EN BANC

June 30, 1987

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is
erroneous. We have carefully studied it and find it is not; on the contrary, it is supported by law
and doctrine. So finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase price
was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were
made in cash and through irrevocable letters of credit. 3Fourteen promissory notes were signed
for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of
the Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were
remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered
to the NDC in Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest
on the balance of the purchase price. No tax was withheld. The Commissioner then held the
NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The
BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the
claimed amount. 6 The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum
of P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a
petition for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of
the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within
the Philippines. — The following items of gross income shall be treated as gross income from
sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities — the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC — were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and collect
income tax on interest received by foreign corporations not engaged in trade or business within
the Philippines is not planted upon the condition that 'the activity or labor — and the sale from
which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest
derived from sources within the Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or
activity' of non-resident corporations in the Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest rather than the physical location of the
securities, bonds or notes or the place of payment, is the determining factor of the source of
interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk &
Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if
the obligor is a resident of the Philippines the interest payment paid by him can have no other
source than within the Philippines. The interest is paid not by the bond, note or other interest-
bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly organized
and existing under the laws of the Republic of the Philippines, with address and principal office
at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese
shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the
contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the
Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%)
per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial
Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which
are duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese
shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17,
$1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase
price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid
the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it
is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue
Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is on the
promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese
shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the
vessels acquired by petitioner is interest derived from sources within the Philippines subject to
income tax under the then Section 24(b)(1) of the National Internal Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

(b) Exclusion from gross income. — The following items shall not be included in gross income
and shall be exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. — Interest upon the obligations of the Government of the
Republic of the Philippines or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent provided in the act authorizing
the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407,
which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such
authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such
securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of the
Philippines, the due and punctual payment of both principal and interest of the above note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this
question must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by the government in consonance with and certainly
not against the following provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of real or
personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and
all officers and employees of the Government of the Philippines having control, receipt, custody;
disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or categorical
gains, profits and income of any nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of business therein, shall (except in the
cases provided for in subsection (a) of this section) deduct and withhold from such annual or
periodical gains, profits and income a tax to twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in section fifty-three a tax
equal to thirty (now 35%) per centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it
is governed in its proprietary activities not only by its charter but also by the Corporation Code
and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not the
Republic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure
to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c)
of the Tax Code, thus:

Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of April
of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the
amount withheld to the officer of the Government of the Philippines authorized to receive it.
Every such person is made personally liable for such tax, and is indemnified against the claims
and demands of any person for the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the
responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due,
and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not subject to withholding. In
case the Commissioner of Internal Revenue decides that the income paid to an individual is not
subject to withholding, the withholding agent may thereupon remit the amount of a tax withheld.
(2nd par., Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released
from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law
frowns upon exemption from taxation; hence, an exempting provision should be
construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It

is so ordered.

Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano,
Gancayno, Padilla, Bidin, Sarmiento and Cortez, JJ., concur
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.

Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.

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. 11Unquestionably, the passage documentations in
these cases were sold in the Philippines and the revenue therefrom was derived from a activity
regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered
the "transport of passengers and cargo to and from foreign cities", 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 2-½ 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 2-½ % 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
TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income
taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore
setting aside the appealed joint decision of respondent Court of Tax Appeals. I just wish to point
out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the
proper characterization of the taxable income derived by respondent BOAC from the sales in the
Philippines of tickets foe BOAC form the issued by its general sales agent in the Philippines gas
become moot after November 24, 1972. Booth opinions state that by amendment through P.D.
No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor
the rate of income tax on foreign corporations, international carriers such as respondent BOAC,
have since then been taxed at a reduced rate of 2-½% on their gross Philippine billings. There is,
therefore, no longer ant source of substantial conflict between the two opinions as to the present
2-½% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A.
Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the Court of
Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be
affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations to
and from the Philippines, is liable for Philippine income taxation in respect of "sales of air
tickets" in the Philippines through a general sales agent, relating to the carriage of passengers
and cargo between two points both outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign
corporation doing business in the Philippines or [had] an office or place of business in the
Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative
of the lialibity of the BOAC to Philippine income taxation in respect of the income here
involved. The liability of BOAC to Philippine income taxation in respect of such income
depends, not on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-
resident foreign corporation," but rather on whether or not such income is derived from "source
within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the
Philippines or having an office or place of business in the Philippines is subject to Philippine
income taxation only in respect of income derived from sources within the Philippines. Section
24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act
No. 2343, approved 20 June 1959, as it existed up to 3 August 1969, read as follows:

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

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

Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be
livied, collected, and paid annually upon the total net income received in the preceeding taxable
year from all sources within the Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... . (Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it
amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. — A corporation, organized, authorized or existing under the laws of
any foreign counrty, except foreign life 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)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident
foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June
1963, read as follows:

(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph
upon the amount received by every foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries,
wages, premium, annuities, compensations, remunerations, emoluments, or other fixed or
determinative annual or periodical gains, profits and income a tax equal to thirty per centum of
such amount: provided, however, that premiums shall not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore
a resident foreign corporation, or not doing business in the Philippines and therefore a non-
resident foreign corporation, it is liable to income tax only to the extent that it derives income
from sources within the Philippines. The circumtances that a foreign corporation is resident in
the Philippines yields no inference that all or any part of its income is Philippine source income.
Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no presumption that
the recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether of not BOAC is deriving income from sources within the
Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of payment but rather
to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs.
Collector of Internal Revenue, 3 the court dealt with the issue of the applicable source rule
relating to reinsurance premiums paid by a local insurance company to a foreign reinsurance
company in respect of risks located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took
place in the Philippines. — [T]he reinsurance, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. —4

The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In the Howden case,
that underlying prestation was theindemnification of the local insurance company. Such
indemnification could take place only in the Philippines where the risks were located and where
payment from the foreign reinsurance (in case the casualty insured against occurs) would be
received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United
States income tax system. The phrase "sources within the United States" was first introduced into
the U.S. tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is
commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the
1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text on federal income
taxation:

The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of
capital assets. While the three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a particular item is from
"source within the United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor (services) the place
where the labor is done should be decisive; if it is done in this counrty, the income should be
from "source within the United States." If the income is from capital, the place where the capital
is employed should be decisive; if it is employed in this country, the income should be from
"source within the United States". If the income is from the sale of capital assets, the place where
the sale is made should be likewise decisive. Much confusion will be avoided by regarding the
term "source" in this fundamental light. It is not a place; it is an activity or property. As such, it
has a situs or location; and if that situs or location is within the United States the resulting
income is taxable to nonresident aliens and foreign corporations. The intention of Congress in
the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the "source", or situs of the
activities or property which produce the income . . . . Thus, if income is to taxed, the recipient
thereof must be resident within the jurisdiction, or the property or activities out of which the
income issue or is derived must be situated within the jurisdiction so that the source of the
income may be said to have a situs in this country. The underlying theory is that the
consideration for taxation is protection of life and propertyand that the income rightly to be
levied upon to defray the burdens of the United States Government is that income which is
created by activities and property protected by this Government or obtained by persons enjoying
that protection. 5

3. We turn now to the question what is the source of income rule applicable in the instant case.
There are two possibly relevant source of income rules that must be confronted; (a) the source
rule applicable in respect of contracts of service; and (b) the source rule applicable in respect
of sales of personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be
simply stated as follows: the income is sourced in the place where the service contracted for is
rendered. Section 37 (a) (3) of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. — The following items of gross income
shall be treated as gross income from sources within the Philippines:

xxx xxx xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines;...
(Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without
the Philippines in the following manner:

(c) Gross income from sources without the Philippines. — The following items of gross income
shall be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in
respect of services rendered by individual natural persons; they also apply to services rendered
by or through the medium of a juridical person. 6 Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services.
Thus, Section 37 (e) of the Tax Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. — Items of gross
income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of
this section shall be allocated or apportioned to sources within or without the Philippines, under
the rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and partly without the
Philippines, or (2) from the sale of personnel property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from sources
within and partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the
1939 U.S. Tax Code which "was based upon a recognition that transportation was a service and
that the source of the income derived therefrom was to be treated as being the place where the
service of transportation was rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication
that income derived from transportation or other services rendered entirely outside the
Philippines must be treated as derived entirely from sources without the Philippines. This
implication is reinforced by a consideration of certain provisions of Revenue Regulations No. 2
entitled "Income Tax Regulations" as amended, first promulgated by the Department of Finance
on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of
the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. — Gross income from sources
within the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for
services was made, or of the place of payment — (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals
with a particular species of foreign transportation companies — i.e.,
foreign steamship companies deriving income from sources partly within and partly without the
Philippines:
Section 163 Foreign steamship companies. — The return of foreign steamship companies whose
vessels touch parts of the Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both within and without the Philippines
of all vessels, whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, — . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations
No. 2 (again implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. — A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside
the Philippines derives income partly form source within and partly from sources without the
Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations
No. 2 that steamship and telegraph and cable services rendered between points both outside the
Philippines give rise to income wholly from sources outside the Philippines, and therefore not
subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one
hand, and to the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the
producer or manufacturer of such personal property will be regarded as sourced entirely within
or entirely without the Philippines or as sourced partly within and partly without the Philippines,
depending upon two factors: (a) the place where the sale of such personal property occurs; and
(b) the place where such personal property was produced or manufactured. If the personal
property involved was both produced or manufactured and sold outside the Philippines, the
income derived therefrom will be regarded as sourced entirely outside the Philippines, although
the personal property had been produced outside the Philippines, or if the sale of the property
takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines.
In other words, the income (and the related expenses, losses and deductions) will be allocated
between sources within and sources without the Philippines. Thus, Section 37 (e) of the Tax
Code, although already quoted above, may be usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and
income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from sources
within and partly from sources without the Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property — i. e., trading — is,
under the Tax Code, regarded as sourced wholly in the place where the personal property is
sold. Section 37 (e) of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains, profits and
income derived from the purchase of personal property within and its sale without the
Philippines or from the purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the country in which
sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of personal
property shall be treated as derived entirely from the country in which sold. The word "sold"
includes "exchange." The "country" in which "sold" ordinarily means the place where the
property is marketed. This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the Philippines or
produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See
Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into
by BOAC in the Philippines. Those transactions may be characterized either as sales of personal
property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of
service or carriage. The applicable "source of income" rules differ depending upon which
characterization is given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering

into contracts of service, i.e., carriage of passengers or cargo between points located outside the
Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be
correct as a matter of tax law. The airline ticket in and of itself has no monetary value, even as
scrap paper. The value of the ticket lies wholly in the right acquired by the "purchaser" — the
passenger — to demand a prestation from BOAC, which prestation consists of the carriage of the
"purchaser" or passenger from the one point to another outside the Philippines. The ticket is
really the evidence of the contract of carriage entered into between BOAC and the passenger.
The money paid by the passenger changes hands in the Philippines. But the passenger does not
receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of shoes of a
refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to
transport the passenger or cargo outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as

purchases and sales of personal property, appear entirely inappropriate from other viewpoint.
Consider first purchases and sales: is BOAC properly regarded as engaged in trading — in the
purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the
Philippines and selling them in the Philippines. Consider next sales: can BOAC be regarded as
"selling" personal property produced or manufactured by it? In a popular or journalistic sense,
BOAC might be described as "selling" "a product" — its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of service or
carriage. The very existance of "source rules" specifically and precisely applicable to the
rendition of services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately
characterized as derived from a "service", rather than from an "activity" (a broader term than
service and including the activity of selling) or from the here involved is income taxation,
and not a sales tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax
Code, as amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by
Presidential Decree No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
any foreign country, 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 preceeding
taxable year from all sources within the Philippines: Provided, however, That international
carriers shall pay a tax of two and one-half per cent on their gross Philippine billings. "Gross
Philippines of passage documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross revenues
from chartered flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the passage documents. For
purposes of determining the taxability to revenues from chartered flights, the term "originating
from the Philippines" shall include flight of passsengers who stay in the Philippines for more
than forty-eight (48) hours prior to embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the world to any other point in the
world, are not charged any Philippine income tax on their Philippine billings (i.e., billings in
respect of passenger or cargo originating from the Philippines). Under this new approach,
international carriers who service port or points in the Philippines are treated in exactly the same
way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has been set aside.
in place of Philippine income taxation, the Tax Code now imposes this 2½ per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the Philippines
regardless of where embarkation and debarkation would be taking place. This 2-½ per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby,
the Government has done away with the difficulties attending the allocation of income and
related expenses, losses and deductions. Because taxes are the very lifeblood of government, the
resulting potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes,
with varying degrees of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to point out
that the determination of the appropriate characterization here — that of contracts of air carriage
rather than sales of airline tickets — entails no down-the-road loss of income tax revenues to the
Government. In lieu thereof, the Government takes in revenues generated by the 2-½ per cent tax
on the gross Philippine billings or receipts of international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income
taxes against respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore
setting aside the appealed joint decision of respondent Court of Tax Appeals. I just wish to point
out that the conflict between the majority opinion penned by Mr. Justice Feliciano as to the
proper characterization of the taxable income derived by respondent BOAC from the sales in the
Philippines of tickets foe BOAC form the issued by its general sales agent in the Philippines gas
become moot after November 24, 1972. Booth opinions state that by amendment through P.D.
No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor
the rate of income tax on foreign corporations, international carriers such as respondent BOAC,
have since then been taxed at a reduced rate of 2-½% on their gross Philippine billings. There is,
therefore, no longer ant source of substantial conflict between the two opinions as to the present
2-½% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A.
Melencio-Herrera speaking for the majority . In my opinion, the joint decision of the Court of
Tax Appeals in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be
affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations to
and from the Philippines, is liable for Philippine income taxation in respect of "sales of air
tickets" in the Philippines through a general sales agent, relating to the carriage of passengers
and cargo between two points both outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign
corporation doing business in the Philippines or [had] an office or place of business in the
Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative
of the lialibity of the BOAC to Philippine income taxation in respect of the income here
involved. The liability of BOAC to Philippine income taxation in respect of such income
depends, not on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-
resident foreign corporation," but rather on whether or not such income is derived from "source
within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the

Philippines or having an office or place of business in the Philippines is subject to Philippine
income taxation only in respect of income derived from sources within the Philippines. Section
24 (b) (2) of the National Internal Revenue CODE ("Tax Code"), as amended by Republic Act
No. 2343, approved 20 June 1959, as it existed up to 3 August 1969, read as follows:

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

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

Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be
livied, collected, and paid annually upon the total net income received in the preceeding taxable
year from all sources within the Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it
amended once more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. — A corporation, organized, authorized or existing under the laws of
any foreign counrty, except foreign life 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)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident
foreign corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June
1963, read as follows:

(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph
upon the amount received by every foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries,
wages, premium, annuities, compensations, remunerations, emoluments, or other fixed or
determinative annual or periodical gains, profits and income a tax equal to thirty per centum of
such amount: provided, however, that premiums shall not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore
a resident foreign corporation, or not doing business in the Philippines and therefore a non-
resident foreign corporation, it is liable to income tax only to the extent that it derives income
from sources within the Philippines. The circumtances that a foreign corporation is resident in
the Philippines yields no inference that all or any part of its income is Philippine source income.
Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no presumption that
the recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether of not BOAC is deriving income from sources within the
Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of payment but rather
to the "property, activity or service which produced the income." In Howden and Co., Ltd. vs.
Collector of Internal Revenue, 3 the court dealt with the issue of the applicable source rule
relating to reinsurance premiums paid by a local insurance company to a foreign reinsurance
company in respect of risks located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took
place in the Philippines. — [T]he reinsurance, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. —4

The Court may be seen to be saying that it is the underlying prestation which is properly
regarded as the activity giving rise to the income that is sought to be taxed. In the Howden case,
that underlying prestation was theindemnification of the local insurance company. Such
indemnification could take place only in the Philippines where the risks were located and where
payment from the foreign reinsurance (in case the casualty insured against occurs) would be
received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United
States income tax system. The phrase "sources within the United States" was first introduced into
the U.S. tax system in 1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is
commonly known, our Tax Code (Commonwealth Act 466, as amended) was patterned after the
1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text on federal income
taxation:

The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of
capital assets. While the three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a particular item is from
"source within the United States" and suggest an investigation into the nature and location of the
activities or property which produce the income. If the income is from labor (services) the place
where the labor is done should be decisive; if it is done in this counrty, the income should be
from "source within the United States." If the income is from capital, the place where the capital
is employed should be decisive; if it is employed in this country, the income should be from
"source within the United States". If the income is from the sale of capital assets, the place where
the sale is made should be likewise decisive. Much confusion will be avoided by regarding the
term "source" in this fundamental light. It is not a place; it is an activity or property. As such, it
has a situs or location; and if that situs or location is within the United States the resulting
income is taxable to nonresident aliens and foreign corporations. The intention of Congress in
the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of taxability the "source", or situs of the
activities or property which produce the income . . . . Thus, if income is to taxed, the recipient
thereof must be resident within the jurisdiction, or the property or activities out of which the
income issue or is derived must be situated within the jurisdiction so that the source of the
income may be said to have a situs in this country. The underlying theory is that the
consideration for taxation is protection of life and propertyand that the income rightly to be
levied upon to defray the burdens of the United States Government is that income which is
created by activities and property protected by this Government or obtained by persons enjoying
that protection. 5

3. We turn now to the question what is the source of income rule applicable in the instant case.
There are two possibly relevant source of income rules that must be confronted; (a) the source
rule applicable in respect of contracts of service; and (b) the source rule applicable in respect
of sales of personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be
simply stated as follows: the income is sourced in the place where the service contracted for is
rendered. Section 37 (a) (3) of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. — The following items of gross income
shall be treated as gross income from sources within the Philippines:

xxx xxx xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines;...
(Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without
the Philippines in the following manner:

(c) Gross income from sources without the Philippines. — The following items of gross income
shall be treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in
respect of services rendered by individual natural persons; they also apply to services rendered
by or through the medium of a juridical person. 6 Further, a contract of carriage or of
transportation is assimilated in our Tax Code and Revenue Regulations to a contract for services.
Thus, Section 37 (e) of the Tax Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. — Items of gross
income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of
this section shall be allocated or apportioned to sources within or without the Philippines, under
the rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and partly without the
Philippines, or (2) from the sale of personnel property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from sources
within and partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the
1939 U.S. Tax Code which "was based upon a recognition that transportation was a service and
that the source of the income derived therefrom was to be treated as being the place where the
service of transportation was rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication
that income derived from transportation or other services rendered entirely outside the
Philippines must be treated as derived entirely from sources without the Philippines. This
implication is reinforced by a consideration of certain provisions of Revenue Regulations No. 2
entitled "Income Tax Regulations" as amended, first promulgated by the Department of Finance
on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of
the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. — Gross income from sources
within the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for
services was made, or of the place of payment — (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals
with a particular species of foreign transportation companies — i.e.,
foreign steamship companies deriving income from sources partly within and partly without the
Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship companies whose
vessels touch parts of the Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both within and without the Philippines
of all vessels, whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, — . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations
No. 2 (again implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. — A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside
the Philippines derives income partly form source within and partly from sources without the
Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations
No. 2 that steamship and telegraph and cable services rendered between points both outside the
Philippines give rise to income wholly from sources outside the Philippines, and therefore not
subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one
hand, and to the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the
producer or manufacturer of such personal property will be regarded as sourced entirely within
or entirely without the Philippines or as sourced partly within and partly without the Philippines,
depending upon two factors: (a) the place where the sale of such personal property occurs; and
(b) the place where such personal property was produced or manufactured. If the personal
property involved was both produced or manufactured and sold outside the Philippines, the
income derived therefrom will be regarded as sourced entirely outside the Philippines, although
the personal property had been produced outside the Philippines, or if the sale of the property
takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines.
In other words, the income (and the related expenses, losses and deductions) will be allocated
between sources within and sources without the Philippines. Thus, Section 37 (e) of the Tax
Code, although already quoted above, may be usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and
income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from sources
within and partly from sources without the Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property — i. e., trading — is,
under the Tax Code, regarded as sourced wholly in the place where the personal property is
sold. Section 37 (e) of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains, profits and
income derived from the purchase of personal property within and its sale without the
Philippines or from the purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the country in which sold.
(Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of personal
property shall be treated as derived entirely from the country in which sold. The word "sold"
includes "exchange." The "country" in which "sold" ordinarily means the place where the
property is marketed. This Section does not apply to income from the sale personal property
produced (in whole or in part) by the taxpayer within and sold without the Philippines or
produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See
Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into
by BOAC in the Philippines. Those transactions may be characterized either as sales of personal
property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of
service or carriage. The applicable "source of income" rules differ depending upon which
characterization is given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering

into contracts of service, i.e., carriage of passengers or cargo between points located outside the
Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be
correct as a matter of tax law. The airline ticket in and of itself has no monetary value, even as
scrap paper. The value of the ticket lies wholly in the right acquired by the "purchaser" — the
passenger — to demand a prestation from BOAC, which prestation consists of the carriage of the
"purchaser" or passenger from the one point to another outside the Philippines. The ticket is
really the evidence of the contract of carriage entered into between BOAC and the passenger.
The money paid by the passenger changes hands in the Philippines. But the passenger does not
receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite
different from the purchase price of a physical good or commodity such as a pair of shoes of a
refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to
transport the passenger or cargo outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as

purchases and sales of personal property, appear entirely inappropriate from other viewpoint.
Consider first purchases and sales: is BOAC properly regarded as engaged in trading — in the
purchase and sale of personal property? Certainly, BOAC was not purchasing tickets outside the
Philippines and selling them in the Philippines. Consider next sales: can BOAC be regarded as
"selling" personal property produced or manufactured by it? In a popular or journalistic sense,
BOAC might be described as "selling" "a product" — its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of service or
carriage. The very existance of "source rules" specifically and precisely applicable to the
rendition of services must preclude the application here of "source rules" applying generally to
sales, and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately
characterized as derived from a "service", rather than from an "activity" (a broader term than
service and including the activity of selling) or from the here involved is income taxation,
and not a sales tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax
Code, as amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by
Presidential Decree No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
any foreign country, 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 preceeding
taxable year from all sources within the Philippines: Provided, however, That international
carriers shall pay a tax of two and one-half per cent on their gross Philippine billings. "Gross
Philippines of passage documents sold therein, whether for passenger, excess baggege or mail,
provide the cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail shall include the gross freight charge up to final destination. Gross revenues
from chartered flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the passage documents. For
purposes of determining the taxability to revenues from chartered flights, the term "originating
from the Philippines" shall include flight of passsengers who stay in the Philippines for more
than forty-eight (48) hours prior to embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the world to any other point in the
world, are not charged any Philippine income tax on their Philippine billings (i.e., billings in
respect of passenger or cargo originating from the Philippines). Under this new approach,
international carriers who service port or points in the Philippines are treated in exactly the same
way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly
within and partly without the Philippines, or wholly without the Philippines, has been set aside.
in place of Philippine income taxation, the Tax Code now imposes this 2½ per cent tax computed
on the basis of billings in respect of passengers and cargo originating from the Philippines
regardless of where embarkation and debarkation would be taking place. This 2-½ per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby,
the Government has done away with the difficulties attending the allocation of income and
related expenses, losses and deductions. Because taxes are the very lifeblood of government, the
resulting potential "loss" or "gain" in the amount of taxes collectible by the state is sometimes,
with varying degrees of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to point out
that the determination of the appropriate characterization here — that of contracts of air carriage
rather than sales of airline tickets — entails no down-the-road loss of income tax revenues to the
Government. In lieu thereof, the Government takes in revenues generated by the 2-½ per cent tax
on the gross Philippine billings or receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.

FIRST DIVISION

COMMISSIONER OF G.R. No. 153793

INTERNAL REVENUE,

Petitioner, Present:

Panganiban, C.J. (Chairperson),

- versus - Ynares-Santiago,

Austria-Martinez,

Callejo, Sr., and

Chico-Nazario, JJ.

JULIANE BAIER-NICKEL, as

represented by Marina Q. Guzman Promulgated:

(Attorney-in-fact)

Respondent. August 29, 2006

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision[1] of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of
respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision[2] of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002Resolution[3] of
the Court of Appeals denying its motion for reconsideration.

The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the
President of JUBANITEX, Inc., a domestic corporation engaged in [m]anufacturing, marketing
on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and
disposing embroidered textile products.[4] Through JUBANITEXs General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent as commission
agent. It was agreed that respondent will receive 10% sales commission on all sales actually
concluded and collected through her efforts.[5]

In 1995, respondent received the amount of P1,707,772.64, representing her sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17,
1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26.[6]

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have
been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that
her sales commission income is not taxable in the Philippines because the same was a
compensation for her services rendered in Germany and therefore considered as income from
sources outside the Philippines.

The next day, April 15, 1998, she filed a petition for review with the CTA contending that no
action was taken by the BIR on her claim for refund.[7] On June 28, 2000, the CTA rendered a
decision denying her claim. It held that the commissions received by respondent were actually
her remuneration in the performance of her duties as President of JUBANITEX and not as a
mere sales agent thereof. The income derived by respondent is therefore an income taxable in
the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that
respondent received the commissions as sales agent of JUBANITEX and not as President
thereof. And since the source of income means the activity or service that produce the income,
the sales commission received by respondent is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in Germany. The dispositive portion of
the appellate courts Decision, reads:

WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals
dated June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby
directed to grant petitioner a tax refund in the amount of Php 170,777.26.

SO ORDERED.[8]

Petitioner filed a motion for reconsideration but was denied.[9] Hence, the instant recourse.

Petitioner maintains that the income earned by respondent is taxable in the Philippines because
the source thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus
implied that source of income means the physical source where the income came from. It further
argued that since respondent is the President of JUBANITEX, any remuneration she received
from said corporation should be construed as payment of her overall managerial services to the
company and should not be interpreted as a compensation for a distinct and separate service as a
sales commission agent.

Respondent, on the other hand, claims that the income she received was payment for her
marketing services. She contended that income of nonresident aliens like her is subject to tax
only if the source of the income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the source of her income were her
marketing activities in Germany, the income she derived from said activities is not subject to
Philippine income taxation.

The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual.

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.

(1) In General. A nonresident alien individual engaged in trade or business in

the Philippines shall be subject to an income tax in the same manner as an individual citizen and
a resident alien individual, on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding.

xxxx

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines.
There shall be levied, collected and paid for each taxable year upon the entire income received
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income.
xxx

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the incomes source. In construing the meaning of source in Section 25 of the NIRC,
resort must be had on the origin of the provision.

The first Philippine income tax law enacted by the Philippine Legislature was Act No.
2833,[10] which took effect on January 1, 1920.[11] Under Section 1 thereof, nonresident aliens are
likewise subject to tax on income from all sources within the Philippine Islands, thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net
income received in the preceding calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon such income; and a like tax shall
be levied, assessed, collected, and paid annually upon the entire net income received in the
preceding calendar year from all sources within the Philippine Islands by every individual, a
nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.

Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as
amended by U.S. Revenue Law of 1917.[12] Being a law of American origin, the authoritative
decisions of the official charged with enforcing it in the U.S. have peculiar persuasive force in
the Philippines.[13]

The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from
sources within the U.S. and specifies when similar types of income are to be treated as from
sources outside the U.S.[14] Under the said Code, compensation for labor and personal services
performed in the U.S., is generally treated as income from U.S. sources; while compensation for
said services performed outside the U.S., is treated as income from sources outside the U.S.[15] A
similar provision is found in Section 42 of our NIRC, thus:

SEC. 42. x x x

(A) Gross Income From Sources Within the Philippines. x x x

xxxx

(3) Services. Compensation for labor or personal services performed in the Philippines;

xxxx
(C) Gross Income From Sources Without the Philippines. x x x

xxxx

(3) Compensation for labor or personal services performed without the Philippines;

The following discussions on sourcing of income under the Internal Revenue Code of the U.S.,
are instructive:

The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. While the three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a particular item is from
sources within the United States and suggest an investigation into the nature and location of the
activities or property which produce the income.

If the income is from labor the place where the labor is done should be decisive; if it is done in
this country, the income should be from sources within the United States. If the income is from
capital, the place where the capital is employed should be decisive; if it is employed in this
country, the income should be from sources within the United States. If the income is from the
sale of capital assets, the place where the sale is made should be likewise decisive.

Much confusion will be avoided by regarding the term source in this fundamental light. It is not a
place, it is an activity or property. As such, it has a situs or location, and if that situs or location
is within the United States the resulting income is taxable to nonresident aliens and foreign
corporations.

The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913
basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the
source, or situs of the activities or property which produce the income. The result is that, on the
one hand, nonresident aliens and nonresident foreign corporations are prevented from deriving
income from the United States free from tax, and, on the other hand, there is no undue imposition
of a tax when the activities do not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issues or is derived
must be situated within the jurisdiction so that the source of the income may be said to have a
situs in this country.

The underlying theory is that the consideration for taxation is protection of life and property and
that the income rightly to be levied upon to defray the burdens of the United States Government
is that income which is created by activities and property protected by this Government or
obtained by persons enjoying that protection. [16]

The important factor therefore which determines the source of income of personal services is not
the residence of the payor, or the place where the contract for service is entered into, or the place
of payment, but the place where the services were actually rendered.[17]

In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,[18] the Court addressed the
issue on the applicable source rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks located in the Philippines. It was
held therein that the undertaking of the foreign insurance company to indemnify the local
insurance company is the activity that produced the income. Since the activity took place in
the Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The
Law of Federal Income Taxation, the Court emphasized that the technical meaning of source of
income is the property, activity or service that produced the same. Thus:

The source of an income is the property, activity or service that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the reinsurance premiums, and the same
took place in the Philippines. x x x the reinsured, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and
indemnity were based, were all situated in the Philippines. x x x[19]
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),[20] the
issue was whether BOAC, a foreign airline company which does not maintain any flight to and
from the Philippines is liable for Philippine income taxation in respect of sales of air tickets in
the Philippines, through a general sales agent relating to the carriage of passengers and cargo
between two points both outside the Philippines. Ruling in the affirmative, the Court applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule
that the source of income is that activity which produced the income. It was held that the sale of
tickets in the Philippines is the activity that produced the income and therefore BOAC should
pay income tax in the Philippines because it undertook an income producing activity in the
country.

Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British
Overseas Airways Corporation in support of their arguments, but the correct interpretation of the
said case favors the theory of respondent that it is the situs of the activity that determines
whether such income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying principle of the law on
sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the
Philippines is to be construed as the activity that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P.
Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente,
interpreted the sale of tickets as a business activity that gave rise to the income of
BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is
the physical source of the money earned. If such was the interpretation of the majority, the Court
would have simply stated that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located or where BOAC physically
received the same. But such was not the import of the ruling of the Court. It even explained in
detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable
activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus

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. 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. x x x[21]

xxxx

The source of an income is the property, activity or service that produced the income. 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 situs 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.[22]

The Court reiterates the rule that source of income relates to the property, activity or service that
produced the income. With respect to rendition of labor or personal service, as in the instant
case, it is the place where the labor or service was performed that determines the source of the
income. There is therefore no merit in petitioners interpretation which equates source of income
in labor or personal service with the residence of the payor or the place of payment of the
income.

Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is exempt
from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were performed
in Germany. Though not raised as an issue, the Court is clothed with authority to address the
same because the resolution thereof will settle the vital question posed in this controversy.[23]

The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer.[24] To those therefore, who claim a refund rest
the burden of proving that the transaction subjected to tax is actually exempt from taxation.

In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that
the activity or the service which would entitle her to 10% commission income, are sales actually
concluded and collected through [her] efforts.[25] What she presented as evidence to prove that
she performed income producing activities abroad, were copies of documents she allegedly faxed
to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in
the finished products as well as samples of sales orders purportedly relayed to her by
clients. However, these documents do not show whether the instructions or orders faxed ripened
into concluded or collected sales in Germany. At the very least, these pieces of evidence show
that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to
whether these instructions/orders gave rise to consummated sales and whether these sales were
truly concluded in Germany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported monthly sales
purported to have transpired in Germany.

The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners
counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent
presented no contracts or orders signed by the customers in Germany to prove the sale
transactions therein.[26] Likewise, in her Comment to the Formal Offer of respondents evidence,
she objected to the admission of the faxed documents bearing instruction/orders marked as
Exhibits R,[27] V, W, and X,[28] for being self serving.[29] The concern raised by petitioners
counsel as to the absence of substantial evidence that would constitute proof that the sale
transactions for which respondent was paid commission actually transpired outside
the Philippines, is relevant because respondent stayed in the Philippines for 89 days in
1995. Except for the months of July and September 1995, respondent was in the Philippines in
the months of March, May, June, and August 1995,[30] the same months when she earned
commission income for services allegedly performed abroad. Furthermore, respondent presented
no evidence to prove that JUBANITEX does not sell embroidered products in
the Philippines and that her appointment as commission agent is exclusively for Germany and
other European markets.

In sum, we find that the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to support
the conclusion[31] that it was in Germany where she performed the income producing service
which gave rise to the reported monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our income tax law.Hence, the claim
for tax refund should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a previous case for
refund of income withheld from respondents remunerations for services rendered abroad, the
Court in a Minute Resolution dated February 17, 2003,[33] sustained the ruling of the Court of
Appeals that respondent is entitled to refund the sum withheld from her sales commission
income for the year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the instant case deals
with her income in 1995. Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must
have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits;
(4) there must be between the two cases identity of parties, of subject matter, and of causes of
action. [34] The instant case, however, did not satisfy the fourth requisite because there is no
identity as to the subject matter of the previous and present case of respondent which deals with
income earned and activities performed for different taxable years.

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002
Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSEDand SET
ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondents claim for refund of income tax paid for the year 1995
is REINSTATED.

SO ORDERED.
 EN BANC

January 24, 2017

G.R. No. 184450

JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES,

MARAH SHARYN M. DE CASTRO and CRIS P. TENORIO, Petitioners,
vs.
SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE,
Respondents.

x-----------------------x

G.R. No. 184508

SENATOR MANUEL A. ROXAS, Petitioner,

vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.

x-----------------------x

G.R. No. 184538

TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), represented by its

President, DEMOCRITO T. MENDOZA, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.

x-----------------------x

G.R. No. 185234

SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION

OF THE PHILIPPINES, INC. and ERNESTO G. EBRO, Petitioners,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
SIXTO S. ESQUIVIAS IV, in his capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.

DECISION

SERENO, CJ.:

Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule 65 of
the 1997 Revised Rules of Court. These Petitions seek to nullify certain provisions of Revenue
Regulation No. (RR) 10-2008. The RR was issued by the Bureau of Internal Revenue (BIR) on
24 September 2008 to implement the provisions of Republic Act No. (R.A.) 9504. The law
granted, among others, income tax exemption for minimum wage earners (MWEs), as well as an
increase in personal and additional exemptions for individual taxpayers.

Petitioners assail the subject RR as an unauthorized departure from the legislative intent of R.A.
9504. The regulation allegedly restricts the implementation of the MWEs income tax exemption
only to the period starting from 6 July 2008, instead of applying the exemption to the entire year
2008. They further challenge the BIR's adoption of the prorated application of the new set of
personal and additional exemptions for taxable year 2008. They also contest the validity of the
RR's alleged imposition of a condition for the availment by MWEs of the exemption provided by
R.A. 9504. Supposedly, in the event they receive other benefits in excess of ₱30,000, they can no
longer avail themselves of that exemption. Petitioners contend that the law provides for the
unconditional exemption of MWEs from income tax and, thus, pray that the RR be nullified.

ANTECEDENT FACTS

R.A. 9504

On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.)
2293. On 21 May 2008, former President Gloria M. Arroyo certified the passage of the bill as
urgent through a letter addressed to then Senate President Manuel Villar. On the same day, the
bill was passed on second reading IN the Senate and, on 27 May 2008, on third reading. The
following day, 28 May 2008, the Senate sent S.B. 2293 to the House of Representatives for the
latter's concurrence.

On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an amendment to
House Bill No. (H.B.) 3971.

On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of
Republic Act No. 8424, as Amended, Otherwise Known as the National Internal Revenue Code
of 1997," was approved and signed into law by President Arroyo. The following are the salient
features of the new law:
 1. It increased the basic personal exemption from ₱20,000 for a single individual,
₱25,000 for the head of the family, and ₱32,000 for a married individual to P50,000 for
each individual.

2. It increased the additional exemption for each dependent not exceeding four from
₱8,000 to ₱25,000.

3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of
gross income to 40% of the gross receipts or gross sales.

4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.

5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay. 1

Section 9 of the law provides that it shall take effect 15 days following its publication in
the Official Gazette or in at least two newspapers of general circulation. Accordingly, R.A. 9504
was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008, the end of
the 15-day period, the law took effect.

RR 10-2008

On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing the
provisions of R.A. 9504. The relevant portions of the said RR read as follows:

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income.

xxxx

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the 'de minimis' benefits
over their respective ceilings prescribed by these regulations shall be considered as part of 'other
benefits' and the employee receiving it will be subject to tax only on the excess over the
₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the
₱30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW.

xxxx

(B) Exemptions from Withholding Tax on Compensation. - The following income payments are
exempted from the requirements of withholding tax on compensation:
 xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where
he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall
determine the wage rates in the different regions based on established criteria and shall be the
basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt from income tax, and
consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or practice
of profession, except income subject to final tax, in addition to compensation income are not
exempted from income tax on their entire income earned during the taxable year. This rule,
notwithstanding, the SMW, holiday pay, overtime pay, night shift differential pay and
hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the employer to
MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in
distressed or isolated stations and camps, which expose them to great danger of contagion or
peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed
subject to income tax and consequently, to withholding tax.

xxxx

SECTION 3. Section 2. 79 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income. --

(A) Requirement of Withholding. - Every employer must withhold from compensation paid an
amount computed in accordance with these Regulations. Provided, that no withholding of tax
shall be required on the SMW, including holiday pay, overtime pay, night shift differential and
hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided,
further, that an employee who receives additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt from income tax and,
consequently, shall be subject to withholding tax.

xxxx

For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall be
a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex "D")
determined by prorating the annual personal and additional exemptions under R.A. 9504 over a
period of six months. Thus, for individuals, regardless of personal status, the prorated personal
exemption is ₱25,000, and for each qualified dependent child (QDC), ₱12,500.

xxxx

SECTION 9. Effectivity. -

These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)

The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present
Petitions.1âwphi1

G.R. No. 184450

Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the
prorated application of the personal and additional exemptions for taxable year 2008 to begin
only effective 6 July 2008 for being contrary to Section 4 of Republic Act No. 9504.2

Petitioners argue that the prorated application of the personal and additional exemptions under
RR 10-2008 is not "the legislative intendment in this jurisdiction."3 They stress that Congress has
always maintained a policy of "full taxable year treatment"4 as regards the application of tax
exemption laws. They allege further that R.A. 9504 did not provide for a prorated application of
the new set of personal and additional exemptions. 5

G.R. No. 184508

Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable
year treatment of the income tax benefits of the new law. He relies on what he says is clear
legislative intent. In his "Explanatory Note of Senate Bill No. 103," he stresses "the very spirit of
enacting the subject tax exemption law"6 as follows:

With the poor, every little bit counts, and by lifting their burden of paying income tax, we give
them opportunities to put their money to daily essentials as well as savings. Minimum wage
earners can no longer afford to be taxed and to be placed in the cumbersome income tax
process in the same manner as higher-earning employees. It is our obligation to ease their
burdens in any way we can.7(Emphasis Supplied)

Apart from raising the issue of legislative intent, Senator Roxas brings up the following legal
points to support his case for the full-year application of R.A. 9504's income tax benefits. He
says that the pro rata application of the assailed RR deprives MWEs of the financial relief
extended to them by the law;8 that Umali v. Estanislao9serves as jurisprudential basis for his
position that R.A. 9504 should be applied on a full-year basis to taxable year 2008; 10and that the
social justice provisions of the 1987 Constitution, particularly Articles II and XIII, mandate a full
application of the law according to the spirit of R.A. 9504. 11

On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the exemption
of MWEs is absolute, regardless of the amount of the other benefits they receive. Thus, he posits
that the Department of Finance (DOF) and the BIR committed grave abuse of discretion
amounting to lack and/or excess of jurisdiction. They supposedly did so when they provided in
Section l of RR 10-2008 the condition that an MWE who receives "other benefits" exceeding the
₱30,000 limit would lose the tax exemption. 12 He further contends that the real intent of the law
is to grant income tax exemption to the MWE without any limitation or qualification, and that
while it would be reasonable to tax the benefits in excess of ₱30,000, it is unreasonable and
unlawful to tax both the excess benefits and the salaries, wages and allowances. 13

G.R. No. 184538

Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504
provide for the application of the tax exemption for the full calendar year 2008. It also espouses
the interpretation that R.A. 9504 provides for the unqualified tax exemption of the income of
MWEs regardless of the other benefits they receive. 14 In conclusion, it says that RR 10-2008,
which is only an implementing rule, amends the original intent of R.A. 9504, which is the
substantive law, and is thus null and void.

G.R. No. 185234

Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as well as increased personal and additional
exemptions for other individual taxpayers, for the whole year 2008. They note that the assailed
RR 10-2008 restricts the start of the exemptions to 6 July 2008 and provides that those MWEs
who received "other benefits" in excess of ₱30,000 are not exempt from income taxation.
Petitioners believe this RR is a "patent nullity" 15 and therefore void.

Comment of the OSG

The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took the position
that the application of R.A. 9504 was intended to be prospective, and not retroactive. This was
supposedly the general 1ule under the rules of statutory construction: law will only be applied
retroactively if it clearly provides for retroactivity, which is not provided in this instance. 17

The OSG contends that Umali v. Estanislao is not applicable to the present case.1âwphi1 It
explains that R.A. 7167, the subject of that case, was intended to adjust the personal exemption
levels to the poverty threshold prevailing in 1991. Hence, the Court in that case held that R.A.
7167 had been given a retroactive effect. The OSG believes that the grant of personal exemptions
no longer took into account the poverty threshold level under R.A. 9504, because the amounts of
personal exemption far exceeded the poverty threshold levels. 18

The OSG further argues that the legislative intent of non-retroactivity was effectively confirmed
by the "Conforme" of Senator Escudero, Chairperson of the Senate Committee on Ways and
Means, on the draft revenue regulation that became RR 10-2008.

ISSUES

Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be
distilled into three major ones:

First, whether the increased personal and additional exemptions provided by R.A. 9504 should
be applied to the entire taxable year 2008 or prorated, considering that R.A. 9504 took effect
only on 6 July 2008.

Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only.

Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that an
MWE who receives other benefits in excess of the statutory limit of ₱30,000 19 is no longer
entitled to the exemption provided by R.A. 9504.

THE COURT'S RULING

I.

Whether the increased personal and additional exemptions provided by R.A. 9504 should be
applied to the entire taxable year 2008 or prorated, considering that the law took effect only on
6 July 2008

The personal and additional exemptions established by R.A. 9504 should be applied to the entire
taxable year 2008.

Umali is applicable.

Umali v. Estanislao20supports this Comi's stance that R.A. 9504 should be applied on a full-year
basis for the entire taxable year 2008.21 In Umali, Congress enacted R.A. 7167 amending the
1977 National Internal Revenue Code (NIRC). The amounts of basic personal and additional
exemptions given to individual income taxpayers were adjusted to the poverty threshold level.
R.A. 7167 came into law on 30 January 1992. Controversy arose when the Commission of
Internal Revenue (CIR) promulgated RR 1-92 stating that the regulation shall take effect on
compensation income earned beginning 1 January 1992. The issue posed was whether the
increased personal and additional exemptions could be applied to compensation income earned
or received during calendar year 1991, given that R.A. 7167 came into law only on 30 January
1992, when taxable year 1991 had already closed.

This Court ruled in the affirmative, considering that the increased exemptions were already
available on or before 15 April 1992, the date for the filing of individual income tax returns.
Further, the law itself provided that the new set of personal and additional exemptions would be
immediately available upon its effectivity. While R.A. 7167 had not yet become effective during
calendar year 1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that purpose, the
new law provided for adjustments "to the poverty threshold level" prevailing at the time of the
enactment of the law. The relevant discussion is quoted below:

[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.

Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended, provides:

Upon the recommendation of the Secretary of Finance, the President shall automatically adjust
not more often than once every three years, the personal and additional exemptions taking into
account, among others, the movement in consumer price indices, levels of minimum wages, and
bare subsistence levels.

As the personal and additional exemptions of individual taxpayers were last adjusted in 1986, the
President, upon the recommendation of the Secretary of Finance, could have adjusted the
personal and additional exemptions in 1989 by increasing the same even without any legislation
providing for such adjustment. But the President did not.

However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act 7167,
was introduced in the House of Representatives in 1989 although its passage was delayed and it
did not become effective law until 30 January 1992. A perusal, however, of the sponsorship
remarks of Congressman Hernando B. Perez, Chairman of the House Committee on Ways and
Means, on House Bill 28970, provides an indication of the intent of Congress in enacting Rep.
Act 716 7. The pertinent legislative journal contains the following:

At the outset, Mr. Perez explained that the Bill Provides for increased personal additional
exemptions to individuals in view of the higher standard of living.

The Bill, he stated, limits the amount of income of individuals subject to income tax to enable
them to spend for basic necessities and have more disposable income.

xxxx
Mr. Perez added that inflation has raised the basic necessities and that it had been three years
since the last exemption adjustment in 1986.

xxxx

Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the effects of
the current inflation and of the implementation of the salary standardization law. Stating that it is
imperative for the government to take measures to ease the burden of the individual income tax
filers, Mr. Perez then cited specific examples of how the measure can help assuage the burden to
the taxpayers.

He then reiterated that the increase in the prices of commodities has eroded the purchasing power
of the peso despite the recent salary increases and emphasized that the Bill will serve to
compensate the adverse effects of inflation on the taxpayers. x x x (Journal of the House of
Representatives, May 23, 1990, pp. 32-33).

It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as
adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is the
poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty
threshold levels in futuro, at which time there may be need of further adjustments in personal
exemptions. Moreover, the Court can not lose sight of the fact that these personal and
additional exemptions are fixed amounts to which an individual taxpayer is entitled, as a
means to cushion the devastating effects of high prices and a depreciated purchasing power
ofthe currency. In the end, it is the lower-income and the middle-income groups of
taxpayers (not the high-income taxpayers) who stand to benefit most from the increase of
personal and additional exemptions provided for by Rep. Act 7167. To that extent, the act
is a social legislation intended to alleviate in part the present economic plight of the lower
income taxpayers. It is intended to remedy the inadequacy of the heretofore existing
personal and additional exemptions for individual taxpayers.

And then, Rep. Act 7167 says that the increased personal exemptions that it provides for shall
be available thenceforth, that is, after Rep. Act 7167 shall have become effective. In other
words, these exemptions are available upon the filing of personal income tax returns which
is, under the National Internal Revenue Code, done not later than the 15th day of April
after the end of a calendar year. Thus, under Rep. Act 7167, which became effective, as
aforestated, on 30 January 1992, the increased exemptions are literally available on or
before 15 April 1992 (though not before 30 January 1992). But these increased exemptions
can be available on 15 April 1992 only in respect of compensation income earned or received
during the calendar year 1991.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in
respect of compensation income received during the 1990 calendar year; the tax due in respect of
said income had already accrued, and been presumably paid, by 15 April 1991 and by 15 July
1991, at which time Rep. Act 7167 had not been enacted. To make Rep. Act 7167 refer back to
income received during 1990 would require language explicitly retroactive in purport and effect,
language that would have to authorize the payment of refunds of taxes paid on 15 April 1991 and
15 July 1991: such language is simply not found in Rep. Act 7167.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available
only in respect of compensation income received during 1992, as the implementing Revenue
Regulations No. 1-92 purport to provide. Revenue Regulations No. 1-92 would in effect
postpone the availability of the increased exemptions to 1 January-15 April 1993, and thus
literally defer the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the implementing
regulations collide frontally with Section 3 of Rep. Act 7167 which states that the statute "shall
take effect upon its approval." The objective of the Secretary of Finance and the Commissioner
of Internal Revenue in postponing through Revenue Regulations No. 1-92 the legal effectivity of
Rep. Act 7167 is, of course, entirely understandable - to defer to 1993 the reduction of
governmental tax revenues which irresistibly follows from the application of Rep. Act 7167. But
the law-making authority has spoken and the Court can not refuse to apply the law-maker's
words. Whether or not the government can afford the drop in tax revenues resulting from such
increased exemptions was for Congress (not this Court) to decide.22 (Emphases supplied)

In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293 reveals two
important points about R.A. 9504: (1) it is a piece of social legislation; and (2) its intent is to
make the proposed law immediately applicable, that is, to taxable year 2008:

Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to exempt
minimum wage earners from the payment of income and/or withholding tax. It is an attempt to
help our people cope with the rising costs of commodities that seem to be going up
unhampered these past few months.

Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board granted an
increase of ₱20 per day as far as minimum wage earners are concerned. By way of impact,
Senate Bill No. 2293 would grant our workers an additional salary or take-home pay of
approximately ₱34 per day, given the exemption that will be granted to all minimum wage
earners. It might be also worthy of note that on the part of the public sector, the Senate
Committee on Ways and Means included, as amongst those who will be exempted from the
payment of income tax and/or withholding tax, government workers receiving Salary Grade V.
We did not make any distinction so as to include Steps 1 to 8 of Salary Grade V as long as one is
employed in the public sector or in government.

In contradistinction with House Bill No. 3971 approved by the House of Representatives
pertaining to a similar subject matter, the House of Representatives, very much like the Senate,
adopted the same levels of exemptions which are:

From an allowable personal exemption for a single individual of ₱20,000, to a head of family of
₱25,000, to a married individual of ₱32,000, both the House and the Senate versions contain a
higher personal exemption of ₱50,000.

Also, by way of personal additional exemption as far as dependents are concerned, up to four,
the House, very much like the Senate, recommended a higher ceiling of ₱25,000 for each
dependent not exceeding four, thereby increasing the maximum additional exemptions and
personal additional exemptions to as high as ₱200,000, depending on one's status in life.

The House also, very much like the Senate, recommended by way of trying to address the
revenue loss on the part of the government, an optional standard deduction (OSD) on gross sales,
and/or gross receipts as far as individual taxpayers are concerned. However, the House, unlike
the Senate, recommended a Simplified Net Income Tax Scheme (SNITS) in order to address the
remaining balance of the revenue loss.

By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of SNITS,
an optional standard deduction of 40% for corporations as far as their gross income is concerned.

Mr. President, if we total the revenue loss as well as the gain

brought about by the 40% OSD on individuals on gross sales and receipts and 40% on gross
income as far as corporations are concerned, with a conservative availment rate as computed by
the Department of Finance, the government would still enjoy a gain of ₱.78 billion or ₱780
million if we use the high side of the computation however improbable it may be.

For the record, we would like to state that if the availment rate is computed at 15% for
individuals and 10% for corporations, the potential high side of a revenue gain would amount to
approximately ₱18.08 billion.

Mr. President, we have received many suggestions increasing the rate of personal exemptions
and personal additional exemptions. We have likewise received various suggestions pertaining to
the expansion of the coverage of the tax exemption granted to minimum wage earners to
encompass as well other income brackets.

However, the only suggestion other than or outside the provisions contained in House Bill No.
3971 that the Senate Committee on Ways and Means adopted, was an expansion of the
exemption to cover overtime, holiday, nightshift differential, and hazard pay also being enjoyed
by minimum wage earners. It entailed an additional revenue loss of ₱l billion approximately on
the part of the government. However, Mr. President, that was taken into account when I stated
earlier that there will still be a revenue gain on the conservative side on the part of government of
₱780 million.

Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher
exemption for our countrymen because of the incessant and constant increase in the price of
goods.Nonetheless, not only Our Committee, but also the Senate and Congress, must act
responsibly in recognizing that much as we would like to give all forms of help that we can and
must provide to our people, we also need to recognize the need of the government to defray its
expenses in providing services to the public. This is the most that we can give at this time
because the government operates on a tight budget and is short on funds when it comes to the
discharge of its main expenses.] 23
Mr. President, time will perhaps come and we can improve on this version, but at present,
this is the best, I believe, that we can give our people. But by way of comparison, it is still ₱10
higher than what the wage boards were able to give minimum wage earners. Given that, we
were able to increase their take-home pay by the amount equivalent to the tax exemption
we have granted.

We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
immediately grant relief to our people.

Thank you, Mr. President. (Emphases Supplied)24

Clearly, Senator Escudero expressed a sense of urgency for passing what would subsequently
become R.A. 9504. He was candid enough to admit that the bill needed improvement, but
because time was of the essence, he urged the Senate to pass the bill immediately. The idea was
immediate tax relief to the individual taxpayers, particularly low-compensation earners, and an
increase in their take-home pay.25

Senator Miriam Defensor-Santiago also remarked during the deliberations that "the increase in
personal exemption from ₱20,000 to ₱50,000 is timely and appropriate given the increased cost
of living. Also, the increase in the additional exemption for dependent children is necessary and
timely."26

Finally, we consider the President's certification of the necessity of the immediate enactment of
Senate Bill No. 2293. That certification became the basis for the Senate to dispense with the
three-day rule27 for passing a bill. It evinced the intent of the President to afford wage earners
immediate tax relief from the impact of a worldwide increase in the prices of commodities.
Specifically, the certification stated that the purpose was to "address the urgent need to cushion
the adverse impact of the global escalation of commodity prices upon the most vulnerable within
the low income group by providing expanded income tax relief."28

In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to
afford immediate tax relief to individual taxpayers, particularly low-income compensation
earners. Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half of the year
2008 only, then the intent of Congress to address the increase in the cost of living in 2008 would
have been negated.

Therefore, following Umali, the test is whether the new set of personal and additional
exemptions was available at the time of the filing of the income tax return. In other words, while
the status of the individual taxpayers is determined at the close of the taxable year, 29 their
personal and additional exemptions - and consequently the computation of their taxable income -
are reckoned when the tax becomes due, and not while the income is being earned or received.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year.30 The taxpayer is required to file an income tax
return on the 15th of April of each year covering income of the preceding taxable year. 31 The tax
due thereon shall be paid at the time the return is filed. 32
It stands to reason that the new set of personal and additional exemptions, adjusted as a form of
social legislation to address the prevailing poverty threshold, should be given effect at the most
opportune time as the Court ruled in Umali.

The test provided by Umali is consistent with Ingalls v. Trinidad, 33 in which the Court dealt
with the matter of a married person's reduced exemption. As early as 1923, the Court already
provided the reference point for determining the taxable income:

[T]hese statutes dealing with the manner of collecting the income tax and with the deductions to
be made in favor of the taxpayer have reference to the time when the return is filed and the tax
assessed. If Act No. 2926 took, as it did take, effect on January 1, 1921, its provisions must be
applied to income tax returns filed, and assessments made from that date. This is the reason why
Act No. 2833, and Act No. 2926, in their respective first sections, refer to income
received during the preceding civil year. (Italics in the original)

There, the exemption was reduced, not increased, and the Court effectively ruled that income tax
due from the individual taxpayer is properly determined upon the filing of the return. This is
done after the end of the taxable year, when all the incomes for the immediately preceding
taxable year and the corresponding personal exemptions and/or deductions therefor have been
considered. Therefore, the taxpayer was made to pay a higher tax for his income earned during
1920, even if the reduced exemption took effect on 1 January 1921.

In the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable year
2008. Hence, individual taxpayers were entitled to claim the increased amounts for the entire
year 2008. This was true despite the fact that incomes were already earned or received prior to
the law's effectivity on 6 July 2008.

Even more compelling is the fact that R.A. 9504 became effective during the taxable year in
question. In Umali, the Court ruled that the application of the law was prospective, even if the
amending law took effect after the close of the taxable year in question, but before the deadline
for the filing of the return and payment of the taxes due for that year. Here, not only did R.A.
9504 take effect before the deadline for the filing of the return and payment for the taxes due for
taxable year 2008, it took effect way before the close of that taxable year. Therefore, the
operation of the new set of personal and additional exemption in the present case was all the
more prospective.

Additionally, as will be discussed later, the rule of full taxable year treatment for the availment
of personal and additional exemptions was established, not by the amendments introduced by
R.A. 9504, but by the provisions of the 1997 Tax Code itself. The new law merely introduced a
change in the amounts of the basic and additional personal exemptions. Hence, the fact that R.A.
9504 took effect only on 6 July 2008 is irrelevant.
The present case issubstantially
identical with Umali and not with
Pansacola.

Respondents argue that Umali is not applicable to the present case. They contend that the
increase in personal and additional exemptions were necessary in that case to conform to the
1991 poverty threshold level; but that in the present case, the amounts under R.A. 9504 far
exceed the poverty threshold level. To support their case, respondents cite figures allegedly
coming from the National Statistical Coordination Board. According to those figures, in 2007, or
one year before the effectivity of R.A. 9504, the poverty threshold per capita was ₱14,866 or
₱89,196 for a family of six. 34

We are not persuaded.

The variance raised by respondents borders on the superficial. The message of Umali is that there
must be an event recognized by Congress that occasions the immediate application of the
increased amounts of personal and additional exemptions. In Umali, that event was the failure to
adjust the personal and additional exemptions to the prevailing poverty threshold level. In this
case, the legislators specified the increase in the price of commodities as the basis for the
immediate availability of the new amounts of personal and additional exemptions.

We find the facts of this case to be substantially identical to those of Umali.

First, both cases involve an amendment to the prevailing tax code. The present petitions call for
the interpretation of the effective date of the increase in personal and additional exemptions.
Otherwise stated, the present case deals with an amendment (R.A. 9504) to the prevailing tax
code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali involved an amendment to
the then prevailing tax code - it interpreted the effective date of R.A. 7167, an amendment to the
1977 NIRC, which also increased personal and additional exemptions.

Second, the amending law in both cases reflects an intent to make the new set of personal and
additional exemptions immediately available after the effectivity of the law. As already pointed
out, in Umali, R.A. 7167 involved social legislation intended to adjust personal and additional
exemptions. The adjustment was made in keeping with the poverty threshold level prevailing at
the time.

Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was meant
to adjust personal and additional exemptions in relation to the poverty threshold level, while
R.A. 9504 was geared towards addressing the impact of the global increase in the price of goods.

Fourth, in both cases, it was clear that the intent of the legislature was to hasten the enactment of
the law to make its beneficial relief immediately available.

Pansacola is not applicable.

In lieu of Umali, the OSG relies on our ruling in Pansacola v.Commissioner of Internal
Revenue. 35 In that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January 1998, and the
petitioner therein pleaded for the application of the new set of personal and additional
exemptions provided thereunder to taxable year 1997. R.A. 8424 explicitly provided for its
effectivity on 1 January 1998, but it did not provide for any retroactive application.

We ruled against the application of the new set of personal and additional exemptions to the
previous taxable year 1997, in which the filing and payment of the income tax was due on 15
April 1998, even if the NIRC had already taken effect on 1 January 1998. This court explained
that the NIRC could not be given retroactive application, given the specific mandate of the law
that it shall take effect on 1 January 1998; and given the absence of any reference to the
application of personal and additional exemptions to income earned prior to 1January 1998. We
further stated that what the law considers for the purpose of determining the income tax due is
the status at the close of the taxable year, as opposed to the time of filing of the return and
payment of the corresponding tax.

The facts of this case are not identical with those of Pansacola.

First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the Tax
Reform Act of 1997. The present case, like Umali, involves a mere amendment of some specific
provisions of the prevailing tax code: R.A. 7167 amending then P.D. 1158 (the 1977 NIRC)
in Umali and R.A. 9504 amending R.A. 8424 herein.

Second, in Pansacola, the new tax code specifically provided for an effective date - the
beginning of the following year - that was to apply to all its provisions, including new tax rates,
new taxes, new requirements, as well as new exemptions. The tax code did not make any
exception to the effectivity of the subject exemptions, even if transitory provisions36 specifically
provided for different effectivity dates for certain provisions.

Hence, the Court did not find any legislative intent to make the new rates of personal and
additional exemptions available to the income earned in the year previous to R.A. 8424's
effectivity. In the present case, as previously discussed, there was a clear intent on the part of
Congress to make the new amounts of personal and additional exemptions immediately available
for the entire taxable year 2008. R.A. 9504 does not even need a provision providing for
retroactive application because, as mentioned above, it is actually prospective - the new law took
effect during the taxable year in question.

Third, in Pansacola, the retroactive application of the new rates of personal and additional
exemptions would result in an absurdity - new tax rates under the new law would not apply, but a
new set of personal and additional exemptions could be availed of. This situation does not obtain
in this case, however, precisely because the new law does not involve an entirely new tax code.
The new law is merely an amendment to the rates of personal and additional exemptions.

Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we apply
the Pansacola test. We stress that Pansacola considers the close of the taxable year as the
reckoning date for the effectivity of the new exemptions. In that case, the Court refused the
application of the new set of personal exemptions, since they were not yet available at the close
of the taxable year. In this case, however, at the close of the taxable year, the new set of
exemptions was already available. In fact, it was already available during the taxable year - as
early as 6 July 2008 - when the new law took effect.

There may appear to be some dissonance between the Court's declarations in Umali and those
in Pansacola, which held:

Clearly from the abovequoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at the
close of the taxable year and not at the time the return is filed and the tax due thereon is paid.
Now comes Section 35(C) of the NIRC which provides,

xxxx

Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn
21 years old; or become gainfully employed. It is as if the changes in his or his dependents status
took place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions e.g.
personal and additional deductions, if any, had already been determined as of the end of
the calendar year.

x x x. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and
additional exemptions under Section 35, can only be allowed as deductions from the individual
taxpayers gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999.
The NIRC made no reference that the personal and additional exemptions shall apply on income
earned before January 1, 1998.37

It must be remembered, however, that the Court therein emphasized that Umali was interpreting
a social legislation:

In Umali, we noted that despite being given authority by Section 29(1)(4) of the National
Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made to cover
1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal and
Additional Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty
Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of
the National Internal Revenue Code, As Amended, and For Other Purposes." Thus, we said
in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992, should consider the
poverty threshold level in 1991, the time it was enacted. And we observed therein that since the
exemptions would especially benefit lower and middle-income taxpayers, the exemption should
be made to cover the past year 1991. To such an extent, Rep. Act No. 7167 was a social
legislation intended to remedy the non-adjustment in 1989. And as cited in Umali, this legislative
intent is also clear in the records of the House of Representatives' Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The
policy declarations in its enactment do not indicate it was a social legislation that adjusted
personal and additional exemptions according to the poverty threshold level nor is there
any indication that its application should retroact. x x x.38 (Emphasis Supplied)

Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more
apparent than real. The circumstances of the cases and the laws interpreted, as well as the
legislative intents thereof, were different.

The policy in this jurisdiction is full

taxable year treatment.

We have perused R.A. 9504, and we see nothing that expressly provides or even suggests a
prorated application of the exemptions for taxable year 2008. On the other hand, the policy of
full taxable year treatment, especially of the personal and additional exemptions, is clear under
Section 35, particularly paragraph C of R.A. 8424 or the 1997 Tax Code:

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General. - For purposes of determining the tax provided in Section 24(A) of this Title,
there shall be allowed a basic personal exemption as follows:

xxxx

(B) Additional Exemption for Dependents.-There shall be allowed an additional exemption of...
for each dependent not exceeding four (4).

x x xx

(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined
above during the taxable year, the taxpayer may claim the corresponding additional exemption,
as the case may be, in full for such year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such

dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during
the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of
the dependents died, or as if such dependents married, became twenty-one (21) years old or
became gainfully employed at the close of such year. (Emphases supplied)

Note that paragraph C does not allow the prorating of the personal and additional exemptions
provided in paragraphs A and B, even in case a status-changing event occurs during the taxable
year. Rather, it allows the fullest benefit to the individual taxpayer. This manner of reckoning the
taxpayer's status for purposes of the personal and additional exemptions clearly demonstrates the
legislative intention; that is, for the state to give the taxpayer the maximum exemptions that can
be availed, notwithstanding the fact that the latter's actual status would qualify only for a lower
exemption if prorating were employed.

We therefore see no reason why we should make any distinction between the income earned
prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and that earned
thereafter (from 6 July 2008 to 31 December 2008) as none is indicated in the law. The principle
that the courts should not distinguish when the law itself does not distinguish squarely app1ies to
this case. 39

We note that the prorating of personal and additional exemptions was employed in the 1939 Tax
Code. Section 23(d) of that law states:

Change of status. - - If the status of the taxpayer insofar as it affects the personal and additional
exemptions for himself or his dependents, changes during the taxable year, the amount of the
personal and additional exemptions shall be apportioned, under rules and regulations
prescribed by the Secretary of Finance, in accordance with the number of months before
and after such change. For the purpose of such apportionment a fractional part of a month shall
be disregarded unless it amounts to more than half a month, in which case it shall be considered
as a month.40 (Emphasis supplied)

On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by restricting the
operation of the prorating of personal exemptions. As amended, Section 23(d) reads:

(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and additional
exemption for himself or his dependents, changes during the taxable year by reason of his
death, the amount of the personal and additional exemptions shall be apportioned, under rules
and regulations prescribed by the Secretary of Finance, in accordance with the number of months
before and after such change. For the purpose of such apportionment a fractional part of a month
shall be disregarded unless it amounts to more than half a month, in which case it shall be
considered as a month.41(Emphasis supplied)

Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our jurisdiction
when it amended Section 23(d) of the 1939 Tax Code and adopted a full taxable year treatment
of the personal and additional exemptions. Section 23(d), as amended, reads:

(d) Change of status. -

If the taxpayer married or should have additional dependents as defined in subsection (c) above
during the taxable year the taxpayer may claim the corresponding personal exemptions in full for
such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional deductions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die during the year, the taxpayer may still claim the
same deductions as if they died at the close of such year.

P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d) thereof
reads as follows:

(d) Change of status. - If the taxpayer marries or should have additional dependents as defined in
subsection (c) above during the taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional deductions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or become twenty-one years old during the
taxable year, the taxpayer may still claim the same exemptions as if they died, or as if such
dependents became twenty-one years old at the close of such year.

The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d) thereof
states:

(d) Change of status.- If the taxpayer married or should have additional dependents as defined in
subsection (c) above during the taxable year, the taxpayer may claim the corresponding personal
exemption in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or become

twenty-one years old during the taxable year, the taxpayer may still claim the same exemptions
as if they died, or as if such dependents became twenty-one years old at the close of such year.

While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable year
treatment in case of the taxpayer's change of status was left untouched.42 Executive Order No.
37, issued on 31 July 1986, retained the change of status provision verbatim. The provision
appeared under Section 30(1)(3) of the NIRC, as amended:

(3) Change of status.- If the taxpayer married or should have additional dependents as defined
above during the taxable year, the taxpayer may claim the corresponding personal and additional
exemptions, as the case may be, in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or if any of such

dependents becomes twenty-one years old during the taxable year, the taxpayer may still claim
the same exemptions as if they died, or if such dependents become twenty-one years old at the
close of such year.

Therefore, the legislative policy of full taxable year treatment of the personal and additional
exemptions has been in our jurisdiction continuously since 1969. The prorating approach has
long since been abandoned. Had Congress intended to revert to that scheme, then it should have
so stated in clear and unmistakeable terms. There is nothing, however, in R.A. 9504 that provides
for the reinstatement of the prorating scheme. On the contrary, the change-of-status provision
utilizing the full-year scheme in the 1997 Tax Code was left untouched by R.A. 9504.

We now arrive at this important point: the policy of full taxable year treatment is established, not
by the amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code, which
adopted the policy from as early as 1969.

There is, of course, nothing to prevent Congress from again adopting a policy that prorates the
effectivity of basic personal and additional exemptions. This policy, however, must be explicitly
provided for by law - to amend the prevailing law, which provides for full-year treatment. As
already pointed out, R.A. 9504 is totally silent on the matter. This silence cannot be presumed by
the BIR as providing for a half-year application of the new exemption levels. Such presumption
is unjust, as incomes do not remain the same from month to month, especially for the MWEs.

Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal and
additional exemptions. In so doing, respondents overstepped the bounds of their rule-making
power. It is an established rule that administrative regulations are valid only when these are
consistent with the law. 43 Respondents cannot amend, by mere regulation, the laws they
administer.44 To do so would violate the principle of non-delegability of legislative powers.45

The prorated application of the new set of personal and additional exemptions for the year 2008,
which was introduced by respondents, cannot even be justified under the exception to the canon
of non-delegability; that is, when Congress makes a delegation to the executive branch.46 The
delegation would fail the two accepted tests for a valid delegation of legislative power; the
completeness test and the sufficient standard test.47 The first test requires the law to be complete
in all its terms and conditions, such that the only thing the delegate will have to do is to enforce
it.48 The sufficient standard test requires adequate guidelines or limitations in the law that map
out the boundaries of the delegate's authority and canalize the delegation.49

In this case, respondents went beyond enforcement of the law, given the absence of a provision
in R.A. 9504 mandating the prorated application of the new amounts of personal and additional
exemptions for 2008. Further, even assuming that the law intended a prorated application, there
are no parameters set forth in R.A. 9504 that would delimit the legislative power surrendered by
Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax Code authorized not only the
prorating of the exemptions in case of change of status of the taxpayer, but also authorized the
Secretary of Finance to prescribe the corresponding rules and regulations.

II.
Whether an MWE is exempt for the entire taxable
year 2008 or from 6 July 2008 only

The MWE is exempt for the entire taxable year 2008.

As in the case of the adjusted personal and additional exemptions, the MWE exemption should
apply to the entire taxable year 2008, and not only from 6 July 2008 onwards. We see no reason
why Umali cannot be made applicable to the MWE exemption, which is undoubtedly a piece of
social legislation. It was intended to alleviate the plight of the working class, especially the low-
income earners. In concrete terms, the exemption translates to a ₱34 per day benefit, as pointed
out by Senator Escudero in his sponsorship speech.50

As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer.
Therefore, RR 10-2008 cannot declare the income earned by a minimum wage earner from 1
January 2008 to 5 July 2008 to be taxable and those earned by him for the rest of that year to be
tax-exempt. To do so would be to contradict the NIRC and jurisprudence, as taxable income
would then cease to be determined on a yearly basis.

Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti dated
5 July 2008 and petitioner Sen. Escudero's signature on the Conforme portion thereof. This letter
and the conforme supposedly establish the legislative intent not to make the benefits of R.A.
9504 effective as of 1 January 2008.

We are not convinced. The conforme is irrelevant in the determination of legislative intent.

We quote below the relevant portion of former Commissioner Hefti's letter:

Attached herewith are salient features of the proposed regulations to implement RA 9504 x x x.
We have tabulated critical issues raised during the public hearing and comments received from
the public which we need immediate written resolution based on the inten[t]ion of the law more
particularly the effectivity clause. Due to the expediency and clamor of the public for its
immediate implementation, may we request your confirmation on the proposed recommendation
within five (5) days from receipt hereof. Otherwise, we shall construe your affirmation. 51

We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A. 9504
was attached to the letter.52 The Matrix had a column entitled "Remarks" opposite the
Recommended Resolution. In that column, noted was a suggestion coming from petitioner
TMAP:

TMAP suggested that it should be retroactive considering that it was [for] the benefit of the
majority and to alleviate the plight of workers. Exemption should be applied for the whole
taxable year as provided in the NIRC. x x x Umali v. Estanislao [ruled] that the increase[d]
exemption in 1992 [was applicable] [to] 1991.

Majority issues raised during the public hearing last July 1, 2008 and emails received suggested
[a] retroactive implementation. 53(Italics in the original)
The above remarks belie the claim that the conforme is evidence of the legislative intent to make
the benefits available only from 6 July 2008 onwards. There would have been no need to make
the remarks if the BIR had merely wanted to confirm was the availability of the law's benefits to
income earned starting 6 July 2008. Rather, the implication is that the BIR was requesting the
conformity of petitioner Senator Escudero to the proposed implementing rules, subject to the
remarks contained in the Matrix. Certainly, it cannot be said that Senator Escudero's conforme is
evidence of legislative intent to the effect that the benefits of the law would not apply to income
earned from 1 January 2008 to 5 July 2008.

Senator Escudero himself states in G.R. No. 185234:

In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax
exemptions and increased basic personal and additional exemptions under Republic Act No.
9504, Petitioner Escudero, as Co-Chairperson of the Congressional Oversight Committee on
Comprehensive Tax Reform Program, and his counterpart in the House of Representatives, Hon.
Exequiel B. Javier, conveyed through a letter, dated 16 September 2008, to Respondent Teves
the legislative intent that "Republic Act (RA) No. 9504 must be made applicable to the entire
taxable year 2008" considering that it was "a social legislation intended to somehow alleviate the
plight of minimum wage earners or low income taxpayers". They also jointly expressed their
"fervent hope that the corresponding Revenue Regulations that will be issued reflect the true
legislative intent and rightful statutory interpretation of R.A. No. 9504." 54

Senator Escudero repeats in his Memorandum:

On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen. Escudero) of
the Congressional Oversight Committee on Comprehensive Tax Reform Program of both House
of Congress wrote Respondent DOF Sec. Margarito Teves, and requested that the revenue
regulations (then yet still to be issued)55 to implement Republic Act No. 9504 reflect the true
intent and rightful statutory interpretation thereof, specifically that the grant of tax exemption
and increased basic personal and additional exemptions be made available for the entire taxable
year 2008. Yet, the DOF promulgated Rev. Reg. No. 10-2008 in contravention of such
legislative intent.x x x.56

We have gone through the records and we do not see anything that would to suggest that
respondents deny the senator's assertion.

Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE' s tax
exemption and the increased basic personal and additional exemptions available for the entire
year 2008. In the face of his assertions, respondents' claim that his conforme to Commissioner
Hefti's letter was evidence of legislative intent becomes baseless and specious. The remarks
described above and the subsequent letter sent to DOF Secretary Teves, by no less than the
Chairpersons of the Bi-camera! Congressional Oversight Committee on Comprehensive Tax
Reform Program, should have settled for respondents the matter of what the legislature intended
for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of the
MWE's tax exemption and the increased personal and additional exemptions beginning only on 6
July 2008 is in contravention of the law it purports to implement.

A clarification is proper at this point. Our ruling that the MWE exemption is available for the
entire taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether the
employee during the entire year of 2008 was an MWE as defined by R.A. 9504. When
the wages received exceed the minimum wage anytime during the taxable year, the employee
necessarily loses the MWE qualification. Therefore, wages become taxable as the employee
ceased to be an MWE. But the exemption of the employee from tax on the income previously
earned as an MWE remains.

This rule reflects the understanding of the Senate as gleaned from the exchange between Senator
Miriam Defensor-Santiago and Senator Escudero:

Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year, he is
promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum wage
employee, Senator Escudero said that the tax computation would be based starting on the new
salary in July. 57

As the exemption is based on the employee's status as an MWE, the operative phrase is "when
the employee ceases to be an MWE. Even beyond 2008, it is therefore possible for one employee
to be exempt early in the year for being an MWE for that period, and subsequently become
taxable in the middle of the same year with respect to the compensation income, as when the pay
is increased higher than the minimum wage. The improvement of one's lot, however, cannot
justly operate to make the employee liable for tax on the income earned as an MWE.

Additionally, on the question of whether one who ceases to be an MWE may still be entitled to
the personal and additional exemptions, the answer must necessarily be yes. The MWE
exemption is separate and distinct from the personal and additional exemptions. One's status as
an MWE does not preclude enjoyment of the personal and additional exemptions. Thus, when
one is an MWE during a part of the year and later earns higher than the minimum wage and
becomes a non-MWE, only earnings for that period when one is a non-MWE is subject to tax. It
also necessarily follows that such an employee is entitled to the personal and additional
exemptions that any individual taxpayer with taxable gross income is entitled.

A different interpretation will actually render the MWE exemption a totally oppressive
legislation. It would be a total absurdity to disqualify an MWE from enjoying as much as
₱150,00058 in personal and additional exemptions just because sometime in the year, he or she
ceases to be an MWE by earning a little more in wages. Laws cannot be interpreted with such
absurd and unjust outcome. It is axiomatic that the legislature is assumed to intend right and
equity in the laws it passes.59

Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be entitled
to an MWE's exemption.
III.

Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in

declaring that an MWE who receives other benefits in excess of the

statutory limit of ₱30,000 is no longer entitled to the exemption provided

by R.A. 9504, is consistent with the law.

Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring
that an MWE who receives other benefits in excess of the statutory limit of ₱30,000 is no longer
entitled to the exemption provided by R.A. 9504.

The BIR added a requirement not

found in the law.

The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier reference.

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -

(A) Compensation Income Defined. – x x x

xxxx

(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges (such
as entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise
known as "de minimis benefits," furnished or offered by an employer to his employees, are not
considered as compensation subject to income tax and consequently to withholding tax, if such
facilities or privileges are of relatively small value and are offered or furnished by the employer
merely as means of promoting the health, goodwill, contentment, or efficiency of his employees.

The following shall be considered as "de minimis" benefits not subject to income tax, hence, not
subject to withholding tax on compensation income of both managerial and rank and file
employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the
year and the monetized value of leave credits paid to government officials and employees;

(b) Medical cash allowance to dependents of employees not exceeding ₱750.00 per employee per
semester or ₱125 per month;
(c) Rice subsidy of ₱l,500.00 or one (1) sack of 50-kg. rice per month amounting to not more
than ₱l,500.00;

(d) Uniforms and clothing allowance not exceeding ₱4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding ₱10,000.00 per annum;

(f) Laundry allowance not exceeding ₱300.00 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement, which must
be in the form of a tangible personal property other than cash or gift certificate, with an annual
monetary value not exceeding ₱10,000.00 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding ₱5,000.00per
employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g.,
on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic
minimum wage.60

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32(b)(7)(e) of the Code. Provided that, the excess of the 'de minimis' benefits over
their respective ceilings prescribed by these regulations shall be considered as part of 'other
benefits' and the employee receiving it will be subject to tax only on the excess over the
₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as 'de
minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon such employer.

Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for
payment to the Bureau of Internal Revenue.

xxxx

(B) Exemptions from Withholding Tax on Compensation. - The following income payments
are exempted from the requirements of withholding tax on compensation:

xxxx
(13) Compensation income of MWEs who work

in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall
determine the wage rates in the different regions based on established criteria and shall be the
basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt form income tax, and
consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the [statutory minimum wage], [h]oliday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean x x x.

In case of hazardous employment, x x x

The NWPC shall officially submit a Matrix of Wage Order by region x x x

Any reduction or diminution of wages for purposes of exemption from income tax shall
constitute misrepresentation and therefore, shall result to the automatic disallowance of expense,
i.e. compensation and benefits account, on the part of the employer. The offenders may be
criminally prosecuted under existing laws.

(14) Compensation income of employees in the public sector with compensation income of
not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to
the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

The basic salary of MWEs in the public sector shall be equated to the SMW in the non-
agricultural sector applicable to the place where he/she is assigned. The determination of the
SMW in the public sector shall likewise adopt the same procedures and consideration as those of
the private sector.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt
from income tax and, consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay
and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean xxx

In case of hazardous employment, x x x

xxxx

SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income. -

(A) Requirement of Withholding. - Every employer must withhold from compensation paid an
amount computed in accordance with these Regulations. Provided, that no withholding of tax
shall be required on the SMW, including holiday pay, overtime pay, night shift differential and
hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided,
further, that an employee who receives additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount
of₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income tax
and, consequently, shall be subject to withholding tax.

xxxx

For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall be
a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex "D")
determined by prorating the annual personal and additional exemptions under R.A. 9504 over a
period of six months. Thus, for individuals, regardless of personal status, the prorated personal
exemption is ₱25,000, and for each qualified dependent child (QDC), ₱12,500.

On the other hand, the pertinent provisions of law, which are supposed to be implemented by the
above-quoted sections of RR10-2008, read as follows:

SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended by adding the following
definitions after Subsection (FF) to read as follows:

Section 22. Definitions.- when used in this Title:61

(A) x x x

(FF) x x x

(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment (DOLE).

(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid
the statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned.

SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.
-

(l)x x x

x x x x; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B), (C) and (D)of this Section, derived for each taxable year from all sources
within the Philippines by an individual alien who is a resident of the Philippines.

(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance
with and at the rates established in the following schedule:

xxxx
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof,
shall compute separately their individual income tax based on their respective total taxable
income: Provided, That if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable income.

Provided, That mm1mum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That
the holiday pay, ovr.rtime pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax.

xxxx

SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 51. Individual Return. -

(A) Requirements. -

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required
to file an income tax return:

(a) x x x

xxxx

(2) The following individuals shall not be required to file an income tax return:

(a) x x x

(b) An individual with respect to pure compensation income, as defined in Section 32(A)(l),
derived from sources within the Philippines, the income tax on which has been correctly
withheld under the provisions of Section 79 of this Code:

Provided, That an individual deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return;

(c) x x x; and

(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who
is exempt from income tax pursuant to the provisions of this Code and other laws, general or
special.

xxxx
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 79. Income Tax Collected at Source. –

(A) Requirement of Withholding. - Except in the case of a minimum wage earner as defined
in Section 22(HH) of this Code, every employer making payment of wages shall deduct and
withhold upon such wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (Emphases
supplied)

Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by
the assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they
leave no room for interpretation - they do not provide or require any other qualification as to who
are MWEs.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she
must be one who is paid the statutory minimum wage if he/she works in the private sector, or not
more than the statutory minimum wage in the non-agricultural sector where he/she is assigned, if
he/she is a government employee. Thus, one is either an MWE or he/she is not. Simply put,
MWE is the status acquired upon passing the litmus test - whether one receives wages not
exceeding the prescribed minimum wage.

The minimum wage referred to in the definition has itself a clear and definite meaning. The law
explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity Board, which
is a creation of the Labor Code.62 The Labor Code clearly describes wages and Minimum Wage
under Title II of the Labor Code. Specifically, Article 97 defines "wage" as follows:

(f) "Wage" paid to any employee shall mean the remuneration or earnings, however designated,
capable of being expressed in terms of money, whether fixed or ascertained on a time, task,
piece, or commission basis, or other method of calculating the same, which is payable by an
employer to an employee under a written or unwritten contract of employment for work done or
to be done, or for services rendered or to be rendered and includes the fair and reasonable value,
as determined by the Secretary of Labor and Employment, of board, lodging, or other facilities
customarily furnished by the employer to the employee. "Fair and reasonable value" shall not
include any profit to the employer, or to any person affiliated with the employer.

While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage is
distinct.63 "Minimum wage" is wage mandated; one that employers may not freely choose on
their own to designate in any which way.

In Article 99, minimum wage rates are to be prescribed by the

Regional Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific instructions
are given in relation to the payment of wages. They must be paid in legal tender at least once
every two weeks, or twice a month, at intervals not exceeding 16 days, directly to the worker,
except in case of force majeure or death of the worker.

These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted by
R.A. 9504 is that which is referred to in the Labor Code. It is distinct and different from other
payments including allowances, honoraria, commissions, allowances or benefits that an
employer may pay or provide an employee.

Likewise, the other compensation incomes an MWE receives that are also exempted by R.A.
9504 are all mandated by law and are based on this minimum wage. Additional compensation in
the form of overtime pay is mandated for work beyond the normal hours based on the employee's
regular wage.64 Those working between ten o'clock in the evening and six o'clock in the morning
are required to be paid a night shift differential based on their regular wage.65Holiday/premium
pay is mandated whether one works on regular holidays or on one's scheduled rest days and
special holidays. In all of these cases, additional compensation is mandated, and computed based
on the employee's regular wage.66

R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards, including the corresponding holiday,
overtime, night differential and hazard pays.

In other words, the law exempts from income taxation the most basic compensation an employee
receives - the amount afforded to the lowest paid employees by the mandate of law. In a way, the
legislature grants to these lowest paid employees additional income by no longer demanding
from them a contribution for the operations of government. This is the essence of R.A. 9504 as a
social legislation. The government, by way of the tax exemption, affords increased purchasing
power to this sector of the working class.

This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:

This bill seeks to exempt minimum wage earners in the private sector and government workers
in Salary Grades 1 to 3, amending certain provisions of Republic Act 8424, otherwise known as
the National Internal Revenue Code of 1997, as amended.

As per estimates by the National Wages and Productivity Board, there are 7 million
workers earning the minimum wage and even below. While these workers are in the verge
of poverty, it is unfair and unjust that the Government, under the law, is taking away a
portion of their already subsistence-level income.

Despite this narrow margin from poverty, the Government would still be mandated to take
a slice away from that family's meager resources. Even if the Government has recently
exempted minimum wage earners from withholding taxes, they are still liable to pay
income taxes at the end of the year. The law must be amended to correct this
injustice. (Emphases supplied)
The increased purchasing power is estimated at about ₱9,500 a year.67 RR 10-2008, however,
takes this away. In declaring that once an MWE receives other forms of taxable income like
commissions, honoraria, and fringe benefits in excess of the non-taxable statutory amount of
₱30,000, RR 10-2008 declared that the MWE immediately becomes ineligible for tax exemption;
and otherwise non-taxable minimum wage, along with the other taxable incomes of the MWE,
becomes taxable again.

Respondents acknowledge that R.A.9504 is a social legislation meant for social justice,68 but
they insist that it is too generous, and that consideration must be given to the fiscal position and
financial capability of the government.69While they acknowledge that the intent of the income
tax exemption of MWEs is to free low-income earners from the burden of taxation, respondents,
in the guise of clarification, proceed to redefine which incomes may or may not be granted
exemption. These respondents cannot do without encroaching on purely legislative prerogatives.

By way of review, this ₱30,000 statutory ceiling on benefits has its beginning in 1994 under R.
A. 7833, which amended then Section 28(b )(8) of the 1977 NIRC. It is substantially carried over
as Section 32(B) (Exclusion from Gross Income) of Chapter VI (Computation of Gross Income)
of Title II (Tax on Income) in the 1997 NIRC (R.A. 8424). R.A. 9504 does not amend that
provision of R.A. 8424, which reads:

SEC. 32. Gross Income.-

(A) General Definition.- x x x

(B) Exclusions from Gross Income.- The following items shall not be included in gross income
and shall be exempt from taxation under this title:

(1) x x x

xxxx

(7) Miscellaneous Items. -

(a) x x x

xxxx

(e) 13th Month Pay and Other Benefits.- Gross benefits received by officials and employees of
public and private entities: Provided, however, That the total exclusion under this subparagraph
shall not exceed Thirty thousand pesos (₱30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 668670;

(ii) Benefits received by employees pursuant to Presidential Decree No. 85171, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986;and

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That
the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the Commissioner, after
considering among others, the effect on the same of the inflation rate at the end of the taxable
year.

(f) x x x

The exemption granted to MWEs by R.A. 9504 reads:

Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax.

"Taxable income" is defined as follows:

SEC. 31. Taxable Income Defined.- The term taxable income means the pertinent items of gross
income specified in this Code, less the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by this Code or other special laws.

A careful reading of these provisions will show at least two distinct groups of items of
compensation. On one hand are those that are further exempted from tax by R.A. 9504; on the
other hand are items of compensation that R.A. 9504 does not amend and are thus unchanged
and in no need to be disturbed.

First are the different items of compensation subject to tax prior to R.A. 9504. These are
included in the pertinent items of gross income in Section 31. "Gross income" in Section 32
includes, among many other items, "compensation for services in whatever form paid, including,
but not limited to salaries, wages, commissions, and similar items." R.A. 9504 particularly
exempts the minimum wage and its incidents; it does not provide exemption for the many other
forms of compensation.

Second are the other items of income that, prior to R.A. 9504, were excluded from gross income
and were therefore not subject to tax. Among these are other payments that employees may
receive from employers pursuant to their employer-employee relationship, such as bonuses and
other benefits. These are either mandated by law (such as the 13th month pay) or granted upon
the employer's prerogative or are pursuant to collective bargaining agreements (as productivity
incentives). These items were not changed by R.A. 9504.

It becomes evident that the exemption on benefits granted by law in 1994 are now extended to
wages of the least paid workers under R.A. 9504. Benefits not beyond ₱30,000 were exempted;
wages not beyond the SMW are now exempted as well. Conversely, benefits in excess of
₱30,000 are subject to tax and now, wages in excess of the SMW are still subject to tax.

What the legislature is exempting is the MWE's minimum wage and other forms statutory
compensation like holiday pay, overtime pay, night shift differential pay, and hazard pay. These
are not bonuses or other benefits; these are wages. Respondents seek to frustrate this exemption
granted by the legislature.

In respondents' view, anyone receiving 13th month pay and other benefits in excess of ₱30,000
cannot be an MWE. They seek to impose their own definition of "MWE" by arguing thus:

It should be noted that the intent of the income tax exemption of MWEs is to free the low-
income earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who are the
low-income earners. Someone who earns beyond the incomes and benefits above-enumerated is
definitely not a low-income earner. 72

We do not agree.

As stated before, nothing to this effect can be read from R.A. 9504. The amendment is silent on
whether compensation-related benefits exceeding the ₱30,000 threshold would make an MWE
lose exemption. R.A. 9504 has given definite criteria for what constitutes an MWE, and R.R. 10-
2008 cannot change this.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to
the requirements provided by law. To do so constitutes lawmaking, which is generally reserved
for Congress. 73 In CIR v. Fortune Tobacco, 74 we applied the plain meaning rule when the
Commissioner of Internal Revenue ventured into unauthorized administrative lawmaking:

[A]n administrative agency issuing regulations may not enlarge, alter or restrict the provisions of
the law it administers, and it cannot engraft additional requirements not contemplated by the
legislature. The Court emphasized that tax administrators are not allowed to expand or
contract the legislative mandate and that the "plain meaning rule" or verba legis in
statutory construction should be applied such that where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and applied without
attempted interpretation.

As we have previously declared, rule-making power must be confined to details for regulating
the mode or proceedings in order to carry into effect the law as it has been enacted, and it cannot
be extended to amend or expand the statutory requirements or to embrace matters not covered by
the statute. Administrative regulations must always be in harmony with the provisions of the law
because any resulting discrepancy between the two will always be resolved in favor of the basic
law. 75 (Emphases supplied)

We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification is not
warranted when the language of the law is plain and clear. 76
The deliberations of the Senate reflect its understanding of the outworking of this MWE
exemption in relation to the treatment of benefits, both those for the ₱30,000 threshold and the de
minimis benefits:

Senator Defensor Santiago. Thank you. Next question: How about employees who are only
receiving a minimum wage as base pay, but are earning significant amounts of income from
sales, commissions which may be even higher than their base pay? Is their entire income from
commissions also tax-free? Because strictly speaking, they are minimum wage earners. For
purposes of ascertaining entitlement to tax exemption, is the basis only the base pay or should it
be the aggregate compensation that is being received, that is, inclusive of commissions, for
example?

Senator Escudero. Mr. President, what is included would be only the base pay and, if any, the
hazard pay, holiday pay, overtime pay and night shift differential received by a minimum wage
earner. As far as commissions are concerned, only to the extent of ₱30,000 would be
exempted. Anything in excess of ₱30,000 would already be taxable if it is being received by
way of commissions. Add to that de minimis benefits being received by an employee, such as
rice subsidy or clothing allowance or transportation allowance would also be exempted; but they
are exempted already under the existing law.

Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear. 77 (Emphases
supplied)

Given the foregoing, the treatment of bonuses and other benefits that an employee receives from
the employer in excess of the ₱30,000 ceiling cannot but be the same as the prevailing treatment
prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504.

The government's argument that the

RR avoids a tax distortion has no
merit.

The government further contends that the "clarification" avoids a situation akin to wage
distortion and discourages tax evasion. They claim that MWE must be treated equally as other
individual compensation income earners "when their compensation does not warrant exemption
under R.A. No. 9504. Otherwise, there would be gross inequity between and among individual
income taxpayers."78 For illustrative purposes, respondents present three scenarios:

37.1. In the first scenario, a minimum wage earner in the National Ca[ital Region receiving
₱382.00 per day has an annual salary of ₱119,566.00, while a non-minimum wage earner with a
basic pay of ₱385.00 per day has an annual salary of ₱120,505.00. The difference in their annual
salaries amounts to only ₱939.00, but the non-minimum wage earner is liable for a tax of
₱8,601.00, while the minimum wage earner is tax-exempt?
37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the threshold of
₱30,000.00 by ₱20,000.00. The non-minimum wage earner is liable for ₱8,601.00, while the
minimum wage earner is still tax-exempt.

37.3. In the third scenario, both workers earn "other benefits" at ₱50,000.00 more than the
₱30,000 threshold. The non-minimum wage earner is liable for the tax of ₱l8,601.00, while the
minimum wage earner is still tax-exempt.79 (Underscoring in the original)

Again, respondents are venturing into policy-making, a function that properly belongs to
Congress. In British American Tobacco v. Camacho, we explained:80

We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress,

which state interest is superior over another, or which method is better suited to achieve one,
some or all of the state's interests, or what these interests should be in the first place. This policy-
determining power, by constitutional fiat, belongs to Congress as it is its function to determine
and balance these interests or choose which ones to pursue. Time and again we have ruled
that the judiciary does not settle policy issues. The Court can only declare what the law is and
not what the law should be. Under our system of government, policy issues are within the
domain of the political branches of government and of the people themselves as the repository of
all state power. Thus, the legislative classification under the classification freeze provision, after
having been shown to be rationally related to achieve certain legitimate state interests and done
in good faith, must, perforce, end our inquiry.

Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its
avowed objectives (i.e. promoting fair competition among the players in the industry) would
suggest that, by Congress's own standards, the current excise tax system on sin products is
imperfect. But, certainly, we cannot declare a statute unconstitutional merely because it can be
improved or that it does not tend to achieve all of its stated objectives. This is especially true for
tax legislation which simultaneously addresses and impacts multiple state interests. Absent a
clear showing of breach of constitutional limitations, Congress, owing to its vast experience and
expertise in the field of taxation, must be given sufficient leeway to formulate and experiment
with different tax systems to address the complex issues and problems related to tax
administration. Whatever imperfections that may occur, the same should be addressed to
the democratic process to refine and evolve a taxation system which ideally will achieve
most, if not all, of the state's objectives.

In fine, petitioner may have valid reasons to disagree with the policy decision of Congress
and the method by which the latter sought to achieve the same. But its remedy is with
Congress and not this Court. (Emphases supplied and citations deleted)

Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and implement it
as enacted.

Besides, the supposed undesirable "income distortion" has been addressed in the Senate
deliberations. The following exchange between Senators Santiago and Escudero reveals the view
that the distortion impacts only a few - taxpayers who are single and have no dependents:
Senator Santiago.... It seems to me awkward that a person is earning just Pl above the minimum
wage is already taxable to the full extent simply because he is earning ₱l more each day, or o
more than P30 a month, or ₱350 per annum. Thus, a single individual earning ₱362 daily in
Metro Manila pays no tax but the same individual if he earns ₱363 a day will be subject to tax,
under the proposed amended provisions, in the amount of ₱4,875 - I no longer took into account
the deductions of SSS, e cetera- although that worker is just ₱360 higher than the minimum
wage.

xxxx

I repeat, I am raising respectfully the point that a person who is earning just Pl above the
minimum wage is already taxable to the full extent just for a mere Pl. May I please have the
Sponsor's comment. Senator Escudero...I fully subscribe and accept the analysis and computation
of the distinguished Senator, Mr. President, because this was the very concern of this
representation when we were discussing the bill. It will create wage distortions up to the extent
wherein a person is paying or rather receiving a salary which is only higher by ₱6,000
approximately from that of a minimum wage earner. So anywhere between P1 to approximately
₱6,000 higher, there will be a wage distortion, although distortions disappears as the salary goes
up.

However, Mr. President, as computed by the distinguished Senator, the distortion is only made
apparent if the taxpayer is single or is not married and has no dependents. Because at two
dependents, the distortion would already disappear; at three dependents, it would not
make a difference anymore because the exemption would already cover approximately the
wage distortion that would be created as far as individual or single taxpayers are
concerned.81(Emphases in the original)

Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents insist
that MWEs who are earning purely compensation income will lose their MWE exemption the
moment they receive benefits in excess of ₱30,000, RR 10-2008 does not withdraw the MWE
exemption from those who are earning other income outside of their employer-employee
relationship. Consider the following provisions of RR 10-2008:

Section 2.78.l (B):

(B) Exemptions from Withholding Tax on Compensation. -

The following income payments are exempted from the requirements of withholding tax on
compensation:

xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place
where he/she is assigned.
 xxxx

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of ₱30,000.00, taxable
allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay
and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt from income tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay
and hazard pay shall still be exempt from withholding tax.

xxxx

(14) Compensation income of employees in the public sector with compensation income of
not more than the SMW in the nonagricultural sector, as fixed by RTWPB/NWPC, applicable to
the place where he/she is assigned.

xxxx

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above exemption.
Provided, however, that a public sector employee who receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently,
from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay
and hazard pay shall still be exempt from withholding tax.

These provisions of RR 10-2008 reveal a bias against those who are purely compensation
earners. In their consolidated comment, respondents reason:

Verily, the interpretation as to who is a minimum wage earner as petitioners advance will
open the opportunity for tax evasion by the mere expedient of pegging the salary or wage of a
worker at the minimum and reflecting a worker's other incomes as some other benefits. This
situation will not only encourage tax evasion, it will likewise discourage able employers
from paying salaries or wages higher than the statutory minimum. This should never be
countenanced. 82

Again, respondents are delving into policy-making they presume bad faith on the part of the
employers, and then shift the burden of this presumption and lay it on the backs of the lowest
paid workers. This presumption of bad faith does not even reflect pragmatic reality. It must be
remembered that a worker's holiday, overtime and night differential pays are all based on the
worker's regular wage. Thus, there will always be pressure from the workers to increase, not
decrease, their basic pay.

What is not acceptable is the blatant inequity between the treatment that RR 10-2008 gives to
those who earn purely compensation income and that given to those who have other sources of
income. Respondents want to tax the MWEs who serve their employer well and thus receive
higher bonuses or performance incentives; but exempts the MWEs who serve, in addition to their
employer, their other business or professional interests.

We cannot sustain respondent’s position.

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable income
received in excess of the minimum wage, but the MWEs will not lose their exemption as such.
Workers who receive the statutory minimum wage their basic pay remain MWEs. The receipt of
any other income during the year does not disqualify them as MWEs. They remain MWEs,
entitled to exemption as such, but the taxable income they receive other than as MWEs may be
subjected to appropriate taxes.

R.A. 9504 must be liberally construed.

We are mindful of the strict construction rule when it comes to the interpretation of tax
exemption laws. 83 The canon, however, is tempered by several exceptions, one of which is when
the taxpayer falls within the purview of the exemption by clear legislative intent. In this
situation, the rule of liberal interpretation applies in favor of the grantee and against the
government. 84

In this case, there is a clear legislative intent to exempt the minimum wage received by an MWE
who earns additional income on top of the minimum wage. As previously discussed, this intent
can be seen from both the law and the deliberations.

Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of the
taxpayers.

R.A. 9504 is a grant of tax relief long overdue.

We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.

Table 1 below shows the tax burden of an MWE over the years. We use as example one who is a
married individual without dependents and is working in the National Capital Region (NCR). For
illustration purposes, R.A. 9504 is applied as if the worker being paid the statutory minimum
wage is not tax exempt:

Table 1 -Tax Burden of MWE over the years

Law Effective NCR Minimum Daily Taxable Tax Due Tax

Wage85 Income86 Burden87
(Annual)

RA 1992 WO 3 (1993 ₱135.00 ₱24,255 ₱1,343.05 3.2%

716788 Dec)

RA WO 5 (1997 ₱185.00 ₱39,905 ₱3,064.55 5.3%

749689 May)

RA 1998 WO 6 (1998 ₱198.00 ₱29,974 ₱2,497.40 40.%

842490 Feb)

(1997 WO 13 (2007 ₱362.00 ₱81,306 ₱10,761.20 9.5%

NIRC) Aug)

WO 14 (2008 ₱382.00 ₱87,566 ₱12,013.20 10.0%

June)

RA 2008 WO 14 (2008 ₱382.00 ₱69,566 ₱8,434.90 7.1%

950491 Aug)

WO 20 (2016 ₱491.00 ₱103,683 ₱15,236.60 9.9%

June)

As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about 3.2%,
when Congress passed R.A. 7167, which increased the personal exemptions for a married
individual without dependents from ₱12,000 to ₱18,000; and R.A. 7496, which revised the table
of graduated tax rates (tax table).

Over the years, as the minimum wage increased, the tax burden of the MWE likewise increased.
In 1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became effective in 1998,
some relief in the MWE's tax burden was seen as it was reduced to 4.0%. This was mostly due to
the increase in personal exemptions, which were increased from ₱18,000 to ₱32,000 for a
married individual without dependents. It may be noted that while the tax table was revised, a
closer scrutiny of Table 3 below would show that the rates actually increased for those who were
earning less.

As the minimum wage continued to increase, the MWE's tax burden likewise did - by August
2007, it was 9.5%. This means that in 2007, of the ₱362 minimum wage, the MWE's take-home
pay was only ₱327.62, after a tax of ₱34.38.
This scenario does not augur well for the wage earners. Over the years, even with the occasional
increase in the basic personal and additional exemptions, the contribution the government exacts
from its MWEs continues to increase as a portion of their income. This is a serious social issue,
which R.A. 9504 partly addresses. With the ₱20 increase in minimum wage from ₱362 to ₱382
in 2008, the tax due thereon would be about ₱30. As seen in their deliberations, the lawmakers
wanted all of this amount to become additional take-home pay for the MWEs in 2008.92

The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted, inflation
has a profound impact in terms of tax burden. "Bracket creep," "the process by which inflation
pushes individuals into higher tax brackets,"93 occurs, and its deleterious results may be
explained as follows:

[A]n individual whose dollar income increases from one year to the next might be obliged to pay
tax at a higher marginal rate (say 25% instead of 15%) on the increase, this being a natural
consequence of rate progression. If, however, due to inflation the benefit of the increase is wiped
out by a corresponding increase in the cost of living, the effect would be a heavier tax burden
with no real improvement in the taxpayer's economic position. Wage and salary-earners
are especially vulnerable. Even if a worker gets a raise in wages this year, the raise will be
illusory if the prices of consumer goods rise in the same proportion. If her marginal tax
rate also increased, the result would actually be a decrease in the taxpayer's real disposable
income.94

Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due only to the
periodic increases in the minimum wage. This unfortunate development illustrates how "bracket
creep" comes about and how inflation alone increases their tax burden:

Table 2

Highest
Applicable
NCR Minimum Daily Tax Due Tax
Law Effective Tax Rate
Wage95 (Annual) Burden96
(Bracket
Creep)

RA WO 3 11%
1992 ₱135.00 ₱1,343.05 3.2%
716797 (1993 Dec)

WO 5 11%
RA
(1997 ₱185.00 ₱3,064.55 5.3%
749698
May)

RA WO 6 10%
1998 ₱198.00 ₱2,497.40 4.0%
842499 (1998 Feb)

(1997 WO 13 20%
₱362.00 ₱10,761.20 9.5%
(2007 Aug)
 NIRC) WO 14 20%
(2008 ₱382.00 ₱12,013.20 10.0%
June)

RA 2008 WO 14 15%
₱382.00 ₱8,434.90 7.1%
9504100 (2008 Aug)

WO 20 20%
(2016 ₱491.00 ₱15,236.60 9.9%
June)

The overall effect is the diminution, if not elimination, of the progressivity of the rate structure
under the present Tax Code. We emphasize that the graduated tax rate schedule for individual
taxpayers, which takes into account the ability to pay, is intended to breathe life into the
constitutional requirement of equity. 101

R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory minimum
wage (SMW), is exempt from tax on that income, as well as on the associated statutory payments
for hazardous, holiday, overtime and night work.

R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs zero tax
rights from the beginning or for the whole year 2008, RR 10-2008 declares that certain workers -
even if they are being paid the SMW, "shall not enjoy the privilege."

Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed

towards the higher tax brackets and higher rates. As Table 2 shows, as of June 2016, an MWE
would already belong to the 4th highest tax bracket of 20% (see also Table 3), resulting in a tax
burden of 9.9%. This means that for every ₱100 the MWE earns, the government takes back
₱9.90.

Further, a comparative view of the tax tables over the years (Table 3) shows that while the
highest tax rate was reduced from as high as 70% under the 1977 NTRC, to 35% in 1992, and
32% presently, the lower income group actually gets charged higher taxes. Before R.A. 8424,
one who had taxable income of less than ₱2,500 did not have to pay any income tax; under R.A.
8424, he paid 5% thereof. The MWEs now pay 20% or even more, depending on the other
benefits they receive including overtime, holiday, night shift, and hazard pays.

Table 3 – Tax Tables: Comparison of Tax Brackets and Rates

Taxable Income Bracket Rates under R. Rates under R. Rates under

A. 7496 (1992) A. 8424 (1998) R. A. 9504
(2008)

Not Over ₱2,500 0% 5% 5%

 Over ₱2,500 but not over
1%
₱5,000

Over ₱5,000 but not over

3%
₱10,000

Over ₱10,000 but not over

7%
₱20,000
10% 10%
Over ₱20,000 but not over
11%
₱30,000

Over ₱30,000 but not over

₱40,000

Over ₱40,000 but not over

15% 15% 15%
₱60,000

Over ₱60,000 but not over

₱70,000
19%
Over ₱70,000 but not over
₱100,000
20% 20%
Over ₱100,000 but not over
₱140,000
24%
Over ₱140,000 but not over
25% 25%
₱250,000

Over ₱250,000 but not over

29% 30% 30%
₱500,000

Over ₱500,00 35% 34% 32%

The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect for
the entire taxable year 2008, and without the qualification introduced by RR 10-2008. The latter
cannot disqualify MWEs from exemption from taxes on SMW and on their on his SMW,
holiday, overtime, night shift differential, and hazard pay.

CONCLUSION

The foregoing considered, we find that respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated
application of the personal and additional exemptions for taxable year 2008 and for the period of
applicability of the MWE exemption for taxable year 2008 to begin only on 6 July 2008; and (b)
the disqualification of MWEs who earn purely compensation income, whether in the private or
public sector, from the privilege of availing themselves of the MWE exemption in case they
receive compensation-related benefits exceeding the statutory ceiling of ₱30,000.

As an aside, we stress that the progressivity of the rate structure under the present Tax Code has
lost its strength. In the main, it has not been updated since its revision in 1997, or for a period of
almost 20 years. The phenomenon of "bracket creep" could be prevented through the inclusion of
an indexation provision, in which the graduated tax rates are adjusted periodically without need
of amending the tax law. The 1997 Tax Code, however, has no such indexation provision. It
should be emphasized that indexation to inflation is now a standard feature of a modern tax
code. 102

We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other benefits, in
consideration of the effect of inflation thereon, as provided under Section 32(B)(7)(e)
entitled" 13th Month Pay and Other Benefits":

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That
the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the Commissioner, after
considering among others, the effect on the same of the inflation rate at the end of the taxable
year.

This same positive duty, which is also imposed upon the same officials regarding the de
minimis benefits provided under Section 33(C)(4), is a duty that has been exercised several
times. The provision reads:

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:

(l) x x x

xxxx

(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and

(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-
2008:

(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation income
from the privilege of the MWE exemption in case they receive bonuses and other compensation-
related benefits exceeding the statutory ceiling of ₱30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and additional
exemptions under R.A. 9504 for taxable year 2008, and for the period of applicability of the
MWE exemption to begin only on 6 July 2008.

(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to grant a
refund, or allow the application of the refund by way of withholding tax adjustments, or allow a
claim for tax credits by (i) all individual taxpayers whose incomes for taxable year 2008 were the
subject of the prorated increase in personal and additional tax exemption; and (ii) all MWEs
whose minimum wage incomes were subjected to tax for their receipt of the 13thmonth pay and
other bonuses and benefits exceeding the threshold amount under Section 32(B)(7)(e) of the
1997 Tax Code.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-9692 January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS
COMPANY, respondents.

Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R.
Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.

MONTEMAYOR, J.:

This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the
assessment and decision of petitioner Collector of Internal Revenue, later referred to as
Collector, assessing and demanding from the respondents Batangas Transportation Company,
later referred to as Batangas Transportation, and Laguna-Tayabas Bus Company, later referred to
as Laguna Bus, the amount of P54,143.54, supposed to represent the deficiency income tax and
compromise for the years 1946 to 1949, inclusive, which amount, pending appeal in the C.T.A.,
but before the Collector filed his answer in said court, was increased to P148,890.14.

The following facts are undisputed: Respondent companies are two distinct and separate
corporations engaged in the business of land transportation by means of motor buses, and
operating distinct and separate lines. Batangas Transportation was organized in 1918, while
Laguna Bus was organized in 1928. Each company now has a fully paid up capital of Pl,000,000.
Before the last war, each company maintained separate head offices, that of Batangas
Transportation in Batangas, Batangas, while the Laguna Bus had its head office in San Pablo
Laguna. Each company also kept and maintained separate books, fleets of buses, management,
personnel, maintenance and repair shops, and other facilities. Joseph Benedict managed the
Batangas Transportation, while Martin Olson was the manager of the Laguna Bus. To show the
connection and close relation between the two companies, it should be stated that Max Blouse
was the President of both corporations and owned about 30 per cent of the stock in each
company. During the war, the American officials of these two corporations were interned in
Santo Tomas, and said companies ceased operations. They also lost their respective properties
and equipment. After Liberation, sometime in April, 1945, the two companies were able to
acquire 56 auto buses from the United States Army, and the two companies diveded said
equipment equally between themselves,registering the same separately in their respective names.
In March, 1947, after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph
Benedict, who was then managing the Batangas Transportation, was appointed Manager of both
companies by their respective Board of Directors. The head office of the Laguna Bus in San
Pablo City was made the main office of both corporations. The placing of the two companies
under one sole mangement was made by Max Blouse, President of both companies, by virtue of
the authority granted him by resolution of the Board of Directors of the Laguna Bus on August
10, 1945, and ratified by the Boards of the two companies in their respective resolutions of
October 27, 1947.

According to the testimony of joint Manager Joseph Benedict, the purpose of the joint
management, which was called, "Joint Emergency Operation", was to economize in overhead
expenses; that by means of said joint operation, both companies had been able to save the
salaries of one manager, one assistant manager, fifteen inspectors, special agents, and one set of
office of clerical force, the savings in one year amounting to about P200,000 or about P100,000
for each company. At the end of each calendar year, all gross receipts and expenses of both
companies were determined and the net profits were divided fifty-fifty, and transferred to the
book of accounts of each company, and each company "then prepared its own income tax return
from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus
transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes
thereon separately".

Under the theory that the two companies had pooled their resources in the establishment of the
Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the bus
companies that there was due from them the amount of P422,210.89 as deficiency income tax
and compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be
restrained, seized, and advertized for sale all the rolling stock of the two corporations, respondent
companies had to file a surety bond in the same amount of P422,210.89 to guarantee the payment
of the income tax assessed by him.
After some exchange of communications between the parties, the Collector, on January 8, 1955,
informed the respondents "that after crediting the overpayment made by them of their alleged
income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable recoupment,
the income tax due from the `Joint Emergency Operation' for the years 1946 to 1949, inclusive,
is in the total amount of P54,143.54." The respondent companies appealed from said assessment
of P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector set aside
his original assessment of P54,143.54 and reassessed the alleged income tax liability of
respondents of P148,890.14, claiming that he had later discovered that said companies had been
"erroneously credited in the last assessment with 100 per cent of their income taxes paid when
they should in fact have been credited with only 75 per cent thereof, since under Section 24 of
the Tax Code dividends received by them from the Joint Operation as a domestic corporation are
returnable to the extent of 25 per cent". That corrected and increased reassessment was embodied
in the answer filed by the Collector with the Court of Tax Appeals.

The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the
two respondent companies, as defined in section 84 (b), and so liable to income tax under section
24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and held, citing
authorities, that the Joint Emergency Operation or joint management of the two companies "is
not a corporation within the contemplation of section 84 (b) of the National Internal Revenue
Code much less a partnership, association or insurance company", and therefore was not subject
to the income tax under the provisions of section 24 of the same Code, separately and
independently of respondent companies; so, it reversed the decision of the Collector assessing
and demanding from the two companies the payment of the amount of P54,143.54 and/or the
amount of P148,890.14. The Tax Court did not pass upon the question of whether or not in the
appeal taken to it by respondent companies, the Collector could change his original assessment
by increasing the same from P54,143.14 to P148,890.14, to correct an error committed by him in
having credited the Joint Emergency Operation, totally or 100 per cent of the income taxes paid
by the respondent companies for the years 1946 to 1949, inclusive, by reason of the principle
of equitable recoupment, instead of only 75 per cent.

The two main and most important questions involved in the present appeal are: (1) whether the
two transportation companies herein involved are liable to the payment of income tax as a
corporation on the theory that the Joint Emergency Operation organized and operated by them is
a corporation within the meaning of Section 84 of the Revised Internal Revenue Code, and (2)
whether the Collector of Internal Revenue, after the appeal from his decision has been perfected,
and after the Court of Tax Appeals has acquired jurisdiction over the same, but before said
Collector has filed his answer with that court, may still modify his assessment subject of the
appeal by increasing the same, on the ground that he had committed error in good faith in
making said appealed assessment.

The first question has already been passed upon and determined by this Tribunal in the case
of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R. No. L-9996,
promulgated on October 15, 1957. Considering the views and rulings embodied in our decision
in that case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to extensively
discuss the point. Briefly, the facts in that case are as follows: The three Evangelista sisters
borrowed from their father about P59,000 and adding thereto their own personal funds, bought
real properties, such as a lot with improvements for the sum of P100,000 in 1943, parcels of land
with a total area of almost P4,000 square meters with improvements thereon for P18,000 in 1944,
another lot for P108,000 in the same year, and still another lot for P237,000 in the same year.
The relatively large amounts invested may be explained by the fact that purchases were made
during the Japanese occupation, apparently in Japanese military notes. In 1945, the sisters
appointed their brother to manage their properties, with full power to lease, to collect and receive
rents, on default of such payment, to bring suits against the defaulting tenants, to sign all letters
and contracts, etc. The properties therein involved were rented to various tenants, and the sisters,
through their brother as manager, realized a net rental income of P5,948 in 1945, P7,498 in 1946,
and P12,615 in 1948.

In 1954, the Collector of Internal Revenue demanded of them among other things, payment of
income tax on corporations from the year 1945 to 1949, in the total amount of P6,157, including
surcharge and compromise. Dissatisfied with the said assessment, the three sisters appealed to
the Court of Tax Appeals, which court decided in favor of the Collector of Internal Revenue. On
appeal to us, we affirmed the decision of the Tax Court. We found and held that considering all
the facts and circumstances sorrounding the case, the three sisters had the purpose to engage in
real estate transactions for monetary gain and then divide the same among themselves; that they
contributed to a common fund which they invested in a series of transactions; that the properties
bought with this common fund had been under the management of one person with full power to
lease, to collect rents, issue receipts, bring suits, sign letters and contracts, etc., in such a manner
that the affairs relative to said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit; and that the said sisters had the intention to
constitute a partnership within the meaning of the tax law. Said sisters in their appeal insisted
that they were mere co-owners, not co-partners, for the reason that their acts did not create a
personality independent of them, and that some of the characteristics of partnerships were absent,
but we held that when the Tax Code includes "partnerships" among the entities subject to the tax
on corporations, it must refer to organizations which are not necessarily partnerships in the
technical sense of the term, and that furthermore, said law defined the term "corporation" as
including partnerships no matter how created or organized, thereby indicating that "a joint
venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term
"corporation" includes "joint accounts" (cuentas en participacion) and "associations", none of
which has a legal personality independent of that of its members. The decision cites 7A Merten's
Law of Federal Income Taxation.
In the present case, the two companies contributed money to a common fund to pay the sole
general manager, the accounts and office personnel attached to the office of said manager, as
well as for the maintenance and operation of a common maintenance and repair shop. Said
common fund was also used to buy spare parts, and equipment for both companies, including
tires. Said common fund was also used to pay all the salaries of the personnel of both companies,
such as drivers, conductors, helpers and mechanics, and at the end of each year, the gross income
or receipts of both companies were merged, and after deducting therefrom the gross expenses of
the two companies, also merged, the net income was determined and divided equally between
them, wholly and utterly disregarding the expenses incurred in the maintenance and operation of
each company and of the individual income of said companies.

From the standpoint of the income tax law, this procedure and practice of determining the net
income of each company was arbitrary and unwarranted, disregarding as it did the real facts in
the case. There can be no question that the receipts and gross expenses of two, distinct and
separate companies operating different lines and in some cases, different territories, and different
equipment and personnel at least in value and in the amount of salaries, can at the end of each
year be equal or even approach equality. Those familiar with the operation of the business of
land transportation can readily see that there are many factors that enter into said operation.
Much depends upon the number of lines operated and the length of each line, including the
number of trips made each day. Some lines are profitable, others break above even, while still
others are operated at a loss, at least for a time, depending, of course, upon the volume of traffic,
both passenger and freight. In some lines, the operator may enjoy a more or less exclusive
exclusive operation, while in others, the competition is intense, sometimes even what they call
"cutthroat competition". Sometimes, the operator is involved in litigation, not only as the result
of money claims based on physical injuries ar deaths occassioned by accidents or collisions, but
litigations before the Public Service Commission, initiated by the operator itself to acquire new
lines or additional service and equipment on the lines already existing, or litigations forced upon
said operator by its competitors. Said litigation causes expense to the operator. At other times,
operator is denounced by competitors before the Public Service Commission for violation of its
franchise or franchises, for making unauthorized trips, for temporary abandonement of said lines
or of scheduled trips, etc. In view of this, and considering that the Batangas Transportation and
the Laguna Bus operated different lines, sometimes in different provinces or territories, under
different franchises, with different equipment and personnel, it cannot possibly be true and
correct to say that the end of each year, the gross receipts and income in the gross expenses of
two companies are exactly the same for purposes of the payment of income tax. What was
actually done in this case was that, although no legal personality may have been created by the
Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint
management operated the business affairs of the two companies as though they constituted a
single entity, company or partnership, thereby obtaining substantial economy and profits in the
operation.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of
Internal Revenue case, supra, we believe and hold that the Joint Emergency Operation or sole
management or joint venture in this case falls under the provisions of section 84 (b) of the
Internal Revenue Code, and consequently, it is liable to income tax provided for in section 24 of
the same code.

The second important question to determine is whether or not the Collector of Internal Revenue,
after appeal from his decision to the Court of Tax Appeals has been perfected, and after the Tax
Court Appeals has acquired jurisdiction over the appeal, but before the Collector has filed his
answer with the court, may still modify his assessment, subject of the appeal, by increasing the
same. This legal point, interesting and vital to the interests of both the Government and the
taxpayer, provoked considerable discussion among the members of this Tribunal, a minority of
which the writer of this opinion forms part, maintaining that for the information and guidance of
the taxpayer, there should be a definite and final assessment on which he can base his decision
whether or not to appeal; that when the assessment is appealed by the taxpayer to the Court of
Tax Appeals, the collector loses control and jurisdiction over the same, the jurisdiction being
transferred automatically to the Tax Court, which has exclusive appellate jurisdiction over the
same; that the jurisdiction of the Tax Court is not revisory but only appellate, and therefore, it
can act only upon the amount of assessment subject of the appeal to determine whether it is valid
and correct from the standpoint of the taxpayer-appellant; that the Tax Court may only correct
errors committed by the Collector against the taxpayer, but not those committed in his favor,
unless the Government itself is also an appellant; and that unless this be the rule, the Collector of
Internal Revenue and his agents may not exercise due care, prudence and pay too much attention
in making tax assessments, knowing that they can at any time correct any error committed by
them even when due to negligence, carelessness or gross mistake in the interpretation or
application of the tax law, by increasing the assessment, naturally to the prejudice of the taxpayer
who would not know when his tax liability has been completely and definitely met and complied
with, this knowledge being necessary for the wise and proper conduct and operation of his
business; and that lastly, while in the United States of America, on appeal from the decision of
the Commissioner of Internal Revenue to the Board or Court of Tax Appeals, the Commissioner
may still amend or modify his assessment, even increasing the same the law in that jurisdiction
expressly authorizes the Board or Court of Tax Appeals to redetermine and revise the assessment
appealed to it.

The majority, however, holds, not without valid arguments and reasons, that the Government is
not bound by the errors committed by its agents and tax collectors in making tax assessments,
specially when due to a misinterpretation or application of the tax laws, more so when done in
good faith; that the tax laws provide for a prescriptive period within which the tax collectors may
make assessments and reassessments in order to collect all the taxes due to the Government, and
that if the Collector of Internal Revenue is not allowed to amend his assessment before the Court
of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums
within the same subject of his original assessment, provided it is done within the prescriptive
period, that would lead to multiplicity of suits which the law does not encourage; that since the
Collector of Internal Revenue, in modifying his assessment, may not only increase the same, but
may also reduce it, if he finds that he has committed an error against the taxpayer, and may even
make refunds of amounts erroneously and illegally collected, the taxpayer is not prejudiced; that
the hearing before the Court of Tax Appeals partakes of a trial de novoand the Tax Court is
authorized to receive evidence, summon witnesses, and give both parties, the Government and
the taxpayer, opportunity to present and argue their sides, so that the true and correct amount of
the tax to be collected, may be determined and decided, whether resulting in the increase or
reduction of the assessment appealed to it. The result is that the ruling and doctrine now being
laid by this Court is, that pending appeal before the Court of Tax Appeals, the Collector of
Internal Revenue may still amend his appealed assessment, as he has done in the present case.

There is a third question raised in the appeal before the Tax Court and before this Tribunal,
namely, the liability of the two respondent transportation companies for 25 per cent surcharge
due to their failure to file an income tax return for the Joint Emergency Operation, which we
hold to be a corporation within the meaning of the Tax Code. We understand that said 25 per
cent surcharge is included in the assessment of P148,890.14. The surcharge is being imposed by
the Collector under the provisions of Section 72 of the Tax Code, which read as follows:

The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to file
the return or list within the time prescribed by law, or in case a false or fraudulent return or list is
willfully made the collector of internal revenue shall add to the tax or to the deficiency tax, in
case any payment has been made on the basis of such return before the discovery of the falsity or
fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any
failure to make and file a return list within the time prescribed by law or by the Collector or other
internal revenue officer, not due to willful neglect, the Collector, shall add to the tax twenty-five
per centum of its amount, except that, when the return is voluntarily and without notice from the
Collector or other officer filed after such time, it is shown that the failure was due to a reasonable
cause, no such addition shall be made to the tax. The amount so added to any tax shall be
collected at the same time in the same manner and as part of the tax unless the tax has been paid
before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be
collected in the same manner as the tax.

We are satisfied that the failure to file an income tax return for the Joint Emergency Operation
was due to a reasonable cause, the honest belief of respondent companies that there was no such
corporation within the meaning of the Tax Code, and that their separate income tax return was
sufficient compliance with the law. That this belief was not entirely without foundation and that
it was entertained in good faith, is shown by the fact that the Court of Tax Appeals itself
subscribed to the idea that the Joint Emergency Operation was not a corporation, and so
sustained the contention of respondents. Furthermore, there are authorities to the effect that
belief in good faith, on advice of reputable tax accountants and attorneys, that a corporation was
not a personal holding company taxable as such constitutes "reasonable cause" for failure to file
holding company surtax returns, and that in such a case, the imposition of penalties for failure to
file holding company surtax returns, and that in such a case, the imposition of penalties for
failure to file return is not warranted1

In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax
Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved in
the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code,
and so is liable to incom tax under section 24 of the code; that pending appeal in the Court of
Tax Appeals of an assessment made by the Collector of Internal Revenue, the Collector, pending
hearing before said court, may amend his appealed assessment and include the amendment in his
answer before the court, and the latter may on the basis of the evidence presented before it,
redetermine the assessment; that where the failure to file an income tax return for and in behalf
of an entity which is later found to be a corporation within the meaning of section 84 (b) of the
Tax Code was due to a reasonable cause, such as an honest belief based on the advice of its
attorneys and accountants, a penalty in the form of a surcharge should not be imposed and
collected. The respondents are therefore ordered to pay the amount of the reassessment made by
the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent
surcharge. No costs.

Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Felix,
JJ., concur.
Reyes, A. J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA,

MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R.
Rosete, and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly
entitled as above, holding that petitioners have constituted an unregistered partnership and are,
therefore, subject to the payment of the deficiency corporate income taxes assessed against them
by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of
P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of
Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying
petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña 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. Oña 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 Oña, were still minors when the project of
partition was approved, Lorenzo T. Oña, 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.
Oña, 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. Oña 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:

Yea Investmen Land Buildin

r t g

Account Accoun Accoun

t t

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The
said incomes are recorded in the books of account kept by Lorenzo T. Oña 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. Oña
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

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation
Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers
solely to the income tax proper for the years 1955 and 1956 and the "Compromise
for non-filing," the latter item obviously referring to the compromise in lieu of the
criminal liability for failure of petitioners to file the corporate income tax returns
for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE

PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;

II.
 THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED
AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM
(sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT

PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES FOR
1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN

UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED
IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE
PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS
COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED

PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON,
FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts
found by the Court of Tax Appeals, should petitioners be considered as co-owners of the
properties inherited by them from the deceased Julia Buñales and the profits derived from
transactions involving the same, or, must they be deemed to have formed an unregistered
partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code?
(2) Assuming they have formed an unregistered partnership, should this not be only in the sense
that they invested as a common fund the profits earned by the properties owned by them in
common and the loans granted to them upon the security of the said properties, with the result
that as far as their respective shares in the inheritance are concerned, the total income thereof
should be considered as that of co-owners and not of the unregistered partnership? And (3)
assuming again that they are taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956 as individual income taxes on
their respective shares of the profits accruing from the properties they owned in common be
deducted from the deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration
or management of the head of the family, the widower and father Lorenzo T. Oña, the
assessment in question refers to the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years 1944 to 1954, the respondent
Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax,
and it was only from 1955 that he considered them as having formed an unregistered partnership.
At least, there is nothing in the record indicating that an earlier assessment had already been
made. Such being the case, and We see no reason how it could be otherwise, it is easily
understandable why petitioners' position that they are co-owners and not unregistered co-
partners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners
should find comfort in the fact that they were not similarly assessed earlier by the Bureau of
Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under
the management of Lorenzo T. Oña who used said properties in business by leasing or selling
them and investing the income derived therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said properties and investments steadily increased
yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in
"building account" in 1956. And all these became possible because, admittedly, petitioners never
actually received any share of the income or profits from Lorenzo T. Oña and instead, they
allowed him to continue using said shares as part of the common fund for their ventures, even as
they paid the corresponding income taxes on the basis of their respective shares of the profits of
their common business as reported by the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance.
In these circumstances, it is Our considered view that from the moment petitioners allowed not
only the incomes from their respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oña as a common fund in undertaking several transactions
or in business, with the intention of deriving profit to be shared by them proportionally, such act
was tantamonut to actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the above-mentioned
provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as
co-owners continues until the inheritance is actually and physically distributed among the heirs,
for it is easily conceivable that after knowing their respective shares in the partition, they might
decide to continue holding said shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business on that basis. Withal, if this were
to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for
holding the appellants therein to be unregistered co-partners for tax purposes, that their common
fund "was not something they found already in existence" and that "it was not a property
inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as petitioners
are doing here, that ergo, in all instances where an inheritance is not actually divided, there can
be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of
inherited properties is automatically converted into an unregistered partnership the moment the
said common properties and/or the incomes derived therefrom are used as a common fund with
intent to produce profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or approved
by the court in the corresponding testate or intestate proceeding. The reason for this is simple.
From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he becomes
liable individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used with the
intent of making profit thereby in proportion to his share, there can be no doubt that, even if no
document or instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property from which
the returns are derived," and, for that matter, on any other provision of said code on partnerships
is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships
under the Civil Code from that of unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice
Roberto Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our Internal
Revenue Code includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said
 Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporation. Again, pursuant to said section
84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of its
own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general
co-partnerships" — which are possessed of the aforementioned personality —
have been expressly excluded by law (sections 24 and 84[b]) from the connotation
of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term

"partnership" it includes not only a partnership as known in
common law but, as well, a syndicate, group, pool, joint venture,
or other unincorporated organization which carries on any
business, financial operation, or venture, and which is not, within
the meaning of the Code, a trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint

venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is
carried on. ... . (8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)

For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships — with the exception only of duly registered general
copartnerships — within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a
theory of co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of
the corporate taxes in question, of their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination of the Tax Court in denying
their motion for reconsideration:
 In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business engaged in
apart from the properties inherited by petitioners. In other words, the taxable
income of the partnership should be limited to the income derived from the
acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the
inherited properties and the income derived therefrom were used in the business
of buying and selling other real properties and corporate securities. Accordingly,
the partnership income must include not only the income derived from the
purchase and sale of other properties but also the income of the inherited
properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is but proper that the
income of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court

that the herein petitioners have formed an unregistered partnership
and, therefore, have to be taxed as such, it might be recalled that
the petitioners in their individual income tax returns reported their
shares of the profits of the unregistered partnership. We think it
only fair and equitable that the various amounts paid by the
individual petitioners as income tax on their respective shares of
the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner
in Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each petitioner
on his share of partnership profits. This is not correct; rather, it should be the
other way around. The partnership profits distributable to the partners (petitioners
herein) should be reduced by the amounts of income tax assessed against the
partnership. Consequently, each of the petitioners in his individual capacity
overpaid his income tax for the years in question, but the income tax due from the
partnership has been correctly assessed. Since the individual income tax liabilities
 of petitioners are not in issue in this proceeding, it is not proper for the Court to
pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might
have paid as individual income tax cannot be credited as part payment of the taxes herein in
question. It is argued that to sanction the view of the Tax Court is to oblige petitioners to pay
double income tax on the same income, and, worse, considering the time that has lapsed since
they paid their individual income taxes, they may already be barred by prescription from
recovering their overpayments in a separate action. We do not agree. As We see it, the case of
petitioners as regards the point under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of
course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the law is
very clear that the claim and action for such reimbursement are subject to the bar of prescription.
And since the period for the recovery of the excess income taxes in the case of herein petitioners
has already lapsed, it would not seem right to virtually disregard prescription merely upon the
ground that the reason for the delay is precisely because the taxpayers failed to make the proper
return and payment of the corporate taxes legally due from them. In principle, it is but proper not
to allow any relaxation of the tax laws in favor of persons who are not exactly above suspicion in
their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed
from is affirm with costs against petitioners.

Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.

Reyes, J.B.L. and Teehankee, JJ., concur in the result.

Castro, J., took no part.

Concepcion, C.J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS

P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

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 ½ 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 Tobeñas 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
señala 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 Oña 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 Arañas, 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.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and
on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two
parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the
three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March
19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70,
while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years
1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the National Internal Revenue
Code 1 that the unregistered partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is subject to individual income tax; and
that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were required to pay the deficiency
income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as
CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership
was in fact formed by petitioners which like a corporation was subject to corporate income tax
distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the
petitioners, there was no adequate basis for the conclusion that they thereby formed an
unregistered partnership which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of
the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT
THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE

AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their
own personal funds they used in buying several real properties. They appointed their brother to
manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the
real properties rented or leased to various tenants for several years and they gained net profits
from the rental income. Thus, the Collector of Internal Revenue demanded the payment of
income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and
partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present in the case at
bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots
for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in February, 1943.
In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even try
to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are
not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits
among themselves. Respondent commissioner and/ or his representative just assumed these
conditions to be present on the basis of the fact that petitioners purchased certain parcels of land
and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common
fund or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from
one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not
make any additional or new purchase. The remaining three (3) parcels were sold by them in
1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15) years.
None of the circumstances are present in the case at bar. The co-ownership started only in 1965
and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down
the rule for determining when a transaction should be deemed a partnership or a co-ownership.
Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do
not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest
in the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership, the
existence of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the others (Padilla,
Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83,
p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does
an agreement to share the profits and losses on the sale of land create a partnership; the parties
are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no partnership existed as between the
three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123
N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to
form a partnership, the existence of a juridical personality different from the individual partners,
and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership.
The two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under
the circumstances, they cannot be considered to have formed an unregistered partnership which
is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality
nor with assets that can be held liable for said deficiency corporate income tax, then petitioners
can be held individually liable as partners for this unpaid obligation of the partnership
p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of
Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is
hereby rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and
on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two
parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the
three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March
19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70,
while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years
1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the National Internal Revenue
Code 1 that the unregistered partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is subject to individual income tax; and
that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were required to pay the deficiency
income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as
CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership
was in fact formed by petitioners which like a corporation was subject to corporate income tax
distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the
petitioners, there was no adequate basis for the conclusion that they thereby formed an
unregistered partnership which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of
the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT
THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE

AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their
own personal funds they used in buying several real properties. They appointed their brother to
manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the
real properties rented or leased to various tenants for several years and they gained net profits
from the rental income. Thus, the Collector of Internal Revenue demanded the payment of
income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and
partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present in the case at
bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots
for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in February, 1943.
In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even try
to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and, hence, those cases are
not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits
among themselves. Respondent commissioner and/ or his representative just assumed these
conditions to be present on the basis of the fact that petitioners purchased certain parcels of land
and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common
fund or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from
one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not
make any additional or new purchase. The remaining three (3) parcels were sold by them in
1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15) years.
None of the circumstances are present in the case at bar. The co-ownership started only in 1965
and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays down
the rule for determining when a transaction should be deemed a partnership or a co-ownership.
Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the
returns are derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do
not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest
in the property. This only means that, aside from the circumstance of profit, the presence of other
elements constituting partnership is necessary, such as the clear intent to form a partnership, the
existence of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the others (Padilla,
Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy
certain real estate for profit in the absence of other circumstances showing a contrary intention
cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83,
p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does
an agreement to share the profits and losses on the sale of land create a partnership; the parties
are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiffs commission, no partnership existed as between the
three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123
N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and
dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to
form a partnership, the existence of a juridical personality different from the individual partners,
and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership.
The two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under
the circumstances, they cannot be considered to have formed an unregistered partnership which
is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality
nor with assets that can be held liable for said deficiency corporate income tax, then petitioners
can be held individually liable as partners for this unpaid obligation of the partnership
p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of
Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is
hereby rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.

SO ORDERED.

Cruz, Griño-Aquino and Medialdea, JJ., concur.

Narvasa, J., took no part.

THIRD DIVISION
 [G.R. No. 112675. January 25, 1999]

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION;

CHARTER INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION;
COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE
CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION;
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES; EASTERN
ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL
INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION;
FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO
MERCHANTS INSURANCE CO., INC.; GOVERNMENT SERVICE
INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN
ZURICH INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.;
METROPOLITAN INSURANCE COMPANY; METRO-TAISHO INSURANCE
CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN
INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION;
PEOPLES TRANS-EAST ASIA INSURANCE CORPORATION;
PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE
CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF
THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY
& INSURANCE COMPANY; RIZAL SURETY & INSURANCE COMPANY;
SANPIRO INSURANCE CORPORATION; SEABOARD-EASTERN INSURANCE
CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE
CO., INC.; STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE
CORPORATION; TABACALERA INSURANCE CO., INC.all assessed as POOL
OF MACHINERY INSURERS, petitioners, vs. COURT OF APPEALS, COURT OF
TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION
PANGANIBAN, J.:

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company. May the clearing house or insurance pool so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal Revenue
Code (NIRC)? Should the pools remittances to the member companies and to the said foreign
firm be taxable as dividends? Under the facts of this case, has the governments right to assess
and collect said tax prescribed?

The Case
 These are the main questions raised in the Petition for Review on Certiorari before us,
assailing the October 11, 1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which
dismissed petitioners appeal of the October 19, 1992 Decision[3] of the Court of Tax
Appeals[4] (CTA) which had previously sustained petitioners liability for deficiency income tax,
interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioners.[5]

The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution[6] denying reconsideration.

The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of
the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion
and Contractors All Risk insurance policies, the petitioners on August 1, 1965 entered into a
Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation.The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending in 1975, on the
basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate
taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39
and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These
assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and
with[h]olding tax, itemized as follows:

Net income per information

return P3,737,370.00

===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========

Dividend paid to Munich

 Reinsurance Company P3,728,412.00
===========

35% withholding tax at

source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========

Dividend paid to Pool Members P 655,636.00

===========

10% withholding tax at

source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========[8]

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the
address given in the information return filed. Hence, this Petition for Review before us.[9]

The Issues

Before this Court, petitioners raise the following issues:

1.Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;

2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House had already
prescribed.[10]

The Courts Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the governments right to assess and collect the taxes had not
prescribed.

First Issue:
Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point out
that the reinsurance policies were written by them individually and separately, and that their
liability was limited to the extent of their allocated share in the original risks thus
reinsured.[11] Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited to
its principal function of allocating and distributing the risk(s) arising from the original insurance
among the signatories to the treaty or the members of the pool based on their ability to absorb the
risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance,
collection and custody of funds, etc.[13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers,
did not share the same risk or solidary liability;[14] (2) there was no common fund;[15] (3) the
executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation;[16] and (4) the pool or clearing house was not and could not
possibly have engaged in the business of reinsurance from which it could have derived income
for itself.[17]
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue,
the agency tasked with the enforcement of tax laws, is accorded much weight and even finality,
when there is no showing that it is patently wrong,[18] particularly in this case where the findings
and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals.[19] Indeed,

[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
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
its authority.[20]
 This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error. Section 24 of the
NIRC, as worded in the year ending 1975, provides:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not includingduly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and building and
loan associations xxx.

Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations. Parenthetically, the
NLRCs inclusion of such entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997,[21] which amended the Tax Code. Pertinent provisions of the new law read
as follows:

SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation, as defined in Section 22 (B) of
this Code, and taxable under this Title as a corporation xxx.

SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract
without the Government. General professional partnerships are partnerships formed
by persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24
covered these unregistered partnerships and even associations or joint accounts, which had no
legal personalities apart from their individual members.[23] The Court of Appeals astutely
applied Evangelista:[24]

xxx Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:
 The term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on. * * * (8 Mertens Law of Federal Income Taxation, p. 562 Note 63)

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two
or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.[25] Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the profits.[26] In other words, a
partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves.[27] Meanwhile,
an association implies associates who enter into a joint enterprise x x x for the transaction of
business.[28]
In the case before us, the ceding companies entered into a Pool Agreement[29] or an
association[30] that would handle all the insurance businesses covered under their quota-share
reinsurance treaty[31] and surplus reinsurance treaty[32]with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool.[33] This common fund pays for the
administration and operation expenses of the pool.[34]
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not
have received their premiums. The ceding companies share in the business ceded to
the pool and in the expenses according to a Rules of Distribution annexed to the Pool
Agreement.[36] Profit motive or business is, therefore, the primordial reason for the
pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to]
the transaction of the business. x x x If together they have conducted business, profit
must have been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it implies that
profit actually resulted.[37]
The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts
obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered
partnership, but merely a co-ownership which took up only two isolated transactions.[39] The
Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged
in a series of transactions spanning more than ten years, as in the case before us.
 Second Issue:
Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insist that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice in the hands of the same
taxpayer.[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends.[41] They add
that even if such remittances were treated as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and
Article 5 of paragraph 5[44] of the RP-West German Tax Treaty.[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice
when it should be taxed only once. That is, xxx taxing the same person twice by the same
jurisdiction for the same thing.[46] In the instant case, the pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is obviously
different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation.Hence, exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right.[47] Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon
reinsurance by any company that has already paid the tax xxx. This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax paid by the former as
their own.
On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of
the ceding companies in the entity formed, pursuant to their reinsurance treaties which required
the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and
loss. This is manifest from a reading of Articles 3[49] and 10[50] of the Quota Share Reinsurance
Treaty and Articles 3[51]and 10[52] of the Surplus Reinsurance Treaty. The foregoing
interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a language
too plain to be mistaken.[53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for
corporate taxes on the basis of the information return it had submitted for the year ending 1975, a
taxable year when said treaty was not yet in effect.[54] Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect
only later, on December 14, 1984.[55]

Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an
assessment.[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC,[57] because the taxpayer
cannot be located at the address given in the information return filed and for which reason there
was delay in sending the assessment.[58] Indeed, whether the governments right to collect and
assess the tax has prescribed involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as
in this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pools information return filed
in 1980 indicated therein its present address. The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Romero, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.