TAX 2 DIGESTS
• (b) Should the inheritance tax be computed on the basis of the
Lorenzo v. Posadas
• Thomas Hanley died in 1922 in Zamboanga leaving a will w/c provided that:
o Any money left be given to nephew Matthew
o All real estate shall not be sold or disposed of 10 years after his
death. It shall be managed by the executors. The proceeds shall
be given to nephew Matthew in Ireland to be used only for the
education of Hanley’s brother's children and their descendants.
o 10 years after Thomas’ death, his property be given to Matthew to
be disposed of in the way he thinks most advantageous
• In 1924, the CFI appointed an administrator, Moore, eventually replaced by
Lorenzo (after Moore resigned).
• CIR assessed the estate inheritance taxes from the time of Thomas’ death
including penalties for deliquency in payment (P2k+).
• CIR filed a motion before the CFI praying that the Lorenzo be ordered to pay
the said amount. The motion was granted. Lorenzo paid under protest and
asked for a refund. CIR refused to refund.
• I: (a) When does the inheritance tax accrue and when must it be
satisfied? UPON DEATH
• Lorenzo asserts that article 657 of the Civil Code (“the rights to the
succession of a person are transmitted from the moment of his death”)
operates only in so far as forced heirs are concerned.
• HOWEVER, there is no distinction between different classes of heirs. The
Administrative Code imposes the tax upon the transmission of property of a
decedent, made effective by his death. An excise or privilege tax imposed on
the right to succeed to, receive, or take property by or under a will or the
intestacy law, or deed, grant, or gift to become operative at or after death.
The property belongs to the heirs at the moment of the death of the ancestor
as completely as if the ancestor had executed and delivered to them a deed
for the same before his death.
• Since Thomas Hanley died on May 27, 1922, the inheritance tax accrued as of
the date.
• However, it does not follow that the obligation to pay the tax arose as of the
date. The time for the payment on inheritance tax is fixed by the Revised
Administrative Code w/c provides that the payment must be made before
entrance into possession of the property of the fideicommissary or cestui que
trust. Thus, the tax should have been paid before the delivery of the
properties to Moore as trustee in 1924.
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value of the estate at the time of the testator's death, or on its
value ten years later? AT THE TIME OF DEATH
Plaintiff contends that the estate of Thomas Hanley could not legally pass to Matthew
until after the expiration of 10 years from the death of the testator in 1922 and the
inheritance tax should be based on the value of the estate in 1932.
Upon the death of the decedent, succession takes place and the right of the estate to
tax vests instantly. The tax should be measured by the value of the estate as it stood
at the time of the decedent's death, regardless of any subsequent contingency value of
any subsequent increase or decrease in value, or the postponement of the actual
possession or enjoyment of the estate by the beneficiary.
(c) In determining the net value of the estate subject to tax, is it proper
to deduct the compensation due to trustees? NO
A trustee, no doubt, is entitled to receive a fair compensation for his services.
However, it does not follow that the compensation due him may lawfully be deducted in
arriving at the net value of the estate subject to tax. First, There is no statute requiring
trustees' commissions to be deducted in determining the net value of the estate subject
to inheritance tax. Second, though a testamentary trust has been created, the testator
intended that the duties of his executors and trustees should be separated.
(d) What law governs the case at bar? Should the provisions of Act No.
3606 favorable to the tax-payer be given retroactive effect? NO
The law at the time was section 1544 of the Revised Administrative Code, as amended
by Act No. 3031, which took effect on March 9, 1922. Inheritance taxation is governed
by the statute in force at the time of the death of the decedent . A statute should be
considered as prospective in its operation, whether it enacts, amends, or repeals an
inheritance tax, unless the language of the statute clearly demands or expresses that it
shall have a retroactive effect.
CIR v Fisher
• Walter G. Stevenson was born in the Philippines of British parents, married in
Manila to another British subject, Beatrice. He died in 1951 in California
where he and his wife moved to.
• In his will, he instituted Beatrice as his sole heiress to certain real and
personal properties, among which are 210,000 shares of stocks in Mindanao
Mother Lode Mines (Mines).
• Ian Murray Statt (Statt), the appointed ancillary administrator of his estate
filed an estate and inheritance tax return. He made a preliminary return to
secure the waiver of the CIR on the inheritance of the Mines shares of stock.
• In 1952, Beatrice assigned all her rights and interests in the estate to the
spouses Fisher.
• Statt filed an amended estate and inheritance tax return claiming
ADDITIOANL EXEMPTIONS, one of which is the estate and inheritance tax on
the Mines’ shares of stock pursuant to a reciprocity proviso in the NIRC,
 hence, warranting a refund from what he initially paid. The collector denied
the claim. He then filed in the CFI of Manila for the said amount.
• CFI ruled that (a) the ½ share of Beatrice should be deducted from the net
estate of Walter, (b) the intangible personal property belonging to the estate
of Walter is exempt from inheritance tax pursuant to the reciprocity proviso in
NIRC.
• I: W/N the estate can avail itself of the reciprocity proviso in the NIRC
granting exemption from the payment of taxes for the Mines shares of stock
• R: No.
• Reciprocity must be total. If any of the two states collects or imposes or does
not exempt any transfer, death, legacy or succession tax of any character,
the reciprocity does not work.
• In the Philippines, upon the death of any citizen or resident, or non-resident
with properties, there are imposed upon his estate, both an estate and an
inheritance tax.
• But, under the laws of California, only inheritance tax is imposed. Also,
although the Federal Internal Revenue Code imposes an estate tax, it does
not grant exemption on the basis of reciprocity. Thus, a Filipino citizen shall
always be at a disadvantage. This is not what the legislators intended.
• SPECIFICALLY:
• Section122 of the NIRC provides that “No tax shall be collected under this
Title in respect of intangible personal property
o (a) if the decedent at the time of his death was a resident of a
foreign country which at the time of his death did not impose a
transfer of tax or death tax of any character in respect of
intangible personal property of citizens of the Philippines not
residing in that foreign country, or
o (b) if the laws of the foreign country of which the decedent was a
resident at the time of his death allow a similar exemption from
transfer taxes or death taxes of every character in respect of
intangible personal property owned by citizens of the Philippines
not residing in that foreign country."
• On the other hand, Section 13851 of the California
Inheritance Tax Law provides that intangible personal property is exempt
from tax if the decedent at the time of his death was a resident of a territory
or another State of the United States or of a foreign state or country which
then imposed a legacy, succession, or death tax in respect to intangible
personal property of its own residents, but either:.
(a) Did not impose a legacy, succession, or death tax of any character
in respect to intangible personal property of residents of this State, or
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(b) Had in its laws a reciprocal provision under which intangible
personal property of a non-resident was exempt from legacy, succession, or
death taxes of every character if the Territory or other State of the United
States or foreign state or country in which the nonresident resided allowed a
similar exemption in respect to intangible personal property of residents of the
Territory or State of the United States or foreign state or country of residence
of the decedent."
CIR v Campos Rueda
• Maria Cerdeira was a Spanish national by reason of
her marriage to a Spanish national.
• She resided in Tangier, Morocco until she died. She
left some intangible properties in the Philippines.
• The Commissioner of Internal Revenue (CIR) then
held the administrator of her estate, Campos Rueda, to be liable for deficiency
estate and inheritance taxes after the transfer of Maria’s intangible properties in
the Philippines.
• Campos Rueda countered this by saying that
Section 122 (now sec 104) of the NIRC provided for reciprocity – and that in the
laws of Tangier, Morocco, "the transfers by reason of death of movable properties,
corporeal or incorporeal, including furniture and personal effects as well as of
securities, bonds, shares, ..., were not subject, on that date and in said zone, to
the payment of any death tax, whatever might have been the nationality of the
deceased or his heirs and legatees."
• Thus, Campos Rueda claimed an exemption in the
amount that the CIR was claiming as a deficiency.
• The CIR on the other hand claimed that the
reciprocity clause could not apply since Tangier Morocco is not a “foreign country”
as required in sec 122.
• I: W/N Tangier, Morocco is a “Foreign country”
within the meaning of section 122 (now sec 104) of the NIRC
• R: YES, Tangier is a “foreign country”
• The expression "foreign country", used in the last
proviso of Section 122 of the National Internal Revenue Code, refers to a
government of that foreign power which, although not an international person in
the sense of international law, does not impose transfer or death taxes upon
intangible personal properties.
• It is, therefore, not necessary that Tangier should
have been recognized by our Government order to entitle the petitioner to the
exemption benefits of the proviso of Section 122 of our Tax. Code.
 • Court also cited previous cases:
o CIR v. De Lara: State of California was considered a “Foreign
country” within the meaning of sec 122.
o Kiene v. CIR: Liechtenstein was considered a “foreign country”
within the meaning of sec 122.
- In this case, it was stated that while US decisions held that intangible
personal property in the Philippines belonging to a non-resident foreigner,
who died outside of this country is subject to the estate tax, the congress, in
including sec 122 in the NIRC clearly provided for an exemption (reciprocity)
– and this exemption must be honored.
Zapanta v Posadas
• Father Braulio Pineda died without any ascendants
or descendants leaving a will in which he instituted his sister Irene Pineda as his
sole heiress.
• During his lifetime Father Braulio donated some of
his property to the six plaintifffs, his relatives, severally, with the condition that
some of them would pay him a certain amount of rice, and others of money every
year, and with the express provision that failure to fulfill this condition would
revoke the donations ipso facto.
• The donations contained another clause that they
would take effect upon acceptance. They were accepted during Father Braulio's
lifetime by every one of the donees.
• CIR then imposed upon the 6 plaintiffs separate
inheritance taxes on the property donated to them in accordance with Section
1536 of the Administrative Code, as amended, which states that “Every
transmission by virtue of inheritance, devise, bequest, gift mortis causa or advance
in anticipation of inheritance, devise, or bequest of real property located in the
Philippine Islands and real rights in such property”
• The 6 plaintiffs paid the inheritance tax under
protest and subsequently filed a separate civil action against the CIR. The trial
court in deciding these six cases, held that the donations to the six plaintiffs made
by the deceased Father Braulio Pineda are donations inter vivos, and therefore,
not subject to the inheritance tax, and ordered the CIR to return to each of the
plaintiffs the sums paid by the latter.
• I: W/n the donation made by Father Braulio was in
fact a donation mortis causa, and thus taxable.
• R: NO, the donation was inter vivos. It was thus
not taxable.
TAX 2 – MONTERO | Y. Sanchez A2012
• Donations were inter vivos considering that not
only was it stated as such in the instruments in which they appeared, but they
were also made in the nature of a donation inter vivos.
• In donations mortis causa, it is the donor’s death
that determines the acquisition of, or the right to, the property, and that it is
revocable at the will of the donor.
• In donations inter vivos, as in the present case, the
donees acquired the right to the property while the donor was still alive, subject
only to their acceptance and the condition that they pay the donor rice and/or
money. The nature of these donations is not affected by the fact that they were
subject to the condition of payment since it was imposed as a resolutory condition,
and in this sense, it is necessarily implies that the right came into existence first,
otherwise there would be nothing to resolve upon the nonfulfillment of the
condition imposed.
• If the donor's life is mentioned in connection with
this condition, it is only fix the donor's death as the end of the term within which
the condition must be fulfilled, and NOT because such death of the donor is the
cause which determines the birth of the right to the donation. The property
donated passed to the ownership of the donees from the acceptance of the
donations, and these could not be revoked except upon the nonfulfillment of the
condition imposed, or for other causes prescribed by the law, but not by mere will
of the donor.
• (However, considering that these donations had
onerous conditions, they are not donations to the full extent. Rather, they are
partly contractual and partly donations. They are donations inter vivos only insofar
as they exceed to the incumbrance imposed.)
• Neither can these donations be considered as an
advance on inheritance or legacy, since they were not heirs or legatees of their
predecessor in interest upon his death (Sec. 1540 of the Administrative Code).
Neither can it be said that they obtained this inheritance or legacy by virtue of a
document which does not contain the requisites of a will (Sec. 618 of the Code of
Civil Pocedure). Besides, if the donations made by the plaintiffs are, as the
appellants contended, mortis causa, then they must be governed by the law on
testate succession (art. 620 of the Civil Code). In such a case, the documents in
which these donations appear, being instruments which do not contain the
requisites of a will, are not valid to transmit the property to the donees (Sec. 618,
Code of Civil Procedure.) Then the defendants are not justified in collecting from
the donees the inheritance tax, on property which has not been legally transferred
to them, and in which they acquired no right.
• Dissenting Opinion by Justice Street: Justice Street
strongly believed that the present case involved “advances in anticipation of
inheritance” considering that the donees were entitled to receive an inheritance if
 no will had been made by the decedent. He believed that what transpired in the
present case is an attempt by the donor to evade the payment of taxes by
• If the donee inter vivos was found to be legatees, heirs, devisees
OR donees mortis causa of the decedent, then they would have
disposing of the bulk of his property before his death.
to pay the inheritance tax.
• The reason for this is because the donation inter vivos is deemed
to be a transfer in anticipation of inheritance/death, meaning
Tuason v Posadas
that it is a scheme to evade payment of taxes.
• In 1922, Esperanza Tuason Chuajap made a donation inter vivos of certain
property to Mariano Tuason.
• In 1923, she made another donation inter vivos, this time to Alfredo Tuason.
Dizon v Posadas
• She died 3 years after leaving a will bequeathing P5,025 to Mariano Tuason
• Dizon was assessed to pay P2k+ as inheritance tax from the properties he
after the judicial administratix paid the prescribed inheritance tax on these
received from his father prior to his father’s death through a deed of gift inter
two bequests.
vivos.
• Consequently, Posadas collected the sums of P3, 809.76 and P6, 653.64 from
both the petitioners as inheritance tax upon the gifts inter vivos made to • Dizon alleged that the tax was illegally collected because he received the
them against their opposition and protest. property prior to the death of his father, through a deed of gift inter vivos
• They filed their protest and the judgment was that the defendant must return which was duly accepted and registered before the death of his father
the amount claimed by the plaintiff. Posadas appealed and argued that the making the property not an inheritance.

•
collection of these amounts as inheritance tax is authorized by the law.
I: W/n Posadas was correct in collecting inheritance tax
• He further states that he was not trying to evade the inheritance tax that is
imposed on heirs when his father donated all his properties to him. Thus, no
• R: YES.
inheritance tax under Act No. 2601 (Chapter 40 of the Administrative Code),
• Section 1536 of the Administrative Code provides that every transmission by being the inheritance tax statute, should be imposed upon the said
virtue of inheritance, devise, bequest, gift mortis causa, or advance in properties.
anticipation of inheritance, devise, or bequest shall be subject to tax. • The Court, however, ruled in favor of Posadas, hence, this appeal.
• Section 1540 then provides that after deductions have been made, there shall
• I:W/N the inheritance tax was correctly imposed upon the properties
be added to the resulting amount the value of all gifts or advances made
transferred through donation inter vivos
by the predecessor to any of those who, after his death, shall
• R: YES.
prove to be his heirs, devisees, legatees, or donees mortis
causa . • Section 1540 of the Administrative Code states that after deductions have
been made, there shall be added to the resulting amount the value of all gifts
• When the law say all gifts, it doubtless refers to gifts inter vivos, and not
or advances made by the predecessor to any of those who, after his death,
mortis causa. Both the letter and the spirit of the law leave no room for any
shall prove to be his heirs, devises, legatees, or donees mortis causa
other interpretation.
• The language refers to donation that took effect before the donor's death,
• In this case facts conveyance was made by the donor five days before his
death and accepted by the donee one day before the donor's death.
and not to mortis causa donations, which can only be made with the
Obviously, this was fraudulently made for the purpose of evading the
formalities of a will, and can only take effect after the donor's death.
inheritance tax.
• In this case, it appears that the Tuazons, after the death of Espereanza,
• As to Dizon’s contention that the he is not an heir because there is no
were found to be legatees under her will. Thus, the donation inter vivos she
property to inherit anymore because he already received the properties of the
had made to them in 1922 and 1923, must be added to the net amount that
father through a donation inter vivos, SC said that even if they don’t know
is to be taxed.
w/n the father left a will, Dizon should NOT be deprived of his share of the
inheritance because the Civil Code confers upon him the status of a forced
heir.

TAX 2 – MONTERO | Y. Sanchez A2012

 • Thus, an advance made by the decedent to Dizon is subject to tax.
• As to Dizon’s contention that Section 1540 is unconstitutional in taxing gifts
or donations because the act would then embrace two subjects, the Court
states that: When the law says all gifts, it doubtless refers to gifts inter vivos,
and not mortis causa. Both the letter and the spirit of the law leave no room
for any other interpretation. Such, clearly, is the tenor of the language which
refers to donations that took effect before the donor's death, and not to
mortis causa donations, which can only be made with the formalities of a will,
and can only take effect after the donor's death.
• The law presumes that such gifts have been made in ancitipation
of inheritance in order to EVADE tax. Thus, to prevent this, they
are added to the resulting amount."
Vidal de Roces v Posadas
• Esperanza Tuazon by public document donated parcels of land situated in
Manila to plaintiffs Vidal de Roces, etc. with their respective husbands, accepted
them in the same public documents, which were duly recorded in the registry of
deeds.
• The plaintiffs took possession of the said lands, received the fruits and
obtained TCTs.
• The donor then died w/o any forced heir and in her will, she bequeathed to
each of the donees the sum of P5,000.
• After the estate had been distributed among the instituted legatees and
before delivery of their respective shares, the CIR ruled that the donees should
pay inheritance tax.
• They thus paid under protest, contending that Art 1540 of the Revised
Administrative Code (after deductions have been made, there shall be added to
the resulting amount the value of all gifts / advances made by the predecessor to
any of those who after his death prove to be heirs, devisees, legatees or donees
mortis causa) does NOT include donations inter vivos. If it does, it is null and void
as it violates uniformity of taxation.
• I: W/n donations inter vivos is included in Sec. 1540 of the Administrative
Code
• R: No.
• The gifts referred to in section 1540 of the Revised Administration Code are,
obviously, those donations inter vivos that take effect immediately or during the
lifetime of the donor but are made in consideration or in contemplation of death.
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• Gifts inter vivos, the transmission of which is NOT MADE IN
CONTEMPLATION OF THE DONOR'S DEATH should not be understood as included
within the said legal provision for the reason that it would amount to imposing a
direct tax on property and not on the transmission.
• This act does not come within the scope of the provisions contained in Article
XI of Chapter 40 of the Administrative Code which deals expressly with the tax on
inheritances, legacies and other acquisitions mortis causa.
CIR v CA and Pajonar
• Pedro Pajonar, a member of the Philippine Scout during WWII was a part of
the infamous Death March by reason of which he suffered shock and became
insane.
• His sister Josefina became the guardian over his person, while his property
was placed under the guardianship of the PNB by the RTC of Dumaguete.
• After his death, PNB filed an accounting of his property under guardianship
valued at 3M in Special Proceedings.
• However, PNB did NOT file and estate tax return, instead it advised his heirs
to execute an extrajudicial settlement and to pay taxes on the estate.
• Pursuant to BIR’s assessment, the estate of Pedro paid taxes in the amount
of 2k.
• Josefina then filed a petition w/ RTC of Dumaguete for the issuance in her
favor of letters of administration of the estate of her brother.
• RTC appointed Josefina as regular administratrix of Pedro’s estate.
• The BIR then made a 2nd amendment for deficiency estate tax, w/c Josefina
paid under protest.
• Without waiting for her protest to be resolved by the BIR, Josefina then filed
a petition for review w/ the CTA praying for the refund of 1.5M OR the
alternative 840k as erroneously paid estate tax.
• CTA ordered CIR to refund Josefina the amount of 252k, representing
erroneously paid estate tax. Among the deductions from the gross estate
allowed by CTA were the amounts of 60K representing notarial fee
for Extrajudicial Settlement plus atty’s fees for guardianship
proceedings.
• I: W/N the notarial fee and atty’s fees paid for the EJ Settlement may be
allowed as deductions fro the gross estate of decedent in order to arrive at
the value of the net estate.
 • R: YES, they are allowed deductions.
• ATTY’s FEES:
• Under American Jurisprudence, expenses incurred in the EJ Settlement of the
estate should be allowed as deduction from the gross estate. “There is not
requirement of formal administration. It is sufficient that the expense be a
NECESSARY contribution toward the settlement to the case.”
• Atty’s fees in order to be deductible from the gross estate must be essential
and related to the settlement of estate. In this case, the atty’s fees paid for
guardianship proceeding was necessary for the distribution of the property of
the late Pedro Pajonar to his rightful heirs. Thus, it was deductible.
• Necessary expenses of administration are such expenses as are entailed for
the preservation and productivity of the estate and for it’s management for
the purposes of liquidation, payment of debts and distribution of the residue
among the persons entitled.
• NOTARIAL FEES:
• Although tax code specifies “judicial expenses of the testamentary or
intestate proceedings,” there is no reason why expenses incurred in the
administration and settlement of an estate in EJ proceedings should not be
allowed. However, deduction is limited to such administration expenses as
are actually and necessarily incurred in the collection of the assets of the
estate, payment of debts, and distribution of the remainder among those
entitled thereto. Such expenses may include executor’s or administrator’s
fees, atty’s fees, court fees and charges, appraiser’s fees, clerk hire, costs of
preserving and distributing the estate and storing or maintaining it, brokerage
fees or commissions for selling or disposing of the estate.
• It is clear that the EJ settlement was for the purpose of payment of taxes and
the distribution of the estate to the heirs. The execution of EJ settlement
necessitated the notarization of the same. Thus the 60k for notarial fee for
the EJ Settlement should be allowed as a deduction from the gross estate.
• Judicial expenses are expenses for administration. Administration expenses
are deductible from the gross estate. Expenses must be essential to the
proper settlement of the estate.
Testate Estate of the late Felix de Guzman v de Guzman-Carillo
• Felix Guzman died and was survived by eight children.
TAX 2 – MONTERO | Y. Sanchez A2012
• One of the properties he left was a residential house located in the
poblacion.
• In conformity with his last will, that house and the lot on which it
stands were adjudicated to his eight children, each being given a one-eighth
proindiviso.
• The administrator submitted four accounting reports for the period
from June 16, 1964 to September, 1967.
• Three of the heirs Crispina de Guzmans-Carillo Honorata de
Guzman-Mendiola and Arsenio de Guzman interposed objections to the
administrator's disbursements in the total sum of P13,610.48.
• I: W/n expenses incurred by the administrator are deductible
• R: YES.
• (Deductible) 1. Expenses for the renovation and
improvement of the family residence — P10,399.59. These expenses
consisted of disbursements for the repair of the terrace and interior of the
family home, the renovation of the bathroom, and the construction of a
fence. The probate court allowed those expenses because an administrator
has the duty to "maintain in tenantable repair the houses and other
structures and fences belonging to the estate, and deliver the same in such
repair to the heirs or devises" when directed to do so by the court (Sec. 2,
Rule 84, Rules of Court).
• (Non-deductible) 2. Expenses incurred by Librada de
Guzman as occupant of the family residence without paying rent
— These were PERSONAL expenses of Librada de Guzman, inuring to her
benefit. Those expenses, not being reasonable administration expenses
incurred by the administrator, should not be charged against the income of
the estate. Librada de Guzman, as an heir, is entitled to share in the net
income of the estate. She occupied the house without paying rent. She
should use her income for her living expenses while occupying the family
residence.
• The STENOGRAPHIC NOTES, REPRESENTATION
EXPENSES and EXPENSES DURING THE CELEBRATION OF THE 1 ST
DEATH ANNIVERSARY OF THE DECEASED should be disallowed.
They have no connection with the care, management and
settlement of the decedent's estate (Nicolas vs. Nicolas 63 Phil 332).
• The other expenses, namely, P19.30 for the lawyer's
subsistence and P144 as the cost of the gift to the physician who
attended to the testator during his last s are allowable expenses.
 • (Deductible) 4. Irrigation fee was properly allowed as a
legitimate expense of administration.
Dizon in his capacity as Administrator of the deceased Fernandez v CIR
• Justice Arsenio Dizon and petitioner Atty. Dizon were appointed as Special
and Assistant Special Administrator, respectively, of the Estate of Jose
Fernandez.
• Justice Dizon authorized Atty. Gonzales to sign and file the required estate
tax return.
• Atty. Gonzales filed the estate tax return with the BIR Regional Office of San
Pablo City, showing a NIL estate tax liability (no tax liability- in this case,
because the deductions exceed the gross estate).
• Ten days after, the BIR Regional Director issued Certifications stating that the
taxes due on the transfer of real and personal properties of Jose had been
fully paid and said properties may be transferred to his heirs.
• Justice Dizon died thus the probate court appointed petitioner as the
administrator of the Estate.
• Atty. Dizon requested the probate court’s authority to sell several properties
of the Estate to pay its creditors. HOWEVER, BIR issued a notice demanding
the payment of P66k+ deficiency estate tax.
• Atty. Gonzales moved for a reconsideration of the Assessment but the CIR
denied the request and reiterated the Estate’s liability. A petition for Review
was filed with the CTA.
• I: W/n deficiency estate tax must be imposed against the Estate
• R: No.
• Claims existing at time of death should be allowed as deductions to the gross
estate.
• Even in the United States, there is some dispute as to whether the deductible
amount for a claim against the estate is fixed as of the decedent's death
which is the general rule, or the same should be adjusted to reflect post-
death developments, such as where a settlement between the parties results
in the reduction of the amount actually paid. On one hand, the U.S. court
ruled that the appropriate deduction is the "value" that the claim had at the
date of the decedent's death.
• On the other hand, the Internal Revenue Service (IRS) opines that post-
death settlement should be taken into consideration and the claim should be
allowed as a deduction only to the extent of the amount actually paid.
• SC agreed w/ date-of-death valuation rule.
TAX 2 – MONTERO | Y. Sanchez A2012
• First, there is no law, nor any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and particularly provides that
post-death developments must be considered in determining the
net value of the estate . It bears emphasis that tax burdens are not to be
imposed, nor presumed to be imposed, beyond what the statute expressly
and clearly imports, tax statutes being construed strictissimi juris against the
government. Any doubt on whether a person, article or activity is taxable is
generally resolved against taxation.
• Second. Such construction finds relevance and consistency in our Rules on
Special Proceedings wherein the term "claims" required to be presented
against a decedent's estate is generally construed to mean debts or demands
of a pecuniary nature which could have been enforced against the deceased
in his lifetime, or liability contracted by the deceased before his death.
Therefore, the claims existing at the time of death are significant to,
and should be made the basis of, the determination of allowable deductions.
Gov of the Phils v Pamintuan
• Florentino Pamintuan filed an income tax return for the year 1919 and paid
an amount on the basis of said return.
• When Florentino died in 1925, intestate proceedings were instituted where
the court appointed commissioners for the appraisal of the value of the
property left by Florentino.
• The court then ordered the delivery to the heirs of their respective shares of
the inheritance after paying the corresponding inheritance taxes which were
duly paid.
• During the pendency of the intestate proceedings, the administrator Jose
Ramirez filed income tax returns for the estate of the deceased
corresponding to the years 1925 and 1926. The intestate proceedings were
then closed in 1926.
• In 1927, subsequent to the distribution of Florentino’s estate, the
government discovered that Florentino had not paid P462 as
additional income for 1919 on account of the sale of his house,
from which he realized an income of P11,000 which was not included in his
income tax return filed in 1919.
• The government demanded payment of the income tax but the heirs refused
to pay. The lower court ruled that the government was barred from collecting
the income tax due to its failure to file its claim with the committee on claims
and appraisals.
• I: W/n the gov can still collect the income tax despite its failure to file its
claim with the committee on claims and appraisals
 • R: Yes. A claim for taxes and assessments whether assessed before or after
the death of the decedent, are not required to be presented to the
committee.
• Heirs are liable for the deficiency income taxes, in proportion to
their share in the inheritance.
• The administration proceedings of the late Florentino having been closed, and
his estate distributed among his heirs, the heirs are responsible for the
payment of the income tax here in question.
• The claims for income taxes need not be filed with the committee on claims
and appraisals appointed in the course of testate proceedings and may be
collected even after the distribution of the decedent’s estate among his heirs,
who shall be liable therefor in proportion to their share in the inheritance.
CIR v Pineda
• Atanasio Pineda died and was survived by his wife Felicisima (the appointed
administratrix) and 15 children.
• Estate proceedings were instituted in the CFI of Manila. The estate was
divided among and awarded to the heirs and the proceedings terminated on
June 8, 1948.
• After the estate proceedings, the BIR investigated the income tax liability of
the estate for the years 1945, 1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed.
• The CIR found the estate liable for Deficiency Income Tax (DIT), Additional
residence tax for 1945 (ART ’45), and Real Estate dealer's tax for the 4th
qtr of 1946 and the whole year of 1947 (REDT ’46-’47) .
• Manuel, the eldest child, contested the assessment. Subsequently, he
appealed to the CTA alleging that he was appealing "only that proportionate
part or portion pertaining to him as one of the heirs."
• CTA held that Manuel was liable for payment corresponding to his share of
such taxes.
• On the other hand, CIR insisted that Manuel should be liable for the payment
of ALL the taxes found by the Tax Court to be due from the estate instead of
only for the amount of taxes corresponding to his share in the estate.
• Manuel opposed the proposition on the ground that as an heir he is liable for
unpaid income tax due the estate only up to the extent of and in proportion
to any share he received, relying on on Government of the Philippine Islands
v. Pamintuan. 1
1
The SC held that "after the partition of an estate, heirs and distributees are liable individually for the
payment of all lawful outstanding claims against the estate in proportion to the amount or value of
the property they have respectively received from the estate."
TAX 2 – MONTERO | Y. Sanchez A2012
• I: W/n Manuel can be required to pay the FULL amount of the tax assessed
by the BIR.
• R: YES, he can be required to pay the full amount.
• Pineda is liable for the assessment as (1) AN HEIR and as (2) A HOLDER-
TRANSFEREE of property belonging to the estate/taxpayer.
o As an HEIR: As an heir he is individually answerable for the part
of the tax proportionate to the share he received from the
inheritance. His liability, however, cannot exceed the amount of his
share.
o As a HOLDER OF PROPERTY belonging to the estate: Pineda is
liable for the tax up to the amount of the property in his
possession. The reason is that the Government has a lien on
the P2,500.00 received by him from the estate as his share in the
inheritance, for unpaid income taxes for which said estate is liable,
pursuant to the last paragraph of Section 315 of the Tax
Code.2
• Therefore, the Government has TWO WAYS of collecting the tax in question:
o One, by going after ALL the heirs and collecting from each one
of them the amount of the tax proportionate to the inheritance
received. This remedy was adopted in Government of the
Philippine Islands v. Pamintuan. In said case, the Government filed
an action against all the heirs for the collection of the tax. This
action rests on the concept that hereditary property consists only
of that part which remains after the settlement of all lawful claims
against the estate, for the settlement of which the entire estate is
first liable. The reason for filing a suit is to achieve
thereby two results: first, payment of the tax; and
second, adjustment of the shares of each heir in the
distributed estate as lessened by the tax .
o Another remedy is by subjecting said property of the estate
which is in the hands of an heir or transferee to the
payment of the tax due, the estate. This second remedy is the
very avenue the Government took in this case to collect the tax.
• The BIR should be given the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be envisioned in the §315, because
2
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or
insurance company liable to pay the income tax, neglects or refuses to pay the same after demand,
the amount shall be a lien in favor of the Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties,
and costs that may accrue in addition thereto upon all property and rights to property belonging to
the taxpayer: . . .
 taxes are the lifeblood of government and their prompt and certain
availability is an imperious need.
• And as afore-stated in this case the suit seeks to achieve only one objective:
payment of the tax. The adjustment of the respective shares due to the heirs
from the inheritance, as lessened by the tax, is left to await the suit for
contribution by the heir from whom the Government recovered said tax.
CIR v Gonzales
• Matias Yusay died leaving his two children as his heirs, Jose & Lilia.
• Jose was appointed administrator who filed with BIR an estate and
inheritance tax return declaring personal & real properties of their father but
the return did not mention any heir.
• On January 25, 1955, BIR demanded payment of assessed estate and
inheritance taxes (approx P30k in total).
• Jose requested for an extension of time within which to pay the tax, which
the CIR denied.
• During the pendency of the said proceedings in Iloilo and after
reinvestigation, BIR reassessed the estate and inheritance tax liability and
issued a reassessment of taxes in a total of P69k.
• Lilia disputed the legality of the 1958 assessment alleging that the right to
make the same has prescribed since more than 5 years had elapsed since the
filing of estate and inheritance tax return on May 11, 1949.
• CTA ruled in favor of Lilia.
• CIR appealed to the SC alleging that the right to assess the taxes in question
has not been lost by prescription since the return which did not name the
heirs cannot be considered true and complete return to start the running of
the period of limitations of 5 years under Sec 331 of Tax Code and pursuant
to Sec 332 he has 10 years within which to make the assessment counted
from the discovery on September 24, 1953 of the identity of the heirs.
• I: W/n the right of the CIR to assess the estate and inheritance taxes in
question has prescribed - NO
• W/n the return filed by Jose sufficient to commence the running of the
prescriptive period to assess said taxes – NO
• R: When tax return is considered sufficient
• A return need not be complete in all particulars. It is sufficient if it complies
substantially with law. There is substantial compliance
• (1) when the return is made in good faith & is not false or
fraudulent;
• (2) when it covers the entire period involved;
TAX 2 – MONTERO | Y. Sanchez A2012
• (3) when it contains information as to the various items of income,
deductions and credits with such definiteness as to permit the
computation and assessment of the tax.
• In this case, the estate and inheritance tax filed by Jose was
substantially defective:
• It was incomplete. – It declared only 93 parcels of land and leaving
out 92 others. This was a huge underdeclaration.
• Moreover, the return mentioned no heir. Thus, no inheritance tax
could be assessed. As a matter of law, on the basis of return, there
would be no occasion for the imposition of estate and inheritance
taxes, When there is no heir, the estate is escheated to the State.
The state does not tax itself.
• The deficient return did not start the running of the period of
limitations BECAUSE the return was made on the wrong form. The taxpayer
failed to observe the law (Sec 332) w/c grants the CIR 10 years (starting
from date the fraud was discovered) within which to bring action for tax
collection, applies. He is obligated to make a return or amend one already
filed based on his own knowledge & information obtained through testimony
or otherwise, & subsequently to assess taxes due.
On MR filed by Lilia: Lilia insists that since she administers only 1/3 of the estate of her
father, she should not be liable for the whole tax. And she suggests that the intestate
estate of Matias Yusay should be liable for the said taxes, 1/3 to be paid by Lilia and
2/3 to be paid by Florencia (wife of deceased Jose).
Ruling of the Court: Estate and inheritance taxes are satisfied from the estate and are
to be paid by the executor or administrator. Where there are 2 or more executors, all of
them are severally liable for the payment of the estate tax. The inheritance tax,
although charged against the account of each beneficiary, should be paid by the
executor or administrator.
Failure to pay the estate and the inheritance taxes before distribution of the estate
would subject the executor or administrator to criminal liability. It is immaterial that Lilia
administers only 1/3 of the estate & will receive as her share only said portion, for her
right to the estate comes after taxes. As an administratrix, she is liable for the entire
estate tax. As an heir, she is liable for the entire inheritance tax although her liability
would not exceed the amount of her share in the estate.
 DONOR’S TAX

Tang Ho v. CIR
• Li Seng Giap, his wife Tang Ho and their 13 children were stockholders of two
close family corporations.
• BIR examiners made an examination of the books of the two corporations
and found that each of Li Seng Giap’s children had a total investment there of
approximately P63k+ in shares issued to them by their father (who was the
manager and controlling stockholder of the two corporations)
• CIR regarded these transfers as undeclared gifts made in the respective
years, and assessed against Li Seng Giap and his children donor's and donee's
taxes due to delayed payment (P76k+).
• They thus paid the sum of P53k+ representing the amount of the basic taxes,
and put up a surety bond to guarantee payment of the balance demanded.
• Sometime later, they requested the CIR for a revision of their tax
assessments, and submitted donor's and donee's gift tax returns showing that the
children received gifts inter vivos and proper nuptias.
o each child received by way of gift inter vivos, every year from 1939
to 1950 (except in 1947 and 1948) P4,000 in cash;
o each of the eight children who married during the period aforesaid,
were given an additional P20,000 as dowry or gift propter nuptias;
o unmarried children received roughly an equivalent amount in 1949,
also by way of gifts inter vivos, so that the total donations made to
each and every child, as of 1950, stood at P63,190.
• They contended that since the cash donated came from the
conjugal funds, they are be considered as donations by BOTH
spouses, for which two separate TAX exemptions may be claimed in
each instance, one for each spouse.

TAX 2 – MONTERO | Y. Sanchez A2012


• I: W/n the donations made by Li Seng Giap to his children from the conjugal
property should be taxed against husband and wife
• R: No. A donation of property belonging to the conjugal partnership, made
during its existence, by the husband alone in favor of the common children, is
taxable to him exclusively as sole donor.
• To be a donation by both spouses, taxable to both, the wife must expressly
join the husband in making the gift. Her participation cannot be implied.
• THUS, in this case, ONLY ONE exemption or deduction can be claimed for
every such gift, and not two, as claimed by petitioners.
• Speculation on the Tang Ho case: Why were they insisting that the dowry
was made in cash? Does the law say that for a dowry to be considered as
exemption, it has to be in cash? No. The reason why they were insisting that it
was made in cash and then this cash was used to buy stock so that it can fall
within the time period that the dowry should be given “before celebration or within
1 year thereafter.”
Gibbs v. CIR
• Allison and Esther Gibbs executed documents entitled “Deed of Sale and
Declaration of Trust” whereby they transferred 53, 000 Lepanto Consolidated
Mines shares of stock to their 5 children, in consideration of the sum of P26,
227.70 to be paid “on or before December 1950.”
• The instituted trustee was Allison’s brother, Finley Gibb.
• Spouses Gibb sent a letter to the CIR asking for a ruling on whether or not
gift taxes should be paid.
• CIR initially assessed the spouses a donee gift tax of P75 on each of the
beneficiaries or a total of about P750. These assessments were based upon the
DIFFERENCE between said market value of the shares of stock and the stipulated
PIROVANO vs. CIR
consideration for transfer thereof.
• Subsequently, CIR revised the assessment by INCREASING them.
• The spouses paid within the period fixed by law but SOUGHT a refund.
• Their demand was denied.
• Trustee Finley Gibb appealed to the Secretary of Finance and instituted a civil
suit in the CFI for recovery of the amount.
• Spouses Gibb again executed 10 additional and separate trusts containing the
same stipulations and conditions.
• These additional deeds of trust impelled CIR to assess donor gift taxes. CIR
held that the gift taxes are available on the FULL MARKET VALUE of all the shares
TAX 2 – MONTERO | Y. Sanchez A2012
of stock thus placed in trust — instead of upon the difference between said market
value and the stipulated considerations. CTA agreed.
• I: W/n CTA was correct in ruling that the gift taxes on the transfer of the
shares of stock should be based on the full market value of shares of stock (NOT
diff between market value and stipulated consideration)
• R: YES, CTA was correct, tax should be based on full MV.
• CTA was correct in finding that the agreements made by the parties were
mere devises to avoid and evade the payment of the corresponding gift
taxes:
o If the trustors were earnestly concerned in providing ample funds
to assure the support, maintenance, care, health, higher education
and travel of their children and the launching of their career after
they had become of age, the trustors would not have really meant
to require them to pay the consideration stipulated in the trust
agreements.
o If the intent was really that the stipulated interest be paid, the
trustee could have authorized the trustors to sell, mortgage,
hypothecate or otherwise dispose of the stocks to raise the
necessary funds.
o The compromise agreements were made with knowledge of the
fact that the CIR was already investigating whether the stipulated
consideration was real or fictitious.
• There being no real consideration for the transfer, gift taxes should be based
on the full market value of the shares of stock at the time of the respective
transfer, and not merely on the difference between the said market value and
the consideration stipulated in the trust agreements.
• Enrico Pirovano was the father Carla Pirovano.
• De la Rama Steamship Co. insured the life of said Enrico Pirovano (then its
President and General Manager) with various Philippine and American insurance
companies for 1M, designating itself as the beneficiary.
• Enrico Pirovano died during the World War II.
• The BOD of De la Rama Steamship Co. adopted a resolution granting the
proceeds expected to be collected on Enrico’s life insurance policies w/c was P400k
for equal division among his 4 minor children, to be convertible into 4k shares of
stock (1k shares / child0.
• The Company received the total sum of P643K as proceeds of the said life
insurance policies obtained from American insurers.

• The BOD modified their resolution by renouncing all its rights title, and
interest to the said amount of P643k in favor of the minor children of the
deceased, subject to the express condition that said amount should be retained by
the Company in the nature of a loan to it, drawing interest at the rate of 5%
per annum, and payable to the Pirovano children after the Company shall have
first settled its bonded indebtedness of 5M.
• This resolution was allowed by the children’s guardian.
• BOD again modified their resolution by providing that the Company shall pay
the proceeds of said life insurance policies to the heirs after the Company shall
have settled in full the balance of its present remaining bonded indebtedness, but
the annual interests accruing on the principal shall be paid to the heirs of Pirovano
whenever the Company is in a position to meet said obligation.
• The mother of the children ACCEPTED this resolution with a PUBLIC
DOCUMENT.
• The SH of the Company ratified the resolutions with certain clarifying
modifications that the payment of the donation shall not be effected until such
time as the Company shall have first duly liquidated its present bonded
indebtedness (P3.2M) with the Nat’l Dev’t Company and that any and all taxes,
legal fees, and expenses in any way connected with the above transaction shall be
chargeable and deducted from the proceeds of the life insurance policies.
• HOWEVER, the majority stockholders of the Company voted to revoke the
donation.
• As a consequence of this revocation and refusal of the Company to pay the
balance of the donation amounting to P564K despite demands, the PIROVANOS
brought an action for the recovery of said amount.
• The RTC ordered that the donation was valid. Thus, the CIR assessed the
amount of P60K as donees' gift tax against each of the heir, and a donor's gift tax
in the total amount of P34K assessed against De la Rama Steamship Co., which
the latter paid.
• The PIROVANOS contested CIR’s assessment and imposition of the donees'
gift taxes and donor's gift tax and also made a claim for refund of the donor's gift
tax so collected.
• I: W/n the PRIVANOS are obliged to pay donees' gift taxes as well as the
imposition of surcharge and interest on the amount of donees' gift taxes
• R: YES.
• A donation made by the corporation to the heirs of a deceased officer out of
gratitude for the officer's past services is considered a donation and is subject to
donee's gift tax.
• Art. 726 of the CivCode states that “When a person gives to another a
thing ... on account of the latter's merits or of the services rendered by him to the
TAX 2 – MONTERO | Y. Sanchez A2012
donor, provided they do not constitute a demandable debt, ..., there is also a
donation.”
• The fact that his services contributed in a large measure to the
success of the company did not give rise to a recoverable debt, and
the conveyances made by the company to his heirs remain a gift or
donation.
• ALSO, the value of such services which do not constitute a recoverable debt
is NOT deductible from the donation.
• The actual consideration for the cession of the policies was the
Company's gratitude to Pirovano. Gratitude has no economic value and is
not "consideration" in the sense that the word is used under the Tax Code.
• OTHERS:
• Sec111 [where property is transferred for less than adequate consideration,
amt exceeding consideration deemed a gift…] is NOT applicable).
• Whether remuneratory or simple, the conveyance remained a gift.
• The definition of CONSIDERATION is “anything that is bargained for by the
promisor and given by the promisee in exchange for the promise”
• Pirovano's successful activities as officer of the De la Rama Steamship Co.
cannot be deemed such consideration for the gift to his heirs, since the services
were rendered long before the Company ceded the value of the life policies to said
heirs; cession and services were not the result of one bargain or of a mutual
exchange of promises.
• A subsequent promise to pay for past services is a nudum pactum i.e., one
that is unenforceable in view of the common law rule that consideration must
consist in a legal benefit to the promisee or some legal detriment to the promisor.
SPS. Gestopa vs. CA ad Mercedes Danlag
• Diego and Catalina Danlag were owners of 6 parcels of unregistered lands.
• They executed 3 deeds of donation mortis causa in favor of Mercedes
Danlag-Pilapil covering 4 parcels. All deeds contained the reservation of rights of
donors to amend / revoke the donation during their lifetime AND to sell,
mortgage / encumber the properties if necessary.
• Diego w/ the consent of Catalina then executed a deed of donation inter
vivos covering the aforementioned lots plus 2 other parcels again in favor of
respondent Mercedes.
• This contained two conditions
o (1) that Danlag spouses shall continue to enjoy the fruits of land
during their lifetime
 o (2) the donee cannot sell or dispose of the land during the lifetime
of the said spouses w/o their consent.
• The Danlags sold parcels 3 and 4 to petitioners Gestopa and executed a deed
of revocation recovering 6 parcels of land subject to deed of donation inter vivos.
• Mecedes filed with RTC against the Gestopas and the Danlags for quieting of
title over the parcels of land.
• She alleged that she was an illegitimate daughter of Diego Danlag’ that she
lived and rendered incalculable beneficial services to Diego and his mother Maura,
when she was still alive.
• In recognition of her services, Diego executed Deed of Donation conveying to
her 6 parcels of land.
• She accepted the donation in the same instrument, openly and publicly
exercised rights of ownership over the donated properties, and caused the transfer
of the tax declarations in her name.
• Through the machination, intimidation and undue influence, Diego persuaded
the husband of Mercedes, Eulalio Pilapil to buy 2 of the 6 parcels covered by the
deed of donation. The inter vivos donation was coupled with conditions she
complied with. She alleges she had not been guilty of any act of ingratitude and
that the revocation had no legal basis.
• Gestopas and Danlags opposed by saying that the deed of donation was null
and void because it was obtained by Mercedes through machination and undue
influence. Even assuming it was validly executed, the intention was for the
donation to take effect upon death of donor. Further, the donation was void for it
left the donor Diego w/o any property at all.
• I : W/n t he donation was inter vivos or mortis causa – inter vivos
• W/n the revocation was valid – NO, it was not.
• R: The donation is INTER VIVOS. Revocation was not proper. (ruling in favor
of Mercedes)
• Crucial in resolving whether the donation was inter vivos or mortis causa is
the determination of whether the donor intended to transfer ownership over the
properties upon the execution of the deed.
• In ascertaining the intention of the donor, all the deed’s provisions must be
read together:
o IRST, the granting clause shows that Diego donated the properties
out of love and affection for Mercedes. This is a mark of a donation
inter vivos.
o SECOND, the reservation of lifetime usufruct indicates that the
donor intended to transfer the naked ownership of the properties.
As correctly posed by the CA, what was the need for such
TAX 2 – MONTERO | Y. Sanchez A2012
reservation if the donor and his spouse remained the owners of the
properties?
o THIRD, the donor reserved sufficient properties for his
maintenance w/ his standing in society, indicating that the donor
intended to part w/ 6 parcels.
o Lastly the donee accepted the donation.
• Alejandro vs. Geraldez: An acceptance clause is a mark that the donation
is inter vivos. Acceptance is a requirement for donations inter vivos.
• Donations mortis causa, being in a form of a will, are not required to be
accepted by the donees during the donor’s lifetime.
• THUS, the right to dispose the properties belonged to Mercedes. Diego’s right
to give consent was merely intended to protect his usufructuary interests.
• The limitation on the right to sell during the donor’s lifetime implied that
ownership had passed to the donees and donation was effective during the
donor’s lifetime.
• Circumstances show that the intention of the donor was to transfer
ownership to Mercedes. Prior to the donation inter vivos, the Danlag spouses
already executed 3 donations mortis causa.
• The Danlag spouses were aware of the difference between the two
donations. If they did not intend to donate inter vivos, they would not again
donate the four lots already donated mortis causa.
• Was the revocation valid? A valid donation, once accepted, becomes
irrevocable, EXCEPT on account of inofficiousness, failure by donee to comply
with charges imposed in donation, or ingratitude.
• The Danlag spouses did NOT invoke any of these. Finally, the records do not
show that the donor-spouses instituted any action to revoke the donation in
accordance w/ Art. 769. The revocation has no legal effect.
ACCRA v. CIR
• During the 1987 national elections, petitioners, who are partners ACCRA law
firm contributed about P882k+ each to the campaign funds of Senator
Angara, then running for the Senate.
• BIR assessed each of the petitioners donors tax for their contributions.
• Petitioners questioned the assessment through a letter to the BIR. They
claimed that political or electoral contributions are NOT considered gifts
under the NIRC and that, therefore, they are not liable for donor’s tax.
• The claim for exemption was denied by the Commissioner.
• I: W/n political contributions can be considered a donation and w/n
petitioners are liable for Donor’s tax
 • R: YES, political contributions ARE donations and petitioners ARE liable for
donor’s tax.
• A donation has the following elements:
o (a) the reduction of the patrimony of the donor;
o (b) the increase in the patrimony of the donee; and,
o (c) the intent to do an act of liberality / animus donandi

• The present case falls squarely within the definition of a

donation.
• Petitioners, each contributed to the campaign funds of Senator Edgardo
Angara, without any material consideration.
• All three elements of a donation are present. The patrimony of the four
petitioners were reduced by P882k+, while Senator Edgardo Angara’s
patrimony correspondingly increased.
• There was intent to do an act of liberality / animus donandi was
present since each of the petitioners gave their contributions
without any consideration.
• 2) Petitioners’ attempt is strained. The fact that petitioners will
somehow in the future benefit from the election of the candidate
to whom they contribute, in no way amounts to a valuable
material consideration so as to remove political contributions
from the purview of a donation.
• Senator Angara was under no obligation to benefit the petitioners. The
proper performance of his duties as a legislator is his obligation as an elected
public servant of the Filipino people and not a consideration for the political
contributions he received.
• In fact, as a public servant, he may even be called to enact laws that are
contrary to the interests of his benefactors, for the benefit of the greater
good.
• In fine, the purpose for which the sums of money were given,
which was to fund the campaign of Senator Angara in his bid for
a senatorial seat, cannot be considered as a material
consideration so as to negate a donation.
• Finally, this Court takes note of the fact that subsequent to the donations
involved in this case, Congress approved Republic Act No. 7166 on November
25, 1991, providing in Section 13 thereof that political/electoral contributions,
duly reported to the Commission on Elections, are NOT subject to the
payment of any gift tax. This all the more shows that the political
contributions herein made are subject to the payment of gift taxes, since the
same were made PRIOR to the exempting legislation, and Republic Act No.
7166 provides no retroactive effect on this point.

TAX 2 – MONTERO | Y. Sanchez A2012


VAT
Commissioner of Internal Revenue v. Mirant Pagbilao Corporation
Mitsubishi  MPC  NPC
• MPC, formerly Southern Energy Quezon, Inc., is a domestic firm engaged in
the generation of power which it sells to the National Power Corporation (NPC).
• For the construction of the electrical and mechanical equipment portion of its
Pagbilao, Quezon plant, MPC secured the services of Mitsubishi Corporation
(Mitsubishi) of Japan.
• Under R.A. 6395, NPC is exempt from all taxes (which covers both direct and
indirect taxes).
• In the light of the NPC's tax exempt status, MPC, on the belief that its sale of
power generation services to NPC is zero-rated for VAT purposes, filed an
Application for Effective Zero Rating.
• CIR issued a ruling stating that the supply of electricity by MPC to the NPC
shall be subject to zero percent (0%) VAT.
• Consistent with its belief to be zero-rated, MPC opted not to pay the VAT
component of the progress billings from Mitsubishi for the period covering April
1993 to September 1996 - for the E & M Equipment Erection Portion of MPC's
contract with Mitsubishi.
• This prompted Mitsubishi to advance the VAT component as this serves as its
output VAT which is essential for the determination of its VAT payment.
• MPC, while awaiting approval of its application, filed its quarterly VAT return
for the second quarter of 1998 where it reflected an input VAT of P148M+, as
supported by an OR.
• MPC filed an administrative claim for refund of unutilized input VAT.
• BIR failed to act on its claim for refund.
• MPC went to the CTA via a petition for review to forestall the running of the
two-year prescriptive period.
• BIR asserted that MPC's claim for refund CANNOT be granted since MPC's
sale of electricity to NPC is NOT zero-rated for its failure to secure an approved
application for zero-rating.
TAX 2 – MONTERO | Y. Sanchez A2012
• The CTA granted MPC's claim for input VAT refund or credit for PhP
10,766,939.48. The CA rendered its assailed decision modifying that of the CTA
decision by granting most of MPC's claims for tax refund or credit for
P146,760,509.48.
• I: W/n MPC is entitled to the refund of its input VAT payments made from
1993 to 1996
• R: Yes, but only to the extent of P10M+, given that claim has prescribed.
• Prescription. MP's claim for refund / tax credit for the creditable input VAT
was filed beyond the period provided by law for such claim. Sec. 112(A) of the
NIRC provides that any VAT-registered person, whose sales are zero-rated may
apply for the issuance of tax credit WITHIN 2 YEARS after the close of the taxable
quarter when the sales were made. MPC filed a refund in Dec 1999 when it should
have filed in Sept 1998 (since the close of the quarter was Sept 1996).
• Creditable input VAT is an indirect tax which can be shifted or passed on
to the buyer, transferee, or lessee of the goods, properties, or services of the
taxpayer.
• The fact that the subsequent sale or transaction involves a wholly-tax exempt
client, resulting in a zero-rated or effectively zero-rated transaction, does NOT,
standing alone, deprive the taxpayer of its right to a refund for any unutilized
creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does
not enter the equation.
• History of VAT. The law that originally imposed the VAT in the country, as
well as the subsequent amendments of that law, has been drawn from the tax
credit method (practiced in Europe).
• If at the end of a taxable quarter the output taxes charged by a seller are
EQUAL to the input taxes passed on by the suppliers, no payment is required.
HOWEVER, when output taxes EXCEED input taxes, the excess has to be paid. On
the other hand, if the input taxes EXCEED the output taxes, the excess shall be
CARRIED OVER TO THE succeeding quarter/s.
• Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any EXCESS over the output
taxes shall be refunded to the taxpayer / credited against other internal revenue
taxes.
• Zero-rated transactions generally refer to the export sale of goods and
supply of services. The tax rate is set at zero. When applied to the tax base, such
rate obviously results in no tax chargeable against the purchaser. The seller of
such transactions charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
• OTHERS:
• BIR and other tax agencies have a duty to treat claims for refunds and tax
credits with proper attention and urgency. Had RDO No. 60 and, later, the BIR
 proper acted, instead of sitting, on MPC's underlying application for effective zero
rating, the matter of addressing MPC's right, or lack of it, to tax credit or refund
could have plausibly been addressed at their level and perchance freed the
taxpayer and the government from the rigors of a tedious litigation.
• The official receipt proves payment by MPC of its creditable input VAT relative
to its purchases from Mitsubishi. BIR is precluded from requiring additional
evidence to prove that input tax had indeed paid or, in fine, that the taxpayer is
indeed entitled to a tax refund or credit for input VAT, we agree with the CA's
above disposition. As the Court distinctly notes, the law considers a duly-executed
VAT invoice or OR referred to in the above provision as sufficient evidence to
support a claim for input tax credit.
CIR v. Phil Health Care Providers, Inc.
• The Philippine Health Care Providers (PHCPI), a health care organization for
sick and disabled persons enrolled in a health care plan, wrote BIR inquiring
whether the services it provides are exempt from the payment of the VAT.
• BIR issued a ruling, confirmed by the BIR Regional Director, stating that
PHCPI was exempt from the VAT coverage.
• BIR then sent PHCPI 2 notices for deficiency in its payment of the VAT and
documentary stamp taxes (DST) f P224M+ for taxable years 1996 and 1997.
• PHCPI protested, but BIR did not take any action, so PHCPI filed with the
CTA a petition for review.
• CTA ordered PHCPI to pay a reduced deficiency VAT and declared the BIR
ruling void, saying that PHCPI is a service contractor subject to VAT since it
does not actually render medical service but merely acts as a conduit between the
members and petitioner's accredited and recognized hospitals and clinics.
• However, after a careful review of the facts of the case, the CTA resolved to
grant petitioner's "Motion for Partial Reconsideration” relying on Sec.246 of the
1977 Tax code which provides that in the absence of showing of bad faith, the
retroactive revocation of the BIR Ruling will be prejudicial to PHCPI. Accordingly,
the VAT assessment issued against PHCPI for the taxable years 1996 and 1997
was WITHDRAWN and SET ASIDE.
• I: 1. W/n PHCPI's services are subject to VAT
• R: YES. HOWEVER, because of the VAT ruling exempting PHCPI from VAT, it
cannot be retroactively revoked and therefore, PHCPI is still exempt.
• 1) Section 102 of the NIRC as amended provides that there shall be levied a
VAT equivalent to 12% of gross receipts derived from the sale or exchange of
TAX 2 – MONTERO | Y. Sanchez A2012
services… The phrase "sale or exchange of service" means the performance of all
kinds of services in the Philippines for consideration.
• Section 103 of the same Code specifies the exempt transactions from the
provision, which includes medical, dental, hospital and veterinary services except
those rendered by professionals.
• It can be seen from PHCPI’s letter to BIR that its services that it is not
actually rendering medical service but merely acting as a conduit
between the members and their accredited and recognized hospitals
and clinics.
• Thus, it does NOT fall under VAT-exempt transactions.
• 2) Section 246 of the 1997 Tax Code, as amended, provides that rulings,
circulars, rules and regulations promulgated by the CIR have no retroactive
application if to apply them would prejudice the taxpayer.
• The exceptions to this rule are:
o (1) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
BIR
o (2) where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is based, or
o (3) where the taxpayer acted in bad faith.
• PHCPI did not fall under any of these exceptions.
• PHCPI's failure to refer to itself as a health maintenance organization is not
an indication of bad faith or a deliberate attempt to make false representations.
• The term "health maintenance organization" was first recorded in the
Philippine statute books only upon the passage of "The National Health Insurance
Act of 1995" which defines a "health maintenance org" as one of the classes of a
"health care provider."
• Thus, the VAT Ruling was issued in PHCPI's favor, and the term "health
maintenance organization" was yet unknown or had no significance for taxation
purposes. PHCPI therefore, believed in good faith that it was VAT exempt for the
taxable years 1996 and 1997 on the basis of the VAT Ruling.
• CIR is precluded from adopting a position contrary to one previously taken
where injustice would result to the taxpayer.
CIR v Acesite (Philippines) Hotel Corporation
• Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel. It
leases a portion of the hotel’s premises to the PAGCOR for casino operations. It
also caters food and beverages to PAGCOR’s casino patrons through the hotel’s
restaurant outlets.
• From 1996 to 1997, Acesite incurred VAT amounting to P30M+ from its rental
income and sale of food and beverages to PAGCOR during said period.
 • Acesite tried to shift the said taxes to PAGCOR by incorporating it in the
amount assessed to PAGCOR but the latter refused to pay the taxes on account of
its tax exempt status.
• Thus, PAGCOR paid the amount due to Acesite minus the P30M+ VAT while
Acesite paid the VAT to the CIR.
• However, Acesite belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. In
1998, Acesite filed an administrative claim for refund with the CIR but CIR failed to
resolve the same, so the case was elevated to the CTA.
• I: W/n the 0% VAT rate (under then Sec 108 (B)(3) of the NIRC) applies to
Acesite
• R: Yes.
• PD 1869 w/c created PAGCOR granted it an exemption from paying taxes.
• A close scrutiny of the provisions of the said law gives PAGCOR a blanket
exemption to taxes with no distinction on whether the taxes are direct or indirect.
• The law even grants tax exempt status to persons dealing with PAGCOR in
casino operations. The unmistakable conclusion is that PAGCOR is not liable for the
P30M+ VAT and neither is Acesite as Acesite is effectively subject to zero percent
rate under the NIRC.
• By extending the exemption to entities or individuals dealing with PAGCOR,
the legislature clearly granted exemption also from indirect taxes. It must be noted
that the indirect tax of VAT, as in the instant case, can be shifted or passed to the
buyer, transferee, or lessee of the goods, properties, or services subject to VAT.
Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect
taxes.
• The NIRC provides that transactions subject to 0% VAT include services
rendered to persons whose exemption under special laws or international
agreements subjects the supply of such services to 0% rate.
• OTHERS:
• It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of such
value, or charged as an additional 10% to the value. Verily, the seller or lessor has
the option to follow either way in charging its clients and customer.
• In the instant case, Acesite followed the latter method, that is, charging an
additional 10% of the gross sales and rentals. Be that as it may, the use of either
method, and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.
CIR v. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO,
INC.
TAX 2 – MONTERO | Y. Sanchez A2012
• A foreign consortium composed of BWSC-Denmark, Mitsui Engineering
and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with
NAPOCOR for the operation and maintenance of 2 power barges.
• BWSC-Denmark, the coordination manager, established BWSC-Mindanao
(domestic corp doing business in Davao) which subcontracted the actual operation
and maintenance of NAPOCOR’s two power barges.
• NAPOCOR paid capacity and energy fees to the Consortium in a mixture of
currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is
deposited directly to the Consortium’s bank accounts in Denmark and Japan, while
the Peso-denominated component is deposited in a separate and special
designated bank account in the Philippines.
• On the other hand, the Consortium paid BWSC-Mindanao in foreign currency
inwardly remitted to the Philippines through the banking system.
• In order to ascertain the tax implications of the above transactions, BWSC-
Mindanao sought a ruling from the BIR, w/c responded with a Ruling declaring
that if BWSC-Min chose to register as a VAT person and the consideration for its
services is paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP, the aforesaid services shall be subject to
VAT at zero-rate.
• BSWC-Mindanao chose to register as a VAT taxpayer.
• In conformity with RR 5-96 allowing zero-rated VAT for services other than
processing, manufacturing and repacking of goods, it subjected its sale of services
to the Consortium to the 10% VAT and paid the amount of P6M+ as its output tax
liability for the year 1996.
• It then filed a claim for the issuance of a tax credit certificate with the BIR,
believing that it erroneously paid the output VAT for 1996 due to its availment of
the Voluntary Assessment Program (VAP) of the BIR.
• CTA ordered BIR to issue a tax credit certificate for the P6M+ in favor of
BSCW-Mindanao. This was affirmed by the CA.
• I: W/n BWSC-Mindanao is entitled to the refund of P6,994,659.67 as
erroneously paid output VAT for the year 1996
• R: Yes, they are entitled to refund. Their services ARE actually still subject to
10% VAT BUT they are not liable for such given their reliance on BIR Rulings.
• An essential condition for qualification to zero-rating under Section 102(b)(2)
of RR 5-96 is that services other than processing, manufacturing, or repacking of
goods must be performed for persons doing business OUTSIDE the Philippines.
• In this case, the payer-recipient of BWSC-Mindanao’s services is the
Consortium which is a joint-venture doing business in the Philippines.
 • While the Consortium’s principal members are non-resident foreign
corporations, the Consortium itself is doing business in the Philippines. This is
shown clearly in BIR Ruling No. 023-95 which states that the contract between the
Consortium and NAPOCOR is for a 15-year term. Considering this length of time,
the Consortium’s operation and maintenance of NAPOCOR’s power barges cannot
be classified as a single or isolated transaction.
• The Consortium does not fall under Section 102(b)(2) which requires that the
recipient of the services must be a person doing business outside the Philippines.
• Therefore, BWSC-Min’s services to the Consortium, not being supplied to a
person doing business outside the Philippines, cannot legally qualify for 0% VAT.
• The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
• However, as the Court stated in American Express, there is an exception to
this rule, which is the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. To be exempt from the destination principle under
Section 102(b)(1) and (2), the services must be (a) performed in the Philippines;
(b) for a person doing business outside the Philippines; and (c) paid in
acceptable foreign currency accounted for in accordance with BSP rules.
• In contrast, this case involves a recipient of services – the Consortium –
which is doing business in the Philippines.
• Nevertheless, in seeking a refund of its excess output tax, respondent relied
on VAT Rulings insofar as they held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%). BWSC’s reliance on these BIR rulings binds
BIR.
• BIR’s revocation CANNOT be given retroactive effect since it will prejudice the
taxpayer, w/c is prohibited by Sec 246 of the NIRC. Changing respondent’s status
will deprive respondent of a refund of a substantial amount representing excess
output tax.
CIR v. Magsaysay Lines
• NDC decided to sell its National Marine Corporation (NMC) shares and 5 of its
ships, w/c were offered for public bidding.
• Among the stipulated terms and conditions for the public auction was that the
winning bidder was to pay "a VAT of 10% on the value of the vessels.”
CIR v. SEKISUI
• Magsaysay Lines offered to buy the shares and the vessels for P168M. The
bid was made by Magsaysay Lines, purportedly for a new company still to be
formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong (collectively, private respondents)
TAX 2 – MONTERO | Y. Sanchez A2012
• The bid was approved by the Committee on Privatization, and a Notice of
Award was issued to Magsaysay Lines.
• Private respondents through counsel then received a VAT Ruling from the
BIR, holding that the sale of the vessels was subject to the 10% VAT. They filed a
motion for reconsideration but their motion was denied so they elevated the case
to the CTA.
• The NDC drew on the Letter of Credit to pay for the VAT, and the amount of
P15,120,000.00 in taxes was paid on 16 March 1989.
• CTA ruled that the sale of a vessel was an "isolated transaction," not done in
the ordinary course of NDC’s business, and was thus not subject to VAT, which
under Section 99 of the Tax Code, was applied only to sales in the course of trade
or business.
• I: W/N the sale is subject to VAT
• R: No, sale is NOT subject to VAT.
• Any sale, barter or exchange of goods or services not in the course of trade
or business is not subject to VAT.
• mperial v. CIR: The term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the acts normally incident
thereof.
• Thus, it connotes REGULARITY of activity.
• In the instant case, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity.
• It should be emphasized that the normal VAT-registered activity of NDC is
leasing personal property.
• This finding is confirmed by the Revised Charter of the NDC which bears no
indication that the NDC was created for the primary purpose of selling real
property.
• Thus, the sale of the vessels was not in the ordinary course of trade or
business of NDC so it should not be subject to VAT.
• SEKISUI JUSHI is a domestic corporation with principal office located in the
Special Export Processing Zone in Laguna.
• It is principally engaged in the business of manufacturing, importing,
 exporting, buying, selling wholesale such goods as strapping bands and other
packaging materials.
• Having registered with the BIR as a VAT taxpayer, Sekisui filed its quarterly
returns with the BIR, in the amount of P4M paid by it in connection with its
domestic purchase of capital goods and services.
• Said input taxes remained unutilized since Sekisui has not engaged in any
business activity or transaction for which it may be liable for output tax and for
which said input taxes may be credited.
• Sekisui then filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance (CENTER-DOF) two separate
applications for tax credit/refund of VAT input taxes paid.
• CIR denied this, but CTA ruled that Sekisui was entitled to refund.
• I: W/n SEKISUI is entitled to the refund/tax credit certificate as alleged
unutilized input taxes paid on domestic purchase of capital goods and services
• R: Yes, it is entitled to refund
• Business enterprises registered with the Philippine Export Zone Authority
(PEZA) may choose between two fiscal incentive schemes:
o (1) to pay a 5% preferential tax rate on its gross income and thus
be exempt from all other taxes; or
o (b) to enjoy an income tax holiday, in which case it is not exempt
from applicable national revenue taxes including the value-added
tax (VAT).
• If the entity avails itself of the 5% preferential tax rate under the first
scheme, it is exempt from all taxes, including the VAT;
• Under the second, it is exempt from income taxes for a number of years, but
not from other national internal revenue taxes like the VAT.
• A perusal of the pleadings and supporting documents indicates that Sekisui
availed itself of the income tax holiday (second). By doing so, it became subject to
VAT. It correctly registered as a VAT taxpayer, because its transactions were not
VAT-exempt.
• Notwithstanding the fact that its purchases should have been zero-rated,
Sekisui was able to prove that it had paid input taxes in the amount of P4M, as
substantially supported by invoices and ORs.
• While an ecozone is within the Philippines, it is deemed a separate customs
territory. Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports and treated as export sales.
• Since 100% of Sekisui's products are exported, all its transactions are
deemed export sales and are thus VAT zero-rated. Sekisui has no output tax with
which it could offset its paid input tax. Since the subject input tax it paid for its
domestic purchases of capital goods and services remained unutilized, it can claim
TAX 2 – MONTERO | Y. Sanchez A2012
a refund for the input VAT previously charged by its suppliers.
ABAKADA vs Ermita (Sept 1, 2005)
• Several actions were filed by different petitioners assailing the validity of R.A.
No. 9337 (increasing VAT to 12%) for being unconstitutional, as it violates Art 6,
Section 28, w/c provides that ““The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of taxation.”
• In particular, SHELL, etc. assailed Section 8, amending Section 110 (B) of the
NIRC, imposing a 70% limit on the amount of input tax to be credited
against the output tax , making it REGRESSIVE and unconstitutional.
Specific provision: If at the end of any taxable quarter the
output tax exceeds the input tax, the excess shall be paid by the
VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters:
PROVIDED that the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in
every quarter shall not exceed 70% of the output VAT:
PROVIDED, HOWEVER, THAT any input tax attributable to zero-
rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes. . .
• I: W/n RA 9337 is unconstitutional for violating uniformity,
equitability and progressiveness of taxation – No, it is VALID.
• TAX IS UNIFORM.
• Uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.
• The rule of uniform taxation does not deprive Congress of the
power to classify subjects of taxation, and only demands uniformity
within the particular class.
• In this case, the tax law is uniform because:
o 1) it provides a standard rate of 0% or 10% (or 12%) on all goods
and services;
o ) it does not make any distinction as to the type of industry or
trade that will bear the 70% limitation on the creditable input tax, 5-year
amortization of input tax paid on purchase of capital goods or the 5% final
withholding tax by the government.
• TAX IS EQUITABLE. (Taxes should equally burden all individuals
or entities in similar economic circumstances.)
• The law is equipped with a threshold margin. The VAT rate of 0% or 10%
(or 12%) does not apply to sales of goods or services with gross annual sales or
receipts not exceeding P1.5M.
 • Also, basic marine and agricultural food products in their original state are • On the other hand, it appears that petitioner Garcia failed to comprehend the
still NOT subject to the tax, thus ensuring that prices at the grassroots level will operation of the 70% limitation on the input tax. According to petitioner, the
remain accessible. limitation on the creditable input tax in effect allows VAT-registered establishments
to retain a portion of the taxes they collect, which violates the principle that tax
• Although the law outs a premium on businesses with low profit margins, and
collection and revenue should be for public purposes and expenditures.
unduly favors those with high profit margins, Congress equalized the burden the
law by likewise imposing a 3% percentage tax on VAT-exempt persons under • As earlier stated, the input tax is the tax paid by a person, passed
Section 109(v), i.e., transactions with gross annual sales and/or receipts not on to him by the seller, when he buys goods. Output tax meanwhile
exceeding P1.5 Million. is the tax due to the person when he sells goods. In computing the VAT
• This acts as an equalizer because in effect, bigger businesses that qualify for payable, three possible scenarios may arise:
VAT coverage and VAT-exempt taxpayers stand on equal-footing. o If output tax = input tax = no payment
• Moreover, Congress provided under mitigating measures to ease, as well as o If output tax > input tax = person liable for excess, to be paid to
spread out, the burden of taxation, which would otherwise rest largely on the
BIR
consumers:
o Excise taxes on petroleum products and natural gas were reduced. o If input tax > output tax = excess shall be carried over to the
Percentage tax on domestic carriers was removed. Power producers are now succeeding quarter or quarters.
exempt from paying franchise tax. o IF input tax results from zero-rated or effectively zero-rated
o Income tax rates of corporations, in order to distribute the burden of transactions, any excess over the output taxes shall be REFUNDED
taxation, were increased to the taxpayer / credited against other internal revenue taxes, at
o Domestic, foreign, and non-resident corporations are now subject to a 35% the taxpayer’s option.
income tax rate, from a previous 32%.
o Intercorporate dividends of non-resident foreign corporations are still subject
• Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input
tax. Thus, a person can credit his input tax only up to the extent of 70% of the
to 15% final withholding tax but the tax credit allowed on the corporation’s
output tax.
domicile was increased to 20%.
o PAGCOR is not exempt from income taxes anymore. • There is no retention of any tax collection because the taxpayer
has already previously paid the input tax to a seller, and the seller
o Even the sale by an artist of his works or services performed for the
will subsequently remit such input tax to the BIR. The party directly
production of such works was not spared.
liable for the payment of the tax is the seller. What only needs to be done is for
• On the INPUT TAX LIMIT* (ITO ata yung impt) the person/taxpayer to apply or credit these input taxes, as evidenced by receipts,
• Petitioner (Shell) assumes that the input tax exceeds 70% of the output tax, against his output taxes.
and therefore, the input tax in excess of 70% remains uncredited. However, to • TAX IS REGRESSIVE, BUT IT IS NOT INVALID.
the extent that the input tax is less than 70% of the output tax, then 100% of
such input tax is still creditable.
• Taxation is PROGRESSIVE when its rate goes up depending on the resources
of the person affected. The Constitution does not really prohibit the
• More importantly, the excess input tax, if any, is retained in a business’s
imposition of indirect taxes, like the VAT. What it simply provides is
books of accounts and remains creditable in the succeeding quarter/s. This is
that Congress shall "evolve a progressive system of taxation."
explicitly allowed by Section 110(B), which provides that “if the input tax exceeds
the output tax, the excess shall be carried over to the succeeding quarter or
*NOTE the distinction made by the court:
quarters.”
VAT - A tax on spending or consumption. It is levied on the sale, barter, exchange or
• In addition, Section 112(B) allows a VAT-registered person to apply for the
lease of goods or properties and services. Being an indirect tax on expenditure, the
issuance of a tax credit certificate or refund for any unused input taxes, to the
seller of goods or services may pass on the amount of tax paid to the buyer, with the
extent that such input taxes have not been applied against the output taxes. Such
seller acting merely as a tax collector. The burden of VAT is intended to fall on the
unused input tax may be used in payment of his other internal revenue taxes.
immediate buyers and ultimately, the end-consumers.
• The non-application of the unutilized input tax in a given quarter is not ad
infinitum, as petitioners exaggeratedly contend.

TAX 2 – MONTERO | Y. Sanchez A2012

Direct tax is a tax for which a taxpayer is directly liable on the transaction or business
it engages in, without transferring the burden to someone else. Examples are individual
and corporate income taxes, transfer taxes, and residence taxes.
ABAKADA v. Ermita (Oct 18, 2005)
• This case is about the Resolution of the Motion for Reconsideration filed by
herein petitioners based on the decision rendered by the court on Sept. 1, 2005,
upholding the constitutionality of RA 9337 or the VAT Reform Act.
• Relevant issues are as follows:
1. MR of Escudero, et al.: W/N there was grave abuse of discretion amounting
to lack or excess of jurisdiction on the part of the Bicameral Committee when
the “No Pass-On Provisions” for the sale of petroleum products and power
generation services were deleted.
2. MR of Bataan Governor Garcia, Jr.: W/N the VAT law is unconstitutional for
being arbitrary, oppressive and inequitable because it burdens the consumers
because of the price increase.
3. MR of Association of Pilipinas Shell Dealers: W/N the Court erred in
upholding the constitutionality of Section 110(A)(2) and Section
110(B) of the NIRC as amended by the EVAT Law imposing
limitations on the amount of input VAT that may be claimed as a
credit against the output VAT; Section 114(C) of the NIRC as
amended by the EVAT Law, requiring the government or any of
its instrumentalities to withhold a 5% final withholding tax on
their gross payments on purchases of goods and services; for
finding that the EVAT Law is not arbitrary, oppressive and confiscatory as to
amount a deprivation of property without due process of law; that it did not
violate the equal protection clause.
• R: MRs are DENIED. TRO is lifted.
• Escudero, et al. argues that the bicameral committee should not have
touched on the “No Pass-On Provisions” since both the Senate and the House of
Representatives were in agreement that such provision should be passed where no
VAT Burden shall be passed to the end-consumer and instead will be shouldered
by the sellers.
• HOWEVER, the deletion of the “No Pass-On Provision” made the
present VAT law more in consonance with the very nature of VAT
which is a tax on spending or consumption, thus, the burden thereof
is ultimately borne by the end-consumer.
TAX 2 – MONTERO | Y. Sanchez A2012
• As to the contention that the right to credit input tax has already evolved into
a vested right, the Court finds that the right to credit the same is a mere
creation of law. Prior to the enactment of multi-stage sales taxation, the sales
taxes paid at every level of distribution are not recoverable from the taxes
payable. With the advent of EO 273 imposing a 10% multi-stage tax on all sales, it
was only then that the crediting of the input tax paid on purchase or importation
of goods and services by VAT-registered persons against the output tax was
established. This continued with the Expanded VAT Law (R.A. No. 7716), and The
Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as
against the output tax is clearly a privilege created by law, a
privilege that also the law can limit. It should be stressed that a
person has no vested right in statutory privileges.
• The impact of the 70% limitation on the creditable input tax will ultimately
depend on how one manages and operates its business. Market forces, strategy
and acumen will dictate their moves. With or without these VAT provisions, an
entrepreneur who does not have the ken to adapt to economic variables will surely
perish in the competition. The arguments posed are within the realm of business,
and the solution lies also in business.
CIR v. Toshiba Information Equipment (Phils.), Inc.
• Toshiba is a domestic corporation with the primary purpose of engaging in
the business of manufacturing and exporting of electrical and mechanical
machinery and goods relating to information technology, computer hardware and
software.
• In 1995, Toshiba registered w/ Philippine Economic Zone Authority (PEZA) as
an Ecozone Export Enterprise. Toshiba also registered with the BIR as a VAT
taxpayer.
• Toshiba filed its VAT returns for the year 1996 reporting its input VAT and
alleging that its input VAT was from its purchases of capital goods and services
which remained unutilized since it had not yet engaged in any business activity for
which it may be liable for output VAT.
• Consequently, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit
and Duty Drawback center of the Department of Finance applications for tax
credit/refund of its unutilized input VAT.
• Toshiba also filed a petition for review with the CTA to toll the running of the
two-year prescriptive period for judicially claiming a tax credit/refund.
• CTA ordered the CIR to refund or to issue a tax credit certificate to Toshiba.
• CIR opposed on the ground that since Toshiba is registered with PEZA as an
Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section
109 of the Tax Code. Since Toshiba’s business is not subject to VAT, the capital
 goods and services it purchased are considered not used in VAT taxable business
and therefore, it is not entitled to refund of input taxes on such capital goods.
• I: W/n Toshiba is entitled to the tax credit/refund of its input VAT on its
• The transaction from a supplier in a customs territory to Toshiba, being a
PEZA-registered enterprise, was considered an effectively VAT zero-rated
purchases of capital goods and services
transaction. However, the sales made by Toshiba to a foreign country were
• R: Yes, Toshiba is entitled to tax credit/refund of its input VAT on its
considered export sales. Thus, they were considered to be automatically VAT
purchases of capital goods and services.
zero-rated transactions.
• An Ecozone enterprise is a VAT-exempt entity. Sales of goods, properties,
• Given that in the case of Toshiba, Toshiba was Buyer 1 and not the Seller,
and services by persons from the Customs Territory to Ecozone enterprise shall be
then it should not have claimed for an input tax credit since theoretically,
subject to VAT at zero percent (0%).
there was no input VAT on Toshiba’s part.
• PEZA-registered enterprises, which would necessarily be located within
• However, the Toshiba case happened prior to RMC 74-99 where PEZA-
Ecozones, are VAT-exempt entities because of Section 8 of RA 7916 which
registered enterprises availed of income tax holidays and so Toshiba was
establishes the fiction that Ecozones are foreign territory. The national territory of
subject to VAT. Thus, there was an assumption that the seller passed on
the Philippines outside of the proclaimed borders of the Ecozone are referred to as
VAT to Toshiba and so, Toshiba should be allowed to claim for an input tax
Customs Territory. The provision provides that PEZA shall manage and operate the
credit.
Ecozones as a separate customs territory, thus creating the fiction that the
• As regards the fact that Toshiba was asking for an input tax credit on capital
Ecozone is a foreign territory.
goods, the ruling in that case is no longer applicable as input tax credit for
• The Philippine VAT system adheres to the Cross Border Doctrine, according to
capital goods under RA 9337 are governed by new rules.
which, no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial board of the taxing authority. • In this case, the Court also made a pronouncement that a VAT-registered
• Sales of goods, properties, and services by a VAT-registered supplier from the supplier from the customs territory to an Ecozone enterprise shall be treated
Customs Territory to an Ecozone enterprise shall be treated as export sales. as export sales, while sales to an ECOZONE enterprise made by a NON-VAT
• If such sales are made by a VAT-registered supplier, they shall be subject to or unregistered supplier would only be exempt from VAT and the supplier
VAT at 0%. In zero-rated transactions, the VAT-registered supplier shall not pass shall not be able to claim credit/refund for his input VAT.
on any output VAT to the Ecozone enterprise, and at the same time, shall be
entitled to claim tax credit/refund of its input VAT attributable to such sales.
• Zero-rating of export sales primarily intends to benefit the export (i.e., the CIR v Seagate
supplier from Customs territory), who is directly and legally liable for VAT.
Meanwhile, sales to an Ecozone enterprise made a by a non-VAT or unregistered • Seagate is a resident foreign corporation duly registered with the SEC to do
supplier would only be exempt from VAT and the supplier shall not be able to business in the Philippines, with principal office address at the Special Economic
claim credit/refund of its input VAT. Zone in Cebu.
• Even conceding, however, that Toshiba as a PEZA-registered enterprise, is a • It is also registered with the Philippine Export Zone Authority (PEZA) to
VAT-exempt entity that could not have engaged in a VAT-taxable business, given
engage in the manufacture of recording components primarily used in computers
the particular circumstances, Toshiba is entitled to a credit/refund of its
for export. Furthermore, it is a VAT-registered entity w/c filed VAT returns for the
input vat.
period of April 1998 to 30 June 1999.
• The sales made to Toshiba, for which it is claiming a refund or credit of its
unutilized input vat, were made in 1996 under the old rule that the tax-status of • Subsequently, an administrative claim for refund of VAT input taxes in
Ecozone enterprises would depend upon the tax incentives it chooses to avail of, the amount of P28,369,226.38 with supporting documents (inclusive of the
either the 5% preferential tax or the income tax holiday under the Omnibus P12,267,981.04 VAT input taxes subject of this Petition for Review), was filed.
Investments Code where the entity will only be exempt from income tax but not • CIR did not act upon this so Seagate elevated the case to CTA.
from VAT.
• Since Toshiba chose to avail of the income tax holiday, it was therefore
• CTA granted the claim for refund but the CA modified it in the reduced
amount of P12M, w/c represented the unutilized but substantiated input VAT paid
subject to the 10% VAT. Therefore Toshiba’s transactions in 1996 being subject to
on capital goods purchased for the period covering April 1, 1998 to June 30, 1999.
VAT, is entitled to a credit/refund of the unutilized input VAT it incurred which it
wasn’t able to apply against its output taxes.

TAX 2 – MONTERO | Y. Sanchez A2012

 This was because Seagate had availed itself only of the fiscal incentives under EO • An ecozone, even though a geographical territory of the Philippines, is
226 and NOT of those under both PD 66 and Section 24 of RA 7916. however regarded in law as foreign soil. This legal fiction is necessary to give
• Respondent was, therefore, considered exempt only from the payment of meaningful effect to the policies of the special law creating the zone.
income tax when it opted for the income tax holiday in lieu of the 5%
• There is a difference between ZERO-RATED TRANSACTIONS and EXEMPT /
preferential tax on gross income earned. As a VAT-registered entity, though, it
EFFECTIVE ZERO-RATED TRANSACTIONS
was still subject to the payment of other national internal revenue taxes, like the
VAT.
Zero-rated Exempt
• I: W/n Seagate is entitled to the refund or issuance of Tax Credit Certificate It is automatic zero-rating. It is effective zero rating.
in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on Refers to the export sale of goods Refers to the sale of goods or supply
capital goods purchased for the period April 1, 1998 to June 30, 1999 and supply of services. of services to persons or entities
• R: YES, Seagate is entitled to refund. whose exemption under special laws
or Int’l agreements to which the
• THERE IS Preferential Tax Treatment Under the following Special Philippines is a signatory effectively
Laws: subjects such transactions to a zero
o PD 66- law creating PEZA rate.
o EO 226- Omnibus Investments Code" of 1987
Intended to be enjoyed by the seller Intended to benefit the purchaser
o RA 7227- Bases Conversion and Development Act of 1992
who is directly and legally liable for the who, not being directly and legally
o RA 7916- VAT Law VAT, making such seller internationally liable for the payment of the VAT, will
o RA 7844- Export Development Act of 1994; competitive by allowing the refund or ultimately bear the burden of the tax
credit of input taxes that are shifted by the suppliers.
o PD 1853- law requiring deposits of duties upon the opening of
attributable to export sales.
letters of credit to cover imports There is total relief for the purchaser There is partial relief because the
• Seagate is one of the business entities registered in and operating from the from the burden of the tax since he purchaser is not allowed any tax
SEZ in Cebu. These entities are exempt from all internal revenue taxes and the does not have input VAT and in effect, refund of or credit for input taxes
implementing rules relevant thereto, including the VAT. because VAT is at 0%, it does not have paid.
• Although export sales are not deemed exempt transactions, they are output VAT.
nonetheless zero-rated, because the ecozone within which it is registered is
managed and operated by the PEZA as a separate customs territory . Differentiate zero-rated from effectively zero-rated transactions according
• This means that in such zone is created the legal fiction of foreign territory. to Seagate
Sir pointed out that: the difference between automatic zero-rated transactions from
• Under the cross-border principle of the VAT system being enforced by
effectively zero-rated transactions is that with automatic zero-rated transactions,
the BIR, no VAT shall be imposed to form part of the cost of goods destined for you only have to look at the Tax Code provisions to know which transactions are
consumption outside of the territorial border of the taxing authority. If exports of automatic zero-rated.
goods and services from the Philippines to a foreign country are free of the VAT, However, with EXEMPTIONS / effective zero-rated transactions, you have to
then the same rule holds for such exports from the national territory -- except look at other laws; thus, for effective zero-rated transactions, there is a need to get
specifically declared areas -- to an ecozone. a prior confirmation or prior approval from the BIR that the transaction is effectively
• THUS, sales made by a VAT-registered person in the customs territory to a zero-rated.
PEZA-registered entity are considered exports to a foreign country NOTE however that Revenue Regulations of 4-2007 does not provide anymore that
there should be an approval before a transaction that is effectively VAT zero-rated to
• Conversely, sales by a PEZA-registered entity to a VAT-registered person in become effectively VAT zero-rated, which could be a legal basis why there is no need
the customs territory are deemed imports from a foreign country. for prior confirmation. But Sir does not agree since there is yet no amendment in the
Tax Code.

TAX 2 – MONTERO | Y. Sanchez A2012

 Applying the special laws enumerated above, respondent as an entity is
exempt from internal revenue laws and regulations. This exemption covers both direct
Exempt Transaction Exempt Party and indirect taxes, stemming from the very nature of the VAT as a tax on consumption,
- involves goods or services which, by - a person or entity granted VAT for which the direct liability is imposed on one person but the indirect burden is passed
their nature, are specifically listed in and exemption under the Tax Code, a special on to another. Respondent, as an exempt entity, can neither be directly charged for the
expressly exempted from the VAT under law or an international agreement to VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent
the Tax Code, without regard to the tax which the Philippines is a signatory, and VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the
status of the party (VAT-exempt or not) to by virtue of which its taxable transactions law does not distinguish, we ought not to distinguish.
the transaction. become exempt from the VAT.
- such transaction is not subject to the - Such party is also not subject to the Tax Refund or Credit is in Order
VAT, but the seller is not allowed any tax VAT, but may be allowed a tax refund of Having determined that respondent’s purchase transactions are subject to a
refund of or credit for any input taxes or credit for input taxes paid, depending zero VAT rate, the tax refund or credit is in order. As correctly held by both the CA and
paid. on its registration as a VAT or non-VAT the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA
taxpayer. 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent
While the liability is imposed on one person, the burden may be passed on to another. preferential tax regime. Therefore, respondent can be considered exempt, not from the
Therefore, if a special law merely exempts a party as a seller from its direct liability for VAT, but only from the payment of income tax for a certain number of years, depending
payment of the VAT, but does not relieve the same party as a purchaser from its on its registration as a pioneer or a non-pioneer enterprise.
indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase Summary
transactions entered into by respondent are not VAT-exempt. To summarize, special laws expressly grant preferential tax treatment to
business establishments registered and operating within an ecozone, which by law is
considered as a separate customs territory. As such, respondent is exempt from all
internal revenue taxes, including the VAT, and regulations pertaining thereto. It has
OTHERS: opted for the income tax holiday regime, instead of the 5 percent preferential tax
Special laws may certainly exempt transactions from the VAT. However, the regime. As a matter of law and procedure, its registration status entitling it to such tax
Tax Code provides that those falling under PD 66 are not. The purchase transactions it holiday can no longer be questioned. Its sales transactions intended for export may not
entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent be exempt, but like its purchase transactions, they are zero-rated. No prior application
is required to register. Its sales transactions, however, will either be zero-rated or taxed for the effective zero rating of its transactions is necessary. Being VAT-registered and
at the standard rate of 10 percent, depending again on the application of the having satisfactorily complied with all the requisites for claiming a tax refund of or credit
destination principle (Under this principle, goods and services are taxed only in the for the input VAT paid on capital goods purchased, respondent is entitled to such VAT
country where these are consumed. Thus, exports are zero-rated, but imports are refund or credit.
taxed).

When VAT Rate is at 0% or at 10% American Express v. CIR

0%- if Seagate enters into such sales transactions with a purchaser (usually in a
abroad) for use or consumption OUTSIDE the Philippines
10%- if Seagate entered into with a purchaser for use or consumption IN the
Philippines, UNLESS the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied
is zero.
The Tax Exemptions are Broad and Express
• Petitioner Amex-Phil is a Philippine branch of American Express International, Inc., a
corporation duly organized under Delaware, US laws. It is a servicing unit of
American Express International, Inc. — HK branch, engaged primarily to facilitate
the collection of Amex HK's receivables from Amex cardholders residing or situated
in the Philippines, as well as the payment of Amex HK to American Express
accredited service establishments and merchants in the Philippines.
• Amex-Phil made a request in writing to BIR for qualification as a zero rated VAT
enterprise.

TAX 2 – MONTERO | Y. Sanchez A2012

• BIR issued a VAT Ruling declaring that as a VAT registered entity whose service is
paid for in acceptable foreign currency which is remitted inwardly to the Philippines
and accounted for in accordance with the rules and regulations of the Central Bank
of the Philippines, Amex-Phil’s service income is automatically zero rated effective
January 1, 1988. For this, there is no need to file an application for zero-rate.
• For the taxable year 1998, petitioner allegedly generated and recorded revenues in
the total amount of P81k which were paid for in HK in foreign currency inwardly
remitted to the Philippines and accounted for in accordance with the rules and
regulations of the BSP.
• Amex-Phil asserts that said revenues qualify as zero-rated pursuant Tax Code as
confirmed in the VAT Ruling. For the same period, Amex-Phil allegedly paid input
VAT amounting to P3.9M+ on its domestic purchases of taxable goods/services.
Petitioner nonetheless claims that its output VAT liability for the period amounted
only to P4k thereby leaving an unutilized input VAT of P3M averred to be directly
attributable to its zero-rated sales.
• Petitioner contends that the input VAT payments in 1998 were paid in the course of
its trade or business. Further, the unapplied input VAT payments subject of this
case had not been carried over to the succeeding first quarter of 1999.
• I : W/N Amex-Phil is entitled to a refund of P3,967,561.06 allegedly representing
unutilized input VAT payments on domestic purchases of taxable
goods/services which are directly attributable to zero-rated sales for the period
January 1 to December 31, 1998
• R: YES. Petitioner's claim for refund is hereby PARTIALLY GRANTED. Respondent
CIR is ORDERED to REFUND to petitioner the sum of P3,967,336.97 representing
unutilized input VAT payments for the period January 1 to December 31, 1998.
• The onus (burden) of taxation under our VAT system is in the country where the
goods, property or services are destined and consumed.
• This is the reason why under our VAT Law, goods, property or services destined to
be consumed in the Philippines are subject to the 10% VAT whereas exports are
zero-rated.
• Amex’s transactions were considered zero-rated because they were services that
were paid for in an acceptable foreign currency & accounted for in accordance w/
the rules & regulations of the BSP since its transactions were paid in HK foreign
currency which was inwardly remitted to the Philippines & accounted for in
accordance w/ the rules of BSP.
TAX 2 – MONTERO | Y. Sanchez A2012
• The governing law in the case at bar is Section 112(A)[then Section 106(a)] in
relation to Section 108(B)(2) of the Tax Code.3 In conformity with this law, to be
entitled to a refund or tax credit of input VAT payments directly
attributable to zero-rated or effectively zero-rated sales, the following
requisites must be complied with:
1) there must be zero-rated or effectively zero-rated sales;
2) that input taxes were incurred or paid;
3) that such input VAT payments are directly attributable to zero-rated sales or
effectively zero-rated sales;
4) that the input VAT payments were not applied against any output VAT liability;
and
5) that the claim for refund was filed within the two-year prescriptive period.
• PETITIONER in this case fulfilled all the requirements, except the 3rd (not all of the
input VAT payments were attributable to the zero-rated sales), hence the partial
grant.
• 1st requirement: Petitioner's sales of services qualify as zero-rated sales. It is a VAT
registered entity and its sales of services to AMEX HK falls under Section 108(B)(2)
of the Tax Code. Further, petitioner's service fee earnings amounting to P81k were
paid for in acceptable foreign currency (US dollars) and accounted for in accordance
with the rules and regulations of the BSP as evidenced by the various telex advices
and demand deposit statementsand certification from BPI Forex Corporation.
• 2ndrequisite: Petitioner submitted various suppliers' invoices and ORs which are
valid documents in accordance with Sections 113 and 237 of the Tax Code. From
said documents, petitioner established that it paid an input VAT in the sum of
P3,972,025.15 on its domestic purchases of taxable goods/services for the year
1998.
• 3rd requisite: Not all of the substantiated input VAT payments of P3,972,025.15
were directly attributable to petitioner's zero-rated sales. For the year 1998,
petitioner had taxable sales in the amount of P46,881.80 with the corresponding
output VAT of P4,688.18 Indubitably, only the input VAT of P3,967,336.97, arrived
at by deducting the output VAT of P4,688.18 from the substantiated input VAT of
3
SEC. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero rated or Effectively Zero-rated Sales. — Any VAT registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section
108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).
 P3,972,025.15, can be directly attributed to petitioner's zero-rated sales for the
subject period.
• 4threquirement: Petitioner offered in evidence its quarterly VAT return for the first
quarter of 1999 to prove that the subject claim was not applied or carried over to
the said quarter.
• Last requirement: Counting the two-year prescriptive period from the date of filing
of petitioner's 1998 first quarterly VAT returns on April 20, 1998, both the
administrative (filed on April 18, 2000) and judicial (filed on April 19, 2000) claims
for refund were filed within the two-year period as mandated by law.
CIR v. CA and Commonwealth Management and Services Corporation
• Commonwealth Management and Services Corporation (COMASERCO), is a
Phil corp w/c is an affiliate of PHILAMLIFE organized by the latter to perform
collection, consultative and other technical services, including functioning as an
internal auditor, of Philamlife and its other affiliates.
• BIR issued an assessment to private respondent COMASERCO for deficiency
VAT amounting to P351k+ for taxable year 1988.
• COMASERCO filed with the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT, but the CIR sent a collection letter to COMASERCO
demanding payment of the deficiency VAT.
• Thus COMASERCO file with the CTA a petition for review wherein they
averred that it was NOT engaged in the business of providing services to Philamlife
and its affiliates.
• COMASERCO was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and NOT in the sale of
services. COMASERCO stressed that it was not profit-motivated, thus not engaged
in business. Thus, it is not liable to pay VAT.
• I: W/n COMASERCO was engaged in the sale of services, and thus liable to
pay VAT thereon
• R: YES, COMASERCO is liable to pay VAT (reversing CA’s decision and
reinstating the decision of the Tax Appeal in favor of the Commissioner)
• CIR avers that to "engage in business" and to "engage in the sale of services"
are two different things.
• SC agreed w/ CIR in saying that the services rendered by COMASERCO to
Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a
tax on the value added by the performance of the service. It is immaterial whether
TAX 2 – MONTERO | Y. Sanchez A2012
profit is derived from rendering the service.
• Sec 99 of the NIRC provides that any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods shall be subject to the VAT
imposed in Sections 100 to 102 of this Code."
• COMASERCO contends that the term "in the course of trade or business"
requires that the "business" is carried on with a view to profit or livelihood. It
avers that the activities of the entity must be profit- oriented.
• COMASERCO submits that it is not motivated by profit, as defined by its
primary purpose in the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit."
• HOWEVER, the EVAT Law clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or
services.
• VAT is a tax on transactions, imposed at every stage of the distribution
process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The
term "in the course of trade or business" requires the regular conduct or pursuit of
a commercial or an economic activity, regardless of whether or not the entity is
profit-oriented.
• The definition of the term "in the course of trade or business" incorporated in
the present law applies to all transactions even to those made prior to its
enactment. Executive Order No. 273 stated that any person who, in the course of
trade or business, sells, barters or exchanges goods and services, was already
liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit
organization or government entity is liable to pay VAT for the sale of goods and
services.
• Section 108 of the NIRC defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or
consideration." It includes "the supply of technical advice, assistance or services
rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking or project."
• It is immaterial whether the primary purpose of a corporation indicates that it
receives payments for services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of determining liability for
VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT.
 CIR v SM Primeholdings Inc.
• SM Prime and First Asia are both engaged in the business of operating
cinema houses, among others.
• BIR sent them both preliminary assessment notices for VAT deficiency on
cinema ticket sales.
• Both protested, but BIR denied their protests, arguing that the list of
enumerated services under Sec. 108 of the NIRC is not exhaustive
because it covers all sales of services. Also, the deficiency assessments
were based on Revenue Memorandum Circular No. 28-2001.
• CTA ruled that the activity of showing cinematographic films was NOT subject
to VAT, and should instead be subject to an amusement tax.
• CTA en banc affirmed this, saying that section 108 of the NIRC actually sets
forth an exhaustive enumeration of what services are intended to be subject to
VAT, w/c does NOT include the showing films and motion pictures.

TAX 2 – MONTERO | Y. Sanchez A2012

 • I: W/n the gross receipts derived from admission tickets by cinema/theater
operators or proprietors are subject to VAT
• R: NO, it is not subject to VAT.
• The enumeration of services subject to VAT under Sec. 108 of the NIRC is
not exhaustive. It is up to the court to determine if showing of films and motion
pictures fall under the phrase “similar services” of Sec. 108 by ascertaining the
intent of the legislature.
• Based on various amendments to the VAT coverage, none pertain to
cinema/theater operators or proprietors. In fact, the activity of showing films and
motion pictures has always been considered as a form of entertainment subject to
amusement tax.
• At present, only lessors or distributors of cinematographic films are
subject to VAT, while persons subject to amusement tax are exempt
from the coverage of VAT.
• It is therefore clear that the legislature never intended to subject this kind of
activity to VAT. To hold otherwise would impose an unreasonable
burden on cinema/theater houses operators or proprietors, who
would be paying an additional 10% VAT on top of the 30%
amusement tax imposed by Sec. 140 of the Local Gov’t. Code, or a
total of 40% tax.
• Such imposition would result in injustice, as persons taxed under the NIRC of
1997 would be in a better position than those taxed under the LGC of 1991.
• The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for
the imposition of VAT on the gross receipts of cinema/theater operators or
proprietors derived from admission tickets. The removal of the prohibition under
the Local Tax Code did not grant nor restore to the national government the
power to impose amusement tax on cinema/theater operators or proprietors.
• Neither did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended by
implication. As it is, the power to impose amusement tax on cinema/theater
operators or proprietors remains with the local government.
• Considering that there is no provision of law imposing VAT on the gross
receipts of cinema/theater operators or proprietors derived from admission tickets,
RMC No. 28-2001 which imposes VAT on the gross receipts from admission to
cinema houses is therefore invalid.
• The rule on tax exemptions should be construed strictly against the taxpayer
does not apply in this case. SM Primeholdings and First Asia need not prove that
they are exempted from the coverage of VAT. Such rule presupposes that the
taxpayer is clearly subject to the tax being levied against him.
TAX 2 – MONTERO | Y. Sanchez A2012
• The reason is obvious: it is both illogical and impractical to determine who
are exempted without first determining who are covered by the provision. Thus,
unless a statute imposes a tax clearly, expressly and unambiguously, what applies
is the equally well-settled rule that the imposition of a tax cannot be
presumed. In fact, in case of doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer.
Tambunting Pawnshop Inc v CIR
• CIR assessed Tambunting pawnshop for deficiency Value-Added Tax for the taxable
year 1999.
• Tambunting was ordered by the BIR to pay P3M+ representing deficiency VAT.
• Tambunting alleged that it is NOT liable for tax because a pawnshop is not
enumerated as one of those engaged in "sale or exchange of services" in Section 108
of the NIRC.
• The nature of the business of pawnshops does not fall under "service" as defined
under the Legal Thesaurus of William C. Burton (accommodate, administer to,
advance, afford, aid, assist, attend, be of use, care for, come to the aid of,
commodere, comply, confer a benefit, contribute to, cooperate, deservire, discharge
one's duty, do a service, do one's bidding, fill an office, forward, furnish aid, furnish
assistance, give help, lend, aid, minister to, promote, render help, servire, submit,
succor, supply aid, take care of, tend, wait on, work for)
• I: W/n Pawnshops are subject to VAT pursuant to Section 108 (A) of NIRC.
• Pawnshops are not under 108 of the NIRC but are specifically classified
as “other Non-bank Financial Intermediaries” by RA 9238.
• Prior to the passage of the EVAT Law in 1994, pawnshops were treated as lending
investors subject to lending investor's tax.
• Subsequently, pawnshops were then treated as VAT-able enterprises under the
general classification of "sale or exchange of services" under Section 108 (A) of the
Tax Code of 1997, as amended. Finally, R.A. No. 9238 [which was passed in
2004] classified pawnshops as Other Non-bank Financial Intermediaries.
• At the time of the disputed assessment, that is, for the year 2000, pawnshops were
not subject to 10% VAT under the general provision on "sale or exchange of
services" as defined under Section 108 (A) of the Tax Code of 1997, which states:
"'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration . . . ."
• Instead, due to the specific nature of its business, pawnshops were then subject to
10% VAT under the category of non-bank financial intermediaries.
• The Court finds that pawnshopsshould have been treated as non-bank
financial intermediaries from the very beginning, subject to the appropriate
taxes provided by law, thus –
o Under the NIRC of 1977, pawnshops should have been levied the 5%
percentage tax on gross receipts imposed on bank and non-bank
financial intermediaries under (now) Section 121 of the Tax Code of 1997
o With the imposition of the VAT under the EVAT Law, pawnshops should
have been subjected to the 10% VAT imposed on banks and non-bank financial
intermediaries and financial institutions under (now) Section 108 of the Tax Code of
1997
o However, through the years, various laws effectively deferred the levy,
collection, and assessment of 10% VAT on services rendered by banks, non-bank
financial intermediaries, finance companies, and other financial intermediaries not
performing quasi-banking functions from 1994 to December 31, 2002;
o With no further deferments given by law, the levy, collection and
assessment of the 10% VAT on banks, non-bank financial intermediaries, finance
companies, and other financial intermediaries not performing quasi-banking functions
were finally made effective beginning January 1, 2003;
o 2004: Finally, with the enactment of R.A. No. 9238 in 2004, the services
of banks, non-bank financial intermediaries, finance companies, and other financial
intermediaries not performing quasi-banking functions were specifically exempted
from VAT, and the 0% to 5% percentage tax on gross receipts on other non-bank
financial intermediaries was reimposed under Section 122 of the Tax Code of 1997.
• Coming now to the issue at hand - Since petitioner is a non-bank financial
intermediary:
o For the tax years 1996-2002  it is actually subject to 10%
VAT.
 HOWEVER, with the levy, assessment and collection of
VAT from non-bank financial intermediaries being specifically
deferred by law then petitioner is NOT liable for VAT during
these tax years.
o Starting January 1, 2003  petitioner is LIABLE for 10% VAT
for said tax year with the full implementation of the VAT system on non-
bank financial intermediaries starting this date.
o Beginning 2004 up to the present, by virtue of R.A. No.
9238,  petitioner is NO longer liable for VAT but it is subject to
percentage tax on gross receipts from 0% to 5%, as the case may be.
Fort Bonifacio Dev Corp v CIR
TAX 2 – MONTERO | Y. Sanchez A2012
• Bground: The first VAT law, EO 273 (OLD NIRC), accommodated potential
burdens for newly liable VAT-registered persons through providing
“Transitional Input Tax Credit” (TITC).
• Then, RA 7716 took effect, which amended the OLD NIRC and included sales
of real property in the coverage of VAT.
• RA 8424 (NIRC) was enacted and amended the Transitory Provisions. It also
included the concept of “Presumptive Input Tax Credit”
• Fort Bonifacio Development Corporation (FBDC) acquired from the National
Government a vast tract of land now known as Fort Bonifacio Global City.
• Because the law then was prior to RA 7716, no VAT was paid.
• However, at the effectivity of RA 7716, FBDC became a VAT-Registered
person, liable for VAT and entitled for transactional input tax credit.
• FBDC executed 2 contracts to sell over lands in Global City in favor of Metro
Pacific Corporation.
• It paid VAT but utilized its transitional input tax credit, which offset each
other.
• Upon FBDC asking the BIR whether the offsetting was valid, BIR
recommended that their claim TITC was correct.
• However, BIR subsequently issued an Assessment where it disallowed the
use of TITC on the basis of a Revenue Regulation 7-95 (limit use of 8%
transitional input tax to book value of improvements only ). BIR now
claims tax deficiency.
• CTA ruled in favor of the CIR. CA affirmed the decision but removed the
penalties and surcharges. FBDC filed 2 petitions to the SC, both claiming
TITC. Both were consolidated in this decision.
• I: W/N Section 105 of the Old NIRC restricts the application by Real Estate
Dealers of the Transitional Input Tax only to improvements on the real
property belonging to their beginning inventory
• R: No. The restriction is invalid. The FBDC is allowed to credit its transitional
input tax on the sale.
• In the OLD NIRC, only goods where covered by the VAT. Real properties
were only included by an amendment of RA 7716.
• But when it was amended, there was no differential treatment in transitional
input tax for goods or real properties. In addition, the definition of “Real
Property” is being primarily used for sale to customers or held for lease in the
ordinary course of business. Thus, the real property is treated the same way
as goods.
 and would require the taxpayer additional proof of payment of taxes. He also
• The issuance of RR 7-95 was erroneous. There is no logic to limit the
argues that the word “presumptive” assumes the payment of tax, thus requiring
provision only to improvements. The very idea runs counter to what the tax
prior payment of taxes. The law necessarily comes into existence only after the
credit seeks to accomplish.
introduction of VAT. However, presumptive input tax credit is included in the OLD
• As GOODS in the business sense, refers to the product that the VAT-
NIRC but was never integrated until the NEW NIRC took effect, which is more than
registered person offers for sale the public, real estate dealers treat real
a decade. Thus, the old meaning is not anymore attached to the word. Only those
properties as their goods.
goods on which input VAT was paid could form the basis of input tax credit.
• The purpose behind the transitional input tax credit is not confined to the
However, this brings about the again absurd situation where goods not subject to
transition from sales to VAT. As proof, Congress has reenacted the VAT are acquired but liable for other tax (estate / donor / capital gains).
transitional input tax both in the OLD NIRC and the NEW NIRC. The
• As a last point, the prohibition of using value of real properties in the
transitional aspect of the transitional input tax pertains to the event that the
beginning inventory in RR 7-95 has already been repealed by RR 6-97.
taxpayer starts to become VAT-registered. As being covered by the VAT does
not merely take place by operation of law, it requires the act of a person to
Fort Bonifacio Dev Corp v CIR (MR)
be covered by VAT.
• For example, A person can be liable for VAT if he decides to start a
• RA 7716 took effect on January 1, 1996. It amended Section 100 of the Old
NIRC by imposing for the first time VAT on sale of real properties.
business. Thus, transitional tax input credit is available, whether
• The provisions of Section 105 of the NIRC remain intact despite the
under the OLD NIRC or NEW NIRC, to a newly-VAT registered
enactment of RA 7716. Section 105 however was amended with the passage of
person.
the New NIRC
• The transitional input tax is available, regardless whether the
• In the April 2, 2009 Decision sought to be reconsidered, the Court struck
purchase of the goods, materials and supplies in the beginning
down Section 4.105-1 of RR 7-95 for being in conflict with the law. It held that
inventory was subjected to VAT or not. To limit its availability to goods
the CIR had no power to limit the meaning and coverage of the term "goods" in
subjected to VAT, would be absurd. Because some goods acquired are not
Section 105 of the Old NIRC to only apply to IMPROVEMENTS on real property
subject to VAT, but still liable for tax like capital gains tax, donors tax and
belonging to the beginning inventory.
estate tax. It would render the purpose of the law useless.
• I: W/n RR 7-95 is valid, given that –
• It is apparent that the transitional input tax credit operates to
benefit newly VAT-registered persons, whether or not they • 1) Sec 100 of the Old NIRC as amended by RA7716, could not have supplied
previously paid taxes in the acquisition of their beginning the distinction between the treatment of real properties or real estate dealers, and
inventory of goods, materials and supplies. the treatment of transactions involving other commercial goods, as said distinction
is found in section 105 and, subsequently, revenue regulations no. 7-95 which
• During that period of transition from non-VAT to VAT status, the transitional
defines the input tax creditable to a real estate dealer who becomes subject to vat
input tax credit serves to alleviate the impact of the VAT on the taxpayer.
for the first time.
At the very beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output VAT. The • 2) Section 4.105.1 and paragraph (a) (iii) of the transitory provisions of
transitional input tax credit mitigates this initial diminution of the taxpayer’s revenue regulations no. 7-95 validly limits the 8% transitional input tax to the
income by affording the opportunity to offset the losses incurred through the improvements on real properties.
remittance of the output VAT at a stage when the person is yet unable to • A law must not be read in truncated parts; its provisions must be read in
credit input VAT payments. relation to the whole law.
• Although the CIR has the power to redefine the concept of “goods, it pertains • The term "goods or properties" by the unambiguous terms of Section 100
to more technical matters. It cannot go as far as to amend the provision, as it includes "real properties held primarily for sale to costumers or held for lease in
include goods and real property in the course of business. Thus, in case of the ordinary course of business."
conflict between a statue and an administrative order, the statue shall prevail • Having been defined in Section 100 of the NIRC, the term "goods" as used in
• Justice Antonio Carpio dissent: The transitional input tax credit applies Section 105 of the same code could not have a different meaning.
• Under Section 105, the beginning inventory of "goods" forms part of the
only when taxes where paid on the properties in the beginning inventory, but this
valuation of the transitional input tax credit.
would constitute a new requisite to the application of transitional input tax credit

TAX 2 – MONTERO | Y. Sanchez A2012

 • Goods, as commonly understood in the business sense, refers to the product • I: W/n CTA was correct in holding that BIR should refund PAL for 10% OCT
which the VAT-registered person offers for sale to the public. With respect to real • R: Yes, CTA was correct.
estate dealers, it is the real properties themselves which constitute their "goods." • The language used in Section 13 of PD 1590, granting PAL tax exemption, is
Such real properties are the operating assets of the real estate dealer. clearly all-inclusive.
• Section 4.105-1 of RR 7-95 restricted the definition of "goods", when it stated • The basic corporate income tax or franchise tax paid by respondent shall be
“in lieu of all other taxes, duties, royalties, registration, license, and other fees and
that in the case of real estate dealers, the basis of the presumptive input tax shall
charges of any kind, nature, or description imposed, levied, established, assessed
be the improvements, such as buildings, roads, drainage systems, and other
or collected by any municipal, city, provincial, or national authority or government
similar structures, constructed on or after the effectivity of EO 273 (January 1,
agency, now or in the future x x x,” except only real property tax.
1988). As mandated by Article 7 of the Civil Code an administrative rule or
regulation cannot contravene the law on which it is based. RR 7-95 is inconsistent
with Section 105 insofar as the definition of the term "goods" is concerned. This is
a legislative act beyond the authority of the CIR and the Secretary of
• The discussion in the previous PAL case5 on “gross income” is immaterial to
the case at bar. OCT is not even an income tax. It is a business tax, which the
Finance.
government imposes on the gross annual sales of operators of communication
• RR 7-95, insofar as it restricts the definition of "goods" as basis of
equipment sending overseas dispatches, messages or conversations from the
transitional input tax credit under Section 105 is a nullity.
Philippines.

CIR v PAL
• From Jan to Dec 2001, PLDT collected from PAL the said 10% Overseas
Communication Tax4 on the amount paid by PAL for overseas telephone calls it
made through PLDT.
• PAL filed w/ the BIR a claim for refund of the OCT it alleged to have
erroneously paid in 2001. This was based on its franchise, Sec 13 of PD 1590, w/c
granted it:
o 1) the option to pay either the basic corporate income tax on its
annual net taxable income or the 2% percent franchise tax on its
gross revenues, whichever was lower; and
o 2) the exemption from all other taxes, duties, royalties,
registration, license and other fees and charges imposed by any
municipal, city, provincial or national authority or government
agency, now or in the future, except only real property tax.
• Also invoking a BIR Ruling in 1994, PAL maintained that, other than being
liable for basic corporate income tax or the franchise tax, whichever was lower,
PAL was exempted from ALL OTHER TAXES, including the OCT by virtue of the “in
lieu of all taxes” clause in Section 13 of PD1590.
• BIR failed to act on the request for refund of PAL, so PAL filed a petition for
review before the CTA.
• CTA ordered BIR to refund PAL the 10% OCT erroneusly collected. (However
CTA held that out of the total amount of P127k respondent sought to refund, only
P126k was supported / documents)
• According to Section 120 of the NIRC, the person paying for the services
rendered shall pay the OCT to the person rendering the service (PLDT); the latter,
in turn, shall remit the amount to the BIR.
• If this Court deems that final tax on interest income – which is also an
income tax, but distinct from basic corporate income tax – is included among “all
other taxes” from which respondent is exempt, then with all the more reason
should the Court consider OCT, which is altogether a different type of tax, as also
covered by the said exemption.
• BIR also argues that PAL cannot avail itself of the benefit of the
“in lieu of all other taxes” proviso in PD1590 when it made no actual
5
BIR likewise opposed the claim for refund of PAL based on the argument that the latter was not exempted from
final withholding tax on interest income, because said tax should be deemed part of the basic corporate income
tax, which respondent had opted to pay. This Court was unconvinced by BIR’s argument, ratiocinating that “basic
corporate income tax,” under Section 13(a) of Presidential Decree No. 1590, relates to the general rate of 35%
(reduced to 32% by the year 2000) imposed on taxable income by Section 27(A) of the NIRC. Although the
definition of “gross income” is broad enough to include all passive incomes, the passive incomes already subjected
to different rates of final tax to be withheld at source shall no longer be included in the computation of gross
income, which shall be used in the determination of taxable income. The interest income of respondent is already
subject to final withholding tax of 20%, and no longer to the basic corporate income tax of 35%. Having
established that final tax on interest income is not part of the basic corporate income tax, then the former is
considered as among “all other taxes” from which respondent is exempted under Section 13 of Presidential Decree
No. 1590.

4
OCT - imposed by Section 120 of the NIRC, w/c shall be collected upon every overseas dispatch or message
transmitted from the Phils by telephone or other communication equipment.

TAX 2 – MONTERO | Y. Sanchez A2012

 payment of either the basic corporate income tax or the franchise
tax.
• BIR made the same averment in the PAL case, which the Court rejected.
• It is clear that PD 1590 intended to give PAL the option to avail itself of
Subsection (a) or (b) as consideration for its franchise.
• PAL has the option to choose the alternative that results in lower taxes. It is
NOT the fact of tax payment that exempts it, but the EXERCISE of its option.
• Under Subsection (a), the basis for the tax rate is PAL’s annual net taxable
income, which (as earlier discussed) is computed by subtracting allowable
deductions and exemptions from gross income.
• By basing the tax rate on the annual net taxable income, PD 1590 necessarily
recognized the situation in which taxable income may result in a negative amount
and thus translate into a zero tax liability.
• The fallacy of the CIR’s argument is evident from the fact that the payment
of a measly sum of one peso would suffice to exempt PAL from other taxes,
whereas a zero liability arising from its losses would not. There is no substantial
distinction between a zero tax and a one-peso tax liability.
• Thus, by merely exercising its option to pay for basic corporate income tax –
even if it had zero liability for the same due to its net loss position in 2001 – PAL
was already exempted from all other taxes, including the OCT.

TAX 2 – MONTERO | Y. Sanchez A2012