions may be computed, . (Emphasis supplied)
Philippines in the following manner:
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2
(c) Gross income from sources without the Philippines. The following items of gross income shall be (again implementing Section 37 of the Tax Code) with provides as follows:
treated as income from sources without the Philippines:
Section 164. Telegraph and cable services. A foreign corporation carrying on the business of
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis transmission of telegraph or cable messages between points in the Philippines and points outside the
supplied) Philippines derives income partly form source within and partly from sources without the Philippines.
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of ... (Emphasis supplied)
services rendered by individual natural persons; they also apply to services rendered by or through the
medium of a juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2
Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides that steamship and telegraph and cable services rendered between points both outside the
as follows: Philippines give rise to income wholly from sources outside the Philippines, and therefore not subject to
Philippine income taxation.
(e) Income form sources partly within and partly without the Philippines. Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and
shall be allocated or apportioned to sources within or without the Philippines, under the rules and to the purchase and sale of personal property, upon the other hand. We consider first sales of personal
regulations prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation property. Income from the sale of personal property by the producer or manufacturer of such personal
or other services rendered partly within and partly without the Philippines, or (2) from the sale of personnel property will be regarded as sourced entirely within or entirely without the Philippines or as sourced partly
property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced within and partly without the Philippines, depending upon two factors: (a) the place where the sale of such
(in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived personal property occurs; and (b) the place where such personal property was produced or manufactured.
partly from sources within and partly from sources without the Philippines. ... (Emphasis supplied) If the personal property involved was both produced or manufactured and sold outside the Philippines,
the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. personal property had been produced outside the Philippines, or if the sale of the property takes place
Tax Code which "was based upon a recognition that transportation was a service and that the source of outside the Philippines and the personal was produced in the Philippines, then, the income derived from
the income derived therefrom was to be treated as being the place where the service of transportation the sale will be deemed partly as income sourced without the Philippines. In other words, the income (and
was rendered. 7 the related expenses, losses and deductions) will be allocated between sources within and sources
without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may be regarded as "selling" personal property produced or manufactured by it? In a popular or journalistic sense,
usefully quoted again: BOAC might be described as "selling" "a product" its service. However, for the technical purposes of
the law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and income from existance of "source rules" specifically and precisely applicable to the rendition of services must preclude
(1) transportation or other services rendered partly within and partly without the Philippines; or (2) from the application here of "source rules" applying generally to sales, and purchases and sales, of personal
the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the property which can be invoked only by the grace of popular language. On a slighty more abstract level,
Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall BOAC's income is more appropriately characterized as derived from a "service", rather than from an
be treated as derived partly from sources within and partly from sources without the Philippines. ... "activity" (a broader term than service and including the activity of selling) or from the here involved
(Emphasis supplied) is income taxation, and not a sales tax or an excise or privilege tax.
In contrast, income derived from the purchase and sale of personal property i. e., trading is, under 5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
the Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree
(e) of the Tax Code provides in part as follows: No. 1355, promulgated on 21 April 1978, in the following manner:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and income (2) Resident corporations. A corporation organized, authorized, or existing under the laws of any
derived from the purchase of personal property within and its sale without the Philippines or from the foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in
purchase of personal property without and its sale within the Philippines, shall be treated as derived subsection (a) of this section upon the total net income received in the preceeding taxable year from all
entirely from sources within the country in which sold. (Emphasis supplied) sources within the Philippines: Provided, however, That international carriers shall pay a tax of two and
one-half per cent on their gross Philippine billings. "Gross Philippines of passage documents sold therein,
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
whether for passenger, excess baggege or mail, provide the cargo or mail originates from the Philippines.
Section 159. Sale of personal property. Income derived from the purchase and sale of personal property The gross revenue realized from the said cargo or mail shall include the gross freight charge up to final
shall be treated as derived entirely from the country in which sold. The word "sold" includes "exchange." destination. Gross revenues from chartered flights originating from the Philippines shall likewise form part
The "country" in which "sold" ordinarily means the place where the property is marketed. This Section of "gross Philippine billings" regardless of the place of sale or payment of the passage documents. For
does not apply to income from the sale personal property produced (in whole or in part) by the taxpayer purposes of determining the taxability to revenues from chartered flights, the term "originating from the
within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold Philippines" shall include flight of passsengers who stay in the Philippines for more than forty-eight (48)
within the Philippines. (See Section 162 of these regulations). (Emphasis supplied) hours prior to embarkation. (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into by Under the above-quoted proviso international carriers issuing for compensation passage documentation
BOAC in the Philippines. Those transactions may be characterized either as sales of personal property in the Philippines for uplifts from any point in the world to any other point in the world, are not charged
(i. e., "sales of airline tickets") or as entering into a lease of services or a contract of service or any Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo
carriage. The applicable "source of income" rules differ depending upon which characterization is given originating from the Philippines). Under this new approach, international carriers who service port or points
to the BOAC transactions. in the Philippines are treated in exactly the same way as international carriers not serving any port or
point in the Philippines. Thus, the source of income rule applicable, as above discussed, to transportation
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts or other services rendered partly within and partly without the Philippines, or wholly without the
of service, i.e., carriage of passengers or cargo between points located outside the Philippines. The Philippines, has been set aside. in place of Philippine income taxation, the Tax Code now imposes this
phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a 2 per cent tax computed on the basis of billings in respect of passengers and cargo originating from the
matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value Philippines regardless of where embarkation and debarkation would be taking place. This 2- per cent
of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby,
from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point the Government has done away with the difficulties attending the allocation of income and related
to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into expenses, losses and deductions. Because taxes are the very lifeblood of government, the resulting
between BOAC and the passenger. The money paid by the passenger changes hands in the Philippines. potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees
But the passenger does not receive undertaken to be delivered by BOAC. The "purchase price of the of consciousness, considered in choosing from among competing possible characterizations under or
airline ticket" is quite different from the purchase price of a physical good or commodity such as a pair of interpretation of tax statutes. It is hence perhaps useful to point out that the determination of the
shoes of a refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to appropriate characterization here that of contracts of air carriage rather than sales of airline tickets
transport the passenger or cargo outside the Philippines. The characterization of the BOAC transactions entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government
either as sales of personal property or as purchases and sales of personal property, appear entirely takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of
inappropriate from other viewpoint. Consider first purchases and sales: is BOAC properly regarded as international carriers.
engaged in trading in the purchase and sale of personal property? Certainly, BOAC was not purchasing
tickets outside the Philippines and selling them in the Philippines. Consider next sales: can BOAC be I would vote to affirm the decision of the Court of Tax Appeals.
18.) G.R. No. 160756 March 9, 2010 Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT
of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. vs. THE HON. EXESEC under Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation does not pay the
ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the
THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., normal income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424
provides:
DECISION
Section 27 (E). [MCIT] on Domestic Corporations. -
CORONA, J.:
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders
year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the
fourth taxable year immediately following the year in which such corporation commenced its business
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this
and those involving creditable withholding taxes.3
Section for the taxable year.
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
computed under Subsection (A) of this Section shall be carried forward and credited against the normal
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
income tax for the three (3) immediately succeeding taxable years.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations
(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to
and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.
suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. labor dispute, or because of force majeure, or because of legitimate business reverses.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
is no realized gain.
Commissioner, the necessary rules and regulations that shall define the terms and conditions under which
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, he may suspend the imposition of the [MCIT] in a meritorious case.
and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the
(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof,
collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that
the term gross income shall mean gross sales less sales returns, discounts and allowances and cost of
these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by
goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the
RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no
merchandise to bring them to their present location and use.
authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of
the real properties classified as ordinary assets. For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
including insurance while the goods are in transit.
process clause because, like the MCIT, the government collects income tax even when the net income
has not yet been determined. They contravene the equal protection clause as well because the CWT is For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production
being levied upon real estate enterprises but not on other business enterprises, more particularly those of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
in the manufacturing sector. insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
The issues to be resolved are as follows: In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
(1) whether or not this Court should take cognizance of the present case;
expenses necessarily incurred to provide the services required by the customers and clients including (A)
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and salaries and employee benefits of personnel, consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional. interest expense.
Overview of the Assailed Provisions On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
With selling price of more than two million 5.0%
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable pesos (P2,000,000.00)
year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed
upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable xxx xxx xxx
year in which such corporation commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or whenever the amount of minimum Gross selling price shall mean the consideration stated in the sales document or the fair market value
corporate income tax is greater than the normal income tax due from such corporation. determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as determined in the Income Tax
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed Regulations shall be used.
under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be
xxx xxx xxx made on the periodic installment payments where the buyer is an individual not engaged in trade or
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld
under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal on the last installment or installments to be paid to the seller.
income tax for the three (3) immediately succeeding taxable years. However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall
xxx xxx xxx be deducted and withheld by the buyer on every installment.

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, This provision was amended by RR 6-2001 on July 31, 2001:
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of
real property, other than capital assets, by persons residing in the Philippines and habitually engaged in xxx xxx xxx
the real estate business were subjected to CWT:
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon: sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with Section
xxx xxx xxx 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance
sale, exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation, with the following schedule:
estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate
Where the seller/transferor is exempt from [CWT] in accordance with Exempt
business in accordance with the following schedule
Sec. 2.57.5 of these regulations.

Those which are exempt from a withholding Exempt Upon the following values of real property, where the seller/transferor
tax at source as prescribed in Sec. 2.57.5 of is habitually engaged in the real estate business.
these regulations.
With a selling price of Five Hundred Thousand Pesos (P500,000.00) or 1.5%
less.
With a selling price of five hundred 1.5%
With a selling price of more than Five Hundred Thousand Pesos 3.0%
thousand pesos (P500,000.00) or less.
(P500,000.00) but not more than Two Million Pesos (P2,000,000.00).

With a selling price of more than two Million Pesos (P2,000,000.00). 5.0%
With a selling price of more than five 3.0%
hundred thousand pesos (P500,000.00) but xxx xxx xxx
not more than two million pesos
(P2,000,000.00). Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the c. In the case of domestic corporations.
consideration.
xxx xxx xxx
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules and/or building treated as capital asset), regardless of the classification thereof, all of which are located
shall apply: in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E)
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment. of the Code, whichever is applicable.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment xxx xxx xxx
plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the
tax based on the gross selling price or fair market value of the property, whichever is higher, on the first We shall now tackle the issues raised.
installment.
Existence of a Justiciable Controversy
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT]
due on the sale, transfer or exchange of real property other than capital asset has been fully Courts will not assume jurisdiction over a constitutional question unless the following requisites are
paid. (Underlined amendments in the original) satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before
the court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or to do so; (4) the question of constitutionality must have been raised at the earliest opportunity and (5) the
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified issue of constitutionality must be the very lis mota of the case.9
that such transfers and conveyances have been reported and the taxes thereof have been duly paid:7
Respondents aver that the first three requisites are absent in this case. According to them, there is no
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly [petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed
authorized representative has certified that such transfers and conveyances have been reported and the by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that
expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx. its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner
has raised concerns in mere abstract and hypothetical form without any actual, specific and concrete
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining instances cited that the assailed law and revenue regulations have actually and adversely affected it.
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the
among others. The pertinent portions thereof state: MCIT or CWT on sales of real property is essentially an academic exercise.

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not
subject to applicable taxes imposed under the Code, depending on whether the subject properties are really settle legal issues.10
classified as capital assets or ordinary assets;
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
engaged in trade or business in the Philippines; dispute.11 On the other hand, a question is considered ripe for adjudication when the act being challenged
has a direct adverse effect on the individual challenging it. 12
xxx xxx xxx
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to their operations as a result of the MCIT or CWT. The assailed provisions are already being implemented.
the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to
Code, as the case may be, based on net taxable income. have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation
of the Constitution and/or the law is enough to awaken judicial duty.14
xxx xxx xxx
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
such question once and for all. minimal or negative net income resulting in minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses otherwise called tax shelters. 23
Respondents next argue that petitioner has no legal standing to sue:
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
Petitioner is an association of some of the real estate developers and builders in the Philippines. [MCIT]. Because from experience too, you have corporations which have been losing year in and year
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material interest out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
or any wrong that it may suffer from the enforcement of [the assailed provisions]. 15 corporation has no business to be in business. It is dead. Why continue if you are losing year in and year
out? So, we have this provision to avoid this type of tax shelters, Your Honor. 24
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing because its operations of a corporation or consistent reports of minimal net income render its financial statements
members stood to be injured by the enforcement of the assailed provisions: and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income,
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that
it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful
the individual members of petitioner association are residents of the NGC. As such they are covered and
manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection
lowered.
process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may
assail those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into
Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR the law:
in that they have been disqualified and eliminated from the selection process. In any event, this Court has
the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
ripeness or legal standing when paramount public interest is involved. 19 The questioned MCIT and CWT expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately
affect not only petitioners but practically all domestic corporate taxpayers in our country. The following the year in which the corporation commenced its operations.25 This grace period allows a new
transcendental importance of the issues raised and their overreaching significance to society make it business to stabilize first and make its ventures viable before it is subjected to the MCIT. 26
proper for us to take cognizance of this petition.20
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
Concept and Rationale of the MCIT which shall be credited against the normal income tax for the three immediately succeeding years.27

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
the true income of corporations.21 It was devised as a relatively simple and effective revenue-raising labor dispute, force majeure and legitimate business reverses.28
instrument compared to the normal income tax which is more difficult to control and enforce. It is a means
to ensure that everyone will make some minimum contribution to the support of the public sector. The Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
congressional deliberations on this are illuminating: already had their own system of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries, have the same form of safeguards
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting as we do. As pointed out during the committee hearings:
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative underdeclaration of gross receipts have this same form of safeguards.
convenience. This will go a long way in ensuring that corporations will pay their just share in supporting
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%)
our public life and our economic advancement.22
of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of
Domestic corporations owe their corporate existence and their privilege to do business to the government. course the different countries have different basis for that minimum income tax.
They also benefit from the efforts of the government to improve the financial market and to ensure a
The other thing youll notice is the preponderance of Latin American countries that employed this method.
favorable business climate. It is therefore fair for the government to require them to make a reasonable
Okay, those are additional Latin American countries. 29
contribution to the public expenses.
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their
own versions of the MCIT.30
MCIT Is Not Violative of Due Process The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly capital is not being taxed.
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income
and other direct expenses; other major expenditures, such as administrative and interest expenses which tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
are equally necessary to produce gross income, were not taken into account.31 Thus, pegging the tax net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the
base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross base the corporations gross income.
income, unlike net income, is not "realized gain."32
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible
We disagree. items and at the same time reducing the applicable tax rate. 49

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
The exercise of taxing power derives its source from the very existence of the State whose social contract many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
with its citizens obliges it to promote public interest and the common good.33 constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of
taxation.50
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), The United States has a similar alternative minimum tax (AMT) system which is generally characterized
extent (rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to prescribe a certain by a lower tax rate but a broader tax base.51 Since our income tax laws are of American origin,
tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of
words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, these laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the
how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. procedure of their implementation are comparable. On the question of the AMTs constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is circumscribed growing from large numbers of taxpayers with large incomes who were yet paying no taxes.
by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption
of constitutionality. xxx xxx xxx

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational
liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due means of obtaining a broad-based tax, and therefore is constitutional. The U.S. Court declared that the
process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes was
it amounts to a confiscation of property.40 But in the same case, we also explained that we will not strike a legitimate governmental end to which the AMT bore a reasonable relation. 55
down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere
American courts have also emphasized that Congress has the power to condition, limit or deny deductions
allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an
from gross income in order to arrive at the net that it chooses to tax. 56 This is because deductions are a
unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the due process
matter of legislative grace.57
clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for
proof of such persuasive character.43 Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base
of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Petitioner is correct in saying that income is distinct from capital. 44
Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members
distinct point in time while income denotes a flow of wealth during a definite period of time. 45 Income is nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation
gain derived and severed from capital.46 For income to be taxable, the following requisites must exist: of their property.
(1) there must be gain; In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
(2) the gain must be realized or received and and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its
(3) the gain must not be excluded by law or treaty from taxation. 47 yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In rights.59 The party alleging the laws unconstitutionality has the burden to demonstrate the supposed
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on violations in understandable terms.60
capital.
RR 9-98 Merely Clarifies Section 27(E) of RA 8424 and in harmony with, the law they seek to apply and implement.64 It is well-settled that an administrative
agency cannot amend an act of Congress.65
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT
is being imposed and collected even when there is actually a loss, or a zero or negative taxable income: We have long recognized that the method of withholding tax at source is a procedure of collecting income
tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three primary
Sec. 2.27(E) [MCIT] on Domestic Corporations. reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost or substantially reduced
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or
through failure to file the corresponding returns and third, to improve the governments cash flow. 67 This
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due
results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
from such corporation. (Emphasis supplied)
reduction of governmental effort to collect taxes through more complicated means and
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative remedies.Respondent Secretary has the authority to require the withholding of a tax on items of income
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation payable to any person, national or juridical, residing in the Philippines. Such authority is derived from
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still Section 57(B) of RA 8424 which provides:
subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on
SEC. 57. Withholding of Tax at Source.
gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to
be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT xxx xxx xxx
would be less than the net income of the corporation which posts a zero or negative taxable income.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR],
We now proceed to the issues involving the CWT. require the withholding of a tax on the items of income payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one
The withholding tax system is a procedure through which taxes (including income taxes) are
percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into
income tax liability of the taxpayer for the taxable year.
three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source
and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and maintains The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B)
that the revenue regulations on the collection of CWT on sale of real estate categorized as ordinary assets to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax
are unconstitutional. is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer
for the taxable year.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the
were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in Real Estate Business
contravention of law"62 because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV) Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business
of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary income tax from net income to GSP or FMV of the property sold.
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income Petitioner is wrong.
at the end of the taxable period.63
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and taxable year.70
payment of taxes on income from the sale of capital and ordinary assets.
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
Petitioners arguments have no merit. remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable
Considered as Ordinary Assets year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
is subject to the limitation that the rules and regulations must not override, but must remain consistent derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets; FWT CWT
xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines; a) The amount of income tax withheld by the a) Taxes withheld on certain income payments
xxx xxx xxx withholding agent is constituted as a full and final are intended to equal or at least approximate the
payment of the income tax due from the payee on tax due of the payee on said income.
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject the said income.
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may
be, based on net taxable income. b)The liability for payment of the tax rests b) Payee of income is required to report the
primarily on the payor as a withholding agent. income and/or pay the difference between the tax
xxx xxx xxx
withheld and the tax due on the income. The
c. In the case of domestic corporations. payee also has the right to ask for a refund if the
tax withheld is more than the tax due.
The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended,
and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary
c) The payee is not required to file an income tax c) The income recipient is still required to file an
income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the
return for the particular income.73 income tax return, as prescribed in Sec. 51 and
same Code, whichever is applicable. (Emphasis supplied)
Sec. 52 of the NIRC, as amended.74
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld,
then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed
the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income. on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioners contention that ordinary assets are being lumped together with, and treated similarly as,
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of capital assets in contravention of the pertinent provisions of RA 8424.
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax
does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to
the taxable year. Instead, said withholding agents knowledge and privity are limited only to the particular the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of
transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the income tax involving ordinary assets.75
only factors reasonably known or knowable by him in connection with the performance of his duties as a
withholding agent. The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same
way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets The withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax
due from the income payable is the essence of the withholding tax method of tax collection.
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized
as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of No Rule that Only Passive
6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This
Incomes Can Be Subject to CWT
final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows: passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source. is never assured by mere receipt of the selling price. As a result, the government is collecting tax from
net income not yet gained or earned.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), constitutional guarantee of due process. More importantly, the due process requirement applies to the
28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor- power to tax.79 The CWT does not impose new taxes nor does it increase taxes. 80 It relates entirely to the
corporation and/or person and paid in the same manner and subject to the same conditions as provided method and time of payment.
in Section 58 of this Code.
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the have to wait years and may even resort to litigation before they are granted a refund. 81 This argument is
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less and validity of the CWT as a method of collecting the tax.1avvphi1
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year. (Emphasis supplied) Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay
labor wages, materials, cost of money and other expenses which can then save the entity from having to
This line of reasoning is non sequitur. obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the
trade which add to the burden of the realty industry: huge investments and borrowings; long gestation
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates period; sudden and unpredictable interest rate surges; continually spiraling development/construction
these as passive income. The BIR defines passive income by stating what it is not: costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies.82
if the income is generated in the active pursuit and performance of the corporations primary purposes, Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
the same is not passive income76 complaints are essentially matters of policy best addressed to the executive and legislative branches of
the government. Besides, the CWT is applied only on the amounts actually received or receivable by the
It is income generated by the taxpayers assets. These assets can be in the form of real properties that
real estate entity. Sales on installment are taxed on a per-installment basis.83 Petitioners desire to utilize
return rental income, shares of stock in a corporation that earn dividends or interest income received from
for its operational and capital expenses money earmarked for the payment of taxes may be a practical
savings.
business option but it is not a fundamental right which can be demanded from the court or from the
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to government.
natural or juridical persons, residing in the Philippines." There is no requirement that this income be
No Violation of Equal Protection
passive income. If that were the intent of Congress, it could have easily said so.
Petitioner claims that the revenue regulations are violative of the equal protection clause because the
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any
enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A)
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business
and 57(B) in the same way.
is involved in a continuous process of production and it incurs costs and expenditures on a regular basis.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of The only difference is that "goods" produced by the real estate business are house and lot units. 84
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has
Again, we disagree.
been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its The equal protection clause under the Constitution means that "no person or class of persons shall be
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative place and in like circumstances."85 Stated differently, all persons belonging to the same class shall be
rules and regulations ordinarily deserve to be given weight and respect by the courts78in view of the rule- taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation
making authority given to those who formulate them and their specific expertise in their respective fields. based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions;
No Deprivation of Property Without Due Process (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply
equally to all members of the same class.86
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business, gain
The taxing power has the authority to make reasonable classifications for purposes of 19.) G.R. No. 179259 September 25, 2013
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or exemption,
infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can be validly treated COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE AIRLINES, INC. (PAL)
differently from other business enterprises. Petitioner, in insisting that its industry should be treated
DECISION
similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business
from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production PEREZ, J.:
processes but the prices of their goods sold and the number of transactions involved. The income from
the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome Before the Court is a Petition for Review on Certiorari seeking to reverse and set aside the 19 July 2007
for the parties to comply with the withholding tax scheme. Decision1and 23 August 2007 Resolution2 of the Court of Tax Appeals (CTA) En Bane in CTA EB No.
271 which affirmed the cancellation and withdrawal of Assessment Notice No. INC-FY -99-2000-000085
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with and Formal Letter of Demand for the payment by the respondent Philippine Airlines, Inc. (respondent), of
several thousand customers every month involving both minimal and substantial amounts. To require the deficiency Minimum Corporate Income Tax (MCIT) in the amount of P326,778,723.35, covering the fiscal
customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions year ending 31 March 2000.
with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation
and may well defeat the purpose of the withholding tax system. Petitioner counters that there are other The Facts
businesses wherein expensive items are also sold infrequently, e.g. heavy equipment, jewelry, furniture,
The factual antecedents of the case are undisputed:
appliance and other capital goods yet these are not similarly subjected to the CWT. 89As already
discussed, the Secretary may adopt any reasonable method to carry out its functions.90 Under Section Petitioner, the Commissioner of Internal Revenue, has the power to assess and collect national internal
57(B), it may choose what to subject to CWT. revenue taxes, fees, and charges, including the 2% per centum MCIT imposed under Section 27(E) of
the National Internal Revenue Code (NIRC) of 1997, as amended. Respondent, on the other hand, is a
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The
domestic corporation duly organized and existing under and by virtue of the laws of the Philippines.
sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are
also subject to CWT for their transactions with said 5,000 corporations. 91 For the fiscal year that ended 31 March 2000, respondent filed on 17July 2000 its Tentative Corporate
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424 Income Tax Return, reflecting a creditable tax withheld for the fourth quarter amounting to P524,957.00,
and a zero taxable income for said year. Hence, respondent filed on 16 July 2001 a written claim for
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not refund before the petitioner.
effect the regisration of any document transferring real property unless a certification is issued by the CIR
As a consequence thereof, respondent received on 10 September 2001the Letter of Authority No.
that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except
200000002247 from the Bureau of Internal Revenue (BIR) Large Taxpayers Service, dated 3 September
to rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this
2001,authorizing the revenue officers named therein to examine respondents books of accounts and
provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in
other accounting records for the purpose of evaluating respondents "Claim for Refund on Creditable
accordance with it:
Withholding Tax Income Tax" covering the fiscal year ending 31 March 2000.
Sec. 58. Returns and Payment of Taxes Withheld at Source.
Numerous correspondences between respondent and the Group Supervisor of the BIR Large Taxpayers
(E) Registration with Register of Deeds. - No registration of any document transferring real property Service, the revenue officers examining its accounting records, and the Chief of LT Audit & Investigation
shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative Division I of the BIR ensued, particularly as to the submission of various supporting documents and
has certified that such transfer has been reported, and the capital gains or [CWT], if any, has been presentation of records.
paid: xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed
On 16 July 2003, respondent received a "Summary of Creditable Withholding Tax at Source Certified by
under Section 269 of this Code. (Emphasis supplied)
RAD Fiscal Year Ending March 31,2000," together with a computation labeled "Compromise Penalties
Conclusion for Late Filing of Return." Likewise, on same date, respondent received a letter dated 8 July 2003 issued
by the Chief of LT Audit & Investigation Division I, informing the former that the results of the investigation
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to of its claim for refund on creditable withholding tax for fiscal year ending 31 March 2000had already been
understand is the income tax."92 When a party questions the constitutionality of an income tax measure, submitted, and that an informal conference was set on 17July 2003 to be held on the latters office.
it has to contend not only with Einsteins observation but also with the vast and well-established
jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably On 11 August 2003, respondent received from the same revenue officers a computation of their initial
failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is deficiency MCIT assessment in the amount of P537,477,867.64. Consequently, respondent received on
unconstitutional. WHEREFORE, the petition is hereby DISMISSED. 20October 2003 a Preliminary Assessment Notice and Details of Assessment issued by the Large
Taxpayers Service dated 22 September 2003, assessing respondent deficiency MCIT including interest,
in the aggregate amount of P315,566,368.68. A written protest to said preliminary assessment was filed (g) The "in lieu of all other taxes" clause under Section 13 of respondents legislative franchise exempts
by respondent on 3 November 2003. it from all taxes necessary in the conduct of its business covered by the franchise, except the tax on its
real property for which respondent is expressly made payable; 7 and
Thereafter, on 16 December 2003, respondent received a Formal Letter of Demand and Details of
Assessment dated 1 December 2003 from the Large Taxpayers Service demanding the payment of the (h) The rationale or purpose for the exemption from all other taxes except the income tax and real property
total amount of P326,778,723.35, inclusive of interest, as contained in Assessment Notice No. INC-FY- tax granted to respondent upon the payment of the basic corporate income tax or the 2% franchise tax is
99-2000-000085. In response thereto, respondent filed its formal written protest on 13 January 2004 that such tax exemption is part of inducement for the acceptance of the franchise and the rendition of
reiterating the following defenses:(1) that it is exempt from, or is not subject to, the 2% MCIT by virtue of public service by the grantee.8
its charter, Presidential Decree No. (PD) 1590;3 and (2) that the three-year period allowed by law for the
BIR to assess deficiency internal revenue taxes for the taxable year ending 31 March 2000 had already Simply put, it pronounced that the only qualification provided for in the law is the option given to
lapsed on 15July 2003. respondent to choose between the taxes which will yield the lesser liability. Thus, if as a result of the
exercise of the option, the respondent ends up without any tax liability, it should not be held liable for any
Since no final action has been taken by petitioner on respondents formal written protest, respondent filed other tax, such as the MCIT, except for real property tax.9
a Petition for Review before the Second Division of the CTA on 4 August 2004 docketed as CTA Case
No.7029. On 30 January 2007, the CTA Second Division denied petitioners Motion for Reconsideration for lack of
merit.10
The Ruling of the CTA Second Division
Aggrieved, petitioner appealed to the CTA En Banc by filing a Petition for Review pursuant to Section 18
In a Decision dated 22 August 2006,4 the CTA Second Division granted respondents petition and of Republic Act (RA) No. 9282(should be RA No. 1125, as amended by RA No. 9282) 11 on 1 March
accordingly ordered for the cancellation and withdrawal of Assessment Notice No. INC-FY-99-2000- 2007,docketed as CTA EB No. 271.12
000085 and Formal Letter of Demand for the payment of deficiency MCIT in the amount
of P326,778,723.35, covering the fiscal year ending 31 March 2000, issued against respondent. The Ruling of the CTA En Banc

The CTA Second Division made the following factual and legal findings, to wit: The CTA En Banc affirmed both the aforesaid Decision and Resolution rendered by the CTA Second
Division in CTA Case No. 7029,ruling that under Section 13 of PD 1590, respondent, as consideration for
(a) Section 13 of PD 1590 acquiring and limiting the extent of the tax liability of respondent under its the franchise, is indeed granted the privilege to choose between two options in the payment of its tax
franchise is coached in a clear, plain and unambiguous manner, and needs no further interpretation or liability to the government. Naturally, its choice will be that which will result in a lower tax liability since
construction; such choice is "in lieu of all other taxes" imposed by all government entities in the country. 13 The only
exception is the real property tax.
(b) Section 13 clearly provides that respondent is liable only for either the basic corporate income tax
based on its annual net taxable income, or the 2% franchise tax based on gross revenue, whichever is The appellate court pointed out that even if respondent opted to be covered by the Income Tax provisions
lower; of the NIRC, it does not follow that it is covered by the MCIT provisions of the same Code. There is nothing
in PD 1590 which obliges the respondent to pay other taxes, much less the MCIT, in case it suffers a net
(c) Respondent-grantee must only choose between the two alternatives mentioned in Section 13 in the operating loss. Otherwise, it would negate the tax relief granted under Section 13 of its franchise and
payment of its tax liability to the government, and its choice must be that which will result in a lower tax would render it useless. The tax relief allows respondent to carry over as a deduction from taxable income
liability; any net loss incurred in any year up to five years following the year of such loss. 14
(d) Since the income tax return of respondent reflected a zero taxable income for the fiscal year ending Likewise, it elucidated that the MCIT is not the basic corporate income tax referred to in Section 13 of PD
31 March 2000,obviously being lower than the 2% franchise tax, its choice of the former is definitely a 1590. There is a distinction between the MCIT and the basic corporate income tax. The MCIT under
better alternative as basis for its tax liability to the government;5 Section 27(E)(1) of the NIRC of 1997, as amended, is imposed upon gross income; while the basic
corporate income tax refers to the 32% income tax on the taxable income of domestic corporations under
(e) The basic corporate income tax mentioned in Section 13 of PD1590 does not refer to the MCIT under
Section 27(A) of the same Code. In other words, the court a quo ruled that since the MCIT is imposed
Section 27(E) of the NIRC of 1997, as amended, but particularly to the applicable rate of 32% income tax
upon gross income, it cannot be made to apply to respondent by virtue of the express provision in its
under Section 27(A) of the same Code, on the taxable income of domestic corporations;
franchise that its basic corporate income tax shall be based on its annual net taxable income. Hence, it
(f) The MCIT is regarded to belong to "other taxes" as it was not included in the choices provided by the is in this sense that the MCIT qualifies as "other taxes" from which the respondent had been granted tax
franchise. To hold otherwise would be to give another option to respondent which is evidently not within exemption by its franchise.15
the ambit of PD 1590;6
Moreover, the provision on MCIT, Section 27(E) of the NIRC of 1997, as amended, did not repeal
respondents franchise considering that it is a general law which cannot impliedly repeal, alter, or amend
PD 1590, being a special law. Neither can Revenue Memorandum Circular (RMC) No. 66-2003 amend Our Ruling
respondents franchise as it is merely an administrative issuance.
Respondents exemption from the MCIT is already a settled matter.
Lastly, there is no provision in RA No. 842416 which provides and specifies that the MCIT shall be in
addition to the taxes for which respondent is liable. To rule otherwise would be violative of Section 24 of Section 27 of the NIRC of 1997, as amended, provides as follows:
PD 1590 which states that respondents franchise may only be modified, amended, or repealed expressly
SEC. 27. Rates of Income Tax on Domestic Corporations.
by a special law or decree that shall specifically modify, amend or repeal the franchise or any section or
provision thereof. Therefore, in the absence of a law expressly repealing PD1590 at the time the subject (A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%)
assessment was issued and for the period covered by the assessment, respondents tax exemption is hereby imposed upon the taxable income derived during each taxable year from all sources within and
privilege under the "in lieu of all other taxes" clause of Section 13 thereof must be applied. without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under
this Title as a corporation, organized in, or existing under the law of the Philippines: Provided, That
Upon denial of petitioners Motion for Reconsideration of the 19 July2007 Decision of the CTA En Banc,
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
it filed this Petition for Review on Certiorari before this Court seeking the reversal of the aforementioned
1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate
Decision and the 23 August 2007 Resolution17 rendered in CTA EB No. 271.
shall be thirty-two percent (32%).
The Issues
xxxx
The issues submitted before this Court for consideration are as follows:
(E) Minimum Corporate Income Tax on Domestic Corporations.
(1) Whether or not the CTA En Banc erred in holding that the MCIT is properly categorized as "other
(1) Imposition of Tax A minimum corporate income tax of two percent (2%) of the gross income as of
taxes" pursuant to respondents charter; and
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
(2) Whether or not the CTA En Banc erred in ruling that respondent is not liable for the 2% MCIT deficiency Title, beginning on the fourth taxable year immediately following the year in which such corporation
for the fiscal year ending 31March 2000.18 commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection(A) of this Section for the taxable year. (Emphasis supplied)
The above mentioned issues may be consolidated and restated as follows: whether or not the CTA En
Banc erred when it affirmed the cancellation of Assessment Notice No. INC-FY-99-2000-000085 and Based on the foregoing, a domestic corporation must pay whichever is the higher of: (1) the income tax
Formal Letter of Demand issued by petitioner against respondent for the payment of deficiency MCIT in under Section 27(A) of the NIRC of 1997,as amended, computed by applying the tax rate therein to the
the amount of P326,778,723.35, covering the fiscal year ending 31 March 2000. taxable income of the corporation; or (2) the MCIT under Section 27(E), also of the same Code, equivalent
to 2% of the gross income of the corporation. The Court would like to underscore that although this may
In support thereof, petitioner submits the following arguments: (a) respondent clearly opted to be covered be the general rule in determining the income tax due from a domestic corporation under the provisions
by the income tax provision of the NIRC of 1997, as amended; hence, it is covered by the MCIT provision of the NIRC of 1997, as amended, such rule can only be applied to respondent only as to the extent
of the same Code and liable to pay the same; (b) the MCIT does not belong to the category of "other allowed by the provisions of its franchise.
taxes" which may enable respondent to avail of the "in lieu of all other taxes" clause under Section 13 of
PD 1590 because it is a category of an income tax pursuant to Section 27 (E) (1) of the NIRC of 1997,as Relevant thereto, PD 1590, the franchise of respondent, contains the following pertinent provisions
amended; (c) the MCIT provision of the NIRC of 1997, as amended, is not an amendment of respondents governing its taxation:
charter, but an amendment of the same Code. Hence, respondents obligation to pay the MCIT is not the
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the
result of an implied amendment of PD 1590, but rather, the consequence of respondents option of paying
Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will
income tax rather than franchise tax; (d) respondent is not only given the privilege to choose between
result in a lower tax:
what will give it the benefit of a lower tax, but also the responsibility of paying its share of the tax burden.
Otherwise stated, it is the legislative intent to give respondent a privilege in the form of an option in paying (a) The basic corporate income tax based on the grantees annual net taxable income computed in
its taxes which would result in paying a lower tax liability, but not in dispensing the sharing of a tax burden accordance with the provisions of the National Internal Revenue Code; or
to which every taxpayer is obligated to bear; and (e) a claim for exemption from taxation is never
presumed; thus, respondent is liable for the deficiency MCIT. (b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources,
without distinction as to transport or non transport operations; provided, that with respect to international
Respondent, in its Comment thereto, counters among others, that there is nothing in PD 1590 which air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall
obliges respondent to pay other taxes, much less the MCIT, in case it suffers a net operating loss. Since be subject to this tax.
the MCIT is not the basic corporate income tax, nor the 2% franchise tax, nor the real property tax
mentioned by Section 13 thereof, then it is but logical to conclude that the MCIT belongs to the category The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties,
of "other taxes" for which respondent is not liable. royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed,
levied, established, assessed, or collected by any municipal, city, provincial, or national authority or The franchise tax, on the other hand, shall be 2% of the gross revenues derived by respondent from all
government agency, now or in the future, including but not limited to the following: sources, whether transport or nontransport operations. However, with respect to international air-transport
service, the franchise tax shall only be imposed on the gross passenger, mail, and freight revenues of
xxxx respondent from its outgoing flights.21
The grantee, shall, however, pay the tax on its real property in conformity with existing law. Accordingly, considering the foregoing precepts, this Court had the opportunity to finally settle this matter
and categorically enunciated in Commissioner of Internal Revenue v. Philippine Airlines, Inc., 22 that
For purposes of computing the basic corporate income tax as provided herein, the grantee is authorized:
respondent cannot be subjected to MCIT for the following reasons:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of depreciation;
First, Section 13(a) of [PD] 1590 refers to "basic corporate income tax." In Commissioner of Internal
and
Revenue v. Philippine Airlines, Inc.,23 the Court already settled that the "basic corporate income tax,
(b) To carry over as a deduction from taxable income any net loss incurred in any year up to five years "under Section 13(a) of [PD] 1590, relates to the general rate of 35%(reduced to 32% by the year 2000)
following the year of such loss. as stipulated in Section 27(A) of the NIRC of 1997.

Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly Section 13(a) of [PD] 1590 requires that the basic corporate income tax be computed in accordance with
basis to the Commissioner of Internal Revenue. Within sixty (60) days after the end of each of the first the NIRC. This means that PAL shall compute its basic corporate income tax using the rate and basis
three quarters of the taxable calendar or fiscal year, the quarterly franchise or income-tax return shall be prescribed by the NIRC of 1997 for the said tax. There is nothing in Section 13(a) of [PD] 1590 to support
filed and payment of either the franchise or income tax shall be made by the grantee. the contention of the CIR that PAL is subject to the entire Title II of the NIRC of 1997, entitled "Tax on
Income."
A final or an adjustment return covering the operation of the grantee for the preceding calendar or fiscal
year shall be filed on or before the fifteenth day of the fourth month following the close of the calendar or Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporate income
fiscal year. The amount of the fiscal franchise or income tax to be paid by the grantee shall be the balance tax of PAL shall be based on its annual net taxable income. This is consistent with Section 27(A) of the
of the total franchise or income tax shown in the final or adjustment return after deducting therefrom the NIRC of 1997, which provides that the rate of basic corporate income tax, which is 32% beginning 1
total quarterly franchise or income taxes already paid during the preceding first three quarters of the same January 2000, shall be imposed on the taxable income of the domestic corporation.
taxable year.
Taxable income is defined under Section 31 of the NIRC of 1997as the pertinent items of gross income
Any excess of the total quarterly payments over the actual annual franchise of income tax due as shown specified in the said Code, less the deductions and/or personal and additional exemptions, if any,
in the final or adjustment franchise or income-tax return shall either be refunded to the grantee or credited authorized for such types of income by the same Code or other special laws.
against the grantees quarterly franchise or income-tax liability for the succeeding taxable year or years
The gross income, referred to in Section 31, is described in Section32 of the NIRC of 1997 as income
at the option of the grantee.
from whatever source, including compensation for services; the conduct of trade or business or the
The term "gross revenue" is herein defined as the total gross income earned by the grantee; (a) transport, exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and
nontransport, and other services; (b) earnings realized from investments in money-market placements, winnings; pensions; and a partners distributive share in the net income of a general professional
bank deposits, investments in shares of stock and other securities, and other investments; (c) total gains partnership.
net of total losses realized from the disposition of assets and foreign-exchange transactions; and (d) gross
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by
income from other sources. (Emphasis supplied)
subtracting from gross income deductions authorized, not just by the NIRC of 1997, but also by special
From the foregoing provisions, during the lifetime of the franchise of respondent, its taxation shall be laws. [PD] 1590 may be considered as one of such special laws authorizing PAL, in computing its annual
strictly governed by two fundamental rules, to wit: (1) respondent shall pay the Government either the net taxable income, on which its basic corporate income tax shall be based, to deduct from its gross
basic corporate income tax or franchise tax, whichever is lower; and (2) the tax paid by respondent, under income the following: (1) depreciation of assets at twice the normal rate; and (2) net loss carry-over up to
either of these alternatives, shall be in lieu of all other taxes, duties, royalties, registration, license, and five years following the year of such loss.
other fees and charges, except only real property tax.
In comparison, the 2% MCIT under Section 27 (E) of the NIRC of 1997 shall be based on the gross
Parenthetically, the basic corporate income tax of respondent shall be based on its annual net taxable income of the domestic corporation. The Court notes that gross income, as the basis for MCIT, is given
income, computed in accordance with the NIRC of 1997, as amended. PD 1590 also explicitly authorizes a special definition under Section 27(E) (4) of the NIRC of 1997, different from the general one under
respondent, in the computation of its basic corporate income tax, to: (1) depreciate its assets twice as Section 34 of the same Code.
fast the normal rate of depreciation;19 and (2) carry over deduction from taxable income any net loss
According to the last paragraph of Section 27 (E) (4) of the NIRC of 1997, gross income of a domestic
incurred in any year up to five years following the year of such loss. 20
corporation engaged in the sale of service means gross receipts, less sales returns, allowances, discounts
and cost of services. "Cost of services" refers to all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including (a) salaries and employee benefits the rendition of public service by the said public utility. In this case, in addition to being a public utility
of personnel, consultants, and specialists directly rendering the service; and (b) cost of facilities directly providing air-transport service, PAL is also the official flag carrier of the country.
utilized in providing the service, such as depreciation or rental of equipment used and cost of supplies.
Noticeably, inclusions in and exclusions/deductions from gross income for MCIT purposes are limited to The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes the
those directly arising from the conduct of the taxpayers business. It is, thus, more limited than the gross objective of Section 13 of [PD] 1590. In effect, PAL would not just have two, but three tax alternatives,
income used in the computation of basic corporate income tax. namely, the basic corporate income tax, MCIT, or franchise tax. More troublesome is the fact that, as
between the basic corporate income tax and the MCIT, PAL shall be made to pay whichever is higher,
In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable income, irrefragably, in violation of the avowed intention of Section 13 of [PD] 1590 to make PAL pay for the lower
which is the basis for basic corporate income tax under Section 27(A); and gross income, which is the amount of tax.
basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and
cannot be used interchangeably. The same reasons prevent this Court from declaring that the basic Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all other taxes" clause in
corporate income tax, for which PAL is liable under Section 13(a) of [PD] 1590, also covers MCIT under Section 13 of [PD] No. 1520 (sic),if it did not pay anything at all as basic corporate income tax or franchise
Section 27(E) of the NIRC of 1997, since the basis for the first is the annual net taxable income, while the tax. As a result, PAL should be made liable for "other taxes" such as MCIT. This line of reasoning has
basis for the second is gross income. been dubbed as the Substitution Theory, and this is not the first time the CIR raised the same. The Court
already rejected the Substitution Theory in
Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of
the NIRC of 1997, and one is paid in place of the other, the two are distinct and separate taxes. Commissioner of Internal Revenue v. Philippine Airlines, Inc., 25 to wit:

The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc.,24 wherein it held that "Substitution Theory"
income tax on the passive income of a domestic corporation, under Section 27(D) of the NIRC of 1997, of the CIR Untenable
is different from the basic corporate income tax on the taxable income of a domestic corporation, imposed
A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes "proviso
by Section 27(A), also of the NIRC of 1997. Section 13 of [PD] 1590 gives PAL the option to pay basic
is a mere incentive that applies only when PAL actually pays something.
corporate income tax or franchise tax, whichever is lower; and the tax so paid shall be in lieu of all other
taxes, except real property tax. The income tax on the passive income of PAL falls within the category of It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as
"allot her taxes" from which PAL is exempted, and which, if already collected, should be refunded to PAL. consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or
collected by the national or the local government. PAL has the option to choose the alternative that results
The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT is
in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.
different from the basic corporate income tax, not just in the rates, but also in the bases for their
computation. Not being covered by Section 13(a) of [PD] 1590,which makes PAL liable only for basic Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as
corporate income tax, then MCIT is included in "all other taxes" from which PAL is exempted. earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income.
By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in
That, under general circumstances, the MCIT is paid in place of the basic corporate income tax, when
which taxable income may result in a negative amount and thus translate into a zero tax liability.
the former is higher than the latter, does not mean that these two income taxes are one and the same.
The said taxes are merely paid in the alternative, giving the Government the opportunity to collect the Notably, PAL was owned and operated by the government at the time the franchise was last amended. It
higher amount between the two. The situation is not much different from Section 13 of [PD] 1590, which can reasonably be contemplated that PD 1590 sought to assist the finances of the government
reversely allows PAL to pay, whichever is lower of the basic corporate income tax or the franchise tax. It corporation in the form of lower taxes. When respondent operates at a loss(as in the instant case), no
does not make the basic corporate income tax in distinguishable from the franchise tax. taxes are due; in this instances, it has a lower tax liability than that provided by Subsection (b).
Given the fundamental differences between the basic corporate income tax and the MCIT, presented in The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one peso
the preceding discussion, it is not baseless for this Court to rule that, pursuant to the franchise of PAL, would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not.
said corporation is subject to the first tax, yet exempted from the second. There is no substantial distinction between a zero tax and a one-peso tax liability. (Emphasis theirs)
Fourth, the evident intent of Section 13 of [PD] 1520 (sic) is to extend to PAL tax concessions not ordinarily Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in the present
available to other domestic corporations. Section 13 of [PD] 1520 (sic) permits PAL to pay whichever is Petition.
lower of the basic corporate income tax or the franchise tax; and the tax so paid shall be in lieu of all other
taxes, except only real property tax. Hence, under its franchise, PAL is to pay the least amount of tax The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind the Substitution
possible. Theory. Section 22 of Republic Act No. 9337, more popularly known as the Expanded Value Added
Tax(E-VAT) Law, abolished the franchise tax imposed by the charters of particularly identified public
Section 13 of [PD] 1520 (sic) is not unusual. A public utility is granted special tax treatment (including tax utilities, including [PD] 1590 of PAL. PAL may no longer exercise its options or alternatives under Section
exceptions/exemptions) under its franchise, as an inducement for the acceptance of the franchise and 13 of [PD] 1590, and is now liable for both corporate income tax and the 12% VAT on its sale of services.
The CIR alleges that Republic Act No. 9337reveals the intention of the Legislature to make PAL share should retain the responsibility of paying its share of the tax burden, this Court has categorically ruled in
the tax burden of other domestic corporations. the above-cited cases that it is not the fact of tax payment that exempts it, but the exercise of its option..

The CIR seems to lose sight of the fact that the Petition at bar involves the liability of PAL for MCIT for Notably, in another case involving the same parties,26 the Court further expressed that a strict
the fiscal year ending 31March 2001. Republic Act No. 9337, which took effect on 1 July 2005,cannot be interpretation of the word "pay" in Section 13of PD 1590 would effectively render nugatory the other rights
applied retroactively and any amendment introduced by said statute affecting the taxation of PAL is categorically conferred upon the respondent by its franchise. Hence, there being no qualification to the
immaterial in the present case. exercise of its options under Section 13, then respondent is free to choose basic corporate income tax,
even if it would have zero liability for the same in light of its net loss position for the taxable year.
And sixth, [PD] 1590 explicitly allows PAL, in computing its basic corporate income tax, to carry over as
deduction any net loss incurred in any year, up to five years following the year of such loss. Therefore, By way of, reiteration, although it appears that respondent is not completely exempt from all forms of
[PD] 1590 does not only consider the possibility that, at the end of a taxable period, PAL shall end up with taxes under PD 1590 considering that Section 13 thereof requires it to pay, either the lower amount of
zero annual net taxable income (when its deductions exactly equal its gross income), as what happened the basic corporate income tax or franchise tax (which are both direct taxes), at its option, mere exercise
in the case at bar, but also the likelihood that PAL shall incur net loss (when its deductions exceed its of such option already relieves respondent of liability for all other taxes and/or duties, whether direct or
gross income). If PAL is subjected to MCIT, the provision in [PD] 1590 on net loss carry-over will be indirect taxes. This is an expression of the same thought in Our ruling that, to repeat, it is not the fact of
rendered nugatory. Net loss carry-over is material only in computing the annual net taxable income to be tax payment that exempts it, but the exercise of its option. All told, the CTA En Bane was correct in
used as basis for the basic corporate income tax of PAL; but PAL will never be able to avail itself of the dismissing the petition in CTA EB No. 271, and affirming the CTA Second Division's Decision and
basic corporate income tax option when it is in a net loss position, because it will always then be compelled Resolution dated 22 August 2006 and 30 January 2007, respectively, in CTA Case No. 7029.
to pay the necessarily higher MCIT.
WHEREFORE, the petition is DENIED for lack of merit. No costs.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without contravening
[PD] 1520 (sic). SO ORDERED.

Between [PD] 1520 (sic), on one hand, which is a special law specifically governing the franchise of PAL,
issued on 11 June 1978;and the NIRC of 1997, on the other, which is a general law on national internal
revenue taxes, that took effect on 1 January 1998, the former prevails. The rule is that on a specific
matter, the special law shall prevail over the general law, which shall be resorted to only to supply
deficiencies in the former. In addition, where there are two statutes, the earlier special and the later
general the terms of the general broad enough to include the matter provided for in the special the
fact that one is special and the other is general creates a presumption that the special is to be considered
as remaining an exception to the general, one as a general law of the land, the other as the law of a
particular case. It is a canon of statutory construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier
statute.

xxxx

The MCIT was a new tax introduced by Republic Act No.8424. Under the doctrine of strict interpretation,
the burden is upon the CIR to primarily prove that the new MCIT provisions of the NIRC of 1997, clearly,
expressly, and unambiguously extend and apply to PAL, despite the latters existing tax exemption. To
do this, the CIR must convince the Court that the MCIT is a basic corporate income tax, and is not covered
by the "in lieu of all other taxes" clause of [PD] 1590. Since the CIR failed in this regard, the Court is left
with no choice but to consider the MCIT as one of "all other taxes," from which PAL is exempt under the
explicit provisions of its charter. (Emphasis supplied)

Based on the foregoing pronouncements, it is clear that respondent is exempt from the MCIT imposed
under Section 27(E) of the NIRC of 1997,as amended. Thus, respondent cannot be held liable for the
assessed deficiency MCIT of P326,778,723.35 for fiscal year ending 31 March 2000.1wphi1

More importantly, as to petitioners contention that respondent needs to actually pay a certain amount as
basic corporate income tax or franchise tax before it can enjoy the tax exemption granted to it since it
20.) G.R. No. 76573 September 14, 1989 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
MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.) vs. CIR & CTA AG&P on August 4, 1981 under Central Bank Confirmation Receipt No. 7905930. Thus, for the first and
FERNAN, C.J.: 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
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing 20 and August 4, 1981. 5
under the laws of Japan and duly licensed to engage in business under Philippine laws with branch office
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and
at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner
the Court of Tax Appeals 1dated February 12, 1986 denying its claim for refund or tax credit in the amount
received from AG&P are effectively connected with its conduct or business in the Philippines as to be
of P229,424.40 representing alleged overpayment of branch profit remittance tax withheld from dividends
considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the
by Atlantic Gulf and Pacific Co. of Manila (AG&P).
National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
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. Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash office to its head office which are effectively connected with its trade or business in the Philippines are
dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2 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
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the
income arises from the business activity in which the corporation is engaged. For example, if a resident
10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the
foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in
withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding
some shares of stock on which dividends are subsequently received, the dividends thus earned are not
tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation
considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum
of Japan, the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid thereon,
Circular No. 55-80).
is shown below:
In the instant case, the dividends received by Marubeni from AG&P are not income arising from the
1981 FIRST QUARTER THIRD TOTAL OF FIRST business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not
(three months QUARTER (three and THIRD considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of
ended 3.31.81) months ended quarters the Tax Code, as amended . . . 6
(In Pesos) 9.30.81)
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
Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00 "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
10% Dividend Tax Withheld 84,972.00 84,972.00 169,944.00 On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for
refund/credit of P229,424.40 on the following grounds:
Cash Dividend net of 10% 764,748.00 764,748.00 1,529,496.00 While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same
Dividend Tax Withheld 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,
15% Branch Profit 114,712.20 114,712.20 229,424.40 3 nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax
Remittance Tax Withheld 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 %
Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60 tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax
Petitioner 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
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under Central
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained: (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
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in beneficial owner of the dividends the tax so charged shall not exceed;
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 (a) . . .
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 (b) 25 per cent of the gross amount of the dividends in all other cases.
made by it and the dividends on the investments were likewise directly remitted to and received by the
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is
Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no participation
therefore the determination of whether it is a resident or a non-resident foreign corporation under
or intervention, directly or indirectly, in the investments and in the receipt of the dividends. And it appears
Philippine laws. Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or
that the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds infused by
business" within the Philippines. Petitioner contends that precisely because it is engaged in business in
the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact,
the Philippines through its Philippine branch that it must be considered as a resident foreign corporation.
the Central Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent of
Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity,
(sic) the dividends in question, treated the Marubeni Corporation of Japan as a non-resident stockholder
whoever made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot
of the Atlantic Gulf & Pacific Company based on the supporting documents submitted to it.
be both a resident and a non-resident corporation depending on the nature of the particular transaction
Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it. involved. Accordingly, whether the dividends are paid directly to the head office or coursed through its
Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and local branch is of no moment for after all, the head office and the office branch constitute but one corporate
hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch is entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign
duly licensed to engage in business under Philippine laws, such dividends are not the income of the corporation because it is transacting business in the Philippines.
Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in the
The Solicitor General has adequately refuted petitioner's arguments in this wise:
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. Hence, the instant The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines
petition for review. 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
It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni
the branch becomes its agent here. So that when the foreign corporation transacts business in the
Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate final tax on
Philippines independently of its branch, the principal-agent relationship is set aside. The transaction
dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of
becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign
1977 which states:
corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is
Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1) Shall conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. 12
be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as provided
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head
in Sections 53 and 54 of this Code ....
office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260
corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned shares including that of nominee) was made for purposes peculiarly germane to the conduct of the
from Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that
which reads: 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
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation not engaged in lower tax rate of 10 %.
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 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
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the
concluded between the Philippines and Japan. 11 Thus: taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to
Article 10 (2) (b).
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. 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 It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident
abroad." 13 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.
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 There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring
10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any tax under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise
imposable by the contracting state concerned should not exceed the 25 % limitation and that said rate known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was not
would apply only if the tax imposed by our laws exceeds the same. In other words, by reason of our perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal from
bilateral negotiations with Japan, we have agreed to have our right to tax limited to a certain extent to final orders, resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen (15)
attain the goals set forth in the Treaty. days counted from the notice of the final order, resolution, award, judgment or decision appealed from ....

Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan been created by virtue of a special law, Republic Act No. 1125. Respondent court is not among those
Treaty of 1980. Said section provides: courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.

(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On dividends received from a Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision
domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that order, ruling, or decision shall become final.
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 Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for
equivalent to 20 % which represents the difference between the regular tax (35 %) on corporations and refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a
the tax (15 %) on dividends as provided in this Section; .... motion for reconsideration which respondent court subsequently denied on November 17, 1986, and
notice of which was received by petitioner on November 26, 1986. Two days later, or on November 28,
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. review with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal was perfected
[Section 24 (b) (1)]. 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.
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 WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986
credit of not less than 20 % of the dividends received. This 20 % represents the difference between the which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni
regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered
the 15 % special rate on dividends received from a domestic corporation. Consequently, petitioner is to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment
entitled to a refund on the transaction in question to be computed as follows: of taxes on dividends received. No costs.

So ordered.
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
===========
21.) G.R. No. 76573 March 7, 1990 because the fifteen percent (15%) tax rate is a concession in the nature of a tax exemption vis-a-vis the
normal rate of thirty five (35%) on corporations. "Petitioner's motion for reconsideration merely reiterates
MARUBENI CORPORATION (formerly MarubenIida, Co., Ltd.) vs. CIR & CTA the same arguments previously raised in its petition and does not raise substantial issues not raised upon
in our decision dated September 14, 1989. Accordingly, since petitioner failed to comply with the
G.R. No. 76573 (Marubeni Corporation vs. Commissioner of Internal Revenue and the Court of Tax
conditions set forth under Section 24 (b)(1) of the National Internal Revenue Code of 1977, we hereby
Appeals).
modify the decision dated September 14, 1989 and rule that petitioner corporation is subject to the twenty
In our decision dated September 14, 1989, we ruled that petitioner was a non-resident foreign corporation five percent(25%) tax rate on dividends pursuant to Article 10(2) of the Philippine-Japan Tax Convention.
subject to Section 24(b) (1) of the National Internal Revenue Code of 1977 which states: The Commissioner of Internal Revenue is hereby ordered to re-compute the tax due from Petitioner
Corporation using the correct tax base and rate.
"Tax on foreign corporations.
Very truly yours,
(1) Nonresident foreign corporations
(Sgd.) JULIETA Y. CARREON
. . . (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 the dividends provided in this section; . . . .""Based on this
finding, we reversed the decision of respondent Court of Tax Appeals dated February 12, 1986 which
affirmed the denial by respondent Commissioner of Internal Revenue of petitioner's claim for refund. We
thus ordered the Commissioner of Internal Revenue to refund or grant as tax credit in favor of petitioner
the amount of P144,452.40."On October 5, 1989, the Solicitor General, representing the public
respondent, filed a motion for reconsideration stating that although we correctly ruled that petitioner is a
non-resident foreign corporation still petitioner could not avail itself of the preferential tax rate of 15%
under said Section 24(b)(1) because it failed to comply with the requisites set forth thereunder. "On
October 9, 1989, petitioner similarly filed its motion for reconsideration remaining steadfast to its position
that it is a resident foreign corporation subject only to the ten percent (10%) final intercorporate dividend
tax. "We grant the motion for reconsideration filed by the Solicitor General. "Section 24(b)(1) is explicit on
the conditions for the availment of the preferential fifteen percent (15%) tax rate. Under said provision,
petitioner must show that Japan grants a tax credit to Marubeni, taxes deemed to have been paid in the
Philippines equivalent to at least twenty percent (20%) against the tax due from Marubeni. aisa dc
"Noteworthy is the recent case of Commissioner of Internal Revenue vs. Procter and Gamble PMC (G.R.
No. 66835, April15, 1988, 160 SCRA 560). In that case we denied Procter and Gamble's claim for refund
for its parent company in the United States since it failed to meet the following conditions necessary for
the availment of the preferential fifteen percent(15%) tax namely: (1) to show the actual amount credited
by the U.S. Government against the income tax due from PMC-USA on the dividends received from
private respondent; (2) to present the income tax return of its mother company for1975 when the dividends
were received; (3) to submit any authenticated document showing that the US Government credited 20%
of the tax deemed paid in the Philippines. "In the case at bar, petitioner similarly failed to comply with the
requisites set forth under Section 24(b)(1). Petitioner reasons that it cannot furnish the Commissioner of
Internal Revenue with the confidential income tax return of Marubeni Japan since such a requirement is
beyond the power of Philippine taxation laws. (Rollo, p. 238)."Such reasoning finds no merit. Section
24(b)(i) of the National Internal Revenue Code of 1977 is clear and explicit on the conditions for the
availment of the preferential fifteen percent (15%) tax rate. Normally the Philippines imposes a higher
thirty five percent (35%) tax rate on corporations. But since the Philippines seeks to lessen the impact of
double taxation between countries, we impose only the lower tax rate of fifteen percent (15%) on
dividends subject to the condition that the country in which the non-resident foreign corporation is
domiciled allows a tax credit of twenty percent (20%). Such prerequisite must be strictly complied with
22.) G.R. No. 215427 December 10, 2014 petitioner from the enumeration of government-owned or controlled corporations (GOCCs) exempted
from liability for corporate income tax.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF
INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by petitioner. Its fallo
the Bureau of Internal Revenue, and JOHN DOE and JANE DOE, who are Promulgated: persons reads:
acting for, in behalf or under the authority of respondent
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section
DECISION 27(c) of the National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and
Gaming Corporation from the enumeration of government-owned and controlled corporations exempted
PERALTA, J.: from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar
as it subjects PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and
Code of 1997, as amended by Republic Act No. 9337.
Gaming Corporation (PAGCOR) on September 13, 2013 in the case entitled Philippine Amusement and
Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et al., 1 which was promulgated on No costs.
March 15, 2011. The Motion for Clarification essentially prays for the clarification of our Decision in the
aforesaid case, as well the issuance of a Temporary Restraining Order and/or Writ of Preliminary SO ORDERED.7
Injunction against the Bureau of Internal Revenue (BIR), their employees, agents and any other persons
or entities acting or claiming any right on BIRs behalf, in the implementation of BIR Revenue Both petitioner and respondent filed their respective motions for partial reconsideration, but the samewere
Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013. denied by this Court in a Resolution8 dated May 31, 2011.

At the onset, it bears stressing that while the instant motion was denominated as a "Motion for Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March
Clarification," in the session of the Court En Bancheld on November 25, 2014, the members thereof ruled 15, 2011 and the Resolution dated May 31, 2011, which clarifies the "Income Tax and Franchise Tax Due
to treat the same as a new petition for certiorari under Rule 65 of the Rules of Court, given that petitioner from the Philippine Amusement and Gaming Corporation (PAGCOR), its Contractees and Licensees."
essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or excess of Relevant portions thereof state:
jurisdiction in issuing RMC No. 33-2013. Consequently, a new docket number has been assigned thereto,
II. INCOME TAX
while petitioner has been ordered to pay the appropriate docket fees pursuant to the Resolution dated
November 25,2014, the pertinent portion of which reads: Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is no
longer exempt from corporate income tax as it has been effectively omitted from the list of government-
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et
owned or controlled corporations (GOCCs) that are exempt from income tax. Accordingly, PAGCORs
al.). The Court Resolved to
income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or or amusement places, gaming pools, and other related operations, are subject to corporate income tax
Preliminary Injunction Application dated September 6, 2013 filed by PAGCOR; under the NIRC, as amended. This includes, among others:

(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to a) Income from its casino operations;
payment of the appropriate docket fees; and
b) Income from dollar pit operations;
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five
c) Income from regular bingo operations; and
(5) days from notice hereof. Brion, J., no part and on leave. Perlas-Bernabe, J., on official leave.
d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided,
Considering that the parties havefiled their respective pleadings relative to the instant petition, and the
however, that the agents commission income shall be subject to regular income tax, and consequently,
appropriate docket fees have been duly paid by petitioner, this Court considers the instant petition
to withholding tax under existing regulations.
submitted for resolution.
Income from "other related operations" includes, butis not limited to:
The facts are briefly summarized as follows:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition
(With Prayer for the Issuance of a Temporary Restraining Order and/or Preliminary Injunction) seeking b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to
the declaration of nullity of Section 12 of Republic Act (R.A.)No. 93373 insofar as it amends Section operate issued to private operators;
27(C)4 of R.A. No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding
c) Income from private internet casino gaming, internet sports betting and private mobile gaming constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs
operations; exempted from corporate income tax.

d) Income from private poker operations; For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCORs income is classified into
two: (1) income from its operations conducted under its Franchise, pursuant to Section 13(2) (b) thereof
e) Income from junket operations; (income from gaming operations); and (2) income from its operation of necessary and related services
under Section 14(5) thereof (income from other related services). In RMC No. 33-2013, respondent further
f) Income from SM demo units; and
classified the aforesaid income as follows:
g) Income from other necessary and related services, shows and entertainment.
1. PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other
PAGCORs other income that is not connected with the foregoing operations are likewise subject to similar recreation or amusement places, gaming pools, includes, among others:
corporate income tax under the NIRC, as amended.
(a) Income from its casino operations;
PAGCORs contractees and licensees are entities duly authorized and licensed by PAGCOR to perform
(b) Income from dollar pit operations;
gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools.
These contractees and licensees are subject to income tax under the NIRC, as amended. (c) Income from regular bingo operations; and
III. FRANCHISE TAX (d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided,
however, that the agents commission income shall be subject to regular income tax, and consequently,
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent
to withholding tax under existing regulations.
(5%) of the gross revenue or earnings it derives from its operations and licensing of gambling casinos,
gaming clubs and other similar recreation or amusement places, gaming pools, and other related 2. Income from "other related operations"includes, but is not limited to:
operations as described above.
(a) Income from licensed private casinos covered by authorities to operate issued to private operators;
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax
treatment of its income from gaming operations and other related operations under RMC No. 33-2013. (b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to
The request was, however, denied by the BIR Commissioner. operate issued to private operators;

On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, (c) Income from private internet casino gaming, internet sports betting and private mobile gaming
recorded in the Book of Entries of Judgment.10 operations;

Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous (d) Income from private poker operations;
interpretation and application of the aforesaid Decision, and seeking clarification with respect to the
following: (e) Income from junket operations;

1. Whether PAGCORs tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits (f) Income from SM demo units; and
gaming income, pursuant to its Charter P.D. 1869, as amended by R.A. 9487, is deemed repealed or
(g) Income from other necessary and related services, shows and entertainment. 12
amended by Section 1 (c) of R.A. 9337.
After a thorough study of the arguments and points raised by the parties, and in accordance with our
2. If it is deemed repealed or amended, whether PAGCORs gaming income is subject to both 5%
Decision dated March 15, 2011, we sustain petitioners contention that its income from gaming operations
franchise tax and income tax.
is subject only to five percent (5%) franchise tax under P.D. 1869, as amended, while its income from
3. Whether PAGCORs income from operation of related services is subject to both income tax and 5% other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as
franchise tax. R.A. No. 9337. This is demonstrable.

4. Whether PAGCORs tax privilege of paying 5% franchise tax inures to the benefit of third parties with First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation
contractual relationship with PAGCOR in connection with the operation of casinos. 11 of related services. Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424
clearly pertains only to petitionersincome from operation of related services. Such income tax exemption
In our Decision dated March 15, 2011, we have already declared petitioners income tax liability in view could not have been applicable to petitioners income from gaming operations as it is already exempt
of the withdrawal of its tax privilege under R.A. No. 9337. However, we made no distinction as to which therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions.
income is subject to corporate income tax, considering that the issue raised therein was only the
xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as Why a special law prevails over a general law has been put by the Court as follows: x x x x
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way x x x The Legislature consider and make provision for all the circumstances of the particular case. The
to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or Legislature having specially considered all of the facts and circumstances in the particular case in granting
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and a special charter, it will not be considered that the Legislature, by adopting a general law containing
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or provisions repugnant to the provisions of the charter, and without making any mention of its intention to
assessments of any kind, nature or description, levied, established or collected by any municipal, amend or modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook
provincial, or national government authority.13 County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.) 18

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved Where a general law is enacted to regulate an industry, it is common for individual franchises
is subject to tax. This is the most sound and logical interpretation because petitioner could not have been subsequently granted to restate the rights and privileges already mentioned in the general law, or to
exempted from paying taxes which it was not liable to pay in the first place. This is clear from the wordings amend the later law, as may be needed, to conform to the general law.19 However, if no provision or
of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or earnings amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the
derived by petitioner from its operation under the Franchise in lieuof all taxes of any kind or form, as well same is the intent of the lawmakers, for repeal of laws by implication is not favored. 20
as fees, charges or leviesof whatever nature, which necessarily include corporate income tax.
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioners tax
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its exemption of its gaming income, then Section 13(2)(a) of P.D. 1869 should have been amended expressly
income from gaming operations as the same is already exempted from all taxes of any kind or form, in R.A. No. 9487, or the same, at the very least, should have been mentioned in the repealing clause of
income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) R.A. No. 9337.21 However, the repealing clause never mentioned petitioners Charter as one of the laws
franchise tax. The exemption attached to the income from gaming operations exists independently from being repealed. On the other hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395
the enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under Section 24 (a) (b)
deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) of R.A. No. 9337, to wit:
than when it was not granted at all in the first place.
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the persons and/or transactions affected herein are made subject to the value-added tax subject to the
Committee on Ways and Means dated October 27, 1997, the exemption of petitioner from the payment provisions of Title IV of the National Internal Revenue Code of 1997, as amended:
of corporate income tax was due to the acquiescence of the Committee on Ways and Means to the
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation
request of petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd for
(NPC);
petitioner to seek exemption from income tax on its gaming operations when under its Charter, it is already
exempted from paying the same. (B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated
power by generation companies; and
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable
construction is possible, the laws must be reconciled in that manner. 14 (C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof
which are contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays
modified accordingly.22
down the taxes imposable upon petitioner, as follows: (1) a five percent (5%) franchise tax of the gross
revenues or earnings derived from its operations conducted under the Franchise, which shall be due and When petitioners franchise was extended on June 20, 2007 without revoking or withdrawing itstax
payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, exemption, it effectively reinstated and reiterated all of petitioners rights, privileges and authority granted
established or collected by any municipal, provincial or national government authority; 15 (2) income tax under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and privileges
for income realized from other necessary and related services, shows and entertainment of that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person.
petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. Thus, the extension of petitioners franchise under the sameterms and conditions means a continuation
No. 8424, petitioners tax liability on income from other related services was merely reinstated. of its tax exempt status with respect to its income from gaming operations. Moreover, all laws, rules and
regulations, or parts thereof, which are inconsistent with the provisions ofP.D. 1869, as amended, a
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity
special law, are considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487,
oroperation. There is no inconsistency between the statutes; and in fact, they complement each other.
thus:
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and
tax treatment of petitioners income prevails over R.A. No. 9337, which is a general law. It is a canon of
regulations and other issuances, or parts thereof, which are inconsistent with the provisions of this Act,
statutory construction that a special law prevails over a general law regardless of their dates of passage
are hereby repealed, amended and modified.
and the special is to be considered as remaining an exception to the general. 17 The rationale is:
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt respondent, which should be immediately struck down, lest grave injustice results. More, it is settled that
such reasonable and beneficial construction which will render the provision thereof operative and in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the
effective, as well as harmonious with each other.23 basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the
basic law.
Given that petitioners Charter is notdeemed repealed or amended by R.A. No. 9337, petitioners income
derived from gaming operations is subject only to the five percent (5%)franchise tax, in accordance with In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No.
P.D. 1869, as amended. With respect to petitioners income from operation of other related services, the 8424, by excluding petitioner from the enumeration of GOCCs exempted from corporate income tax, is
same is subject to income tax only. The five percent (5%) franchise tax finds no application with respect valid and constitutional. In addition, we hold that:
to petitioners income from other related services, inview of the express provision of Section 14(5) of P.D.
1869, as amended, to wit: 1. Petitioners tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect
to its income from gaming operations, pursuant to P.D. 1869, as amended, is not repealed or amended
Section 14. Other Conditions. by Section l(c) ofR.A. No. 9337;

xxxx 2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and

(5) Operation of related services. The Corporation is authorized to operate such necessary and related 3. Petitioner's income from other related services is subject to corporate income tax only.
services, shows and entertainment. Any income that may be realized from these related services shall
not be included as part of the income of the Corporation for the purpose of applying the franchise tax, but In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the
the same shall be considered as a separate income of the Corporation and shall be subject to income implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner's income
tax.24 derived from its gaming operations; and (2) franchise tax on petitioner's income from other related
services.
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other
related services without basis therefor. WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and
desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on
For proper guidance, the first classification of PAGCORs income under RMC No. 33-2013 (i.e., income petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income from
from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or other related services.
amusement places, gambling pools) should be interpreted in relation to Section 13(2) of P.D. 1869, which
pertains to the income derived from issuing and/or granting the license to operate casinos to PAGCORs SO ORDERED.
contractees and licensees, as well as earnings derived by PAGCOR from its own operations under the
Franchise. On the other hand, the second classification of PAGCORs income under RMC No. 33-2013
(i.e., income from other related operations) should be interpreted in relation to Section 14(5) of P.D. 1869,
which pertains to income received by PAGCOR from its contractees and licensees in the latters operation
of casinos, as well as PAGCORs own income from operating necessary and related services, shows and
entertainment.

As to whether petitioners tax privilege of paying five percent (5%) franchise tax inures to the benefit of
third parties with contractual relationship with petitioner in connection with the operation of casinos, we
find no reason to rule upon the same. The resolution of the instant petition is limited to clarifying the tax
treatment of petitioners income vis--visour Decision dated March 15, 2011. This Decision is not meant
to expand our original Decision by delving into new issues involving petitioners contractees and
licensees. For one, the latter are not parties to the instant case, and may not therefore stand to benefit or
bear the consequences of this resolution. For another, to answer the fourth issue raised by petitioner
relative to its contractees and licensees would be downright premature and iniquitous as the same would
effectively countenance sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion
amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming
operations and other related services to corporate income tax and five percent (5%) franchise
tax.1wphi1 This unduly expands our Decision dated March 15, 2011 without due process since the
imposition creates additional burden upon petitioner. Such act constitutes an overreach on the part of the
23.) G.R. No. 180529 November 13, 2013 On April 30, 2004, the Bank of Commerce (BOC) filed a Petition for Review, 7 assigned to the CTA 2nd
Division, praying that it be held not liable for the subject Documentary Stamp Taxes (DST).
COMMISSIONER OF INTERNAL REVENUE vs. BANK OF COMMERCE.
As also stipulated by the parties, the issues before the CTA 2nd Division were:
DECISION
1. Whether [BOC] can be held liable for [TRB]s alleged deficiency [DST] liability on [its SSD] Accounts
LEONARDO-DE CASTRO, J.: for taxable year 1999 in the amount of P41,442,887.51, inclusive of penalties.
This is a Petition (or Review on Certiorari 1 filed by the Commissioner of Internal Revenue (CIR) wherein 2. Whether TRBs [SSD] Accounts for taxable year 1999 is subject to [DST]. 8
the September 17 2007 Amended Decision2 and November 15 2007 Resolution3 of the Court of Tax
Appeals En Bane (CTA) in C.T.A. EB No. 259, are sought to be nullified and set aside. 4 In support of the first issue, BOC called the attention of the CTA 2nd Division to the fact that as stated in
Article III of the Purchase and Sale Agreement, it and Traders Royal Bank (TRB) continued to exist as
The facts of the case, as stipulated by the parties are as follows: separate corporations with distinct corporate personalities. BOC emphasized that there was no merger
between it and TRB as it only acquired certain assets of TRB in return for its assumption of some of TRBs
1. [Bank of Commerce (BOC)] is a banking corporation duly organized and existing under and by virtue
liabilities.9
of the laws of the Republic of the Philippines, with principal office address at 12th Floor, Bankers Centre
Building, 6764 Ayala Avenue, Makati City. Ruling of the CTA 2nd Division
2. Respondent is the Commissioner of the Bureau of Internal Revenue [(CIR)], duly appointed to perform In a Decision10 dated August 31, 2006, the CTA 2nd Division dismissed the petition for lack of merit. It
the duties of his office, including, among others, the power to decide, cancel and abate tax liabilities held that the Special Savings Deposit (SSD) account in issue is subject to DST because its nature and
pursuant to Section 244(B) of the Tax Code, as amended by Republic Act ("RA" No.) 8424, otherwise substance are akin to that of a certificate of deposit bearing interest, which under the then Section 180 of
known as the Tax Reform Act ("TRA") of 1997. the National Internal Revenue Code (NIRC), is subject to DST.
3. On November 9, 2001, [BOC] and Traders Royal Bank (TRB) executed a Purchase and Sale As for BOCs liability, the CTA 2nd Division said that since the issue of non-merger between BOC and
Agreement5whereby it stipulated the TRBs desire to sell and the BOCs desire to purchase identified TRB was not raised in the administrative level, it could not be raised for the first time on appeal. The CTA
recorded assets of TRB in consideration of BOC assuming identified recorded liabilities. 4. Under the 2nd Division also noted how BOC "actively participated in the proceedings before the administrative body
Purchase and Sale Agreement, BOC and TRB shall continue to exist as separate corporations with without questioning the legitimacy of the proper party in interest."11
distinct corporate personalities.
When its Motion for Reconsideration12 was denied13 on January 8, 2007, BOC filed a Petition for
5. On September 27, 2002, [BOC] received copies of the Formal Letter of Demand and Assessment Review14 before the CTA En Banc, adducing the following grounds:
Notice No. DST-99-00-000049 dated September 11, 2002, addressed to "TRADERS ROYAL BANK (now
Bank of Commerce)", issued by the CIR demanding payment of the amount of P41,467,887.51, as THE HOLDING OF THE HONORABLE SECOND DIVISION THAT [BOC] IS DEEMED TO HAVE
deficiency documentary stamp taxes (DST) on Special Savings Deposit (SSD) account of TRB for taxable ADMITTED THAT IT IS THE PROPER PARTY ASSESSED BY THE [CIR] BECAUSE IT DID NOT RAISE
year 1999. THE ISSUE OF MERGER IN THE LETTER OF PROTEST FILED WITH THE [CIR] IS WITHOUT BASIS
AND VIOLATES ELEMENTARY RULES OF DUE PROCESS.
6. On October 11, 2002, [TRB] filed its protest letter contesting the Formal Letter of Demand and
Assessment Notice No. DST-99-00-000049 dated September 11, 2002, pursuant to Sec. 228 of the Tax THE HONORABLE SECOND DIVISION ERRED IN HOLDING THAT TRBS SSD ACCOUNTS FOR
Code. TAXABLE YEAR 1999 ARE SUBJECT TO [DST] UNDER THEN SECTION 180 OF THE TAX CODE.15

7. On March 31, 2004, [BOC] received the Decision dated March 22, 2004 denying the protest filed by Ruling of the CTA En Banc on BOCs Petition for Review
[TRB] on October 11, 2002. The last two paragraphs of the Decision stated that:
On June 27, 2007, the CTA En Banc affirmed the CTA 2nd Divisions Decision and Resolution, ruling that
"WHEREFORE, in view of all the foregoing, Assessment Notice No. DST-99-00-000049 demanding BOC was liable for the DST on TRBs SSD accounts.16
payment of the amount of P41,467,887.51, as deficiency stamp tax for the taxable year 1999 is hereby
MODIFIED AND/OR REDUCED to P41,442,887.51. Consequently, Traders Royal Bank (now Bank of Citing this Courts decision in International Exchange Bank v. Commissioner of Internal Revenue, 17 the
Commerce) is hereby ordered to pay the above-stated amount, plus interest that have accrued thereon CTA En Banc said that the CTA 2nd Division was correct when it deemed TRBs SSD accounts to be
until the actual date of payment, to the Large Taxpayers Service, B.I.R. National Office Building, Diliman, certificates of deposit bearing interest, subject to DST under Section 180 of the NIRC, as they involved
Quezon City, within thirty (30) days from receipt hereof; otherwise, collection thereof shall be effected deposits, which though may be withdrawn anytime, earned a higher rate of interest when kept in the bank
through the summary remedies provided by law. for a specified number of days.18

This constitutes the Final Decision of this Office on the matter." 6 Proceeding then to what it considered to be the pivotal issue, the CTA En Banc, agreeing with the decision
of the CTA 2nd Division, held that BOC was liable for the DST on the subject SSD accounts. The CTA
En Banc also noted that BOC was inconsistent in its position, for claiming that it was the one that filed the The CTA En Banc also gave weight to BIR Ruling No. 10-200626 dated October 6, 2006 wherein the CIR
protest letter with the BIR, in its Petition for Review before the CTA 2nd Division and Pre-Trial Brief, while expressly recognized the fact that the Purchase and Sale Agreement between BOC and TRB did not
stating that it was TRB that filed the protest letter, in its Joint Stipulation of Facts and Issues. The CTA result in their merger.27Elaborating on this point the CTA En Banc said:
En Banc added that it would not be unfair to hold BOC liable for the subject DST as TRB constituted an
Escrow Fund in the amount of Fifty Million Pesos (P50,000,000.00) to answer for all claims against TRB, By practice, a BIR ruling contains the official written interpretative opinion of the Commissioner of Internal
which are excluded from the Agreement.19 Revenue addressed to a particular taxpayer regarding his taxability over certain matters. Moreover, well-
settled is the rule that the interpretation of an administrative government agency like the BIR, is accorded
Undaunted, BOC filed before the CTA En Banc a Motion for Reconsideration20 of its June 27, 2007 great respect and ordinarily controls the construction of the courts. The reason behind this rule was
Decision, positing the following grounds for reconsideration: explained in Nestle Philippines, Inc. vs. Court of Appeals, in this wise: "The rationale for this rule relates
not only to the emergence of the multifarious needs of a modern or modernizing society and the
I establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates
to the accumulation of experience and growth of specialized capabilities by the administrative agency
There was no merger between [BOC] and [TRB] as already decided by this Honorable Court in a decision
charged with implementing a particular statute.
dated 18 June 2007; hence [BOC] cannot be held liable for the tax liability of [TRB.]
Here, We have no reason to disregard the interpretation made by the Commissioner as it is in accord with
II
the aforementioned Resolution of the First Division.28 (Citation omitted.)
[BOC] could not have raised the issue of non-merger of [BOC] and [TRB] in the proceedings before the
With the reversal of the CTA En Banc s June 27, 2007 Decision, the CIR filed a Motion for
[CIR] because it was never a party to the proceedings before the [CIR]. Contrary to the Courts findings,
Reconsideration29praying that BOC be held liable for the deficiency DST of TRB on its SSD accounts for
the issue of non-merger is no longer an issue but a fact stipulated by both parties.
taxable year 1999. In support of its motion, the CIR presented the following arguments:
III
[BOC] is estopped from raising the issue that it is not the party held liable for Trader[s] Royal Bank (TRB)s
The [CIR]s decision holding [BOC] liable for TRBs tax liability is void since [BOC] was not a party to the deficiency DST assessment because it was not a party to the proceeding before [the] Bureau of Internal
proceedings before the [CIR].21 Revenue (BIR).30

Ruling of the CTA En Banc on BOCs Motion for Reconsideration Issues not raised in the administrative level cannot be raised for the first time on appeal. 31

On September 17, 2007, the CTA En Banc, in its Amended Decision, reversed itself and ruled that BOC The deficiency Assessment of TRB can be enforced and collected against [BOC]. 32
could not be held liable for the deficiency DST of TRB on its SSD accounts. The dispositive portion of the
The Honorable Court En Banc erred in considering BIR Ruling No. 10-2006 as basis to justify its
CTA En Banc s Amended Decision reads:
conclusion.33
WHEREFORE, [BOC]s Motion for Reconsideration is hereby GRANTED. The Decision in the case at bar
The Honorable Court En Banc has no sufficient justification for not considering the Escrow fund in its
promulgated on June 27, 2007 is REVERSED. The appealed Decision in C.T.A. Case No. 6975 is SET
Amended Decision.34
ASIDE and a new one is hereby ENTERED finding petitioner Bank of Commerce NOT LIABLE for the
amount of P41,442,887.51 representing the assessment of deficiency Documentary Stamp Tax on the On November 15, 2007, the CTA En Banc denied the motion for lack of merit. The CTA En Banc said
Special Savings Deposit accounts of Traders Royal Bank for taxable year 1999. 22 that the rule that no issue may be raised for the first time on appeal is not a hard and fast rule as
"jurisprudence declares that the appellate court is clothed with ample authority to review matters, even if
In its Amended Decision, the CTA En Banc said that while it did not make a categorical ruling in its June
they are not assigned as errors in their appeal, if it finds that their consideration is necessary in arriving
27, 2007 Decision on the issue of merger between BOC and TRB, the CTA 1st Division did in its June
at a just decision of the case." Thus, in the interest of justice, the CTA En Banc found it necessary to
18, 2007 Resolution23in C.T.A. Case No. 6392, entitled Traders Royal Bank v. Commissioner of Internal
consider and resolve issues, even though not previously raised in the administrative level, if it is necessary
Revenue. The Traders Royal Bank case, just like the case at bar, involved a deficiency DST assessment
for the complete adjudication of the rights and obligations of the parties and it falls within the issues they
against TRB on its SSD accounts, albeit for taxable years 1996 and 1997. When the CIR attempted to
already identified.35 The CTA En Banc also reiterated its ruling in its Amended Decision, that BOC could
implement a writ of execution against BOC, which was not a party to the case, by simply inserting its
not be held liable for the deficiency DST on the SSD accounts of TRB, in consonance with the Resolution
name beside TRBs in the motion for execution, BOC filed a Motion to Quash (By Way of Special
of the CTA 1st Division in the Traders Royal Bank case; and BIR Ruling No. 10-2006, which has not been
Appearance) with the CTA 1st Division,24 which the CTA 1st Division granted in a Resolution on June 18,
shown to have been revoked or nullified by the CIR.36
2007, primarily on the ground that there was no merger between BOC and TRB.
With the foregoing disquisition rendering the issue on the Escrow Fund moot, the CTA En Banc found no
With the foregoing ruling, the CTA En Banc declared that BOC could not be held liable for the deficiency
more reason to discuss it.37
DST assessed on TRBs SSD accounts for taxable year 1999 in the interest of substantial justice and to
be consistent with the CTA 1st Divisions Resolution in the Traders Royal Bank case. 25
Unsuccessful in its Motion for Reconsideration, the CIR is now before this Court, praying for the Unlike the Decision of the CTA 2nd Division in this case, which focused on the taxability of the SSD
reinstatement of the CTA 2nd Divisions August 31, 2006 Decision, which found BOC liable for the subject accounts, the CTA 1st Divisions Resolution in Traders Royal Bank, explicitly addressed the issue of
DST. The CIR posits the following grounds in its Petition for Review: merge between BOC and TRB. The CTA 1st Division, relying on the provisions in both the Purchase and
Sale Agreement and the Tax Code, determined that the agreement did not result in a merger, to wit:
I.
In the Motion, [BOC] moves to have the Writ of Execution dated March 09, 2007 issued against it quashed
THE DEFICIENCY ASSESSMENT OF TRADERS ROYAL BANK (TRB) CAN BE ENFORCED AND on the ground that it is a separate entity from [TRB]; that there was no merger or consolidation between
COLLECTED AGAINST RESPONDENT BANK OF COMMERCE (BOC) BECAUSE THE LATTER the two entities. Further, [BOC] claims that the deficiency [DST] amounting to P27,698,562.92 for the
ASSUMED THE OBLIGATIONS AND LIABILITIES OF TRB PURSUANT TO THE PURCHASE AND taxable years 1996 and 1997 of [TRB] was not one of the liabilities assumed by [BOC] in the Purchase
SALE AGREEMENT EXECUTED BETWEEN THEM AND THE APPLICABLE LAW ON MERGER OF and Sale Agreement.
CORPORATIONS (SECTION 80 OF THE CORPORATION CODE).
After carefully evaluating the records, the [CTA 1st Division] agrees with [BOC] for the following reasons:
II.
First, a close reading of the Purchase and Sale Agreement shows the following self-explanatory
THE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN REVERSING ITS PREVIOUS provisions:
DECISION WHICH AFFIRMED THE ASSESSMENT AND ENFORCEMENT OF DEFICIENCY TAXES
BY PETITIONER AGAINST RESPONDENT, CONTRARY TO LAW AND JURISPRUDENCE.38 a) Items in litigation, both actual and prospective, against [TRB] are excluded from the liabilities to be
assumed by the Bank of Commerce (Article II, paragraph 2); and
In response, BOC presented in its Comment,39 the following grounds in support of its prayer that the CIRs
petition be denied: b) The Bank of Commerce and Traders Royal Bank shall continue to exist as separate corporations with
distinct corporate personalities (Article III, paragraph 1).
I. THE PETITION FOR REVIEW DID NOT RAISE QUESTIONS OF LAW.
Second, aside from the foregoing, the Purchase and Sale Agreement does not contain any provision that
II. THE COURT OF TAX APPEALS EN BANC WAS CORRECT AND DID NOT COMMIT GRAVE ABUSE the [BOC] acquired the identified assets of [TRB] solely in exchange for the latters stocks. Merger is
OF DISCRETION WHEN IT FOUND RESPONDENT NOT LIABLE FOR THE SUBJECT TAX BECAUSE: defined under Section 40 (C)(6)(b) of the Tax Code as follows:
A. THERE WAS NO MERGER CREATED BETWEEN THE RESPONDENT BANK OF COMMERCE AND "b) The term "merger" or "consolidation", when used in this Section, shall be understood to mean: (i) the
TRADERS ROYAL BANK (TRB). ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, [t]hat for a transaction to be regarded as a
B. THE PETITIONER ITSELF RULED AND RENDERED AN OPINION UNDER BIR REVENUE RULING
merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business
NO. 10-2006 THAT THERE WAS NO MERGER BETWEEN THE RESPONDENT AND TRB.
purpose and not solely for the purpose of escaping the burden of taxation: x x x."
III. RESPONDENT IS NOT ESTOPPED FROM RAISING THE ISSUE OF NON-MERGER BETWEEN
Since the purchase and sale of identified assets between the two companies does not constitute a merger
RESPONDENT AND TRB BECAUSE IT WAS NOT A PARTY TO THE PROCEEDINGS BEFORE THE
under the foregoing definition, the Bank of Commerce is considered an entity separate from petitioner.
PETITIONER.
Thus, it cannot be held liable for the payment of the deficiency DST assessed against
IV. THE PETITIONERS DECISION HOLDING RESPONDENT LIABLE FOR TRBS TAX LIABILITY IS petitioner.41 (Citation omitted.)
VOID SINCE RESPONDENT WAS NOT A PARTY TO [THE] PROCEEDINGS BEFORE THE
Thus, when the CTA En Banc took into consideration the above ruling in its Amended Decision, it
PETITIONER.40
necessarily affirmed the findings of the CTA 1st Division and found them to be correct. This Court likewise
This Courts Ruling finds the foregoing ruling to be correct. The CTA 1st Division was spot on when it interpreted the Purchase
and Sale Agreement to be just that and not a merger.
The petition is denied for lack of merit.
The Purchase and Sale Agreement, the document that is supposed to have tied BOC and TRB together,
As the CTA En Banc stated in its Amended Decision, the issue boils down to whether or not BOC is liable was replete with provisions that clearly stated the intent of the parties and the purpose of its execution,
for the deficiency DST of TRB for taxable year 1999. viz:
In resolving this issue, the CTA En Banc relied on 1) the Resolution in the Traders Royal Bank case, 1. Article I of the Purchase and Sale Agreement set the terms of the assets sold to BOC, while Article II
wherein the CTA 1st Division made a categorical pronouncement on the issue of merger based on the was about the consideration for those assets. Moreover, it was explicitly stated that liabilities not included
evidence at its disposal, which included the Purchase and Sale Agreement; and 2) the CIRs own in the Consolidated Statement of Condition were excluded from the liabilities BOC was to assume, to wit:
administrative ruling on the issue of merger in BIR Ruling No. 10-2006 dated October 6, 2006.
ARTICLE II CONSIDERATION: ASSUMPTION OF LIABILITIES
In consideration of the sale of identified recorded assets and properties covered by this Agreement, [BOC] corporation but it is also necessary that such acquisition is solely for stock of the absorbing corporation.
shall assume identified recorded TRBs liabilities including booked contingent liabilities as listed and Stated differently, the acquiring corporation will issue a block of shares equal to the net asset value
referred to in its Consolidated Statement of Condition as of August 31, 2001, in the total amount of transferred, which stocks are in turn distributed to the stockholders of the absorbed corporation in
PESOS: TEN BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED THIRTY-SIX THOUSAND proportion to the respective share.
(P10,401,436,000.00), provided that the liabilities so assumed shall not include:
After a careful perusal of the facts presented as well as the details of the instant case, it is observed by
xxxx this Office that the transaction was purely concerning acquisition and assumption by [BOC] of the
recorded liabilities of TRB. The [Purchase and Sale] Agreement did not mention with respect to the
2. Items in litigation, both actual and prospective, against TRB which include but are not limited to the issuance of shares of stock of [BOC] in favor of the stockholders of TRB. Such transaction is absent of
following: the requisite of a stock transfer and same belies the existence of a merger. As such, this Office considers
the Agreement between [BOC] and TRB as one of "a sale of assets with an assumption of liabilities rather
xxxx
than merger."
2.3 Other liabilities not included in said Consolidated Statement of Condition.42 (Emphases supplied.)
xxxx
2. Article III of the Purchase and Sale Agreement enumerated in no uncertain terms the effects and
In the case at bar, [BOC] purchased identified recorded assets and properties of TRB.1wphi1 In
consequences of such agreement as follows:
consideration thereof, [BOC] assumed certain liabilities of TRB which were identified in the Consolidated
ARTICLE III EFFECTS AND CONSEQUENCES Statement of Condition as of August 31, 2001. In this wise, the liabilities of TRB assumed by [BOC] were
limited only to those already identified as of August 31, 2001 amounting in all to Ten Billion Four Hundred
The effectivity of this Agreement shall have the following effects and consequences: One Million Four Hundred Thirty-Six Thousand Pesos (P10,401, 436,000.00) x x x. More so, liabilities
that were not assumed by [BOC] should not be enforced against it. x x x. (Emphasis supplied.)
1. [BOC] and TRB shall continue to exist as separate corporations with distinct corporate personalities;
xxxx
2. With the transfer of its branching licenses to [BOC] and upon surrender of its commercial banking
license to BSP, TRB shall exist as an ordinary corporation placed outside the supervisory jurisdiction of 2. Much have been said that the transaction between TRB and [BOC] is not a merger within the
BSP. To this end, TRB shall cause the amendment of its articles and by-laws to delete the terms "bank" contemplation of Section 40(C)(b) of the Tax Code of 1997. To reiterate, this Office has ruled in the
and "banking" from its corporate name and purpose. foregoing discussion that the transaction is one of sale of assets with assumption of identified recorded
liabilities of TRB. As such, the liabilities assumed by [BOC] amounted only to P10,401,436,000.00 with
3. There shall be no employer-employee relationship between [BOC] and the personnel and officers of
some enumerated exclusion in the Agreeement. x x x. 46
TRB.43 (Emphases supplied.)
Clearly, the CIR, in BIR Ruling No. 10-2006, ruled on the issue of merger without taking into consideration
Moreover, the second whereas clause, which served as the premise for the subsequent terms in the
TRBs pending tax deficiencies. The ruling was based on the Purchase and Sale Agreement, factual
agreement, stated that the sale of TRBs assets to BOC were in consideration of BOCs assumption of
evidence on the status of both companies, and the Tax Code provision on merger. The CIRs knowledge
some of TRBs liabilities, viz:
then of TRBs tax deficiencies would not be material as to affect the CIRs ruling. The resolution of the
WHEREAS, TRB desires to sell and [BOC] desires to purchase identified recorded assets of TRB in issue on merger depended on the agreement between TRB and BOC, as detailed in the Purchase and
consideration of [BOC] assuming identified recorded liabilities of TRB x x x. 44 Sale Agreement, and not contingent on TRBs tax liabilities. It is worthy to note that in the Joint Stipulation
of Facts and Issues submitted by the parties, it was explicitly stated that both BOC and TRB continued to
The clear terms of the above agreement did not escape the CIR itself when it issued BIR Ruling No. 10- exist as separate corporations with distinct corporate personalities, despite the effectivity of the Purchase
2006, wherein it was concluded that the Purchase and Sale Agreement did not result in a merger between and Sale Agreement.47
BOC and TRB. In this petition however, the CIR insists that BIR Ruling No. 10-2006 cannot be used as a
basis for the CTA En Bancs Amended Decision, due to BOCs failure, at the time it requested for such Considering the foregoing, this Court finds no reason to reverse the CTA En Bancs Amended Decision.
ruling, to inform the CIR of TRBs deficiency DST assessments for taxable years 1996, 1997, and 1999. 45 In reconsidering its June 27, 2007 Decision, the CTA En Banc not only took into account the CTA 1st
Divisions ruling in Traders Royal Bank, which, save for the facts that BOC was not made a party to the
The CIRs contention is untenable. case, and the deficiency DST assessed were for taxable years 1996 and 1997, is almost identical to the
case herein; but more importantly, the CIRs very own ruling on the issue of merger between BOC
A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on the issue of merger without any
reference to TRBs subject tax liabilities. The relevant portions of such ruling are quoted below: WHEREFORE, the petition is hereby DENIED.

One distinctive characteristic for a merger to exist under the second part of [Section 40(C)(b) of the 1997 SO ORDERED.
NIRC] is that, it is not enough for a corporation to acquire all or substantially all the properties of another

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