Beruflich Dokumente
Kultur Dokumente
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her five children. In 1948,
Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo T.
Oa the surviving spouse was appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On
April 14, 1949, the administrator submitted the project of partition, which was approved by the Court on May 16, 1949 (See
Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were still minors when the
project of partition was approved, Lorenzo T. Oa, their father and administrator of the estate, filed a petition in Civil Case
No. 9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the
Court appointed him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-half (1/2) interest in
ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the
death of the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24;
Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the administrator thereof, in the
obligation of P94,973.00, consisting of loans contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or
see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end balances:
Year Investment Land Building
Account Account Account
1949 P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oa where the corresponding shares of the petitioners in
the net income for the year are also known. Every year, petitioners returned for income tax purposes their shares in the net
income derived from said properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-
26). However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an
unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section
84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as
corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the ruling of respondent that they have
formed an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR
rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square meters located
at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their
residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens
titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga
Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of
them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four
petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of
which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the
accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in
addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of
sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant
appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they
allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that
the power to tax involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would
obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit
was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated
sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad presupone
necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin ela; y por razon del fin
objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener en su integridad
la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho positive se
ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion aparte del origen de fuente de que
surgen, no siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to
purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is fundamentally similar to the De Leon case.
Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued
dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns
their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of
co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31,
1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own properties which produce income
should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at
all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp.
77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used the
inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and building,
entrusted the administration of the building to an administrator and divided equally the net income, and from Evangelista vs. Collector of
Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property which they leased to various tenants
and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and
whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.
SO ORDERED.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.
Concepcion, Jr., is on leave.
G.R. No. 195909 : September 26, 2012
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ST. LUKE'S MEDICAL CENTER, INC.,Respondent.
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.
DECISION
CARPIO, J.:
The Case
These are consolidated1rll petitions for review on certiorari under Rule Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(8) of the National Internal Revenue Code. However, it is not liable
for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts
of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of
Court.rllbrr
SO ORDERED.
G.R. No. 203514, February 13, 2017
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ST. LUKE'S MEDICAL CENTER, INC., Respondent.
DECISION
DEL CASTILLO, J.:
The doctrine of stare decisis dictates that "absent any powerful countervailing considerations, like cases ought to be decided alike." 1
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the May 9, 2012 Decision 3 and the September 17, 2012
Resolution4 of the Court of Tax Appeals (CTA) in CTA EB Case No. 716.
Factual Antecedents
On December 14, 2007, respondent St. Luke's Medical Center, Inc. (SLIVIC) received from the Large Taxpayers Service-Documents
Processing and Quality Assurance Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-
0000965 and QA-07-000097,6 assessing respondent SLMC deficiency income tax under Section 27(B)7 of the 1997 National Internal Revenue
Code (NIRC), as amended, for taxable year 2005 in the amount of P78,617,434.54 and for taxable year 2006 in the amount of
P57,119,867.33.
On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an administrative protest 8 assailing the
assessments. SLMC claimed that as a non-stock, non-profit charitable and social welfare organization under Section 30(E) and (G) 9 of the
1997 NIRC, as amended, it is exempt from paying income tax.
On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed Assessment10 dated April 9, 2008 increasing the deficiency
income for the taxable year 2005 tax to P82,419,522.21 and for the taxable year 2006 to P60,259,885.94, computed as
follows:ChanRoblesVirtualawlibrary
For Taxable Year 2005:chanRoblesvirtualLawlibrary
ASSESSMENT NO. QA-07-000096
PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees P3,623,511,616.00
Less: Cost of Sales/Services 2,643,049,769.00
Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883.00
Net Income Subject to Tax 499,194,964.00
X Tax Rate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments
25% Surcharge 12,479,874.10
20% Interest Per Annum (4/15/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
Total Amount Due P82,419,522.21
For Taxable Year 2006:chanRoblesvirtualLawlibrary
ASSESSMENT NO. QA-07-000097
PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees P3,815,922,240.00
Less: Cost of Sales/Service 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
X Tax Rate 10%
Tax Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due P60,259,885.9411
Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed as CTA Case No. 7789.
On August 26, 2010, the CTA Division rendered a Decision 13 finding SLMC not liable for deficiency income tax under Section 27(B) of the
1997 NIRC, as amended, since it is exempt from paying income tax under Section 30(E) and (G) of the same Code.
Thus:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, Audit Results/Assessment Notice Nos. QA-
07-000096 and QA-07-000097, assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and 2006, respectively, are
hereby CANCELLED and SET ASIDE.
SO ORDERED.14chanroblesvirtuallawlibrary
CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010 Resolution. 15
This prompted CIR to file a Petition for Review16 before the CTA En Banc.
On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
Issue
Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the CTA erred in exempting SLMC from the payment
of income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960, entitled Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.,18 finding SLMC not entitled to the tax exemption under Section 30(E) and (G) of the NIRC of 1997
as it does not operate exclusively for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. Thus,
the Court disposed of the case in this manner:ChanRoblesVirtualawlibrary
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of
Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St Luke's
Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section
27(B) of the National h1ternal Revenue Code. However, it is not liable for surcharges and interest on such deficiency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section I, Rule 45 of the Rules of Court.
SO ORDERED.19chanroblesvirtuallawlibrary
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the Court that on April 30, 2013, it paid the BIR the amount
of basic taxes due for taxable years 1998, 2000-2002, and 2004-2007, as evidenced by the payment confirmation21 from the BIR, and that it
did not pay any surcharge,
interest, and compromise penalty in accordance with the above-mentioned Decision of the Court. In view of the payment it made, SLMC
moved for the dismissal of the instant case on the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a competent proof of payment as it is a mere
photocopy and does not even indicate the quarter/s and/or year/s said payment covers. 22
In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers Service of the BIR dated May 27, 2013, certifying that,
"[a]s far as the basic deficiency income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concerned, this Office considers
the cases closed due to the payment made on April 30, 2013." SLMC likewise submitted a letter25 from the BIR dated November 26, 2013 with
attached Certification of Payment26 and application for abatement,27 which it earlier submitted to the Court in a related case, G.R. No. 200688,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.28
CIR's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under Section 27(B) of the 1997 NIRC. 29 It likewise
asserts that SLMC is liable to pay compromise penalty pursuant to Section 248(A) 30 of the 1997 NIRC for failing to file its quarterly income tax
returns.31
As to the alleged payment of the basic tax, CIR contends that this does not render the instant case moot as the payment confirmation
submitted by SLMC is not a competent proof of payment of its tax liabilities. 32
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.)33 positing that earning a profit by a charitable, benevolent hospital or educational institution does
not result in the withdrawal of its tax exempt privilege. 34 SLMC further claims that the income it derives from operating a hospital is not income
from "activities conducted for profit."35 Also, it maintains that in accordance with the ruling of the Court in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),36 it is not liable for compromise penalties.37
In any case, SLMC insists that the instant case should be dismissed in view of its payment of the basic taxes due for taxable years 1998,
2000-2002, and 2004-2007 to the BIR on April 30, 2013.38
Our Ruling
SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues from paying patients are concerned.
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues from paying patients are
concerned has been settled in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),39 where
the Court ruled that:ChanRoblesVirtualawlibrary
xxx We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E)
and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. 'Proprietary' means
private, following the definition of a 'proprietary educational institution' as 'any private school maintained and administered by private
individuals or groups' with a government permit. 'Non-profit' means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club Filipino, Inc. de Cebu, this Court considered as
non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. The Court defined 'charity' in Lung Center of the
Philippines v. Quezon City as 'a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.' A non-profit club for the benefit of its members fails this test. An organization may be considered as non-
profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any
income such institution earns from activities conducted for profit is taxable, ad expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center
concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law
granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the
constitutional provision that '[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of
Congress.' The requirements for a tax exemption are strictly construed against tl1e taxpayer because an exemption restricts the collection of
taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption from real
property taxes. This ruling uses the same premise as Hospital de San Juan and Jesus Sacred Heart College which says that receiving income
from paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives
income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the
persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property. The
Constitution provides that '[c]haritable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use property in a certain way, i.e., for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect of failing to
meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to
income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution 'actually, directly and exclusively'
use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:chanRoblesvirtualLawlibrary
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted 'exclusively' for charitable purposes. The organization
of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E)
of the NIRC specifically requires that the corporation or association be non-stock, which is defined by the Corporation Code as 'one where no
part of its income is distributable as dividends to its members, trustees, or officers' and that any profit 'obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used tor the furtherance of the purpose or purposes for which the corporation was
organized.' However, under Lung Center, any profit by a charitable institution must not only be plowed back 'whenever necessary or proper,'
but must be 'devoted or used altogether to the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be
exclusive to charity. There is also a specific requirement that 'no part of [the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.' The use of lands, buildings and improvements of the institution is but a part of its
operations.
There is no dispute that St. Luke's is organized as a non-stock and non profit charitable institution. However, this does not automatically
exempt St Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property 'actually, directly and exclusively' for charitable purposes. To be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable institution must be 'organized and operated exclusively' for charitable purposes. Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC requires that the institution be 'operated exclusively' for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and operated exclusively' by providing
that:ChanRoblesVirtualawlibrary
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts 'any' activity for profit, such activity is not
tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the [n]on-
stock corporation or association [must be] organized and operated exclusively for . . . charitable . . . purposes . . . It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated exclusively' for the promotion of social welfare.
Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable purposes, it is nevertheless allowed to
engage in 'activities conducted for profit' without losing its tax exempt status for its not for profit activities. The only consequence is that the
'income of whatever kind and character' of a charitable institution 'from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax.' Prior to the introduction of Section 27(B), the tax rate on such income from for profit activities
was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not an institution 'operated exclusively' for charitable purposes. Clearly, revenues from
paying patients are income received from 'activities conducted for profit.' Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared P1,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free Services' expenditure of
P218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following 'calculation' to support its claim that 65.20% of its 'income
after expenses was allocated to free or charitable services' in 1998.
xxxx
'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and 'exclusively' is
defined, 'in a manner to exclude; as enjoying a privilege exclusively.' ... The words 'dominant use' or 'principal use' cannot be substituted for
the words 'used exclusively' without doing violence to the Constitution and the law. Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without violating the NIRC. Services to paying patients are activities
conducted for profit. They cannot be considered any other way. There is a 'purpose to make profit over and above the cost' of services. The
P1.73 billion total revenues :from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying
patients.
St Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining
34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it
cannot be said that the income is 'devoted or used altogether to the charitable object which it is intended to achieve.' The income is plowed
back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC
expressly qualifies that income from activities for profit is taxable 'regardless of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase 'any activity conducted for profit.'
However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which
introduced the phrase 'or from any activity conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree Vd. que es una actividad esencial dicho hospital para
el funcionamiento del colegio de medicina de medicina de dicha universidad?
xxx xxx xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero considerando que el hospital tiene cuartos de pago,
y a los mismos generalmente van enformos de buena posicion social economica, lo que se paga por estos enformos debe estar sujeto a
'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of Santo
Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should
be subject to income tax. He said that this was one of the reasons Congress inserted the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an educational institution. However, it is applicable to charitable institutions because
Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for profit should not escape the reach
of taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An
institution cannot use its corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or social welfare purposes insofar as its
revenues from paying patients are C.Qncemed. This ruling is bacred not only on a strict interpretation of a provision granting tax exemption,
but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be 'operated
exclusively' for charitable or social welfare purposes to be completely exempt from income tax. An institution tmder Section 30(E) or (G) does
not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, tmder the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential tO% rate pursuant to Section
27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of
government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.
St. Luke's fails to meet the requirements tmder Section 30(E) and (G) of the NlRC to be completely tax exempt from all its income. However, it
remains a proprietary non-profit hospital tmder Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and
such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax
rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 tmder Section 27(B) of the NIRC. However, St. Luke's has good reasons to rely
on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is 'a corporation for purely charitable and social welfare purposes' and
thus exempt from income tax. In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that 'good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest.' 40chanroblesvirtuallawlibrary
A careful review of the pleadings reveals that there is no countervailing consideration for the Court to revisit its aforequoted ruling in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis, which
states that "[o]nce a case has been decided in one way, any other case involving exactly the same point at issue xxx should be decided in the
same manner,"41 the Court finds that SLMC is subject to 10% income tax insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997 NIRC requires said institution to
operate exclusively for charitable or social welfare purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code
earns income from its for-profit activities, it will not lose its tax exemption. However, its income from for profit activities will be subject to
income tax at the preferential 10% rate pursuant to Section 27(B) thereof.
As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC for its alleged failure to file its quarterly income
tax returns, this has also been resolved in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),42 where the imposition of surcharges and interest under Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good
faith and honest belief on the part SLMC that it is not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is not liable
to pay compromise penalty under Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the payment made by SLMC on April 30, 2013.
However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the instant Petition has become moot.
While the Court agrees with the CIR that the payment confirmation from the BIR presented by SLMC is not a competent proof of payment as it
does not indicate the specific taxable period the said payment covers, the Court fmds that the Certification issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, and the letter from the BIR dated November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment especially since CIR never questioned the authenticity of these documents. In fact,
in a related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.,45 the Court dismissed the
petition based on a letter issued by CIR confirming SLMC's payment of taxes, which is the same letter submitted by SLMC in the instant case.
In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot by the payment made by SLMC of the basic
taxes for the taxable years 2005 and 2006, in the amounts of P49,919,496.40 and P41,525,608.40, respectively. 46
SO ORDERED.chanrobles
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue officers to
examine the latter's books of accounts and other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years.5
Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1) income
tax on rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax (VAT) on business income;
and (3) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded the payment of P17,303,001.12, inclusive of
surcharge, interest and penalty for taxable years 2001, 2002 and 2003.7
DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005 a petition for review with
the CTA Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4 (3) of the Constitution, which
reads:
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(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan transactions of [DLSU] in the amount of
P1,1681,774.00 is hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts,
plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from September 30, 2004 until full
payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there. being no compromise agreement between the parties.
SO ORDERED.9ChanRoblesVirtualawlibrary
Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision. 10 On April 6, 2010, the CTA Division denied
the Commissioner's motion for reconsideration while it held in abeyance the resolution on DLSU's motion for reconsideration. 11
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its revenues
and assets for non-educational or commercial purposes removed these items from the exemption coverage under the Constitution. 12
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to prove that its rental income
was used actually, directly and exclusively for educational purposes.13The Commissioner did not promptly object to the formal offer of
supplemental evidence despite notice.14
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's tax deficiencies. The
dispositive portion of the amended decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is hereby ORDERED TO PAY for
deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted amount
of P5,506,456.71...xxx.
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the...basic deficiency taxes...until full payment thereof
pursuant to Section 249(B) of the [National Internal Revenue Code]...xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge and deficiency
interest which have accrued...from September 30, 2004 until fully paid. 15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division erred in admitting DLSU's
additional evidence.16
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA En Banc (CTA En Banc Case
No. 671) on the following grounds: (1) the entire assessment should have been cancelled because it was based on an invalid LOA; (2)
assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU submitted evidence similar to
those submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the
CTA Division erred in finding that a portion of DLSU's rental income was not proved to have been used actually, directly and exclusively for
educational purposes.18chanroblesvirtuallawlibrary
The CTA En Banc Rulings
The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA Division. 19
Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA), the CTA En Banc found that
DLSU was able to prove that a portion of the assessed rental income was used actually, directly and exclusively for educational purposes;
hence, exempt from tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence confirming that part of its rental income had
indeed been used to pay the loan it obtained to build the university's Physical Education - Sports Complex.21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by supporting documents to have
been actually, directly and exclusively used for educational purposes, must be subjected to income tax and VAT. 22
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its loan and mortgage documents.23 The CTA En
Banc found that DLSU's DST payments had been remitted to the BIR, evidenced by the stamp on the documents made by a DST imprinting
machine, which is allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
(RR) No. 15-2001.25cralawred
The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU formally offered them only when
it moved for reconsideration of the CTA Division's original decision. Notably, the law creating the CTA provides that proceedings before it shall
not be governed strictly by the technical rules of evidence.26
The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010 decision.27 Thus, she came to this
court for relief through a petition for review on certiorari (G.R. No. 196596).
The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities to P2,554,825.47 inclusive of surcharge.28
The issue of the LOA's validity was raised during trial; 29 hence, the issue was deemed properly submitted for decision and reviewable on
appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of issuing a LOA covering
audit of unverified prior years is prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which
provides that if the audit includes more than one taxable period, the other periods or years shall be specifically indicated in the LOA.31
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the assessments for
deficiency income tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid.32
The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties, factual settings, bases of
assessments, sets of evidence, and defenses.33
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while DLSU successfully proved that a portion of
its rental income was transmitted and used to pay the loan obtained to fund the construction of the Sports Complex, the rental income
from other sources were not shown to have been actually, directly and exclusively used for educational purposes. 34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No. 198941) came to this Court for
relief.chanroblesvirtuallawlibrary
The Consolidated Petitions
First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of. 35 DLSU's operations of canteens and
bookstores within its campus even though exclusively serving the university community do not negate income tax liability. 36
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax Code, which
states among others, that the income of whatever kind and character of [a non-stock and non-profit educational institution] from any of [its]
properties, real or personal, or from any of (its] activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed by this Code.37
The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal Revenue v. YMCA38 to
support its conclusion that revenues however generated are covered by the constitutional exemption, provided that, the revenues will be used
for educational purposes or will be held in reserve for such purposes.39
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but not from income tax
on the rentals earned from property.40 Thus, DLSU's income from the leases of its real properties is not exempt from taxation even if the
income would be used for educational purposes. 41
Second, the Commissioner insists that DLSU did not prove the fact of DST payment 42 and that it is not qualified to use the On-Line Electronic
DST Imprinting Machine, which is available only to certain classes of taxpayers under RR No. 9-2000.43
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated submission of supplemental
evidence reopened the case for trial, and worse, DLSU offered the supplemental evidence only after it received the unfavorable CTA
Division's original decision.44 In any case, DLSU's submission of supplemental documentary evidence was unnecessary since its rental
income was taxable regardless of its disposition. 45
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA issued contrary to RMO No.
43-90 is void, thus, an assessment issued based on such defective LOA must also be void. 46
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the basis of this defective LOA,
the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and 2003. 47 DLSU objects to the
CTA En Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
chanRoblesvirtualLawlibrary
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.ChanRoblesVirtualawlibrary
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU follows this format, then any
assessment arising from it must be entirely voided.48
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties, the same set of
evidence should be appreciated and weighed in the same manner. 49 The CTA En Banc erred when it did not similarly appreciate DLSU's
evidence as it did to the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution.50
The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those she raised in her: (1)
petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.51chanroblesvirtuallawlibrary
Counter-arguments
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties. 53
On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit educational institutions is novel to the 1987 Constitution and
that Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax Code is almost an exact
replica of Section 26 of the 1977 Tax Code - with the addition of non-stock, non-profit educational institutions to the list of tax-exempt entities;
and (3) that the 1977 Tax Code was promulgated when the 1973 Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational institution under the 1973 Constitution was only for real property tax.
Back then, the special tax treatment on income of private educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only
under the 1987 Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes, was expressly and categorically enshrined. 55
DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to the Constitution void and
without any force and effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a
nonstock and non-profit educational institution from any of its properties, real or personal, or from any of its activities conducted for
profit regardless of the disposition made of such income, should be declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes."57
DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption to be granted under Article
XIV, Section 4 (3) of the Constitution, the taxpayer must prove that: (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-stock, non-profit educational institution. It had
also submitted evidence to prove that it actually, directly and exclusively used its income for educational purposes. 59
DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax exemption was granted "to
incentivize private educational institutions to share with the State the responsibility of educating the youth." 60
Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU's loan and mortgage transactions had
remitted to the BIR the DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In any case, DLSU argues that it
cannot be held liable for DST owmg to the exemption granted under the Constitution. 62
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental evidence. Because of the
Commissioner's failure to timely object, she became bound by the results of the submission of such supplemental evidence. 63
The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this issue in both the
administrative and judicial proceedings.64 That it was asked on crossexamination during the trial does not make it an issue that the CTA could
resolve.65 The Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational institution is only exempt
from property tax but not from tax on the income earned from the property. 66
In addition, DLSU prays that the Court award attorney's fees in its favor because it was constrained to unnecessarily retain the services of
counsel in this separate petition.68chanroblesvirtuallawlibrary
Issues
Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize as follows:
I. Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for educational purposes are
exempt from duties and taxes;chanrobleslaw
II. Whether the entire assessment should be voided because of the defective LOA;chanrobleslaw
III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and
IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be disturbed by the Court.
Our Ruling
The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus sustain the CTA En
Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.
I. The revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly, and
exclusively for educational purposes are exempt from duties and taxes.
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including
those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment [underscoring and emphasis supplied]
Before fully discussing the merits of the case, we observe that:
First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit educational institutions and (2)
proprietary educational institutions.69
Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock, non-profit educational
institution.70
Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the same provision, also
imposes certain conditions to avail of the exemption. We discuss below the import of the constitutional text vis-a-vis the Commissioner's
counter-arguments.
Fourth, there is a marked distinction between the treatment of nonstock, non-profit educational institutions and proprietary educational
institutions. The tax exemption granted to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive
use of their revenues and assets for educational purposes. While tax exemptions may also be granted to proprietary educational institutions,
these exemptions may be subject to limitations imposed by Congress.
As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational institution is crucial in determining
the nature and extent of the tax exemption granted to non-stock, non-profit educational institutions.
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The relevant text reads:
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The following organizations shall not be taxed under this Title [Tax on Income] in respect to income received by them as such:
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such
income shall be subject to tax imposed under this Code. [underscoring and emphasis supplied]ChanRoblesVirtualawlibrary
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit educational institutions such
that the revenues and income they derived from their assets, or from any of their activities conducted for profit, are taxable even if these
revenues and income are used for educational purposes.
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock, non-profit educational institutions?
While the present petition appears to be a case of first impression, 71 the Court in the YMCA case had in fact already analyzed and explained
the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements that are relevant to the
present case.
The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established as a "welfare, educational
and charitable non-profit corporation," was subject to income tax under the Tax Code and the Constitution. 72
The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article VI, Section 28 (3) of the
Constitution,73 the YMCA is not tax-exempt per se; "what is exempted is not the institution itself...those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes." 74
The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of then Section 27 (now Section 30) of
the Tax Code, which mandates that the income of exempt organizations from any of their properties, real or personal, are subject to the same
tax imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last paragraph of Section 27 unequivocally
subjects to tax the rent income of the YMCA from its property.75
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted under Article XIV, Section 4 (3)
of the Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding that the term educational institution,
when used in laws granting tax exemptions, refers to the school system (synonymous with formal education); it includes a college or an
educational establishment; it refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal
school system.76
The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer
falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation
is used actually, directly and exclusively for educational purposes.77
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches, parsonages or convents,
mosques, and non-profit cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes...," Article XIV, Section 4 (3) categorically states that
"[a]ll revenues and assets... used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986 Constitutional Commission79 to
provide broader tax privilege to non-stock, non-profit educational institutions as recognition of their role in assisting the State provide a public
good. The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax
exemption extended to all revenues and assets of non-stock, non-profit educational institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must
have also been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively
for educational purposes, then said revenues and income shall be exempt from taxes and duties. 81
We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.
Revenues consist of the amounts earned by a person or entity from the conduct of business operations. 82 It may refer to the sale of goods,
rendition of services, or the return of an investment. Revenue is a component of the tax base in income tax, 83 VAT,84 and local business tax
(LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a person or entity. 86 It may refer to real estate, cash deposit in
a bank, investment in the stocks of a corporation, inventory of goods, or any property from which the person or entity may derive income or
use to generate the same. In Philippine taxation, the fair market value of real property is a component of the tax base in real property tax
(RPT).87 Also, the landed cost of imported goods is a component of the tax base in VAT on importation88 and tariff duties.89
Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.
To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which the entity shall be exempted
from shall depend on whether the item is an item of revenue or asset.
To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not actually, directly and
exclusively used for educational purposes, even if the bookstore or canteen caters only to university students, faculty and staff.
The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v. Aquino.90 We ruled in that case
that the test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. We also held that the exemption
extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.
In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from the property tax exemption
granted under the Constitution.91 There is no exemption because the asset is not used actually, directly and exclusively for educational
purposes. The commercial use of the property is also not incidental to and reasonably necessary for the accomplishment of the main purpose
of a university, which is to educate its students.
However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of its school
building, such revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational purposes.
Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and exclusively for educational
purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer must factually prove that it used actually, directly
and exclusively for educational purposes the revenues or income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be viewed and
treated separately. But so long as the assets or revenues are used actually, directly and exclusively for educational purposes, they are exempt
from duties and taxes.
The tax exemption granted by the Constitution to non-stock, non-profit educational institutions, unlike the exemption that may be
availed of by proprietary educational institutions, is not subject to limitations imposed by law.
That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational institutions cannot be
doubted. As discussed, the privilege granted to the former is conditioned only on the actual, direct and exclusive use of their revenues and
assets for educational purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations imposed by law.
We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit educational institutions
compared with their proprietary counterparts.
While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30 (Exemptions from Tax on
Corporations) of the Tax Code, a proprietary educational institution is covered by Section 27 (Rates of Income Tax on Domestic
Corporations).
To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions shall not be taxed on income
received by them as such.
Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which are nonprofit shall pay a tax of ten percent (10%) on
their taxable income...Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total
gross income derived by such educational institutions...[the regular corporate income tax of 30%] shall be imposed on the entire taxable
income...92
By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of 10% corporate income tax. The
reduced rate is applicable only if: (1) the proprietary educational institution is non profit and (2) its gross income from unrelated trade, business
or activity does not exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-profit educational institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution insofar as it
subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational
purpose. We make this declaration in the exercise of and consistent with our duty 93 to uphold the primacy of the Constitution.94
Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not cover the other exempt
organizations under Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.
DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003 and insists that the entire LOA should be voided for
being contrary to RMO No. 43-90, which provides that if tax audit includes more than one taxable period, the other periods or years shall be
specifically indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to examine the books of account and other accounting records of the taxpayer
in order to determine the taxpayer's correct internal revenue liabilities 95 and for the purpose of collecting the correct amount oftax, 96 in
accordance with Section 5 of the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take testimony of
persons. The LOA commences the audit process97 and informs the taxpayer that it is under audit for possible deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently, disregard the BIR and the CTA's
findings of tax deficiency for taxable year 2003?
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
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3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of issuing [LOAs]
covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated in the [LOA]. 98
What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90 does not say that a
LOA which contains unverified prior years is void. It merely prescribes that if the audit includes more than one taxable period, the other
periods or years must be specified. The provision read as a whole requires that if a taxpayer is audited for more than one taxable year, the
BIR must specify each taxable year or taxable period on separate LOAs.
Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the extent of the audit
and the scope of the revenue officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer by demanding random
accounting records from random unverified years, which may include documents from as far back as ten years in cases of fraud audit.99
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA does not strictly comply with
RMO 43-90 because it includes unverified prior years. This does not mean, however, that the entire LOA is void.
As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU was fully
apprised that it was being audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.
Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at the CTA Division, and thus, should not have been
entertained on appeal, is not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.100 DLSU then raised the issue in
its memorandum and motion for partial reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the
CTA En Banc could, as it did, pass upon the validity of the LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of
the LOA at the CTA En Banc but she chose not to file her comment and memorandum despite notice. 102
III. The CTA correctly admitted the supplemental evidence formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA Division. 103 The CTA
Division admitted the supplemental evidence, which proved that a portion of DLSU's rental income was used actually, directly and exclusively
for educational purposes. Consequently, the CTA Division reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing grounds, to wit: (1) the
Commissioner failed to timely object to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the technical
rules of evidence.
First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence.104
The Court has held that if a party desires the court to reject the evidence offered, it must so state in the form of a timely objection and it cannot
raise the objection to the evidence for the first time on appeal. 105
Because of a party's failure to timely object, the evidence offered becomes part of the evidence in the case. As a consequence, all the parties
are considered bound by any outcome arising from the offer of evidence properly presented. 106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite notice.107 The Commissioner
objected to the admission of the supplemental evidence only when the case was on appeal to the CTA En Banc. By the time the
Commissioner raised her objection, it was too late; the formal offer, admission and evaluation of the supplemental evidence were all fait
accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency of the supplemental
evidence admitted, she was bound by the outcome of the CTA Division's assessment of the evidence.108
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the formal offer of supplemental
evidence, without prompt objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for reconsideration.
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its motion for reconsideration with the CTA
its Final Adjustment Return. The Commissioner, as in the present case, did not oppose the taxpayer's motion for reconsideration and the
admission of the Final Adjustment Return.110 We thus admitted and gave weight to the Final Adjustment Return although it was only submitted
upon motion for reconsideration.
We held that while it is true that strict procedural rules generally frown upon the submission of documents after the trial, the law creating the
CTA specifically provides that proceedings before it shall not be governed strictly by the technical rules of evidence 111 and that the paramount
consideration remains the ascertainment of truth. We ruled that procedural rules should not bar courts from considering undisputed facts to
arrive at a just determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of Internal
Revenue113 and Commissioner of Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the supplemental
supporting document only upon filing their motions for reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the technical rules of evidence in the
present tax assessmentcase. If anything, the liberal application of the rules assumes greater force and significance in the case of a taxpayer
who claims a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of excess tax payments based on
the Tax Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality is afforded to taxpayers who paid more than they
should have under a statute, then with more reason that we should allow a taxpayer to prove its exemption from tax based on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the Commissioner failed to promptly
object, but more so because the strict application of the technical tules of evidence may defeat the intent of the Constitution.
IV. The CTA's appreciation of evidence is generally binding on the Court unless compelling reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its function of being
dedicated exclusively to the resolution of tax problems, has developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority.116 We thus accord the findings of fact by the CTA with the highest respect. These findings of facts can only
be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the CTA.
In the absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect.117
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly and exclusively for
educational purposes a portion of its assessed income and that it had remitted the DST payments though an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that DLSU successfully proved
that it used actually, directly and exclusively for educational purposes a portion of its rental income.
The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the submission of the supplemental evidence, which consisted
of statement of receipts, statement of disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed P93.86 Million, 119 which was used to build the university's Sports Complex. Based on these
pieces of evidence, the CTA found that DLSU's rental income from its concessionaires were indeed transmitted and used for the payment of
this loan. The CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct and exclusive use for
educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to a fund (CF-CPA
Account),120 intended for the university's capital projects, was not proved to have been used actually, directly and exclusively for
educational purposes. The CTA observed that "[DLSU]...failed to fully account for and substantiate all the disbursements from the [fund]."
Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires was indeed used for educational purposes."121
To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who reviewed, audited and
examined the voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of receipts, invoices, vouchers and
other long accounts; (b) reproduction of, and comparison of such reproduction with, and certification that the same are faithful copies of
original documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c) preparation of schedules or summaries
containing a chronological listing of the numbers, dates and amounts covered by receipts or invoices or other relevant documents and the
amount(s) of taxes paid; (d) making findings as to compliance with substantiation requirements under pertinent tax laws, regulations
and jurisprudence; (e) submission of a formal report with certification of authenticity and veracity of findings and conclusions in the
performance of the audit; (f) testifying on such formal report; and (g) performing such other functions as the CTA may direct. 122
Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only the portion of the rental income
pertaining to the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was considered as used
actually, directly and exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated disbursements must be
subjected to income tax and VAT.123
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002 due to the defective
LOA.124
The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the evidence on record, which we
reiterate, were examined and verified by the Independent CPA. Thus, we see no persuasive reason to deviate from these factual findings.
However, while we generally respect the factual findings of the CTA, it does not mean that we are bound by its conclusions. In the present
case, we do not agree with the method used by the CTA to arrive at DLSU's unsubstantiated rental income (i.e., income not proved to have
been actually, directly and exclusively used for educational purposes).
To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable year 2003.125 DLSU earned this income from leasing
a portion of its premises to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO
Bookstore.126
To prove that its rental income was used for educational purposes, DLSU identified the transactions where the rental income was
expended, viz.: 1) P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports Complex; and 2) P6,602,655.00 transferred to
the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00 transferred to the CF-CPA Account was used
actually, directly and exclusively for educational purposes. According to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to P6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of the P10,610,379.00 rental
income, P4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA Account for taxable year
2003 is only 26.68%.130The CTA held as follows:
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However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO Bookstore, which were
transmitted to the CF-CPA Account, petitioner again failed to fully account for and substantiate all the disbursements from the CF-CPA
Account; thus failing to prove that the rental income derived therein were actually, directly and exclusively used for educational purposes.
Likewise, the findings of the Court-Commissioned Independent CPA show that the disbursements from the CF-CPA Account for fiscal year
2003 amounts to P-6,259,078.30 only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for educational purposes. Since for fiscal year
2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
P23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the
ratio of 26.68% with the total rent income added to and used in the CF-CPA Account in the amount of P6,602,655.00 ts
P1,761,588.35.131 (emphasis supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports Complex (P4,007,724.00) from the rental income
(P10,610,379.00) earned from the abovementioned concessionaries. The difference (P6,602,655.00) was the portion claimed to have
been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (P1,761,308.37) from the P6,602,655.00 to
arrive at the supposed unsubstantiated portion of the rental income (P4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived by multiplying the rental income claimed to have
been added to the CF-CPA Account (P6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total
disbursements (P23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA Account as found by the
Independent CPA (P6,259,078.30) by the total disbursements (P23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the constitutional grant of tax exemption to non-stock, non-
profit educational institutions. The CTA's reasoning is flawed because it required DLSU to substantiate an amount that is greater than the
rental income deposited in the CF-CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which amounted to a total of
P10.61 million)135 were used for educational purposes. This amount was divided into two parts: (a) the P4.01 million, which was used to pay
the loan obtained for the construction of the Sports Complex; and (b) the P6.60 million, 136 which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 million.137 These figures, read in light of the
constitutional exemption, raises the question: does DLSU claim that the whole total CF-CPA disbursement of P23.46 million is tax-
exempt so that it is required to prove that all these disbursements had been made for educational purposes?
The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46 million had been for educational purposes and
should thus be tax-exempt; DLSU only claimed P10.61 million for taxexemption and should thus be required to prove that this amount had
been used as claimed.
Of this amount, P4.01 had been proven to have been used for educational purposes, as confirmed by the Independent CPA. The amount in
issue is therefore the balance of P6.60 million which was transferred to the CF-CPA which in turn made disbursements of P23.46 million for
various general purposes, among them the P6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in year 2003 in the amount
P6.26 million. Based on these given figures, the CTA concluded that the expenses for educational purposes that had been coursed through
the CF-CPA should be prorated so that only the portion that P6.26 million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that revenues actually and directly used for educational purposes
should be tax-exempt. As already mentioned above, DLSU is not claiming that the whole P23.46 million CF-CPA disbursement had been used
for educational purposes; it only claims that P6.60 million transferred to CF-CPA had been used for educational purposes. This was what
DLSU needed to prove to have actually and directly used for educational purposes.
That this fund had been first deposited into a separate fund (the CF-CPA established to fund capital projects) lends peculiarity to the facts of
this case, but does not detract from the fact that the deposited funds were DLSU revenue funds that had been confirmed and proven to have
been actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might have had other sources of funding is
irrelevant because the assessment in the present case pertains only to the rental income which DLSU indisputably earned as revenue in
2003. That the proven CF-CPA funds used for educational purposes should not be prorated as part of its total CF-CPA disbursements for
purposes of crediting to DLSU is also logical because no claim whatsoever had been made that the totality of the CF-CPA disbursements had
been for educational purposes. No prorating is necessary; to state the obvious, exemption is based on actual and direct use and this DLSU
has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and what it has proven. In
more concrete terms, DLSU only had to prove that its rental income for taxable year 2003 (P10,610,379.00) was used for educational
purposes. Hence, while the total disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only had to substantiate its
P10.6 million rental income, part of which was the P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259 million was
substantiated to have been used for educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:
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CTA Decision138 Revised
Tax base for deficiency income tax and VAT 4,841,066.65 343,576.70
On DLSU's argument that the CTA should have appreciated its evidence in the same way as it did with the evidence submitted by Ateneo
in another separate case, the CTA explained that the issue in the Ateneo case was not the same as the issue in the present case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under certain BIR and Department
of Finance issuances139that required the educational institution to own and operate the canteens, or other commercial enterprises within its
campus, as condition for tax exemption. The CTA held that the Constitution does not require the educational institution to own or operate
these commercial establishments to avail of the exemption. 140
Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of evidence differently. The
CTA likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on its decision on two different
cases with two different issues."141
DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar, if not stronger sets of
evidence, as Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the evidence supporting their
respective claims for tax exemption would necessarily differ because their attendant issues and facts differ.
To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were assessed varied. The
amount of tax assessment also varied. The amount of income proven to have been used for educational purposes also varied because the
amount substantiated varied.142 Thus, the amount of tax assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand,
the BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while
Ateneo was not.143
Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and exclusively for educational purposes
by submitting similar evidence, e.g., the testimony of their employees on the use of university revenues, the report of the Independent CPA,
their income summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income and
revenues had indeed been used for educational purposes.
The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced in court. Indeed, the
Independent CPA testified that some disbursements had not been proven to have been used actually, directly and exclusively for educational
purposes.144
The final nail on the question of evidence is DLSU's own admission that the original of these documents had not in fact been produced before
the CTA although it claimed that there was no bad faith on its part.145 To our mind, this admission is a good indicator of how the Ateneo and
the DLSU cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that the contents of the missing supporting documents
were proven by its recital in some other authentic documents on record,146 can no longer be entertained at this late stage of the proceeding.
The CTA did not rule on this particular claim. The CTA also made no finding on DLSU's assertion of lack of bad faith. Besides, it is not our
duty to go over these documents to test the truthfulness of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and uniformity of taxation means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate.147 A tax is uniform when it operates with the same force and effect in every
place where the subject of it is found.148 The concept requires that all subjects of taxation similarly situated should be treated alike and placed
in equal footing.149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their income proved to have been used
actually, directly and exclusively for educational purposes were exempted from taxes. The CTA equally applied the requirements in
the YMCA case to test if they indeed used their revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used actually, directly and
exclusively for educational purposes its income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a
different result happened because it failed to fully prove that it used actually, directly and exclusively for educational purposes its revenues
and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation similarly situated are treated
in literally the same way in all and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit educational institutions,
does not mean that the CTA or this Court would similarly decide every case for (or against) both universities. Success in tax litigation, like in
any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in not
fully cancelling its tax liabilities.
The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted through its bank's On-Line
Electronic DST Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this method of payment because an
educational institution is excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making, signing, issuing, accepting, or
transferring the same.150 The Tax Code provides that whenever one party to the document enjoys exemption from DST, the other party not
exempt from DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the document, such that the
payment and compliance by one shall mean the full settlement of the DST due on the document.
In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to DST. 151 For the purpose
of showing that the DST on the loan agreement has been paid, DLSU presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be
further assessed for deficiency DST on the said documents.
Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST through the On-Line
Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it was not DLSU who used
the On-Line Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions. RR No. 9-2000 expressly
includes banks in the class of taxpayers that can use the On-Line Electronic DST Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the assessed DST deficiency, except for the unpaid balance
of P13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No. 196596 and AFFIRM the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for
the total amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the Commissioner of Internal Revenue in
G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 671, with the MODIFICATIONthat the base for the deficiency income tax and VAT for taxable year 2003 is P343,576.70.
SO ORDERED.cralawlawlibrary
1The petitions are filed under Rule 45 of the Rules of Court in relation to Rule 16 of the Revised CTA Rules (A.M. No. 05-11-07). On
November 28, 2011, the Court resolved to consolidate the petitions to avoid conflicting decisions. Rollo, p. 78 (G.R. No. 198941).
2 Id. at 34-70 (G.R. No. 196596).
3 Id. at 14-53 (G.R. No. 198841).
4 Id. at 9-43 (G.R. No. 198941).
5 Id. at 85. The date of the issuance of the LOA is not on record.
6 Id. at 4 (G.R. No. 196596). The PAN was issued by the SIR's Special Large Taxpayers Task Force on educational institutions.
7 Id. at 151-154.
8 Id. at 38 and 268.
9 Id. at 97-128.
10 Id. at 39 and 268-269.
11 Id. at 129-137.
12 Id. at 185-194.
13 Id. at 155-159, filed on May 18, 2010.
14 Id. at 302. DLSU quoted the June 9, 2010 resolution of the CTA Division, viz.:
"For resolution is [DLSU's] 'Supplemental Formal Offer of Evidence in Relation to the [CTA Division's] Resolution Dated 06 April 2010' filed on
April 23, 2010, sans any Comment/Opposition from the [Commissioner] despite notice." [emphasis and underscoring ours]
15 Id. at 149-150.
16 Id. at 40.
17Ateneo de Manila University v. Commissioner of Internal Revenue, CTA Case Nos. 7246 and 7293.
18Rollo, p. 73 (G.R. No. 198841).
19 Id. at 77-96 (G.R. No. 196596), decision dated December 10, 2010.
20 Id. at 82-88.
21 Id. at 86.
22 Id. at 86-87.
23 Id. at 88-90.
24 Section 200 (D) of the Tax Code provides:
(D) Exception. - In lieu of the foregoing provisions of this Section, the tax may be paid either through purchase and actual affixture; or
by imprinting the stamps through a documentary stamp metering machine, on the taxable document, in the manner as may be
prescribed by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. [emphasis
ours]
25cralawredSection 2.2 of RR No. 15-2001 provides that: "In lieu of constructive stamping, Section 200 (D) of the [Tax Code], however, allows
the payment of DST ... or by imprinting of stamps through a documentary stamp metering machine (... or on line electronic DST
imprinting machine)." [emphasis ours]
26Rollo, pp. 91-94 (G.R. No. 196596).
27 Id. at 72-76.
28 Id. at 88-90 (G.R. No. 198841).
29 Id. at 75-79.
30 Id. at 80, citing Commissioner of Internal v. Sony Philippines, Inc., 649 Phil. 519 (2010).
31 Id. at 80.
32 Id. at 81.
33 Id. at 82.
34 These pertain to rental income from Alerey Inc., Zaide Food Corp., Capri International and MTO Bookstore. Id. at 85.
35 Id. at 43-55 (G.R. No. 196596).
36 Id. at 48.
37 Id. at 50.
38 358 Phil. 562 (1998).
39Rollo, p. 46 (G.R. No. 196596).
40 Id. at 51-55.
41 Id. at 50.
42 Id. at 55-56.
43 The Commissioner cites Section 4 of RR No. 9-2000 which states that the "on-line electronic DST imprinting machine," unless expressly
exempted by the Commissioner, will be used in the payment and remittance of the DST by the following class of taxpayers: a) bank, quasi-
bank or non-bank financial intermediary, finance company, insurance, surety, fidelity, or annuity company; b) the Philippine Stock Exchange
(in the case of shares of stock and other securities traded in the local stock exchange); c) shipping and airline companies; d) pre-need
company (on sale of pre-need plans); and e) other industries as may be required by the Commissioner.
44Rollo, pp. 57-65 (G.R. No. 196596).
45 Id. at 65-66.
46 Id. at 14-16 (G.R. No. 198841).
47 Id. at 24, 30.
48 Id. at 25-26.
49 Id. at 41-48.
50 Id. at 34-48.
51 Id. at 9-43 (G.R. No. 198941).
52 Id. at 272-276 (G.R. No. 196596). DLSU claims that the Commissioner failed to state that the allegations in the petition are true and correct
of her personal knowledge or based on authentic record. The CIR also allegedly failed to state that she caused the preparation of the petition
and that she has read and understood all the allegations. DLSU notes that a pleading required to be verified but lacks proper verification is
treated as an unsigned pleading.
53 Id. at 276-279.
54 Id. at 279-285.
55 Id. at 282.
56 Id. at 286-289.
57 Id. at 287.
58 Id. at 290.
59 Id. at 291.
60 Id. at 283.
61
Id. at 296-301.
62 Id. at 297-298.
63 Id. at 301-302.
64 Id. at 192-197 (G.R. No. 198841).
65 Id. at 192-193.
66 Id. at 197-207.
67 Id. at 82-93 (G.R. No. 198941).
68 Id. at 89-90.
69
In Commissioner v. St. Luke's Medical Center, Inc., 695 Phil. 867, 885 (2012), the Court quoted Section 27 (B) of the Tax Code and
defined proprietary educational institution as "any private school maintained and administered by private individuals or groups" with a
government permit.
70Rollo, p. 37 (G.R. No. 196596).
71Previous cases construing the nature of the exemption of tax-exempt entities under Section 30 (then Section 27) of the Tax Code vis-a-vis
the exemption granted under the Constitution pertain to nonprofit foundations, churches, charitable hospitals or social welfare institutions.
Some cases involved educational institutions but they tackled local or real property taxation. See: YMCA, supra note 37, St. Luke's, supra note
68; Angeles University Foundation v. City of Angeles, 689 Phil. 623 (2012); and Abra Valley College, Inc. v. Aquino, infra note 90.
72Supra note 38.
73Article VI, Section 28 (3) of the Constitution, provides: "Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation."
74Supra note 38, at 579-580.
75 Id. at 575-578.
76 Id. at 581-582.
77 Id. at 580-581.
78For purposes of construing Article XIV, Section 4 (3) of the Constitution, we treat income and revenues as synonyms. Black's Law
Dictionary (Fifth Edition, 1979) defines revenues as "return or yield; profit as that which returns or comes back from investment; the annual or
periodical rents, profits, interest or issues of any species of property or personal..." (p. 1185) and income as "the return in money from one's
business, labor, or capital invested; gains, profits, salary, wages, etc ..." (p. 687).
79See Record of the Constitutional Commission No. 69, Volume IV, August 29, 1986.
80See
IV Record 401, 402, as cited by DLSU, Rollo, p. 283 (G.R. No. 196596). The following comments of the Constitutional Commission
members are illuminating:
MR. GASCON: ... There are many schools which are genuinely non-profit and non-stock but which may have been taxed at the expense of
students. In the long run, these schools oftentimes have to increase tuition fees, which is detrimental to the interest of the students. So when
we encourage non-stock, non-profit institutions be assuring them of tax exemption, we also assure the students of lower tuition fees. That is
the intent.
xxxx
COMM. NOLLEDO: ... So I think, what is important here is the philosophy behind the duty on the part of the State to educate the Filipino
people that duty is being shouldered by private institutions. In order to provide incentive to private institutions to share with the State the
responsibility of educating the youth, I think we should grant tax exemption.
81As the Constitution is not primarily a lawyer's document, its language should be understood in the sense that it may have in common. Its
words should be given their ordinary meaning except where technical terms are employed. See: People v. Derilo, 338 Phil. 350, 383 (1997).
82Black'sLaw Dictionary, Fifth Edition, defines "Revenues" as, "Return or yield, as of land; profit as that which returns or comes back from an
investment; the annual or periodical rents, profits, interest or issues of any species of property, real or personal; income of individual,
corporation, government, etc." (citing Willoughby v. Willoughby, 66 R.I. 430, 19 A.2d 857, 860)
83 Section 32, Tax Code
84 Sections 106 and 108, Tax Code.
85
Section 143 cf. Section 131(n), Local Government Code.
86Black's Law Dictionary, Fifth Edition, defines "Assets" as, "Property of all kinds, real and personal, tangible and intangible, including, inter
alia, for certain purposes, patents and causes of action which belong to any person including a corporation and the estate of a decedent. The
entire property of a rerson, association, corporation, or estate that is applicable or subject to the payment of his or his debts."
87 Section 208 cf. Sections 233 and 235, Local Government Code.
88 Section 107, Tax Code
89 Section 104, PD 1464, otherwise known as the Tariff and Customs Code of the Philippines.
90 245 Phil. 83 (1988).
91 Id. at 91-92.
92
Section 27 (B) further provides that the term unrelated trade, business or other activity means any trade, business or activity, the conduct of
which is not substantially related to the exercise or performance by such educational institution ... of its primary purpose of functions.
93 CONSTITUTION, Article VIII, Section 5 (2).
94In Kida, et al. v. Senate of the Philippines, et al., 675 Phil. 316, 365-366 (2011), we held that the primacy of the Constitution as the supreme
law of the land dictates that where the Constitution has itself made a determination or given its mandate, then the matters so determined or
mandated should be respected until the Constitution itself is changed by amendment or repeal through the applicable constitutional process.
95 Revenue Audit Memorandum Order No. 2-95.
96Rollo, p. 79 (G.R. No. 198841). See Section 13 of the tax Code.
97See the Taxpayers Bill of Rights at http://www.bir.gov.ph/index.P/taxpayer-bill-of-rights.html last accessed on June 1, 2016.
98 Cited in Commissioner of Internal Revenue v. Sony Philippines, Inc., supra note 30, at 531.
99 Section 222, Tax Code.
100Rollo, p. 78 (G.R. No. 198841).
101 Id. at 75-79.
102 Id. at 73-74.
103 Id. at 155-159 (G.R. No. 196596).
104AsianConstruction and Development Corp. v. COMFAC Corp., 535 Phil. 513, 517-518 (2006) citing Tison v. Court of Appeals, G.R. No.
121027, July 31, 1997, 276 SCRA 582, 596-597.
105 Id. citing Arwood Industries, Inc. v. D.M Consunji, Inc., G.R. No. 142277, December 11, 2002, 394 SCRA 11, 18.
106 Id. at 518.
107Rollo, p. 302 (G.R. No. 196596), CTA Division Resolution dated June 9, 2010, quoted by DLSU.
108Supra note 103.
109 386 Phil. 719 (2000).
110 Id. at 726.
111See Section 8, Republic Act No. 1125, published in Official Gazette, S. No. 175 / 50 OG No. 8, 3458 (August, 1954).
112Supra note 91, at 726.
113 556 Phil. 439 (2007).
114 579 Phil. 442 (2008).
115 Section 76 in relation to Section 229 of the Tax Code.
116Commissioner of Internal Revenue v. Asian Transmission Corporation, 655 Phil. 186, 196 (2011).
117Commissioner of Internal Revenue v. Toledo Power, Inc., G.R. No. 183880, January 20, 2014, 714 SCRA 276, 292, citing Barcelon, Roxas
Securities, Inc. v. Commissioner of Internal Revenue, 529 Phil. 785 (2006).
118Rollo, p. 143-144 (G.R. No. 196596).
119 Id. at 144 (G.R. No. 196596), the amount is rounded-off from P93,860,675.40.
120 Id. at 143 (G.R. No. 196596). Capital Fund - Capital Projects Account.
121 Id. at 144 (G.R. No. 196596).
122 Rule 3, Section 2 of the Revised Rules of the CTA, A.M. No. 05-11-07-CTA, November 22, 2005.
123Rollo, pp. 86, 145 (G.R. No. 196596).
124 Id. at 81 (G.R. No. 198841).
125 Id. at 101, page 9 of CTA Division Amended Decision.
126 Id. at 98 (G.R. No. 198841).
127Id. at 87. According to the CTA, the income earned from the lease of premises to MTO-Sports Complex and La Casita amounted to
P2,090,880.00 and P1,916,844.00, respectively (Total of P4,007,724.00). These amounts were specifically identified as part of the proceeds
used by DLSU to pay an outstanding loan obligation that was previously obtained for the purpose of constructing the Sports Complex.
128 Id.
129 Id.
130 Id. at 86.
131 Id. at 85-86.
132The tax base of P4,841,066.65 was computed as follows:
chanRoblesvirtualLawlibrary
Rental income 10,610,379.00
Less: Rent income used in construction of Sports Complex 4,007,724.00
Rental income allegedly added and used in the CF-CPA Account 6,602,655.00
Less: Substantiated portion of CF-CPA disbursements 1,761,588.35
Tax base for deficiency income tax and VAT 4,841,066.65
133The substantiated portion of CF-CPA disbursements amounting to P1,761,308.37 was computed as follows:
chanRoblesvirtualLawlibrary
Rental income allegedly added and used in the CF-CPA Account 6,602,655.00
Multiply by: Ratio of substantiated disbursements (See note 134) 26.68%
Substantiated portion of CF-CPA disbursements 1,761,588.35
134The ratio of 26.68% was computed as follows:
chanRoblesvirtualLawlibrary
Substantiated disbursements of the CF-CPA Account, per
6,259,078.30
Independent CPA
Divide by: Total disbursements made out of the CF-CPA Account 23,463,543.02
Ratio 26.68%
135 For brevity, the exact amount of P10,610,379.00 shall hereinafter be expressed as P10.61 million.
136 For brevity, the exact amount of P6,602,655.00 shall hereinafter be expressed as P6.60 million.
137 For brevity, the exact amount of P23,463,543.02 shall hereinafter be expressed as P23.46 million.
138Supra note 130.
139Rollo,pp. 82-83 (G.R. No. 198841). Ateneo was assessed deficiency income tax and VAT under Section 2.2 of DOF Circular 137-87 and
BIR Ruling No. 173-88.
140 Id. at 83 (G.R. No. 198841).
141 Id. at 83 (G.R. No. 198841).
142 See Ateneo case (CTA Case Nos. 7246 & 7293, March 11, 2010). Id. at 140-154 (G.R. No. 198841).
143 Id. at 145 (G.R. No. 198841).
144 Id. at 85-90 (G.R. No. 198841).
145 Id. at 47 (G.R. No. 198841).
146 Id.
147Churchillv. Concepcion, 34 Phil. 969. 976 (1916); Eastern Theatrical Co. vs. Alfonso, 83 Phil. 852, 862 (1949); Abakada Guro Party List v.
Ermita, 506 Phil. 1, 130-131 (2005).
148British American Tobacco v. Camacho, 603 Phil. 38, 48-49 (2009).
149Commissioner of Internal Revenue v. Court of Appeals, 329 Phil. 987, 1010 (1996).
150 Section 173, Tax Code.
151 Sections 179 and 195, Tax Code.
152Rollo, p. 89 (G.R. No. 198841).
DISSENTING OPINION
LEONEN, J.:
I agree with the ponencia that Article IV, Section 4(3) of the 1987 Constitution grants tax exemption on all assets and all revenues earned by a
non-stock, non-profit educational institution, which are actually, directly, and exclusively used for educational purposes. All revenues, whether
or not sourced from educational activities, are covered by the exemption. The taxpayer needs only to prove that the revenue is actually,
directly, and exclusively used for educational purposes to be exempt from income tax.
First, Letter of Authority No. 2794, which covered the "Fiscal Year Ending 2003 and Unverified Prior Years," is void in its entirety for being in
contravention of Revenue Memorandum Order No. 43-90. Any assessment based on such defective letter of authority must likewise be void.
Second, the Court of Tax Appeals erred in finding that only a portion of the rental income derived by De La Salle University, Inc. (DLSU) from
its concessionaires was used for educational purposes.chanroblesvirtuallawlibrary
I
An audit process to which a particular taxpayer may be subjected begins when a letter of authority is issued by the Commissioner of Internal
Revenue or by the Revenue Regional Director. The letter of authority is an official document that empowers a revenue officer to examine and
scrutinize a taxpayer's books of accounts and other accounting records in order to determine the taxpayer's correct internal revenue tax
liabilities.1
In this regard, Revenue Audit Memorandum Order No. 1-00 provides that a letter of authority authorizes or empowers a designated revenue
officer to examine, verify, and scrutinize a taxpayer's books and records, in relation to internal revenue tax liabilities for a particular period.2
Revenue Membrandum Order No. 43-90, on policy guidelines for the audit/investigation and issuance of letters of authority to audit, provides:
chanRoblesvirtualLawlibrary
C. Other policies for issuance of L/As.
1. All audits/investigations, whether field audit or office audit, should be conducted under a Letter of Authority.
2. The duplicate of each internal revenue tax which is specifically indicated in the L/A shall be attached thereto, unless a return
is not required under the Tax Code to be filed therefor or when the taxpayer has not filed a return or the Assessment Branch
has certified that no return is on file therein or the same cannot be located.
3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing L/As covering
audit of "unverified prior years" is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A.
....
4. Any re-assignment/transfer of cases to another RO(s), and revalidation of L/As which have already expired, shall require the
issuance of a new L/A, with the corresponding notation thereto, including the previous L/A number and date of issue of said
L/As.
....
D. Preparation and issuance of L/As.
1. All L/As for cases selected and listed pursuant to RMO No. 36-90 to be audited in the revenue regions shall be prepared
and signed by the Regional Director (RD).
2. The Regional Director shall prepare and sign the L/As for returns recommended by the RDO for assignment to the
ROs, indicating therein the name and address of the taxpayer, the name of the RO(s) to whom the L/A is assigned, the
taxable period and kind of tax; after which he shall forward the same to the RDO or Chief, Assessment Branch, who in tum
shall indicate the date of issue of the L/A prior to its issuance.
3. The L/As for investigation of taxpayers by National Office audit offices (including the audit division in the Sector Operations
Service and Excise Tax Service) shall be prepared in accordance with the procedures in the preceding paragraph, by their
respective Assistant Commissioners and signed by the Deputy Commissioner concerned or the Commissioner. The L/As for
investigation of taxpayer by the intelligence and Investigation Office and any other special audit teams formed by the
Commissioner shall be signed by the Commissioner of Internal Revenue.
4. For the proper monitoring and coordination of the issuance of Letter of Authority, the only BIR officials authorized to issue
and sign Letters of Authority are the Regional Directors, the Deputy Commissioners and the Commissioner. For the
exigencies of the service, other officials may be authorized to issue and sign Letters of Authority but only upon prior
authorization by the Commissioner himself. (Emphasis supplied)
Thus, under Revenue Memorandum Order No. 43-90, both the taxable period and the kind of tax must be specifically stated.
Here, Letter of Authority No. 2794,5 which was the basis of the Bureau of Internal Revenue to examine DLSU's books of account, stated that
the examination covers the period Fiscal Year Ending 2003 and Unverified Prior Years.
It is my view that the entire Letter of Authority No. 2794 should be struck down as void for being broad, indefinite, and uncertain, and for being
in direct contravention to the policy clearly and explicitly declared in Revenue Memorandum Order No. 43-90 that: (a) a letter of authority
should cover one (1) taxable period; and (b) if it covers more than one taxable period, it must specify all the periods or years covered.
The prescribed procedures under Revenue Memorandum Order No. 43-90, including the requirement of definitely specifying the taxable year
under investigation, were meant to achieve a proper enforcement of tax laws and to minimize, if not eradicate, taxpayers' concerns on
arbitrary assessment, undue harassment from Bureau of Internal Revenue personnel, and unreasonable delay in the investigation and
processing of tax cases.6
Inasmuch as tax investigations entail an intrusion into a taxpayer's private affairs, which are protected and guaranteed by the Constitution, the
provisions of Revenue Memorandum Order No. 43-90 must be strictly followed.
Letter of Authority No. 2794 effectively allowed the revenue officers to examine, verity, and scrutinize DLSU's books of account and other
accounting records without limit as to the covered period. This already constituted an undue intrusion into the affairs of DLSU to its prejudice.
DLSU was at the mercy of the revenue officers with no adequate protection or defense.
As early as 1933, this Court in Sy Jong Chuy v. Reyes7 held that the extraordinary inquisitorial power conferred by law upon collectors of
internal revenue must be strictly construed. The power should be limited to books and papers relevant to the subject of investigation, which
should be mentioned with reasonable certainty. Although the case particularly referred to the use of "subpoena duces tecum" by internal
revenue officers, its discussion is apropos:
chanRoblesvirtualLawlibrary
The foregoing discussion will disclose that there are two factors involved in the correct solution of the question before us. The first fact which
must be made to appear by clear and unequivocal proof, as a condition precedent to the right of a court, and, by analogy, an internal revenue
officer, to require a person to deliver up for examination by the court or an internal revenue officer his private books and papers, is their
relevancy; and the second fact which must be established in the same manner is the specification of documents and an indication of them with
as much precision as is fair and feasible[.]
Speaking to the fact of relevancy, there is absolutely no showing of the nature of any official investigation which is being conducted by the
Bureau of Internal Revenue, and this is a prerequisite to the use of the power granted by section 436 of the Administrative Code. Moreover,
when the production under a subpoena duces tecum is contested on the ground of irrelevancy, it is for the movant or the internal revenue
officer to show facts sufficient to enable the court to determine whether the desired documents are material to the issues. And here, all that we
have to justify relevancy is the typewritten part of a mimeographed form reading: "it being necessary to use them (referring to the books) in an
investigation now pending under the Income Tax and Internal Revenue Laws." This is insufficient.
But it is in the second respect that the subpoena is most fatally defective. It will be recalled that it required the production of "all the
commercial books or any other papers on which are recorded your transactions showing income and expenses for the years 1925, 1926,
1927, 1928 inclusive", that these books numbered fifty-three in all, and that they are needed in the business of the corporation. In the parlance
of equity, the subpoena before us savored of a fishing bill, and such bills are to be condemned. That this is so is shown by the phraseology of
the subpoena which is a general command to produce all of the books of account for four years. This, it seems to us, made the subpoena
unreasonably broad in scope. The internal revenue officer had it within his power to examine any or all of the books of the corporation in the
offices of the corporation and then having ascertained what particular books were necessary for an official investigation had it likewise within
his power to issue a subpoena duces tecum sufficiently explicit to be understood and sufficiently reasonable not to interfere with the ordinary
course of business. But this method was not followed. Obviously, if the special deputy could in 1930 call for the production of the books of the
corporation for 1925, 1926, 1927, and 1928, the officer could have called for the production of the books for the year just previous, or 1929,
and for the books of the current year, and if this could be done, the intrusion into private affairs with disastrous paralyzation of business can
easily be visualized.8 (Citations omitted)ChanRoblesVirtualawlibrary
This Court held that the subpoena duces tecum issued by a special deputy of the Collector of Internal Revenue, which commanded a Chinese
merchant to appear at the Internal Revenue Office and produce for investigation all commercial books or papers showing his transactions for
four (4) years (from 1925 to 1928) was "unreasonably broad in scope." This Court further held that the subpoena was not properly issued
because the Collector failed to show the relevance of the Chinese books and to specify the particular books desired, and its sweeping scope
clashed with the constitutional prohibition against unreasonable search and seizure. Thus:
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Generally speaking, there are two readily understandable points of view of the question at issue. The first is the viewpoint of the tax collecting
officials. Taxation is a necessity as all must agree. It is for the officials who have to enforce the revenue laws to see to it that there is no
evasion of those laws and that there is an equal distribution of the tax burden. To accomplish their duty it will often be incumbent upon the
internal revenue officers, for the efficient administration of the service, to inspect the books of merchants and even require the production of
those books in the offices of the inspecting officials. The right of a citizen to his property becomes subservient to the public welfare. All [these]
we are the first to concede. In proper cases, the officers of the Bureau of Internal Revenue should receive the support of the courts when
these officers attempt to perform in a conscientious and lawful manner the duties imposed upon them by law. The trouble is that the particular
subpoena under scrutiny neither shows its relevancy nor specifies with the particularity required by law the books which are to be produced.
The second viewpoint is not that of the government on which is imposed the duty to collect taxes, but is the viewpoint of the merchant. A
citizen goes into business, and in so doing provides himself with the necessary books of account. He cannot have government officials on a
mere whim or a mere suspension taking his books from his offices to the offices of the government for inspection. To permit that would be to
place a weapon in the hands of a miscellaneous number of government employees some of whom might use it improperly and others of whom
might use it improperly. With an understanding of the obligations of the government to protect the citizen, the constitution and the organic law
have done so by throwing around him a wall which makes his home and his private papers his castle. It should be our constant purpose to
keep a subpoena duces tecum from being of such a broad and sweeping character as to clash with the constitutional prohibition against
unreasonable searches and seizures.
Answering the question at issue, we do so without vacillation by holding that the subpoena duces tecum was not properly issued in
accordance with law because the showing of relevancy was not sufficient to justify enforcing the production of the Chinese books; because
the subpoena duces tecum failed to specify the particular books desired, and because a ruling should be avoided which in any manner
appears to sanction an unreasonable search and seizure. In the absence of a showing of materiality, and in the absence of all particularity in
specifying what is wanted by a subpoena duces tecum, the refusal of a merchant to obey a subpoena, commanding him to produce his
commercial books, will be sustained. The courts function to protect the individual citizen of whatever class or nationality against an unjust
inquisition of his books and papers.9ChanRoblesVirtualawlibrary
If we were to uphold the validity of a letter of authority covering a base year plus unverified prior years, we would in essence encourage the
unscrupulous practice of issuing letters of authority even without prior compliance with the procedure that the Commissioner herself
prescribed. This would not help .in curtailing inefficiencies and abuses among revenue officers in the discharge of their tasks. There is nothing
more devious than the scenario where government ignores as much its own rules as the taxpayer's constitutional right against the
unreasonable examination of its books and papers.
In Viduya v. Berdiago:10
It is not for this Court to do less than it can to implement and enforce the mandates of the customs and revenue laws. The evils associated
with tax evasion must be stamped out - without any disregard, it is to be affirmed, of any constitutional right.11 (Emphasis
supplied)ChanRoblesVirtualawlibrary
The inevitability and indispensability of taxation is conceded. Under the law, the Bureau of Internal Revenue has access to all relevant or
material records and data of the taxpayer for the purpose of collecting the correct amount of tax.12 However, this authority must be exercised
reasonably and under the prescribed procedure. 13The Commissioner and revenue officers must strictly comply with the requirements of the
law and its own rules,14 with due regard to taxpayers' constitutional rights. Otherwise, taxpayers are placed in jeopardy of being deprived of
their property without due process of law.
There is nothing in the law-nor do I see any great difficulty-that could have prevented the Commissioner from cancelling Letter of Authority No.
2794 and replacing it with a valid Letter of Authority. Thus, with the nullity of Letter of Authority No. 2794, the assessment against DLSU
should be set aside.chanroblesvirtuallawlibrary
II
DLSU is not liable for deficiency income tax and value-added tax.
i. Alarey, Inc.
ii. Capri International, Inc.
iii. Zaide Food Corporation
iv. La Casita Roja
v. MTO International Product Mobilizer, Inc.
(2) The rental income from the concessionaires was added to the Depository Fund - PE Sports Complex Fund and to the Physical Plant
Fund (PPF), and, this income was spent on the Current Fund-Capital Projects Account (CF-CPA).
(3) DLSU's rental income from MTO- PE Sports Complex and La Casita, which was transmitted and used for the payment of the loan from
Philippine Trust Company for the construction of the PE Sports Complex, was actually, directly, and exclusively used for educational
purposes.15
(4) DLSU's rental income from Alarey, Inc., Zaide Food Corporation, Capri International, and MTO - Bookstore were transmitted to the CF-
CPA Account.16
These facts were supported by the findings of the Court commissioned independent CPA (ICPA), Atty. Raymund S. Gallardo of Punongbayan
& Araullo:
chanRoblesvirtualLawlibrary
From the journal vouchers/official receipts, we have traced that the income received from Alarey, Capri, MTO-Bookstore and Zaide were
temporarily booked under the Revenue account with the following codes: 001000506, 001000507, 001000513 and 001000514. At the end of
the year, said temporary account were closed to PPF account (Exhibits LL-3-A, LL-3-B and LL-3-C).
On the other hand, we have traced that the rental income received from MTO-PE Sports and La Casita [was] temporarily booked under the
Revenue Account code 001000515 and 001000516 upon receipt in the fiscal year May 31, 2001. At the end of fiscal year 2001, the said
temporary accounts were closed to the DF-PE Sports. However, starting fiscal year 2002, the rental income from the said lessees was directly
recorded under the DF-PE Sports account (Exhibits LL-4-A, LL-4-B, and LL-4-C).17 (Emphasis in the original)ChanRoblesVirtualawlibrary
With regard to the disbursements from the CF-CPA Fund, the ICPA examined DLSU's disbursement vouchers as well as subsidiary and
general ledgers. It made the following findings:
Nature of Expenditure 2001 2002 2003
Based on the subsidiary ledger (Exhibits "LL-29-A, LL-29-B and LL-29-C"), total expenses under the CF-CPA amounted to P14,158,711.48 in
2001, P17,126,033.76 in 2002 and P23,463,543.02 in 2003. Of the said amounts, P6,853,606.77, 8,378,917.36, P17,204,464.72 in 2001,
2002 and 2003 respectively, were not validated since the disbursement vouchers were not available. It was represented by the management
that such amounts were strictly spent for renovation. However, due to the migration of accounts to the new accounting software to be used by
the University sometime in 2011, some supporting documents which were used in the migration were inadvertently misplaced. 19
Hence, in its Decision dated January 5, 2010, the Court of Tax Appeals First Division upheld the Commissioner's assessment of deficiency
income tax "for petitioner's failure to fully account for and substantiate all the disbursements from the CF-CPA."20 According to the Court of
Tax Appeals, "it cannot scertain whether rent income from MTO-Bookstore, Alarey, Zaide and Capri were indeed used for educational
purposes."21
DLSU moved for reconsideration. Subsequently, it formally offered to the Court of Tax Appeals First Division, among others, 22 the following
supplemental pieces of documentary evidence:
1) Summary Schedule to Support Misplaced Vouchers for the Period of 3 Years from School Year June 1, 2001 to May 31, 2003 (Exh.
XX);23 and
2) Schedule of Disbursement Vouchers Examined (Unlocate Documents) for the Fiscal Years Ended May 31, 2001 (Exh. YY 24), May
31, 2002 (Exh. ZZ25cralawred) and May 31, 2003 (Exh. AAA26).
These pieces of evidence were admitted by the Court of Tax Appeals in its Resolution dated June 9, 2010. 27
Q10: Please tell us the relevance of Exhibits "YY", "ZZ" and "AAA".
A10: These are the details of the accounts pertaining to the inadvertently misplaced documents. Before the documents were
inadvertently misplaced, these have been entered in the accounting software of Petitioner. Details were downloaded from
Petitioner's accounting software.
These details include the Charge Account, the Classification of Expense per Chart Account of the University, the Cost Center per
Chart of Account of the University, the Supplier Name, the Disbursement Voucher Number, the Disbursement Voucher Date, the
Check Number, the Check Date, the Cost, and the Description per Disbursement Voucher.
The specifics which accompany the entries were all taken from the documents before these were inadvertently misplaced.
Exhibit "YY" pertains to the details of the accounts for Fiscal Year 2001, Exhibit "ZZ" for Fiscal Year 2002, and Exhibit "AAA" for
Fiscal Year 2003.28
Samples of the information provided in these pieces of evidence are as follows:
100-213- Furniture, PFO BARILEA 2001050105 5/30/2001 180403 3-May-01 89,234.04 TABLE, A
940 Fixture and Capital WOOD 1.20 x .6029
Equipment Projects WORKS
100- Airconditioner PFO RCC 2001081468 15-Aug-01 000018844 16- 63,249.9 AIRCON WIN
213-943 Capital MARKETING 2 Aug- 5 TYPE 3TR
Projects CORPORATIO 01 2HP SPLIT
N TYPE30
However, the Court of Tax Appeals First Division was unconvinced. It simply stated that DLSU failed to sufficiently account for the
unsubstantiated disbursements. Although it considered the other additional documentary evidence (Exhibits "VV" and "WW") formally offered
by DLSU, Exhibits "XX," "YY," "ZZ," and "AAA" were brushed aside without citing any reason or discussing the probative value or weight of
these additional pieces of evidence.32 Thus:
chanRoblesvirtualLawlibrary
With regard the unsubstantiated disbursements from the CF-CPA, Petitioner alleged that the supporting documents were inadvertently
misplaced due to migration of accounts to its new accounting software used sometime in 2001. In lieu thereof, petitioner submitted
downloaded copies of the Schedule of Disbursement Vouchers from its accounting software.
According to ICPA's findings, the petitioner was able to show only the disbursements from the CF-CPA amounting to P7,305,104.71,
P8,747,116.40 and P6,259,078.30 for the fiscal years 2001, 2002 and 2003, respectively.33ChanRoblesVirtualawlibrary
The Court of Tax Appeals First Division concluded that only the portion of the rental income pertaining to the substantiated disbursements of
the CF-CPA would be considered as actually, directly, and exclusively used for educational purposes. 34 This portion was computed by
multiplying the ratio of substantiated disbursements to the total disbursements per subsidiary ledgers to the total rental income, thus:
chanRoblesvirtualLawlibrary
Using the amounts determined for the Fiscal Year 2003,
P6,259,078.30
------------------ = 26.68% x P6,602,655.00 = P1,761,588.35
P23,463,543.02
Hence, for 2003, the portion of the rental income that was not sufficiently proven to have been used for educational purposes amounted to
P4,841,066.65. This amount was used as base for computing the deficiency income tax and value-added tax.
On appeal, the Court of Tax Appeals En Banc simply ruled that "petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account."35 The Court of Tax Appeals En Banc heavily relied on the findings of the ICPA that "the
[substantiated] disbursements from the CF-CPA Account for fiscal year 2003 amounts to P6,259,078.30." 36 However, these findings of the
ICPA were made when Exhibits "XX," "YY," "ZZ," and "AAA" had not yet been submitted. The additional exhibits were offered by DLSU to
address the findings of the ICPA with regard to the unsubstantiated disbursements. Unfortunately, nowhere in the Decision of the Court of Tax
Appeals En Banc was there a discussion on the probative value or weight of these additional exhibits.
As a rule, factual findings of the Court of Tax Appeals are entitled to the highest respect and will not be disturbed on appeal. Some exceptions
that have been recognized by this Court are: (1) when a party shows that the findings are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the tax court; 37 (2) when the judgment is premised on a misapprehension of facts; 38 or (3) when
the tax court failed to notice certain relevant facts that, if considered, would justify a different conclusion. 39 The third exception applies here.
The Court of Tax Appeals should have considered the additional pieces of evidence, which have been duly admitted and formed part of the
case records. This is a requirement of due process. 40 The right to be heard, which includes the right to present evidence, is meaningless if the
Court of Tax Appeals can simply ignore the evidence.
In Edwards v. McCoy:41
[T]he object of a hearing is as much to have evidence considered as it is to present it. The right to adduce evidence, without the corresponding
duty to consider it, is vain. Such right is conspicuously futile if the person or persons to whom the evidence is presented can thrust it aside
without notice or consideration.42ChanRoblesVirtualawlibrary
In Ang Tibay v. Court of Industrial Relations,43 this Court similarly ruled that "not only must the party be given an opportunity to present his
case and to adduce evidence tending to establish the rights which he asserts but the tribunal must consider the evidence presented."44
....
Section 5. When original document is unavailable. - When the original document has been lost or destroyed, or cannot be produced in court,
the offeror, upon proof of its execution or existence and the cause of its unavailability without bad faith on his part, may prove its contents by a
copy, or by a recital of its contents in some authentic document, or by the testimony of witnesses in the order
stated.ChanRoblesVirtualawlibrary
For secondary evidence to be admissible, there must be satisfactory proof of: (a) the execution and existence of the original; (b) the loss and
destruction of the original or its non-production in court; and (c) the unavailability of the original not being due to bad faith on the part of the
offeror. The admission by the Court of Tax Appeals First Division-which the En Banc affirmed of these pieces of evidence presupposes that all
three prerequisites have been established by DLSU, that is, that DLSU had sufficiently explained its non-production of the disbursement
vouchers, and the cause of unavailability is without bad faith on its part.
There can be no just determination of the present action if we ignore Exhibits "XX," "YY," "ZZ," and "AAA," which were submitted before the
Court of Tax Appeals and which supposedly contained the same information embodied in the unlocated disbursement vouchers. Exhibits
"YY," "ZZ," and "AAA" were the downloaded copies of the Schedule of Disbursement Vouchers from DLSU's accounting software. The
Commissioner did not dispute the veracity or correctness of the detailed entries in these documents. 45 Her objection to the additional pieces of
evidence was based on the ground that "DLSU was indirectly reopening the trial of the case" and the additional exhibits were "not newly
discovered evidence."46 An examination of these exhibits shows that the disbursements from the CF-CPA Account were used for educational
purposes.
These additional pieces of evidence, taken together with the findings of the ICPA, corroborate the findings of the Court of Tax Appeals in its
January 5, 2010 Decision that DLSU uses "fund accounting" to ensure that the utilization of an income (i.e., rental income) is restricted to a
specified purpose (educational purpose):
chanRoblesvirtualLawlibrary
Petitioner's Controller, Mr. Francisco De La Cruz, stated the following in his judicial affidavit:
chanRoblesvirtualLawlibrary
Q: You mentioned that one of your functions as Controller is to ensure that [petitioner]'s utilization of income from all sources is consistent with
existing policies. What are some of [petitioner]'s policies regarding utilization of its income from all sources?
To ensure observance of limitations and restrictions placed on the use of resources available to the [Petitioner], the accounts of the [Petitioner]
are maintained in accordance with the principle of fund accounting. This is the procedure by which resources for various purposes are
classified for accounting and financial reporting purposes into funds that are in accordance with specified activities and objectives. Separate
accounts are maintained for each fund; however, in the accompanying financial statements, funds that have similar characteristics have been
combined into fund groups. Accordingly, all financial transactions have been recorded and reported by fund
group.47ChanRoblesVirtualawlibrary
ACCORDINGLY, I vote to GRANT the Petition of De La Salle University, Inc. and to SET ASIDE the deficiency assessments issued against it.
PHILIPPINE AMUSEMENT AND GAMING G.R. No. 172087
CORPORATION (PAGCOR),
Petitioner, Present:
CORONA, C.J.,
CARPIO,
CARPIO MORALES,
- versus - VELASCO, JR.,
NACHURA,*
LEONARDO-DE CASTRO,
BRION,*
THE BUREAU OF INTERNAL REVENUE PERALTA,
(BIR), represented herein by HON. JOSE MARIO BUAG, BERSAMIN,
in his official capacity as COMMISSIONER OF INTERNAL DEL CASTILLO,
REVENUE, ABAD,
Public Respondent, VILLARAMA, JR.,
PEREZ,
JOHN DOE and JANE DOE, who are persons acting for, in MENDOZA, and
behalf, or under the authority of Respondent. SERENO, JJ.
Public and Private Respondents.
Promulgated:
x-----------------------------------------------------------------------------------------x
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition[1] with prayer for the issuance of a Temporary Restraining Order
and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the
declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of
1997, by excluding petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III of the
Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for
being contrary to law.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A[2] on January 1, 1977. Simultaneous to its creation, P.D. No.
1067-B[3](supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of five
percent (5%) of the gross revenue.[4] Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption. [5]
To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 [6] was issued. Section 13 thereof reads as
follows:
(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles, automobiles,
boats, ships, barges, aircraft and such other gambling paraphernalia, including accessories or related facilities, for the sole
and exclusive use of the casinos, the proper and efficient management and administration thereof and such other clubs,
recreation or amusement places to be established under and by virtue of this Franchise shall be exempt from the payment of
duties, taxes and other imposts, including all kinds of fees, levies, or charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing contractual
arrangements with the Corporation, for the sole and exclusive use of the casino or to be used to service the operations and
requirements of the casino, shall likewise be totally exempt from the payment of all customs duties, taxes and other imposts,
including all kinds of fees, levies, assessments or charges of any kind or nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as 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 to the earnings of the
Corporation, except a Franchise Tax of five percent (5%)of the gross revenue or earnings derived by the Corporation
from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and
shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established,
or collected by any municipal, provincial or national government authority.
(b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise,
specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator
has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this
Franchise and to those receiving compensation or other remuneration from the Corporation as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance of this
provision shall be free of any tax.
(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the Corporation should
declare a cash dividend income corresponding to the participation of the private sector shall, as an incentive to the
beneficiaries, be subject only to a final flat income rate of ten percent (10%) of the regular income tax rates. The dividend
income shall not in such case be considered as part of the beneficiaries' taxable income; provided, however, that such dividend
income shall be totally exempted from income or other form of taxes if invested within six (6) months from the date the dividend
income is received in the following:
(a) operation of the casino(s) or investments in any affiliate activity that will ultimately redound to the benefit
of the Corporation; or any other corporation with whom the Corporation has any existing arrangements in connection
with or related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government debentures; or
(c) BOI-registered or export-oriented corporation(s).[7]
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of Instruction No. 1430,
which was issued in September 1984.
On January 1, 1998, R.A. No. 8424,[8] otherwise known as the National Internal Revenue Code of 1997, took effect. Section
27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs) shall pay corporate income tax, except petitioner
PAGCOR, the Government Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and
the Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special
general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS),
the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the
Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business, industry, or activity. [9]
With the enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National Internal Revenue Code of 1997 were
amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National
Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special
general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall pay such
rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.
Different groups came to this Court via petitions for certiorari and prohibition[11] assailing the validity and constitutionality of R.A. No.
9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5, which imposes a 10% VAT on
importation of goods; and Section 6, which imposes a 10% VAT on sale of services and use or lease of properties, all contain a uniform
proviso authorizing the President, upon the recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions
were alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive authority to fix the
rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of Section 26 (2), Article VI of the Constitution, which
section provides for the "no amendment rule" upon the last reading of a bill;
2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the guarantee of equal protection of the
laws, and Section 28 (1), Article VI of the Constitution; and
3) other technical aspects of the passage of the law, questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337. [12]
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,[13] specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The
said revenue regulation, in part, reads:
(h) x x x
Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how
their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the Tax Code. This
includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or franchisees.
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE NON-
IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING
BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED
VAT ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE
BASIC LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON
PETITIONERS LICENSEES OR FRANCHISEES.[14]
The BIR, in its Comment[15] dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL
PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO
ALL OF THEIR PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,[16] concurred with the arguments of the
petitioner. It added that although the State is free to select the subjects of taxation and that the inequity resulting from singling out a particular
class for taxation or exemption is not an infringement of the constitutional limitation, a tax law must operate with the same force and effect to all
persons, firms and corporations placed in a similar situation. Furthermore, according to the OSG, public respondent BIR exceeded its statutory
authority when it enacted RR No. 16-2005, because the latter's provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No.
9337.
The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977, petitioner is no longer
exempt from corporate income tax as it has been effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that such
omission is unconstitutional, as it is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be
denied the equal protection of the laws.
.
In City of Manila v. Laguio, Jr.,[17] this Court expounded the meaning and scope of equal protection, thus:
Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed. Similar subjects, in other words, should not be treated differently, so as to give undue
favor to some and unjustly discriminate against others. The guarantee means that no person or class of persons shall be denied
the same protection of laws which is enjoyed by other persons or other classes in like circumstances. The "equal protection of
the laws is a pledge of the protection of equal laws." It limits governmental discrimination. The equal protection clause extends
to artificial persons but only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the law may
operate only on some and not all of the people without violating the equal protection clause. The classification must, as an
indispensable requisite, not be arbitrary. To be valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.[18]
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted from payment of
corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special
or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the
Government, except the Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine
Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by
this Section upon corporations or associations engaged in similar business, industry, or activity.[19]
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means dated October 27, 1997
would show that the exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of the Committee
on Ways on Means to the request of PAGCOR that it be exempt from such tax.[20] The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we
included a tax on cockfighting winnings.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the
VAT and other sales taxes---
CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release the money
into the hands of the public, they will not use that to --- for wallpaper. They will spend that eh, Mr. Chairman. So when they
spend that---
HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an
approximation?
HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the economy
which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives it in the
form of wages and supplies and other services and other goods. They are not being taken from the public and stored in a
vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.
The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate income tax was not based
on a classification showing substantial distinctions which make for real differences, but to reiterate, the exemption was granted upon the request
of PAGCOR that it be exempt from the payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the enumeration of
GOCCs that are exempt from paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the
Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR
be subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to show the
world who our creditors, that we are increasing official revenues that go to the national budget. Unfortunately today, Pagcor
is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small taxes that
they are subjected to. Of the 9.7 billion, they claim they remitted to national government seven billion. Pagkatapos, there
are other specific remittances like to the Philippine Sports Commission, etc., as mandated by various laws, and then about
400 million to the President's Social Fund. But all in all, their net profit today should be about 12 billion. That's why I am
questioning this two billion. Because while essentially they claim that the money goes to government, and I will accept
that just for the sake of argument. It does not pass through the appropriation process. And I think that at least if
we can capture 35 percent or 32 percent through the budgetary process, first, it is reflected in our official income
of government which is applied to the national budget, and secondly, it goes through what is constitutionally
mandated as Congress appropriating and defining where the money is spent and not through a board of directors
that has absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.
There is wisdom in the comments of my good friend from Cebu, Senator Osmea.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends from the
Department of Finance in a difficult position, but may we know your comments on this knowing that as Senator Osmea just
mentioned, he said, I accept that that a lot of it is going to spending for basic services, you know, going to most, I think,
supposedly a lot or most of it should go to government spending, social services and the like. What is your comment on
this? This is going to affect a lot of services on the government side.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre-judgment
on this and I don't blame you. I don't blame you. And I know you have your own research. But will this not affect a lot, the
disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for you to explain to,
say, foreign creditors, how do you explain to them that if there is a fiscal gap some of our richest corporations has [been]
spared [from] taxation by the government which is one rich source of revenues. Now, why do you save, why do you spare
certain government corporations on that, like Pagcor? So, would it be easier for you to make an argument if everything was
exposed to taxation?
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman Teves?
Yes, from definitely improving the collection, it will help us because it will then enter as an official revenue although
when dividends declare it also goes in as other income. (sic)
xxxx
xxxx
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on value-
added tax. Do you mean to say we are going to amend it from income tax to value-added tax, as far as Pagcor is
concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption from income
tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are VATable? What
will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but
it just takes away their exemption from non-payment of income tax.[22]
Taxation is the rule and exemption is the exception. [23] The burden of proof rests upon the party claiming exemption to prove that it is,
in fact, covered by the exemption so claimed. [24] As a rule, tax exemptions are construed strongly against the claimant. [25] Exemptions must be
shown to exist clearly and categorically, and supported by clear legal provision. [26]
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering that Section 1 of R.A.
No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative
intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the
omission or removal of PAGCOR from exemption from the payment of corporate income tax. It is a basic precept of statutory construction that
the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est
exclusio alterius.[27] Thus, the express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being
excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax,
expressed in the maxim: exceptio firmat regulam in casibus non exceptis.[28]
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCORs exemption from payment of corporate income
tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law
may operate only on some, and not all, without violating the equal protection clause. The legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part of, and is read into, the contract even without the parties expressly saying so. Petitioner states
that the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration and
inducement for their decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A.
No. 9337 has the effect of changing the main consideration and inducement for the transactions of private parties with it; thus, the amendatory
provision is violative of the non-impairment clause of the Constitution.
In Manila Electric Company v. Province of Laguna,[33] the Court held that a franchise partakes the nature of a grant, which is
beyond the purview of the non-impairment clause of the Constitution.[34] The pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the
nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from
being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment
clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this
kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not
to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution,
like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of
a public utility shall be granted except under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so requires.[35]
In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or amusement
places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of
the Philippines.[36] Under Section 11, Article XII of the Constitution, PAGCORs franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27
(c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCORs
transactions with private parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being contrary
to R.A. No. 9337.Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal
of petitioner's exemption from the payment of corporate income tax, which was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except Presidential Decree No. 529.[37]
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law that grants petitioner
exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A.
No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to
read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including
the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;
x x x x[38]
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on
other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed
by VAT-registered persons to persons or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed
in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.[39] Acesite was the owner and operator of the Holiday Inn Manila
Pavilion Hotel. It leased a portion of the hotels premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental income and
sale of food and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it in
the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid only the
amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the Commissioner of
Internal Revenue, fearing the legal consequences of its non-payment. In May 1998, Acesite sought the refund of the amount it paid as VAT on
the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR
and Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of
taxes. Section 13 of P.D. 1869 pertinently provides:
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise,
as 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
to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any municipal, provincial,
or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted
under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies),
or individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes,
like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from
indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator
refers to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although, differently worded, the
provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax
exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is
that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively
subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted
exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax
exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which
case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or lessor has the
option to follow either way in charging its clients and customer. In the instant case, Acesite followed the latter method, that is,
charging an additional 10% of the gross sales and rentals. Be that as it may, the use of either method, and in particular, the
first method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the
payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by
VAT registered persons shall be subject to 0%.
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of such
services to zero (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to
entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case of Commissioner of
Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World Health Organization (WHO)
upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee
WHO, and such does not violate the rule that tax exemptions are personal because the manifest intention of the agreement
is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869,
extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe
any indirect tax, like VAT, that may be shifted to PAGCOR.[40]
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in
R.A. No. 8424,[41] it is still applicable to this case, since the provision relied upon has been retained in R.A. No. 9337. [42]
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law
prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law. [43] RR No. 16-2005, therefore, cannot
go beyond the provisions of R.A. No. 9337.Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting
PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 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 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 Code of 1997, as amended by
Republic Act No. 9337.
No costs.
SO ORDERED.
G.R. No. 215427 December 10, 2014
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of the Bureau of
Internal Revenue, and JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority of
respondent, Respondents.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and 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 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 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 Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a "Motion for Clarification," in the session of the Court En
Bancheld on November 25, 2014, the members thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of
Court, given that petitioner essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction in
issuing RMC No. 33-2013. Consequently, a new docket number has been assigned thereto, 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:
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et al.). The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or Preliminary Injunction Application
dated September 6, 2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to payment of the appropriate
docket fees; and
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five (5) days from notice hereof.
Brion, J., no part and on leave. Perlas-Bernabe, J., on official leave.
Considering that the parties havefiled their respective pleadings relative to the instant petition, and the appropriate docket fees have been duly
paid by petitioner, this Court considers the instant petition submitted for resolution.
The facts are briefly summarized as follows:
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 the declaration of nullity of Section 1 2 of Republic Act (R.A.)No.
93373 insofar as it amends Section 27(C)4 of R.A. No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding
petitioner from the enumeration of government-owned or controlled corporations (GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision 6 granting in part the petition filed by petitioner. Its fallo reads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 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 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 Code of 1997, as amended by
Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial reconsideration, but the samewere denied by this Court in a
Resolution8 dated May 31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March 15, 2011 and the Resolution dated
May 31, 2011, which clarifies the "Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR),
its Contractees and Licensees." Relevant portions thereof state:
II. INCOME TAX
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-owned or controlled corporations (GOCCs) that are exempt from income tax.
Accordingly, PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or
amusement places, gaming pools, and other related operations, are subject to corporate income tax under the NIRC, as amended. This
includes, among others:
a) Income from its casino operations;
b) Income from dollar pit operations;
c) Income from regular bingo operations; and
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, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private
operators;
c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCORs other income that is not connected with the foregoing operations are likewise subject to corporate income tax under the NIRC, as
amended.
PAGCORs contractees and licensees are entities duly authorized and licensed by PAGCOR to perform 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.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent (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 operations as described above.
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. The request was, however, denied by the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, recorded in the Book of Entries of
Judgment.10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation and application of the
aforesaid Decision, and seeking clarification with respect to the following:
1. Whether PAGCORs tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits gaming income, pursuant to
its Charter P.D. 1869, as amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.
2. If it is deemed repealed or amended, whether PAGCORs gaming income is subject to both 5% franchise tax and income tax.
3. Whether PAGCORs income from operation of related services is subject to both income tax and 5% franchise tax.
4. Whether PAGCORs tax privilege of paying 5% franchise tax inures to the benefit of third parties with contractual relationship with
PAGCOR in connection with the operation of casinos.11
In our Decision dated March 15, 2011, we have already declared petitioners income tax liability in view of the withdrawal of its tax privilege
under R.A. No. 9337. However, we made no distinction as to which income is subject to corporate income tax, considering that the issue
raised therein was only the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs
exempted from corporate income tax.
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 (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
classified the aforesaid income as follows:
1. PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places,
gaming pools, includes, among others:
(a) Income from its casino operations;
(b) Income from dollar pit operations;
(c) Income from regular bingo operations; and
(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, to withholding tax under existing
regulations.
2. Income from "other related operations"includes, but is not limited to:
(a) Income from licensed private casinos covered by authorities to operate issued to private operators;
(b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to
private operators;
(c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
(d) Income from private poker operations;
(e) Income from junket operations;
(f) Income from SM demo units; and
(g) Income from other necessary and related services, shows and entertainment. 12
After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we
sustain petitioners contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as
amended, while its income from other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A.
No. 9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation 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 could not have been applicable to petitioners income from gaming operations as it is already exempt
therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions.
xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as 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 to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or
collected by any municipal, provincial, or national government authority. 13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most
sound and logical interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first
place. This is clear from the wordings of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or
earnings derived by petitioner from its operation under the Franchise in lieuof all taxes of any kind or form, as well as fees, charges or leviesof
whatever nature, which necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the
same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for
the five percent (5%) franchise tax. The exemption attached to the income from gaming operations exists independently from the enactment of
R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse
position if the exemption was granted (then withdrawn) than when it was not granted at all in the first place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated
October 27, 1997, the exemption of petitioner from the payment of corporate income tax was due to the acquiescence of the Committee on
Ways and Means to the request of petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd for petitioner to seek
exemption from income tax on its gaming operations when under its Charter, it is already exempted from paying the same.
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
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays 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 payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial or national government authority; 15 (2) income tax for income realized from other
necessary and related services, shows and entertainment of petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax
exemption under R.A. No. 8424, petitioners tax liability on income from other related services was merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity oroperation. There is no
inconsistency between the statutes; and in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the tax treatment of petitioners income
prevails over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a general law
regardless of their dates of passage and the special is to be considered as remaining an exception to the general. 17 The rationale is:
Why a special law prevails over a general law has been put by the Court as follows: x x x x
x x x The Legislature consider and make provision for all the circumstances of the particular case. The Legislature having specially considered
all of the facts and circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting
a general law containing provisions repugnant to the provisions of the charter, and without making any mention of its intention to amend or
modify the charter, intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs.
Nolting 34 Phil., 401.)18
Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and
privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law. 19 However, if no
provision or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the
lawmakers, for repeal of laws by implication is not favored. 20
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioners tax exemption of its gaming income, then
Section 13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least, should have been
mentioned in the repealing clause of R.A. No. 9337.21 However, the repealing clause never mentioned petitioners Charter as one of the laws
being repealed. On the other hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph
of R.A. No. 9136, is categorically provided under Section 24 (a) (b) of R.A. No. 9337, to wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected
herein are made subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as
amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation (NPC);
(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
(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 modified accordingly. 22
When petitioners franchise was extended on June 20, 2007 without revoking or withdrawing itstax exemption, it effectively reinstated and
reiterated all of petitioners rights, privileges and authority granted under its Charter. Otherwise, Congress would have painstakingly
enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person.
Thus, the extension of petitioners franchise under the sameterms and conditions means a continuation 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 special law, are considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and effective, as well as harmonious with each other. 23
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 P.D. 1869, as amended. With respect to petitioners income from
operation of other related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no application with
respect to petitioners income from other related services, inview of the express provision of Section 14(5) of P.D. 1869, as amended, to wit:
Section 14. Other Conditions.
xxxx
(5) Operation of related services. The Corporation is authorized to operate such necessary and related 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 the same shall be considered as a separate income of the Corporation and shall be subject to income tax.24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis
therefor.
For proper guidance, the first classification of PAGCORs income under RMC No. 33-2013 (i.e., income from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or 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
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 respondent, which should be immediately struck down,
lest grave injustice results. More, it is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement
said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No. 8424, by excluding petitioner from the
enumeration of GOCCs exempted from corporate income tax, is valid and constitutional. In addition, we hold that:
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 by Section l(c) ofR.A. No. 9337;
2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and
3. Petitioner's income from other related services is subject to corporate income tax only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013
insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's
income from other related services.
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 petitioner's income derived from its gaming operations; and (2) franchise tax on
petitioner's income from other related services.
SO ORDERED.
G.R. No. 212530, August 10, 2016
BLOOMBERRY RESORTS AND HOTELS, INC., Petitioner, v. BUREAU OF INTERNAL REVENUE, REPRESENTED BY COMMISSIONER
KIM S. JACINTO-HENARES, Respondent.
DECISION
PEREZ, J.:
This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules on Court seeking: (a) to annul the issuance by the Commissioner of
Internal Revenue (CIR) of an alleged unlawful governmental regulation, specifically the provision of Revenue Memorandum Circular (RMC)
No. 33-20131 dated 17 April 2013 subjectingcontractees and licensees of the Philippine Amusement and Gaming Corporation (PAGCOR) to
income tax under the National Internal Revenue Code (NIRC) of 1997, as amended; and (b) to enjoin respondent CIR from implementing the
assailed provision of RMC No. 33-2013.2chanrobleslaw
The Facts
As narrated in the present petition, the factual antecedents of the case reveal that, on 8 April 2009, PAGCOR granted to petitioner a
provisional license to establish and operate an integrated resort and casino complex at the Entertainment City project site of PAGCOR.
Petitioner and its parent company, Sureste Properties, Inc., own and operate Solaire Resort & Casino. Thus, being one of its licensees,
petitioner only pays PAGCOR license fees, in lieu of all taxes, as contained in its provisional license and consistent with the PAGCOR Charter
or Presidential Decree (PD) No. 1869,3 which provides the exemption from taxes of persons or entities contracting with PAGCOR in casino
operations.
However, when Republic Act (R.A.) No. 9337 took effect4, it amended Section 27(C) of the NIRC of 1997, which excluded PAGCOR from the
enumeration of government-owned or controlled corporations (GOCCs) exempt from paying corporate income tax. The enactment of the law
led to the case of PAGCOR v. The Bureau of Internal Revenue, et al.,5 where PAGCOR questioned the validity or constitutionality of R.A. No.
9337 removing its exemption from paying corporate income tax, and therefore alleging the same to be void for being repugnant to the equal
protection and the non-impairment clauses embodied in the 1987 Philippine Constitution. Subsequently, the Court articulated that Section 1 of
RA No. 9337, amending Section 27(C) of the NIRC of 1997, which removed PAGCOR's exemption from corporate income tax, was indeed
valid and constitutional.
Consequently, in implementing the aforesaid amendments made by R.A. No. 9337, respondent issued RMC No. 33-2013 dated 17 April 2013
declaring that PAGCOR, in addition to the five percent (5%) franchise tax of its gross revenue under Section 13(2)(a) of PD No. 1869, is now
subject to corporate income tax under the NIRC of 1997, as amended. In addition, a provision therein states that PAGCOR's contractees and
licensees, being entities duly authorized and licensed by it to perform gambling casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools, are likewise subject to income tax under the NIRC of 1997, as amended.
Aggrieved, as it is now being considered liable to pay corporate income tax in addition to the 5% franchise tax, petitioner immediately elevated
the matter through a petition for certiorari and prohibition before this Court asserting the following arguments: (i) PD No. 1869, as amended by
R.A. No. 9487, is an existing valid law, and expressly and clearly exempts the contractees and licensees of PAGCOR from the payment of all
kinds of taxes except the 5% franchise tax on its gross gaming revenue; (ii) This clear exemption from taxes of PAGCOR's contracting parties
under Section 13(2)(b) of PD No. 1869, as amended by R.A. No. 9487, was not repealed by the deletion of PAGCOR in the list of tax-exempt
entities under the NIRC; (iii) Respondent CIR acted without or in excess of its jurisdiction, or with grave abuse of discretion amounting to lack
or excess of jurisdiction when she issued the assailed provision in RMC No. 33-2013 which, in effect, repealed or amended PD No. 1869; and
(iv) Respondent CIR, in issuing the assailed provision in RMC No. 33-2013, will adversely affect an industry which seeks to create income for
the government, promote tourism and generate jobs for the Filipino people. 6chanrobleslaw
To rationalize its direct recourse before this Court, petitioner submits the following justification:
chanRoblesvirtualLawlibrary
(a) What is involved is a pure question of law, i.e. whether or not petitioner is exempted from payment of all taxes, national or
local, except the 5% franchise tax by virtue of Section 13(2)(b) of PD No. 1869, as amended;
(b) The rule on exhaustion of administrative remedies is disregarded, among others, when: (i) the administrative action is
patently illegal amounting to lack or excess of jurisdiction; (ii) to require exhaustion of administrative remedies would be
unreasonable; and (iii) it would amount to nullification of a claim;
(c) The gaming business funded by private investors under license by PAGCOR is a new industry which involves national
interest. Hence, the inclusion of the assailed provision in RMC No. 33-2013 which implements income taxes on PAGCOR's
licensees and operators when an exemption for such is specifically provided for by PD No. 1869, as amended, being
unlawful and unwarranted legislation by the respondent, seriously affects national interest as it effectively curtails the basis
for the investments in the industry and resulting tourist interest and jobs generated by the industry; and
(d) The assailed provision of RMC No. 33-2013 affects not only petitioner or other locators and PAGCOR licensees in
Entertainment City, Paraaque City, but also the rest of private casinos licensed by PAGCOR operating in economic zones.
Thus, in order to prevent multiplicity of suits and to avoid a situation when different local courts issue differing opinions on
one question of law, direct recourse to this Court is likewise sought. 7
It is the contention of petitioner that although Section 4 of the NIRC of 1997, as amended, gives respondent CIR the power to interpret the
provisions of tax laws through administrative issuances, she cannot, in the exercise of such power, issue administrative rulings or circulars not
consistent with the law sought to be applied since administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out. Since the assailed provision in RMC No. 33-2013 subjecting the contractees and licensees of
PAGCOR to income tax under the NIRC of 1997, as amended, contravenes the provision of the PAGCOR Charter granting tax exemptions to
corporations, associations, agencies, or individuals with whom PAGCOR has any contractual relationship in connection with the operations of
the casinos authorized to be conducted under the PAGCOR Charter, it is petitioner's position that the assailed provision was issued by
respondent CIR with grave abuse of discretion amounting to lack or excess of jurisdiction.
Respondent, in her Comment filed on 18 December 2014,8 counters that there was no grave abuse of discretion on her part when she issued
the subject revenue memorandum circular since it did not alter, modify or amend the intent and meaning of Section 13(2)(b) of PD No. 1869,
as amended, insofar as the imposition is concerned, considering that it merely clarified the taxability of PAGCOR and its contractees and
licensees for income tax purposes as well as other franchise grantees similarly situated under prevailing laws; that prohibition will not lie to
restrain a purely administrative act, nor enjoin acts already done, being a preventive remedy; and that tax exemptions are strictly construed
against the taxpayer.
The Issues
Hence, we are now presented with the following issues for our consideration and resolution: (i) whether or not the assailed provision of RMC
No. 33-2013 subjecting the contractees and licensees of PAGCOR to income tax under the NIRC of 1997, as amended, was issued by
respondent CIR with grave abuse of discretion amounting to lack or excess of jurisdiction; and (ii) whether or not said provision is valid or
constitutional considering that Section 13(2)(b) of PD No. 1869, as amended (PAGCOR Charter), grants tax exemptions to such contractees
and licensees.
Our Ruling
At the outset, although it is true that direct recourse before this Court is occasionally allowed in exceptional cases without strict observance of
the rules on hierarchy of courts and on exhaustion of administrative remedies, we find the imperious need to first determine whether or not this
case falls within the said exceptions, before we delve into the merits of the instant petition.
We thus find the need to look back at the dispositions rendered in Asia International Auctioneers, Inc., et al. v. Parayno, Jr., 9 wherein we ruled
that revenue memorandum circulars10 are considered administrative rulings issued from time to time by the CIR. It has been explained that
these are actually rulings or opinions of the CIR issued pursuant to her power under Section 4 11 of the NIRC of 1997, as amended, to make
rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of
articles of sales and similar purposes. Therefore, it was held that under R.A. No. 1125,12 which was thereafter amended by RA No.
9282,13 such rulings of the CIR (including revenue memorandum circulars) are appealable to the Court of Tax Appeals (CTA), and not to any
other courts.
In the same case, we further declared that "failure to ask the CIR for a reconsideration of the assailed revenue regulations and RMCs is
another reason why a case directly filed before us should be dismissed. It is settled that the premature invocation of the court's intervention is
fatal to one's cause of action. If a remedy within the administrative machinery can still be resorted to by giving the administrative officer every
opportunity to decide on a matter that comes within his jurisdiction, then such remedy must first be exhausted before the court's power of
judicial review can be sought. The party with an administrative remedy must not only initiate the prescribed administrative procedure to obtain
relief but also to pursue it to its appropriate conclusion before seeking judicial intervention in order to give the administrative agency an
opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to the court." 14chanrobleslaw
Then, in The Philippine American Life and General Insurance Company v. Secretary of Finance, 15 we had the occasion to elucidate that the
CIR's power to interpret the provisions of the Tax Code and other tax laws is subject to the review by the Secretary of Finance; and thereafter,
the latter's ruling may be appealed to the CTA, having the technical knowledge over the subject controversies. Also, the Court held that "the
power of the CTA includes that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the [regional trial court] in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of
the tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these
cases."16 Stated differently, the CTA "can now rule not only on the propriety of an assessment or tax treatment of a certain transaction, but
also on the validity of the revenue regulation or revenue memorandum circular on which the said assessment is based." 17 From the foregoing
jurisprudential pronouncements, it would appear that in questioning the validity of the subject revenue memorandum circular, petitioner should
not have resorted directly before this Court considering that it appears to have failed to comply with the doctrine of exhaustion of
administrative remedies and the rule on hierarchy of courts, a clear indication that the case was not yet ripe for judicial remedy. Notably,
however, in addition to the justifiable grounds relied upon by petitioner for its immediate recourse (i.e. pure question of law, patently illegal act
by the BIR, national interest, and prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in order not to further
delay the disposition of the issues at hand, and also to promote the vital interest of substantial justice. To add, in recent years, this Court has
consistently acted on direct actions assailing the validity of various revenue regulations, revenue memorandum circulars, and the likes, issued
by the CIR. The position we now take is more in accord with latest jurisprudence. Upon the exercise of this prerogative, we are ushered into
the merits of the case.
The determination of the submissions of petitioner will have to follow the pilot case of PAGCOR v. The Bureau of Internal Revenue, et
al.,18 where this Court clarified its earlier ruling in G.R. No. 172087 19involving the same parties, and expressed that: (i) Section 1 of RA No.
9337, amending Section 27(C) of the NIRC of 1997, as amended, which excluded PAGCOR from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional; (ii) PAGCOR's tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes
with respect to its income from gaming operations is not repealed or amended by Section l(c) of R.A. No. 9337; (iii) PAGCOR's income from
gaming operations is subject to the 5% franchise tax only; and (iv) PAGCOR's income from other related services is subject to corporate
income tax only.
First. Under P.D. No. 1869, as amended, [PAGCOR] is subject to income tax only with respect to its operation of related services.
Accordingly, the income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to [PAGCOR's] income from
operation of related services. Such income tax exemption could not have been applicable to [PAGCOR's] income from gaming
operations as it is already exempt therefrom under P.D. No. 1869, as amended, to wit:
SECTION 13. Exemptions.
XXXX
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as 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 to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the
gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial, or national government authority.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most
sound and logical interpretation because [PAGCOR] could not have been exempted from paying taxes which it was not liable to pay in the first
place. This is clear from the wordings of P.D. No. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross
revenue or earnings derived by [PAGCOR] from its operation under the Franchise in lieu of all taxes of any kind or form, as well as
fees, charges or levies of whatever nature, which necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to [PAGCOR] with respect to its income from gaming
operations as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local,
under its Charter, save only for the five percent (5%) franchise tax. The exemption attached to the income from gaming operations
exists independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright ridiculous, if not
deleterious, since [PAGCOR] would be in a worse position if the exemption was granted (then withdrawn) than when it was not granted at all
in the first place.20 (Emphasis supplied)
Furthermore,
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 the manner.
As we see it, there is no conflict between P.D. No. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable
upon [PAGCOR], 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 payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial or national government authority; and (2) income tax for income
realized from other necessary and related services, shows and entertainment of [PAGCOR]. With the enactment of R.A. No. 9337, which
withdrew the income tax exemption under R.A. No. 8424, [PAGCOR's] tax liability on income from other related services was merely
reinstated.
It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for each kind of activity or operation. There is no
inconsistency between the statutes; and in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. No. 1869, as amended, which expressly provides the tax treatment of [PAGCOR's]
income prevails over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a
general law regardless of their dates of passage and the special is to be considered as remaining an exception to the
general. x x x
x x x x Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights
and privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law. However, if
no provision or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of
the lawmakers, for repeal of laws by implication is not favored.
In this regard, we agree with [PAGCOR] that if the lawmakers had intended to withdraw [PAGCOR's] tax exemption of its gaming
income, then Section 13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least,
should have been mentioned in the repealing clause of R.A. No. 9337. However, the repealing clause never mentioned [PAGCOR's]
Charter as one of the laws being repealed. On the other hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well
as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under Section 24(a) (b) of R.A. No. 9337, x x x.
xxxx
When [PAGCOR's] franchise was extended on June 20, 2007 without revoking or withdrawing its tax exemption, it effectively
reinstated and reiterated all of [PAGCOR's] rights, privileges and authority granted under its Charter. Otherwise, Congress would have
painstakingly enumerated the rights and privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to
a person. Thus, the extension of [PAGCOR's] franchise under the same terms and conditions means a continuation 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 of P.D. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with
Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and effective, as well as harmonious with each other.
Given that [PAGCOR's] Charter is not deemed repealed or amended by R.A. No. 9337, [PAGCOR's] income derived from gaming
operations is subject only to the five percent (5%) franchise tax, in accordance with P.D. 1869, as amended. With respect to
[PAGCOR's] income from operation of other related services, the same is subject to income tax only. The five percent (5%) franchise tax finds
no application with respect to [PAGCOR's] income from other related services, in view of the express provision of Section 14(5) of P.D. No.
1869, as amended, x x x.21 (Emphasis supplied)
The Court through Justice Diosdado M. Peralta, categorically followed what was simply provided under the PAGCOR Charter (PD No. 1869,
as amended by RA No. 9487), by proclaiming that despite amendments to the NIRC of 1997, the said Charter remains in effect. Thus, income
derived by PAGCOR from its gaming operations such as the operation and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gaming pools and related operations is subject only to 5% franchise tax, in lieu of all other taxes, including
corporate income tax. The Court concluded that the CIR committed grave abuse of discretion amounting to lack or excess of
jurisdiction when it issued RMC No. 33-2013 subjecting both income from gaming operations and other related services to
corporate income tax and 5% franchise tax considering that it unduly expands the Court's Decision dated 15 March 2011 without
due process, which creates additional burden upon PAGCOR.
Noticeably, however, the High Court in the abovementioned case intentionally did not rule on the issue of whether or not PAGCOR's tax
privilege of paying only the 5% franchise tax in lieu of all other taxes inures to the benefit of third parties with contractual relationship with it in
connection with the operation of casinos, such as petitioner herein. The Court sitting En Bane simply stated that:
The resolution of the instant petition is limited to clarifying the tax treatment of [PAGCOR's] income vis-a-vis our Decision dated March 15,
2011. This Decision (dated 10 December 2014) is not meant to expand our original Decision (dated 15 March 2011) by delving into new
issues involving [PAGCOR's] 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 if this resolution. For another, to answer the fourth issue raised by [PAGCOR] relative to its contractees and
licensees would be downright premature and iniquitous as the same would effectively countenance sidesteps to judicial process. 22
Bearing in mind the parties involved and the similarities of the issues submitted in the present case, we are now presented with the prospect
of finally resolving the confusion caused by the amendments introduced by RA No. 9337 to the NIRC of 1997, and the subsequent issuance of
RMC No. 33-2013, affecting the tax regime not only of PAGCOR but also its contractees and licensees under the existing laws and prevailing
jurisprudence.
Section 13 of PD No. 1869 evidently states that payment of the 5% franchise tax by PAGCOR and its contractees and licensees exempts
them from payment of any other taxes, including corporate income tax, quoted hereunder for ready reference:
Sec. 13. Exemptions.
xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as 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 to the earnings of the Corporation, except a Franchise Tax of five (5%) percent
of the gross revenue or earnings derived by the Corporation from its operationunder this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from
the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend
to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those
receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.(Emphasis and underlining supplied)
As previously recognized, the above-quoted provision providing for the said exemption was neither amended nor repealed by any subsequent
laws (i.e. Section 1 of R.A. No. 9337 which amended Section 27(C) of the NIRC of 1997); thus, it is still in effect. Guided by the doctrinal
teachings in resolving the case at bench, it is without a doubt that, like PAGCOR, its contractees and licensees remain exempted from the
payment of corporate income tax and other taxes since the law is clear that said exemption inures to their benefit.
We adhere to the cardinal rule in statutory construction that when the law is clear and free from any doubt or ambiguity, there is no room for
construction or interpretation. As has been our consistent ruling, where the law speaks in clear and categorical language, there is no occasion
for interpretation; there is only room for application.23chanrobleslaw
As the PAGCOR Charter states in unequivocal terms that exemptions granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the
benefit of and extend tocorporation(s), association(s), agency(ies), or individual(s) with whom the PAGCOR or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise, so it must be that
all contractees and licensees of PAGCOR, upon payment of the 5% franchise tax, shall likewise be exempted from all other taxes, including
corporate income tax realized from the operation of casinos.
For the same reasons that made us conclude in the 10 December 2014 Decision of the Court sitting En Banc in G.R. No. 215427 that
PAGCOR is subject to corporate income tax for "other related services", we find it logical that its contractees and licensees shall likewise pay
corporate income tax for income derived from such "related services."
Simply then, in this case, we adhere to the principle that since the statute is clear and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation. This is the plain meaning rule or verba legis, as expressed in the maxim index animi sermo or
speech is the index of intention.24chanrobleslaw
Plainly, too, upon payment of the 5% franchise tax, petitioner's income from its gaming operations of gambling casinos, gaming clubs and
other similar recreation or amusement places, and gaming pools, defined within the purview of the aforesaid section, is not subject to
corporate income tax.
WHEREFORE, the petition is GRANTED. Accordingly, respondent Bureau of Internal Revenue, represented by Commissioner Kim S. Jacinto-
Henares is hereby ORDERED to CEASE AND DESIST from implementing Revenue Memorandum Circular No. 33-2013 insofar as it imposes
corporate income tax on petitioner Bloomberry Resorts and Hotels, Inc.'s income derived from its gaming operations.
SO ORDERED.chanRoblesvirtualLawlibrary
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's assessment of deficiency income taxes against respondent
British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of
18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the
international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation
service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments,
it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience
and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in
1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the
Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines Wamer Barnes
and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of P2,498,358.56 for
deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of
a new assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under
protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR on 16 February 1972.
But before said denial, BOAC had already filed a petition for review with the Tax Court on 27 January 1972, assailing the assessment and
praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in
the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of
Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16 February 1972, however,
the CIR not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case the deficiency income tax
assessment for P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's
request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court
praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of
BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do
not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is
income from services so that the place where services are rendered determines the source. Thus, in the dispositive portion of its Decision, the
Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against
BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of
tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from
Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in the Philippines
or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation but a non-resident foreign
corporation, then it is liable to Philippine income tax at the rate of thirty-five per cent (35%) of its gross income received from
all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales
agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in
the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the
various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by
Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally incident to,
and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources
within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country, except
a foreign fife insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the
Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income
from Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of
whatever kind and in whatever form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests,
rents, dividends, securities, or the transactions of any business carried on for gain or profile, or gains, profits, and income
derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any source
whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws." Income
means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it means something distinct
from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder
and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21)
dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the
sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37,
by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income
from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and
that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place
where the services are rendered determines the source; and since BOAC's service of transportation is performed outside the Philippines, the
income derived is from sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation.
Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of
an income is that activity ... which produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is
the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency
income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69,
promulgated on 24 November, 1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings. (Sec. 24[b]
[21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier
doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail
provided the cargo or mail originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2- % tax on gross
Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax
Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal 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 of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein
subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the
activity of transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by the State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of the case under consideration is income tax, a direct tax on the
income of persons and other entities "of whatever kind and in whatever form derived from any source." Since the two cases treat of a different
subject matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the British Overseas
Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to
1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.
Separate Opinions
Promulgated:
COMMISSIONER OF INTERNAL REVENUE,
Respondent. September 29, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the Decision[1] dated July 5,
2007 of the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying petitioners claim for tax refund of P5.03 million.
The undisputed facts are as follows:
Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the laws of the State of Delaware, U.S.A., engaged in the
international airline business.
Petitioner used to be an online international carrier of passenger and cargo, i.e., it used to operate passenger and cargo flights originating in the
Philippines. Upon cessation of its passenger flights in and out of the Philippines beginning February 21, 1998, petitioner appointed a sales agent
in the Philippines -- Aerotel Ltd. Corp., an independent general sales agent acting as such for several international airline companies. [2] Petitioner
continued operating cargo flights from the Philippines until January 31, 2001. [3]
On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax refund, pursuant to Section 28(A)(3)(a)[4] of the National
Internal Revenue Code of 1997 (NIRC) in relation to Article 4(7)[5] of the Convention between the Government of the Republic of the Philippines
and the Government of the United States of America with respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total
amount of P15,916,680.69 pertaining to income taxes paid on gross passenger and cargo revenues for the taxable years 1999 to 2001, which
included the amount of P5,028,813.23 allegedly representing income taxes paid in 1999 on passenger revenue from tickets sold in the
Philippines, the uplifts of which did not originate in the Philippines. Citing the change in definition of Gross Philippine Billings (GPB) in the NIRC,
petitioner argued that since it no longer operated passenger flights originating from the Philippines beginning February 21, 1998, its passenger
revenue for 1999, 2000 and 2001 cannot be considered as income from sources within the Philippines, and hence should not be subject to
Philippine income tax under Article 9[6] of the RP-US Tax Treaty.[7]
As no resolution on its claim for refund had yet been made by the respondent and in view of the two (2)-year prescriptive period (from the time
of filing the Final Adjustment Return for the taxable year 1999) which was about to expire on April 15, 2002, petitioner filed on said date a petition
for review with the Court of Tax Appeals (CTA).[8]
Petitioner asserted that under the new definition of GPB under the 1997 NIRC and Article 4(7) of the RP-US Tax Treaty, Philippine tax authorities
have jurisdiction to tax only the gross revenue derived by US air and shipping carriers from outgoing traffic in the Philippines. Since the Bureau
of Internal Revenue (BIR) erroneously imposed and collected income tax in 1999 based on petitioners gross passenger revenue, as beginning
1998 petitioner no longer flew passenger flights to and from the Philippines, petitioner is entitled to a refund of such erroneously collected income
tax in the amount of P5,028,813.23.[9]
In its Decision[10] dated May 18, 2006, the CTAs First Division[11] ruled that no excess or erroneously paid tax may be refunded to petitioner
because the income tax on GPB under Section 28(A)(3)(a) of the NIRC applies as well to gross revenue from carriage of cargoes originating from
the Philippines. It agreed that petitioner cannot be taxed on its 1999 passenger revenue from flights originating outside the Philippines. However, in
reporting a cargo revenue of P740.33 million in 1999, it was found that petitioner deducted two (2) items from its gross cargo revenue of P2.84
billion: P141.79 million as commission and P1.98 billion as other incentives of its agent.These deductions were erroneous because the gross
revenue referred to in Section 28(A)(3)(a) of the NIRC was total revenue before any deduction of commission and incentives. Petitioners gross
cargo revenue in 1999, being P2.84 billion, the GPB tax thereon was P42.54 million and not P11.1 million, the amount petitioner paid for the reported
net cargo revenue of P740.33 million. The CTA First Division further noted that petitioner even underpaid its taxes on cargo revenue by P31.43
million, which amount was much higher than the P5.03 million it asked to be refunded.
A motion for reconsideration was filed by petitioner but the First Division denied the same. It held that petitioners claim for tax refund was not
offset with its tax liability; that petitioners tax deficiency was due to erroneous deductions from its gross cargo revenue; that it did not make an
assessment against petitioner; and that it merely determined if petitioner was entitled to a refund based on the undisputed f acts and whether
petitioner had paid the correct amount of tax.[12]
Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First Division.
Hence, this petition anchored on the following grounds:
I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE PETITIONERS CLAIM FOR REFUND OF
ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS [GPB] BASED ON ITS FINDING THAT
PETITIONERS UNDERPAYMENT OF [P31.43 MILLION] GPB TAX ON CARGO REVENUES IS A LOT HIGHER THAN
THE GPB TAX OF [P5.03 MILLION] ON PASSENGER REVENUES, WHICH IS THE SUBJECT OF THE INSTANT
CLAIM FOR REFUND. THE DENIAL OF PETITIONERS CLAIM ON SUCH GROUND CLEARLY AMOUNTS TO AN
OFF-SETTING OF TAX LIABILITIES, CONTRARY TO WELL-SETTLED JURISPRUDENCE.
II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONERS RIGHT TO DUE PROCESS.
III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY DENYING PETITIONERS CLAIM FOR REFUND
OF ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS BASED ON ITS FINDING THAT
PETITIONER UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT OF [P31.43 MILLION] FOR THE
TAXABLE YEAR 1999.
IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE ANY ASSESSMENTS FOR DEFICIENCY
TAXES. THE AUTHORITY TO MAKE ASSESSMENTS FOR DEFICIENCY NATIONAL INTERNAL REVENUE TAXES
IS VESTED BY THE 1997 NIRC UPON RESPONDENT.
V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME TAX FOR THE TAXABLE YEAR 1999 IS
ALREADY BARRED BY PRESCRIPTION.[13]
The main issue to be resolved is whether the petitioner is entitled to a refund of the amount of P5,028,813.23 it paid as income tax on its
passenger revenues in 1999.
Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line passenger revenues cannot be denied based on the finding of
the CTA that petitioner allegedly underpaid the GPB tax on cargo revenues by P31,431,171.09, which underpayment is allegedly higher than
the GPB tax of P5,028,813.23 on passenger revenues, the amount of the instant claim. The denial of petitioners claim for refund on such ground
is tantamount to an offsetting of petitioners claim for refund of erroneously paid GPB against its alleged tax liability. Petitioner thus cites the well-
entrenched rule in taxation cases that internal revenue taxes cannot be the subject of set-off or compensation.[14]
According to petitioner, the offsetting of the liabilities is very clear in the instant case because the amount of petitioners claim for refund
of erroneously paid GPB tax of P5,028,813.23 for the taxable year 1999 is being offset against petitioners alleged deficiency GPB tax liability
on cargo revenues for the same year, which was not even the subject of an investigation nor any valid assessment issued by respondent against
the petitioner. Under Section 228[15] of the NIRC, the taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void. This administrative process of issuing an assessment is part of procedural due process
enshrined in the 1987 Constitution. Records do not show that petitioner has been assessed by the BIR for any deficiency GBP tax for 1999, nor
was there any finding or investigation being conducted by respondent of any liability of petitioner for GPB tax for the said taxable period. Clearly,
petitioners right to due process was violated.[16]
Petitioner further argues that the CTA acted in excess of its jurisdiction because the exclusive appellate jurisdiction of the CTA covers only
decisions or inactions of the respondent in cases involving disputed assessments. The CTA has effectively assessed petitioner with a P31.43
million tax deficiency when it concluded that petitioner underpaid its GPB tax on cargo revenue. Since respondent did not issue an assessment
for any deficiency tax, the alleged deficiency tax on its cargo revenue in 1999 cannot be considered a disputed assessment that may be passed
upon by the CTA. Petitioner stresses that the authority to issue an assessment for deficiency internal revenue taxes is vested by law on
respondent, not with the CTA.[17]
Lastly, petitioner argues that any assessment against it for deficiency income tax for taxable year 1999 is barred by prescription. Petitioner
claims that the prescriptive period within which an assessment for deficiency income tax may be made has prescribed on April 17, 2003, three
(3) years after it filed its 1999 tax return.[18]
Respondent Commissioner maintains that the CTA acted within its jurisdiction in denying petitioners claim for tax refund. It points out that the
objective of the CTAs determination of whether petitioner correctly paid its GPB tax for the taxable year 1999 was to ascertain the latters
entitlement to the claimed refund and not for the purpose of imposing any deficiency tax. Hence, petitioners arguments regarding the propriety
of the CTAs determination of its deficiency tax on its GPB for gross cargo revenues for 1999 are clearly misplaced. [19]
The petition has no merit.
As correctly pointed out by petitioner, inasmuch as it ceased operating passenger flights to or from the Philippines in 1998, it is not
taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues. This much was also found by the CTA. In South African Airways
v. Commissioner of Internal Revenue,[20] we ruled that the correct interpretation of the said provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2% of its GPB, while international air carriers that do not have flights
to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.
Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable year 1999 at the time when petitioner was still operating
cargo flights originating from the Philippines although it had ceased passenger flight operations. The CTA found that petitioner had underpaid
its GPB tax for 1999 because petitioner had made deductions from its gross cargo revenues in the income tax return it filed for the taxable year
1999, the amount of underpayment even greater than the refund sought for erroneously paid GPB tax on passenger revenues for the same
taxable period. Hence, the CTA ruled petitioner is not entitled to a tax refund.
Petitioners arguments regarding the propriety of such determination by the CTA are misplaced.
Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made erroneous deductions on its gross cargo revenue;
that because of the erroneous deductions, petitioner reported a lower cargo revenue and paid a lower income tax thereon; and that petitioner's
underpayment of the income tax on cargo revenue is even higher than the income tax it paid on passenger revenue subject of the claim for refund,
such that the refund cannot be granted.
Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is made in case of
any list, statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any understatement
or undervaluation, no tax collected under such assessment shall be recovered by any suit, 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 statements or returns made or to be made in good faith regarding annual depreciation of oil or gas
wells and mines.
In the afore-cited case of South African Airways, this Court rejected similar arguments on the denial of claim for tax refund, as follows:
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability
under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the latter
provision. Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot
be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors
of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from
the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes
cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
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 cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off.
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.
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund
with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental
motion for reconsideration alleging bringing to said courts attention the existence of the deficiency income 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 same year. To award such
refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein
private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for
the same year.
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 constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself
and without unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that (w)hen an assessment is made in case of any list, statement, or
return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be 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 statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.
Moreover, to grant the refund without determination of the proper assessment and the tax due would
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 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.
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 important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as taxes. This would necessarily include the determination of the
correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties
as to all the matters subject thereof or necessarily involved therein. (Emphasis supplied.)
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.
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 NIRC, is liable under Sec.
28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for
a refund.[21] (Additional emphasis supplied.)
In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to a refund based on the facts. On the assumption
that petitioner filed a correct return, it had the right to file a claim for refund of GPB tax on passenger revenues it paid in 1999 when it was not
operating passenger flights to and from the Philippines. However, upon examination by the CTA, petitioners return was found erroneous as it
understated its gross cargo revenue for the same taxable year due to deductions of two (2) items consisting of commission and other incentives
of its agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is not entitled to a refund of its GPB tax on its passenger
revenue, the amount of the former being even much higher (P31.43 million) than the tax refund sought (P5.2 million). The CTA therefore correctly
denied the claim for tax refund after determining the proper assessment and the tax due. Obviously, the matter of prescription raised by petitioner
is a non-issue. The prescriptive periods under Sections 203[22] and 222[23] of the NIRC find no application in this case.
We must emphasize that tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in favor of the taxing
authority.[24] In any event, petitioner has not discharged its burden of proof in establishing the factual basis for its claim for a refund and we find
no reason to disturb the ruling of the CTA. It has been a long-standing policy and practice of the Court to respect the conclusions of quasi-
judicial agencies such as the CTA, a highly specialized body specifically created for the purpose of reviewing tax cases.[25]
WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated July 5, 2007 of the Court of Tax Appeals En Banc in
C.T.A. EB No. 227.
With costs against the petitioner.
SO ORDERED.
x-----------------------------------------------------------------------------------------x
DECISION
The Case
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision [1] and October 30, 2007
Resolution[2] of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of Internal
Revenue. The assailed decision affirmed the Decision dated May 10, 2006 [3] and Resolution dated August 11, 2006[4] rendered by the CTA First
Division.
The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa.
Its principal office is located at Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the Philippines, it is an internal
air carrier having no 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 off-line flights for the carriage of passengers and cargo between
ports or points outside the territorial 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.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights, summarized as follows:
2.5% Gross
Period Date Filed Phil. Billings
For Passenger 1st Quarter May 30, 2000 PhP 222,531.25
2nd Quarter August 29, 2000 424,046.95
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91
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 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 was docketed
as CTA Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA 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 Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of
32% on its income derived from the sales of passage documents in the Philippines. On this ground, the CTA denied petitioners claim for a
refund.
Petitioners Motion for Reconsideration of the above decision was denied by the CTA First Division in a Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax payment on its GPB. This was
denied by the CTA in its assailed decision. A subsequent Motion for Reconsideration by petitioner was also denied in the assailed resolution of
the CTA En Banc.
The Issues
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 the 32% income tax imposed by
Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of passage documents covering petitioners off-line
flights is Philippine-source income subject to Philippine income tax.
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]
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 contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,[6] we held, Since an 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.
In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec. 28(A)(3)(a) of the 1997
NIRC defining GPB. It is petitioners contention that, with the new definition of GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner
argues that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax.
Gross Philippine billings include gross revenue realized from uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the
cargo or mail originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:
Gross Philippine Billings means gross revenue realized from uplifts of passengers anywhere in the world and excess baggage,
cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the passage documents
were sold in the Philippines. Legislature departed from such concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
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 and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage document.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines, income is
included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, it is not taxable under Sec.
28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further posits the view that due to the non-applicability of
Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for its sale of passage documents in the Philippines.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas 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 that their income from sales of passage documents here is income from within the Philippines. Thus, in that
case, we held the off-line air carrier liable for the 32% tax on its taxable income.
Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it does not apply to the instant
case, which must be decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations, such as itself, on
all income from sources within the Philippines. Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international
carrier that does not maintain flights to or from the Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at
all. In other words, the existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all 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 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, then the general rule under Sec. 28(A)(1) would
not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable
for the tax under Sec. 28(A)(1).
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. The findings therein that an off-line air carrier is doing business in
the Philippines and that income from the sale of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is to exempt off-line air carriers
from income tax by citing the pronouncements made by Senator Juan Ponce Enrile during the deliberations on the provisions of the 1997 NIRC.
Such pronouncements, however, are not controlling on this Court. We said in Espino v. Cleofe:[8]
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must be
sought, first of all, in the words of the statute itself, read and considered in their natural, ordinary, commonly-accepted and
most obvious significations, according to good and approved usage and without resorting to forced or subtle construction.
Courts, therefore, as a rule, cannot presume that the law-making 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 jurisdiction that statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not controlling in the
interpretation of law. (Emphasis supplied.)
Moreover, an examination of the subject provisions of the law would show that petitioners interpretation of those provisions is erroneous.
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the
Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
xxxx
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-
half percent (2 1/2%) on its Gross Philippine Billings as defined hereunder:
(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 and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of
the Gross Philippine Billings if the passenger boards a plane in a port or 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 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.
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources
within the Philippines.Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as that which would otherwise be included in the provision from which it is excepted. It is a clause which
exempts something from the operation of a statue by express words.[9] Further, an exception need not be introduced by the words except or
unless. An exception will be construed as such if it removes something from the operation of a provision of law. [10]
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 international carriers that derive income from carriage of persons, excess
baggage, cargo and mail 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 the exception. As such, petitioner must fall under the
general rule. This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being
excepted must be regarded as coming within the purview of the general rule. [11]
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.
As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that petitioner is liable for income tax under Sec.
28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether the existence of such liability would preclude their claim for a refund of
tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioners motion for reconsideration, the CTA First Division ruled in its Resolution dated
August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a taxpayer
from claiming a tax refund since a refund claim can proceed independently of a tax assessment and that the assessment
cannot be offset by its claim for refund.
Petitioners argument is erroneous. Petitioner premises its argument on the existence of an assessment. 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 assessment to be made, respondent must observe the
formalities provided in Revenue Regulations No. 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]
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1),
considering that there has not yet been any assessment of their obligation under the latter provision. Petitioner argues that such offsetting is in
the nature of legal compensation, which cannot be applied under the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,[13] thus:
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject
to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be
subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
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
cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
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.
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:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental motion for
reconsideration alleging bringing to said courts attention the existence of the deficiency income 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 same year. To award such refund despite the existence of that deficiency
assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at
the same time be liable for a tax deficiency assessment for the same year.
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 constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim
of Citytrust was filed, provides that (w)hen an assessment is made in case of any list, statement, or return, which in the opinion
of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be 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
statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.
Moreover, to grant the refund without determination of the proper assessment and the tax due would 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 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.
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 important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the Government is
entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or
necessarily involved therein. (Emphasis supplied.)
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.
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 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by
petitioner is now put in doubt. As such, we cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright denial of
petitioners claim for a refund. Even though petitioner is not entitled to a refund due to the question on the propriety of petitioners tax return
subject of the instant controversy, it would not be proper to deny such claim without making a determination of petitioners liability under Sec.
28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is,
gross income less deductions and exemptions, if any. It cannot be assumed 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 or
that a tax deficiency exists. The assailed decision fails to mention having computed for the tax due under Sec. 28(A)(1) and the records are
bereft of any evidence sufficient to establish petitioners taxable income. There is a necessity to receive evidence to establish such amount vis-
-vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc in CTA E.B. Case No. 210
are SET ASIDE. The instant case is REMANDED to the CTA En Banc for 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
in this Decision.
SO ORDERED.
RESOLUTION
FELICIANO, J.:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and Gamble
Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and
Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the
thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit in the
amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code
("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen
percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public
respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision ordering
petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA
of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between
the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this Resolution resolving
that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit, which
need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the Petition for Review
filed by the Commissioner of Internal Revenue. The question was not raised by the Commissioner on the administrative level, and neither was
it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising this
question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not pretend
that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or
tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the
government must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance,
save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time on
appeal questions which had not been litigated either in the lower court or on the administrative level. For, if petitioner had at the earliest
possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express authorization from its parent corporation to
bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in
the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen below,
also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of
a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court for the recovery
of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer
files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (As amended by
P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC?
The term "taxpayer" is defined in our NIRC as referring to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus
becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is
made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms liable for tax" and
"subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who
is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest,
or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in fact the
agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to
withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of
both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer.
The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law. 6 (Emphasis
supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment
of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted
where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of
this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and
to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by
basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable
for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-
vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund
and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section
24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all
sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of
the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the
Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20)
percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the
preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax
waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the
amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year
may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not
be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss
recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid
or accrued during the taxable year to any foreign country or to any possession of the United States; and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation
from which itreceives dividends in any taxable year shall
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less
developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to
any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such
accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess profits taxes imposed on or
with respect to suchprofits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of
any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having
been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA.
This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the
amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic
cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but
instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed
paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce
double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate
P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
P65.00 Available for remittance as dividends to P&G-USA
P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax
P65.00 Dividends remittable to P&G-USA
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC
P9.75 Reduced dividend tax
P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC
P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if
P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for
Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical
with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of
which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your
contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of
credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation declaring the dividend in addition to the tax withheld from
the dividend remitted. In other words, the U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion
of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000
Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S.
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize
as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750
100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly more than 20%
requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its parent company shall
be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and
modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation.
(Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and
Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and
which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by this Title shall be
credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess profits, taxes paid or
accrued during the taxable year to any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US governmente.g., for taxes collected by the US government
on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives
dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country,
upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such
accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is
taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term"accumulated profits"
when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed
upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such
dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the
income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection shall be
construed to mean such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US
subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the US corporate income tax paid by its
US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with
a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit
granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that
P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been answered. The basic
legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-
USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent
(35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the
"deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption
nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not
applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given
by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11
It is this
practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g.,
Republic of Vanuatu 12Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the
fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as a matter of law, of a
particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to
prevent the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify
to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent
corporation for the taxable year involved. Since the US tax laws can and do change, such implementing regulations could also provide that
failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the
twenty (20) percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US law at a
given time. We should leave details relating to administrative implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct
reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather
to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and
objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen
percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economyforemost of which is
the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the
rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends
received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost
of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit
from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier
taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor
additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires
the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20)
percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the
investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.
P55.25 Dividends actually remitted to P&G-USA
P55.25
x 46% Maximum US corporate income tax rate
P25.415US corporate tax payable by P&G-USA
without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
P15.66 US corporate income tax payable after Section 901
tax credit.
P55.25
- 15.66
P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)
- 0 - US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on
the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up with P55.25, the full
amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should encourage
additional investment or re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," 15the Philippines, by a
treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to
US parent corporations:
Art 11. Dividends
xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a
resident of the other Contracting State shall not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's
taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent
corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine [subsidiary] . 16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax
Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of
twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US
law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to
SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the
Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.
Separate Opinions
# Separate Opinions
CRUZ, J., concurring:
I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at
least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to their home state. In effect, both the Philippines and the home state of the foreign
investors reduce their respective tax "take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may be confined to the
35% corporate income tax and 15% dividend tax only, both payable to the Philippines, with the US tax hability being offset wholly or substantially by the Us "deemed paid' tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or
more on the same amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will be encouraged to
do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to the
superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and contribute to our economic development. The benefit to us may not be
immediately available in instant revenues but it will be realized later, and in greater measure, in terms of a more stable and robust economy.
As a way out of double taxation, countries enter into tax treaties. A tax treaty 1
is a bilateral convention (but may be made multilateral) entered into between sovereign
states for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment,
and according fair and equitable tax treatment to foreign residents or nationals. 2
A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be derived therefrom.
A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35
percent but a concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are
considered as having been frilly paid.
To illustrate:
"X" Foreign Corporation income 100
Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15
1. "X" Foreign Corp. Tax Liability without Tax Sparing
"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55
2. "X" Foreign Corp. Tax Liability with Tax Sparing
"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35
By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the reversal of the Procter & Gamble decision for the following reasons:
1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the same day the decision of the Second Division was promulgated, and while Wander has attained
finality this is simply because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by said Third Division.
2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite settled
doctrines from a treatise on Civil Law:
We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability in the law. The doctrine, which is really 'adherence to precedents,' states that once a
case has been decided one way, then another case, involving exactly the same point at issue, should be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a doctrine may be, and no
matter how long it has been followed thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare decisis does not and should not apply when there is a conflict
between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil. 249).
While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no longer rules. More pregnant than anything else is that the court shall be right (Phil.
Trust Co. v. Mitchell, 69 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the
United States, a country with which we had no tax treaty, at the time the taxes herein were collected.
4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere fact that in this Procter and Gamble case the B.I.R. desires; to charge 35% indicates that the
B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of the B.I.R.
5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would
be rendered unattainable.
6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves
unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to bring up the case.
ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of our own decision should be DENIED.
Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.
Footnotes
1 We refer here (unless otherwise expressly indicated) to the provisions of the NIRC as they existed during the relevant taxable years and at the time the claim for refund was made. We shall hereafter
refer simply to the NIRC.
2 Section 20 (n), NIRC (as renumbered and re-arranged by Executive Order No. 273, 1 January 1988).
3 E.g., Section 51 (e), NIRC:
Sec. 51. Returns and payment of taxes withheld at source.. . .
xxx xxx xxx
(e) Surcharge and interest for failure to deduct and withhold.If the withholding agent, in violation of the provisions of the preceding section and implementing regulations thereunder, fails to deduct
and withhold the amount of tax required under said section and regulations, he shall be liable to pay in addition to the tax required to be deducted and withheld, a surcharge of fifty per centum if the
failure is due to willful neglect or with intent to defraud the Government, or twenty-five per centum if the failure is not due to such causes, plus interest at the rate of fourteen per centum per annum from
the time the tax is required to be withheld until the date of assessment.
xxx xxx xxx
Section 251 (Id.):
Sec. 251. Failure of a withholding agent to collect and remit tax. Any person required to collect, account for, and remit any tax imposed by this Code who willfully fails to collect such tax, or account
for and remit such tax, or willfully assists in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable to a penalty equal to
the total amount of the tax not collected, or not accounted for and remitted. (Emphasis supplied)
4 Houston Street Corporation v. Commissioner of Internal Revenue, 84 F. 2nd. 821 (1936); Bank of America v. Anglim, 138 F. 2nd. 7 (1943).
5 15 SCRA 1 (1965).
6 15 SCRA at 4.
7 The following detailed examination of the tenor and import of Sections 901 and 902 of the US Tax Code is, regrettably, made necessary by the fact that the original decision of the Second Division
overlooked those Sections in their entirety. In the original opinion in 160 SCRA 560 (1988), immediately after Section 902, US Tax Code is quoted, the following appears: "To Our mind, there is nothing
in the aforecited provision that would justify tax return of the disputed 15% to the private respondent" (160 SCRA at 567). No further discussion of Section 902 was offered.
8 Sometimes also called a "derivative" tax credit or an "indirect" tax credit; Bittker and Ebb, United States Taxation of Foreign Income and Foreign Persons, 319 (2nd Ed., 1968).
9 American Chicle Co. v. U.S. 316 US 450, 86 L. ed. 1591 (1942); W.K. Buckley, Inc. v. C.I.R., 158 F. 2d. 158 (1946).
10 In his dissenting opinion, Paras, J. writes that "the amount of the tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether or not the tax credit contemplated is
within the limits set forth in the law" (Dissent, p. 6) Section 902 US Tax Code does not specify particular fixed amounts or percentages as tax credits; what it does specify in Section 902(A) (2) and (C)
(1) (B) is a proportionexpressed in the fraction:
dividends actually remitted by P&G-Phil. to P&G-USA
amount of accumulated profits earned by P&G-Phil. in
excess of income tax
The actual or absolute amount of the tax credit allowed by Section 902 will obviously depend on the actual values of the numerator and the denominator used in the fraction specified. The point is that
the establishment of the proportion or fraction in Section 902 renders the tax credit there allowed determinate and determinable.
** The denominator used by Com. Plana is the total pre-tax income of the Philippine subsidiary. Under Section 902 (c) (1) (B), US Tax Code, quoted earlier, the denominator should be the amount of
income of the subsidiary in excess of [Philippine] income tax.
11 The US tax authorities cannot determine the amount of the "deemed paid" credit to be given because the correct proportion cannot be determined: the numerator of the fraction is unknown, until
remittance of the dividends by P&G-Phil. is in fact effected. Please see computation, supra, p. 17.
12 BIR Ruling dated 21 March 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.
13 BIR Ruling dated 13 October 1981, addressed to Mr. A.R. Sarvino, Manager-Securities, Hongkong and Shanghai Banking Corporation.
14 BIR Ruling dated 31 January 1983, addressed to the Tax Division, Sycip, Gorres, Velayo and Company.
15 Text in 7 Philippine Treaty Series 523; signed on 1 October 1976 and effective on 16 October 1982 upon ratification by both Governments and exchange of instruments of ratification.
16 Art. 23 (1), Tax Convention; the same treaty imposes a similar obligation upon the Philippines to give to the Philippine parent of a US subsidiary a tax credit for the appropriate amount of US taxes
paid by the US subsidiary. (Art. 23[2], id) Thus, Sec. 902 US Tax Code and Sec. 30(c) (8), NIRC, have been in effect been converted into treaty commitments of the United States and the Philippines,
respectively, in respect of US and Philippine corporations.
PARAS, J., dissenting:
1 There are two types of credit systems. The first, is the underlying credit system which requires the other contracting state to credit not only the 15% Philippine tax into company dividends but also the
35% Philippine tax on corporations in respect of profits out of which such dividends were paid. The Philippine corporation is assured of sufficient creditable taxes to cover their total tax liabilities in their
home country and in effect will no longer pay taxes therein. The other type provides that if any tax relief is given by the Philippines pursuant to its own development program, the other contracting state
will grant credit for the amount of the Philippine tax which would have been payable but for such relief.
2 The Philippines, for one, has entered into a number of tax treaties in pursuit of the foregoing objectives. The extent of tax treaties entered into by the Philippines may be seen from the following
tabulation:
Table 1 RP Tax Treaties
BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled
Wander Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of 15%
withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation organized under Philippine laws. It is
wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and remitted to its parent company,
Glaro dividends in the amount of P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to
the Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on the dividends it remitted to
Glaro amounting to P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of
P115,400.00, contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by
Presidential Decree Nos. 369 and 778, and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with respondent Court of
Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the amount of P115,440.00
representing overpaid withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second
quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated August 13, 1984. Hence, the
instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED
INHOLDING THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE PARENT
COMPANY OF THE HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE
DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to claim the refund; and (2) Whether or
not Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the dividend income and a mere
withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this Court. It was never raised at the
administrative level, or at the Court of Tax Appeals. To allow a litigant to assume a different posture when he comes before the court and
challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby the Courtwhich is supposed to
review administrative determinationswould not review, but determine and decide for the first time, a question not raised at the administrative
forum. Thus, it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level,
issues not raised in the lower court cannot be raised for the first time on appeal (Aguinaldo Industries Corporation vs. Commissioner of
Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597;
Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement
of the alleged overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro.
The fact that it became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax
Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. Thus, this Court
construing Section 53 (b) of the Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent is
compulsory." It is a device to insure the collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines,
by aliens who are outside the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA
944). In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of surcharge and interest (Section
54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity who should for the refund or credit of overpaid withholding
tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign country where Glaro is domiciled,
grants to Glaro a tax credit against the tax due it, equivalent to 20%, or the difference between the regular 35% rate of the preferential 15%
rate. The dispute in this issue lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation
from corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
(b) Tax on foreign corporations. 1) Non-resident corporation. A foreign corporation not engaged in
trade or business in the Philippines, including a foreign life insurance company not engaged in the life
insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest (except interest on foreign loans which
shall be subject to 15% tax), dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains,
profits, and income, and capital gains: ... Provided, still further That 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%)
dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends
received, 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%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly, Wander claims that full credit is
granted and not merely credit equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of
the parent corporation allows a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty
percentage point portion spared, waived or otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a
Swiss law to the effect that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared waived or otherwise considered as
if paid in whole or in part by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the case may be,
of the foreign tax so spared or waived or considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose
any tax or the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly
stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations" interest here and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner
that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines,
the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which
is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue,
24 SCRA 198, which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
[CTA CASE: GH PROP v COMM 2015 PDF]
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