TAX REVIEW Cases from Income Tax:
1. National Development v. CIR - Ana Grace Lapu
2. CIR v. British Overseas - Edward Langcay/ Elle
Xian Edwards
3. CIR v. Juliane-Rosalie Agas
4. Soriano v. Secretary of Finance - @Reppie
Briones
5. Confederation for Unity v. Commisioner BIR -
6. CIR v. Batangas Transpo - @Ricel Garcia
7. Ona v. CIR- sharon rosana ela
8. Obillos v. CIR - @Rodencio Emag Jr.
9. Pascual v. CIR - @Adrienne Louise Tajon
10. AFISCO v. CA - @ayen grethel
11. Marubeni v. CIR - Jordan Berguia
12. Obiter dictum CIR v. St. Luke's- KIM
13. Obiter dictum CIR v. DLSU-bless
14. South African Airways v. CIR - @Harry Agas
Ababon
15. Air Canada v. CIR – April Parreno
16. CIR v. Club Filipino de Cebu -@Joyz Margaret
Tepora
17. CIR v. Sinco Educational - @Reginal Turla
18. CREBA v. Romulo - Rodriguez,Mary Grace
19. Manila Banking v. CIR - Aragones, Gil
20. Bank of America v. CA @ma thea (THEA REYES)
21.Cynamid v. CA - @Tats Yumul
22. Iconic Beverages v. CIR - Dimaampao
23. BDO v. Republic - Mataac
24. CIR v. Filinvest - Caronan
25. CIR v. Manning - Aidan H.
26. CIR v. CA (1999) - @Juday Salivar
27. CIR v. Goodyear -ESUERTE
28. CIR v. Wander Philippines - @Clarisa Taganas
29. CIR v. Procter and Gamble - zausa
30. Wise & Co. v. Meer- Rubino, James @James
Rubino
31. Jardine Davies v. CIR- Dela Rosa,Lyn
32. SMI-ed v. CIR - Gingco
33. Republic v. Spouses Salvador - RAVILAS
34. O'Gilvie v. US – Neil
35. International Broadcasting v. Amarilla
36. CIR v. CA (1991)
37. In Re: Zialzita AM 90-6-015-SC - joy grace
duremdes
38. CIR v. Mitsubishi (1990) - Karim
39. CIR v. Secretary of Justice and PAGCOR
40. CIR v. Isabela Cultural- Florague
41. CIR v. General Foods - Nerissa Tobilla
42. Atlas Consolidated GR L-29111 (1981) - Dulce
Amor
43. Tambunting Pawnshop v. CIR - yumol, mildred
44. CIR v. VDA de Prieto
45. Paper Industries v. CA - Florencio G. Capones
Jr.
46. Sky Internet v. CIR - Calacar
47. Philippine Refining v. CA- @Zenvie Domingo
48. Fernandez Hermanos v. CA - Pakitongkitong
49. Calasanz v. CIR -salazar
50. China Banking v. CA - cepe
51. Ossorio Pension v. CA - cagatin
52. ING Bank v. CIR - Gako
1
1. National Development Company v CIR GR No L-53961, June 30, 1987

FACTS:
The National Development Company (NDC) entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Initial
payments were made in cash and through irrevocable letters of credit. When the vessels
were completed and delivered to the NDC in Tokyo, the latter remitted to the shipbuilders
the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax
was withheld. The Commissioner then held the NDC liable on such tax in the total sum of
P5,115,234.74. Negotiations followed but failed. NDC went to CTA. BIR was sustained by
CTA. BIR was sustained by CTA. Hence, this petition for certiorari.

ISSUE:
Is NDC liable for the tax?

RULING:
Yes.
Although NDC is not the one taxed since it was the Japanese shipbuilders who were liable
on the interest remitted to them under Section 37 of the Tax Code, still, the imposition is
valid.
The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the
same from the Japanese shipbuilders. Such liability is imposed by Section 53c of the Tax
Code. NDC was remiss in the discharge of its obligation as the withholding agent of the
government and so should be liable for the omission.

RULING ON THE SITUS of the taxable entity:

The petition must fail for the following reasons.

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

SEC. 37. (Now Sec. 42 of NIRC) Income from sources within the Philippines. — (a)
Gross income from sources within the Philippines. — The following items of gross
income shall be treated as gross income from sources within the Philippines:

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

xxx xxx xxx

2
The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities — the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to the
NDC — were done in Tokyo. 8 The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident corporation with principal
offices in Manila.

As the Tax Court put it:

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

Here in the case at bar, petitioner National Development Company, a

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

The law is clear. Our plain duty is to apply it as written. The residence of the obligor
which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta.
Mesa, Manila, Philippines; and as a corporation duly organized and existing under
the laws of the Philippines, it is a domestic corporation, resident of the Philippines.

3
 (Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner,
which is admittedly a resident of the Philippines, is on the promissory notes issued
by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan
in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels
acquired by petitioner is interest derived from sources within the Philippines subject
to income tax under the then Section 24(b)(1) of the National Internal Revenue
Code. 9
4. SORIANO V SEC OF FINANCE

Ruling:

the policy of full taxable year treatment is established, not by the amendments
introduced by R.A. 9504, but by the provisions of the 1997 Tax Code, which adopted the
policy from as early as 1969.

Principles:

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

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

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

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year.[30] The taxpayer is required to fi1e an
income tax return on the 15th of April of each year covering income of the preceding
taxable year.[31] The tax due thereon shall be paid at the time the return is filed

In the present case, the increased exemptions were already available much earlier than
the required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July
2008, more than nine months before the deadline for the filing of the income tax return
for taxable year 2008. Hence, individual taxpayers were entitled to claim the increased

4
amounts for the entire year 2008. This was true despite the fact that incomes were already
earned or received prior to the law's effectivity on 6 July 2008.

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

First, both cases involve an amendment to the prevailing tax code. The present petitions
call for the interpretation of the effective date of the increase in personal and additional
exemptions. Otherwise stated, the present case deals with an amendment (R.A. 9504) to
the prevailing tax code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali
involved an amendment to the then prevailing tax code - it interpreted the effective
date of R.A. 7167, an amendment to the 1977 NIRC, which also increased personal and
additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of
personal and additional exemptions immediately available after the effectivity of the
law. As already pointed out, in Umali, R.A. 7167 involved social legislation intended to
adjust personal and additional exemptions. The adjustment was made in keeping with
the poverty threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was
meant to adjust personal and additional exemptions in relation to the poverty threshold
level, while R.A. 9504 was geared towards addressing the impact of the global increase
in the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the
enactment of the law to make its beneficial relief immediately available.

#5. CONFEDERATION FOR UNITY, RECOGNITION AND ADVANCEMENT OF GOVERNMENT

EMPLOYEES (COURAGE)Petitioners, v. COMMISSIONER, BUREAU OF INTERNAL REVENUE
AND THE SECRETARY, DEPARTMENT OF FINANCE, Respondents.

G.R. Nos. 213446 and 213658 are petitions for Certiorari, Prohibition and/or Mandamus
under Rule 65 of the Rules of Court, with Application for Issuance of Temporary
Restraining Order and/or Writ of Preliminary Injunction, uniformly seeking to: (a) issue a
Temporary Restraining Order to enjoin the implementation of Revenue Memorandum
Order (RMO) No. 23- 2014 dated June 20, 2014 issued by the Commissioner of Internal
Revenue (CIR); and (b) declare null, void and unconstitutional paragraphs A, B, C, and
D of Section III, and Sections IV, VI and VII of RMO No. 23-2014. The petition in G.R. No.
213446 also prays for the issuance of a Writ of Mandamus to compel respondents to
upgrade the P30,000.00 non-taxable ceiling of the 13th month pay and other benefits
for the concerned officials and employees of the government.

The Antecedents

On June 20, 2014, respondent CIR issued the assailed RMO No. 23-2014, in furtherance of
Revenue Memorandum Circular (RMC) No. 23-2012 dated February 14, 2012 on the
"Reiteration of the Responsibilities of the Officials and Employees of Government Offices
for the Withholding of Applicable Taxes on Certain Income Payments and the Imposition
of Penalties for Non-Compliance Thereof," in order to clarify and consolidate the
5
responsibilities of the public sector to withhold taxes on its transactions as a customer (on
its purchases of goods and services) and as an employer (on compensation paid to its
officials and employees) under the National Internal Revenue Code (NIRC or Tax Code)
of 1997, as amended, and other special laws.

In sum, petitioners and intervenors (collectively referred to as petitioners) argue that:

1. RMO No. 23-2014 is ultra vires insofar as:

a. Sections III and IV of RMO No. 23-2014, for subjecting to withholding taxes
non-taxable allowances, bonuses and benefits received by government
employees;

On the other hand, respondents counter that:

1. The CIR did not abuse its discretion in the issuance of RMO No. 23-2014 because:
a. RMO No. 23-2014 does not discriminate against government employees. It
does not create a new category of taxable income nor make taxable
those which are exempt;

The Court's Ruling

The petitions assert that the CIR's issuance of RMO No. 23-2014, particularly Sections III
and IV thereof, is tainted with grave abuse of discretion.

Sections III and IV of RMO No. 23-2014 are valid.

Compensation income is the income of the individual taxpayer arising from services
rendered pursuant to an employer-employee relationship. Under the NIRC of 1997, as
amended, every form of compensation for services, whether paid in cash or in kind, is
generally subject to income tax and consequently to withholding tax. The name
designated to the compensation income received by an employee is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances, commissions, fees, (including
director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe
benefits tax under Section 33 of the Tax Code), pensions, retirement pay, and other
income of a similar nature, constitute compensation income that are taxable and
subject to withholding.

Sections III and IV of the assailed RMO do not charge any new or additional tax. On the
contrary, they merely mirror the relevant provisions of the NIRC of 1997, as amended, and
its implementing rules on the withholding tax on compensation income. The assailed
Sections simply reinforce the rule that every form of compensation for personal services
received by all employees arising from employer-employee relationship is deemed
subject to income tax and, consequently, to withholding tax, unless specifically
exempted or excluded by the Tax Code; and the duty of the Government, as an
employer, to withhold and remit the correct amount of withholding taxes due thereon.

6
While Section III enumerates certain allowances which may be subject to withholding
tax, it does not exclude the possibility that these allowances may fall under the
exemptions identified under Section IV – thus, the phrase, "subject to the exemptions
enumerated herein." In other words, Sections III and IV articulate in a general and broad
language the provisions of the NIRC of 1997, as amended, on the forms of compensation
income deemed subject to withholding tax and the allowances, bonuses and benefits
exempted therefrom. Thus, Sections III and IV cannot be said to have been issued by the
CIR with grave abuse of discretion as these are fully in accordance with the provisions of
the NIRC of 1997, as amended, and its implementing rules.

WHEREFORE, premises considered, Sections III and IV RMO No. 23-2014 are DECLARED
valid inasmuch as they merely mirror the provisions of the National Internal Revenue Code
of 1997, as amended. The Court's Decision upholding the validity of Sections III and IV of
the assailed RMO is to be applied only prospectively.

6. G.R. No. L-9692 January 6, 1958 COLLECTOR OF INTERNAL REVENUE vs. BATANGAS
TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY

Facts:

Respondent companies are two distinct and separate corporations engaged in the
business of land transportation by means of motor buses, and operating distinct and
separate lines. Prior to World War II, each company maintained were separately
manage. However, after liberation, the two companies were placed under joint
management, called the "Joint Emergency Operation", to economize in overhead
expenses. At the end of each calendar year, all gross receipts and expenses of both
companies were determined and the net profits were divided fifty-fifty, and transferred
to the book of accounts of each company, and each company "then prepared its own
income tax return from this fifty per centum of the gross receipts and expenditures, assets
and liabilities and paid the corresponding income taxes thereon separately". Under the
theory that the two companies had pooled their resources in the establishment of the
Joint Emergency Operation, thereby forming a joint venture, the Collector assessed said
companies P54, 143.54 as deficiency income tax. The respondent companies appealed
from said assessment to the Court of Tax Appeals. The original assessment was increased
to P148, 890.14 after the CIR’s discovery that said companies had been "erroneously
credited in the last assessment with 100 per cent of their income taxes paid when they
should in fact have been credited with only 75 per cent thereof.” The Collector believes
that the Joint Emergencry Operation was a corporation distinct from the two respondent
companies and so liable to income tax under section 24, both of the National Internal
Revenue Code. Respondent appealed and CTA reversed the decision of the Collector
citing that the Joint Emergency Operation is not a corporation in contemplation of
section 84 of the NIRC.The Tax Court also did not pass upon the question of whether or
not in the appeal taken to it by respondent companies, the Collector could change his
original assessment to correct an error committed by him in having credited the Joint
Emergency Operation, totally or 100 per cent of the income taxes paid by the

7
respondent companies for the years 1946 to 1949, inclusive, by reason of the principle of
equitable recoupment, instead of only 75 per cent.

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

RULING

In view of the foregoing, and with the reversal of the appealed decision of the Court of
Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation
involved in the present is a corporation within the meaning of section 84 (b) of the Internal
Revenue Code, and so is liable to income tax under section 24 of the code; that pending
appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal
Revenue, the Collector, pending hearing before said court, may amend his appealed
assessment and include the amendment in his answer before the court, and the latter
may on the basis of the evidence presented before it, redetermine the assessment; that
where the failure to file an income tax return for and in behalf of an entity which is later
found to be a corporation within the meaning of section 84 (b) of the Tax Code was due
to a reasonable cause, such as an honest belief based on the advice of its attorneys and
accountants, a penalty in the form of a surcharge should not be imposed and collected.
The respondents are therefore ordered to pay the amount of the reassessment made by
the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent
surcharge.

PRINCIPLES
Partnerships are taxed as a corporation

when the Tax Code includes "partnerships" among the entities subject to the tax on
corporations, it must refer to organizations which are not necessarily partnerships in the
technical sense of the term, and that furthermore, said law defined the term
"corporation" as including partnerships no matter how created or organized, thereby
indicating that "a joint venture need not be undertaken in any of the standard forms, or
in conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations"; that besides, said
section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en
participacion) and "associations", none of which has a legal personality independent of
that of its members. The decision cites 7A Merten's Law of Federal Income Taxation.

8
7. Oña vs. Commissioner of Internal Revenue L-19342 dated May 25, 1972

Facts:
Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five children.
A civil case was instituted for the settlement of her state, in which Oña was appointed
administrator and later on the guardian of the three heirs who were still minors when the
project for partition was approved. This shows that the heirs have undivided ½ interest in
10 parcels of land, 6 houses and money from the War Damage Commission.
Although the project of partition was approved by the Court, no attempt was made to
divide the properties and they remained under the management of Oña who used said
properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As a
result, petitioners’ properties and investments gradually increased. Petitioners returned
for income tax purposes their shares in the net income but they did not actually receive
their shares because this left with Oña who invested them.
Based on these facts, CIR decided that petitioners formed an unregistered partnership
and therefore, subject to the corporate income tax, particularly for years 1955 and 1956.
Petitioners asked for reconsideration, which was denied hence this petition for review
from CTA’s decision.

Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax

Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the
estate of the deceased among themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of Oña and let him use their
shares as part of the common fund for their ventures, even as they paid corresponding
income taxes on their respective shares.

Yes. For tax purposes, the co-ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a
project partition either duly executed in an extrajudicial settlement or approved by the
court in the corresponding testate or intestate proceeding. The reason is simple. From the
moment of such partition, the heirs are entitled already to their respective definite shares
of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly, he
becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to
be used with the intent of making profit thereby in proportion to his share, there can be

9
no doubt that, even if no document or instrument were executed, for the purpose, for
tax purposes, at least, an unregistered partnership is formed.

For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships —
The term “partnership” includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on… (8 Merten’s Law of Federal Income Taxation, p. 562
Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships — within the purview
of the term “corporation.” It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the
income tax for corporations. Judgment affirmed.

Ruling on Partnership Taxed as a corporation:

Same; Same; Corporation; Partnerships considered corporation for tax purposes.—For
purposes of the tax on corporations, the National Internal Revenue Code, includes
partnerships—with the exception only of duly registered general co-partnerships—within
the purview of the term “corporation.”
#8. JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
FOC:
Jose Obillos, Sr. bought two two (2) lots from Ortigas & Co., Ltd. He transferred his rights
to his four children, the petitioners, to enable them to build their residences. The company
sold the two lots to petitioners for P178,708. Presumably, the Torrens titles issued to them
would show that they were co-owners of the two lots. After more than a year, the
petitioners resold them to the for the total sum of P313,050. They derived from the sale a
total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital
gain and paid an income tax on one-half thereof or of P16,792.
The CIR required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof. He assessed P37,018
as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42%
accumulated interest, or a total of P71,074.56.
He also considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and
the accumulated interest.
ISSUE:
Whether the assessment of CIR is correct and valid?
RULING:
The CIR is not correct in imposing such assessment. The Court held that it is error to
consider the petitioners as having formed a partnership under article 1767 of the Civil

10
Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would
result in oppressive taxation and confirm the dictum that the power to tax involves the
power to destroy. To consider them as partners would obliterate the distinction between
a co-ownership and a partnership. The petitioners were not engaged in any joint venture
by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found
it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the co-
ownership. The division of the profit was merely incidental to the dissolution of the co-
ownership which was in the nature of things a temporary state.
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of
itself establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived". There must
be an unmistakable intention to form a partnership or joint venture.

#9. Pascual vs. ClR, GR No.78133 dated Octaber 18, 1988

There is no partnership, the sharing of returns does not by itself establish a partnership.
The existence of a juridical personality different from the individual partners and the
freedom to each party to transfer or assign the whole property. They shared in the gross
profits as co-owners and paid their capital gains taxes on their profits.

CORPORATE INCOME TAXATION

• Sec.22(b) meaning of corporation under NIRC: The term 'corporation' shall include
partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), association, or insurance companies, but does
not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the Government.
• General professional partnership: are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.
• Joint venture engaged in consortium projects (sec.2 &3 RR 10-12)
o In order to be exempt from tax as a corporation:
the undertaking must be for a construction project
Should involve joining or pooling of resources by local contractors, licensed as
general contractor under PCAB
The local contractors are engaged in construction business
The joint venture itself is license by PCAB
.

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10. AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS
[G.R. No. 112675. January 25, 1999]
DOCTRINE:
Unregistered Partnerships and associations are considered as corporations for tax
purposes – Under the old internal revenue code, “A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, xxx.” Ineludibly, the Philippine legislature included in the concept
of corporations those entities that resembled them such as unregistered partnerships and
associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a

corporation – In the case at bar, petitioners-insurance companies formed a Pool
Agreement, or an association that would handle all the insurance businesses covered
under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich is
considered a partnership or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the
same person twice by the same jurisdiction for the same thing.” In the instant case, the
insurance pool is a taxable entity distince from the individual corporate entities of the
ceding companies. The tax on its income is obviously different from the tax on the
dividends received by the companies. There is no double taxation.

FACTS:

The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance
policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-
Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a pool, which they
complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for 1975. On the basis of
this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners,
respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed
their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter’s collection of premiums on behalf of its members, the
ceding companies, was taxable income.

ISSUE/S:
1. Whether or not the pool is taxable as a corporation.
2. Whether or not there is double taxation.

12
HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them “individually and
separately,” and that their liability was limited to the extent of their allocated share in the
original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its
role was limited to its principal function of “allocating and distributing the risk(s) arising
from the original insurance among the signatories to the treaty or the members of the
pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of
incidental functions, such as records, maintenance, collection and custody of funds,
etc.”

Argument of SC: According to Section 24 of the NIRC of 1975:

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

Ineludibly, the Philippine legislature included in the concept of corporations those

entities that resembled them such as unregistered partnerships and associations.
Interestingly, the NIRC’s inclusion of such entities in the tax on corporations was made
even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

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

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable
year from all sources within and without the Philippines by every corporation, as defined
in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.”
“SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract
without the Government. ‘General professional partnerships’ are partnerships formed by
persons for the sole purpose of exercising their common profession, no part of the income
of which is derived from engaging in any trade or business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24
covered these unregistered partnerships and even associations or joint accounts, which
had no legal personalities apart from their individual members.

13
Furthermore, Pool Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and surplus reinsurance
treaty with Munich may be considered a partnership because it contains the following
elements: (1) The pool has a common fund, consisting of money and other valuables that
are deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool. (2) The pool functions through an
executive board, which resembles the board of directors of a corporation, composed of
one representative for each of the ceding companies. (3) While, the pool itself is not a
reinsurer and does not issue any policies; its work is indispensable, beneficial and
economically useful to the business of the ceding companies and Munich, because
without it they would not have received their premiums pursuant to the agreement with
Munich. Profit motive or business is, therefore, the primordial reason for the pool’s
formation.

2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich
are not dividends subject to tax. Imposing a tax “would be tantamount to an illegal
double taxation, as it would result in taxing the same premium income twice in the hands
of the same taxpayer.” Furthermore, even if such remittances were treated as dividends,
they would have been exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC , as
well as Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West German Tax
Treaty.

Argument of Supreme Court: Double taxation means “taxing the same person twice by
the same jurisdiction for the same thing.” In the instant case, the insurance pool is a
taxable entity distince from the individual corporate entities of the ceding companies.
The tax on its income is obviously different from the tax on the dividends received by the
companies. There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax

exemption construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on
foreign corporations; hence, it cannot be claimed by the ceding companies which are
domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code because the same subsection specifically
taxes dividends, the type of remittances forwarded to it by the pool. The foregoing
interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must
be construed strictissimi juris, and the statutory exemption claimed must be expressed in
a language too plain to be mistaken.

11. MARUBENI CORPORATION V. COMMISSIONER OF INTERNAL REVENUE- INCOME TAX

Facts:

14
Marubeni Corporation is a Japanese corporation licensed to engage in business in the
Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co.
of Manila were declared, a 10% final dividend tax was withheld from it, and another 15%
profit remittance tax based on the remittable amount after the final 10% withholding tax
were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or
tax credit for the amount which it has allegedly overpaid the BIR.

Issues and Ruling:

1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and
Pacific Co. are effectively connected with its conduct or business in the Philippines as to
be considered branch profits subject to 15% profit remittance tax imposed under Section
24(b)(2) of the National Internal Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its
trade or business in the Philippines are subject to the 15% profit remittance tax. The
dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not
income arising from the business activity in which Marubeni Corporation is engaged.
Accordingly, said dividends if remitted abroad are not considered branch profits for
purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax Code,
as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the

transaction. Marubeni Corporation’s head office in Japan is a separate and distinct
income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and
Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate
affairs of Marubeni Corporation in Japan, but certainly not of the branch in the
Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with
the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross
income from all sources within the Philippines. However, a discounted rate of 15% is given
to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on
the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a
tax credit of not less than 20% of the dividends received. This 15% tax rate imposed on
the dividends received under Section 24(b)(1)(iii) is easily within the maximum ceiling of
25% of the gross amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.

Note: Each tax has a different tax basis.

15
Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as
reflected in the phrase “shall not exceed.” This means that any tax imposable by the
contracting state concerned hould not exceed the 25% limitation and said rate would
apply only if the tax imposed by our laws exceeds the same.

#14. South African Airways v. CIR

Facts:

- Petitioner South African Airways is a foreign corporation organized and existing under
and by virtue of the laws of the Republic of South Africa.
- It is an internal air carrier having no landing rights in the country. Petitioner has a
general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel), that sells
passage documents for compensation or commission for petitioners off-line flights for
the carriage of passengers and cargo between ports or points outside the territorial
jurisdiction of the Philippines. Petitioner is not registered with the Securities and
Exchange Commission nor licensed to do business in the Philippines.
- Petitioner filed separate quarterly and annual income tax returns for its off-line flights.
Thereafter, petitioner filed with the Bureau of Internal Revenue a claim for the refund
as erroneously paid tax on Gross Philippine Billings. Such claim was unheeded. Thus,
petitioner filed a Petition for Review with the CTA for the refund. CTA ruled that
petitioner is a resident foreign corporation engaged in trade or business in the
Philippines. It further ruled that petitioner was not liable to pay tax on its GPB under
Section 28(A)(3)(a) of the National Internal Revenue Code (NIRC) of 1997. The CTA,
however, stated that petitioner is liable to pay a tax of 32% on its income derived
from the sales of passage documents in the Philippines. CTAEB - denied.

Issue: Whether the income derived by petitioner from the sale of passage documents
covering petitioners off-line flights is Philippine-source income subject to Philippine
income tax.

Held:

- Sec. 28(b)(2) of the 1939 NIRC provided: (2) Resident Corporations. A corporation
organized, authorized, or existing under the laws of a foreign country, engaged in
trade or business within the Philippines, shall be taxable as provided in subsection (a)
of this section upon the total net income received in the preceding taxable year
from all sources within the Philippines: Provided, however, that international carriers
shall pay a tax of two and one-half percent on their gross Philippine billings. This
provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB
as follows: Gross Philippine billings include gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the Philippines of
passage documents sold therein, whether for passenger, excess baggage or mail,
provided the cargo or mail originates from the Philippines.
16
- Gross Philippine Billings refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document. Now, it is the place of sale
that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the
Philippines, income is included in GPB.
- To reiterate, the correct interpretation of the above provisions is that, if an
international air carrier maintains flights to and from the Philippines, it shall be taxed
at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that
do not have flights to and from the Philippines but nonetheless earn income from
other activities in the country will be taxed at the rate of 32% of such income.

#15. AIR CANADA VS CIR

(Tax Treaty Issue)

FACTS: Air Canada is a "foreign corporation organized and existing under the laws of
Canada.” As an off-line carrier, it does not have flights originating from or coming to the
Philippines does not operate any airplane in the Philippines.

Air Canada engaged the services of Aerotel Ltd., Corp. as its general sales agent in the
Philippines. Aerotel sells Air Canada's passage documents in the Philippines. Through
Aerotel, it filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of P5,185,676.77.

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously
paid income taxes amounting to P5,185,676.77 before the Bureau of Internal Revenue.To
prevent the running of the prescriptive period, Air Canada filed a Petition for Review
before the Court of Tax Appeals on November 29, 2002.

Petitioner claims that the general provision imposing the regular corporate income tax
on resident foreign corporations does not apply to "international carriers," which are
especially classified and taxed under Section 28(A)(3).

Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment" in the Philippines
pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty. It points out
that Aerotel is an "independent general sales agent that acts as such for other
international airline companies in the ordinary course of its business." Aerotel sells passage
tickets on behalf of petitioner and receives a commission for its services. Petitioner states
that even the BIR — through VAT Ruling No. 003-04—has conceded that an offline
international air carrier, having no flight operations to and from the Philippines, is not
deemed engaged in business in the Philippines by merely appointing a general sales
agent.

17
Respondent maintains that petitioner is subject to the 32% corporate income tax as a
resident foreign corporation doing business in the Philippines.

Court of Tax Appeals First Division denied the Petition for Review and, hence, the claim
for refund. Court of Tax Appeals En Bane affirmed the findings of the First Division. Hence,
this Petition for Review was filed.

ISSUES:

1. Whether the Republic of the Philippines-Canada Tax Treaty applies,

specifically:chanRoblesvirtualLawlibrary

 Whether the Republic of the Philippines-Canada Tax Treaty is enforceable.

YES
 Whether the appointment of a local general sales agent in the Philippines
falls under the definition of "permanent establishment" under Article V(2)(i)
of the Republic of the Philippines-Canada Tax Treaty. YES

RULING:

A. The application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax
treaty between the Philippines and the home country of the foreign air carrier.

B. Through the appointment of Aerotel as its local sales agent, petitioner is deemed
to have created a "permanent establishment" in the Philippines as defined under
the Republic of the Philippines-Canada Tax Treaty.

The following terms are indicative of Aerotel's dependent

status:chanRoblesvirtualLawlibrary

1.) Aerotel must give petitioner written notice "within 7 days of the date it acquires
or takes control of another entity or merges with or is acquired or controlled by
another person or entity;
2.) In carrying out the services, Aerotel cannot enter into any contract on behalf
of petitioner without the express written consent of the latter;it must act
according to the standards required by petitioner;follow the terms and
provisions of Air Canada GS A Manual and its written instructions;
3.) All use of petitioner's name, logo, and marks must be with the written consent
of petitioner and according to petitioner's corporate standards and guidelines
set out in the Manual.
4.) All claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotei are for the account of petitioner, except in the
case of negligence of Aerotei.

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 Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger
General Sales Agency Agreement executed between the parties. In essence,
Aerotel extends to the Philippines the transportation business of petitioner

Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax
Treaty, the "business profits" of an enterprise of a Contracting State is "taxable only
in that State unless the enterprise carries on business in the other Contracting State
through a permanent establishment. Thus, income attributable to Aerotel or from
business activities effected by petitioner through Aerotel may be taxed in the
Philippines.

However, pursuant to the last paragraph of Article VII in relation to Article VIII
(Shipping and Air Transport) of the same Treaty, the tax imposed on income
derived from the operation of ships or aircraft in international traffic should not
exceed 1 1/2% of gross revenues derived from Philippine sources.

#16. THE COLLECTOR OF INTERNAL REVENUE V. THE CLUB FILIPINO, INC. DE CEBU

FACTS
Nature of Club Filipino Inc. De Cebu
Club Filipino, Inc. de Cebu is a civic corporation with an original authorized capital stock
of P22,000.00, which was subsequently increased to P200,000.00, among others, to it
“provide, operate, and maintain x x x all sorts of games not prohibited under general laws
and general ordinances; and develop and cultivate sports of every kind and any
denomination for recreation and healthy training of its members and shareholders.”

Neither in the articles or by-laws is there a provision relative to dividends and their
distribution, although it is covenanted that upon its dissolution, the Club's remaining
assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu.
The Club owns and operates a club house, a bowling alley, a golf course, and a bar-
restaurant for its members and their guests, which was a necessary incident to the
operation of the club. The club is operated mainly with funds derived from membership
fees and dues.

Declaration of stock dividends due to capital surplus brought about by real property
revaluation
As a result of a capital surplus, arising from the increased value due to the revaluation of
its real properties, the Club declared stock dividends; but no actual cash dividends were
distributed to the stockholders.

19
BIR assessment
A BIR agent discovered that the Club has never paid percentage tax on the gross
receipts of its bar and restaurant. The Collector of Internal Revenue assessed against and
demanded from the Club the unpaid percentage tax on the gross receipts plus
surcharges. The Club requested for the cancellation of the assessment. The request
having been denied, the Club filed the instant petition for review.

ISSUE(S): Whether or not Club Filipino is a stock corporation.

RULING
NO. It is a non-stock corporation.

Having found as a fact that the Club was organized to develop and cultivate sports of
all class and denomination, for the healthful recreation and entertainment of its
stockholders and members; that upon its dissolution, its remaining assets, after paying
debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated
mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash
dividend distribution to its stockholders and that whatever was derived on retail from its
bar and restaurant was used to defray its overall overhead expenses and to improve its
golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in
the business of an operator of bar and restaurant.

It is conceded that the Club derived profit from the operation of its bar and restaurant,
but such fact does not necessarily convert it into a profit-making enterprise. The bar and
restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived
therefrom are necessarily incidental to the primary object of developing and cultivating
sports for the healthful recreation and entertainment of the stockholders and members.
That a Club makes some profit, does not make it a profit-making Club. As has been
remarked a club should always strive, whenever possible, to have surplus.

The fact that the capital stock of the respondent Club is divided into shares does not
detract from the finding of the trial court that it is not engaged in the business of operator
of bar and restaurant. What is determinative of whether or not the Club is engaged in
such business is its object or purpose, as stated in its articles and by-laws. It is a familiar
rule that the actual purpose is not controlled by the corporate form or by the commercial
aspect of the business prosecuted, but may be shown by extrinsic evidence, including
the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax
Court concluded that the Club is not engaged in the business as a barkeeper and
restaurateur.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit:

20
(1) a capital stock divided into shares and
(2) an authority to distribute to the holders of such shares, dividends or allotments of the
surplus profits on the basis of the shares held (sec. 3, Act No. 1459).
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic,
non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent
In the case at bar, nowhere in its articles of incorporation or by-laws could be found an
authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot,
therefore, be considered a stock corporation, within the contemplation of the
corporation law.

#17. Commissioner of Internal Revenue vs G. Sinco Educational Corp. G. R. No. L-9276.

October 23, 1956

FACTS:
In June, 1949, Vicente G. Sinco established and operated an educational institution
known as Foundation College of Dumaguete. Sinco would have continued operating
said college were it not for the requirement of the Department of Education that as far
as practicable schools and colleges recognized by the government should be
incorporated, and so on September 21, 1951, the V. G. Sinco Educational Institution was
organized. This corporation was non-stock and was capitalized by V. G. Sinco and
members of his immediate family. This corporation continued the operations of
Foundation College of Dumaguete Invoking section 27 (e) of the National Internal
Revenue Code, the Appellee claims that it is exempt from the payment of the income
tax because it is organized and maintained exclusively for the educational purposes
and no part of its net income inures to the benefit of any private individual. On the
other hand, the Appellant maintains that part of the net income accumulated by the
Appellee inured to the benefit of V. G. Sinco, president and founder of the corporation,
and therefore the Appellee is not entitled to the exemption prescribed by the law.
ISSUE:
Whether or not appellee is entitled to the exemption provided by law
HELD:
Yes. Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims
that it is exempt from the payment of the income tax because it is organized and
maintained exclusively for the educational purposes and no part of its net income
inures to the benefit of any private individual. On the other hand, the Appellant
maintains that part of the net income accumulated by the Appellee inured to the
benefit of V. G. Sinco, president and founder of the corporation, and therefore the
Appellee is not entitled to the exemption prescribed by the law. While the acquisition of
additional facilities, may redound to the benefit of the institution itself, it cannot be
positively asserted that the same will redound to the benefit of its stockholders, for no
one can predict the financial condition of the institution upon its dissolution. It has been
held that the mere provision for the distribution of its assets to the stockholders upon
dissolution does not remove the right of an educational institution from tax exemption.

21
The fact that the members may receive some benefit on dissolution upon distribution of
the assets is a contingency too remote to have any material bearing upon the question
where the association is admittedly not a scheme to avoid taxation and its good faith
and honesty or purpose is not challenged.
#18. Chamber of Real Estate and Builders’ Associations, Inc., v. The Hon. Executive
Secretary Alberto Romulo, et al. G.R. No. 160756. March 9, 2010

Facts: Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an
association of real estate developers and builders in the Philippines, questioned the
validity of Section 27(E) of the Tax Code which imposes the minimum corporate income
tax (MCIT) on corporations.
Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2%
of gross income, beginning on the 4th taxable year immediately following the year in
which it commenced its business operations, when such MCIT is greater than the normal
corporate income tax. If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT.
CREBA argued, among others, that the use of gross income as MCIT base amounts to a
confiscation of capital because gross income, unlike net income, is not realized gain.
CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise
known as the Consolidated Withholding Tax Regulations, which prescribe the rules and
procedures for the collection of CWT on sales of real properties classified as ordinary
assets, on the grounds that these regulations:
Ø Use gross selling price (GSP) or fair market value (FMV) as basis for determining
the income tax on the sale of real estate classified as ordinary assets, instead of the
entity’s net taxable income as provided for under the Tax Code;
Ø Mandate the collection of income tax on a per transaction basis, contrary to the Tax
Code provision which imposes income tax on net income at the end of the taxable
period;
Ø Go against the due process clause because the government collects income tax
even when the net income has not yet been determined; gain is never assured by
mere receipt of the selling price; and
Ø Contravene the equal protection clause because the CWT is being charged upon
real estate enterprises, but not on other business enterprises, more particularly, those in
the manufacturing sector, which do business similar to that of a real estate enterprise.
Issues: (1) Is the imposition of MCIT constitutional? (2) Is the imposition of CWT on
income from sales of real properties classified as ordinary assets constitutional?
Held: (1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and
confiscatory if it taxes capital, because it is income, and not capital, which is subject to
income tax. However, MCIT is imposed on gross income which is computed by
deducting from gross sales the capital spent by a corporation in the sale of its goods,
i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is
not being taxed.
Various safeguards were incorporated into the law imposing MCIT.

22
Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup
initial major capital expenditures, the MCIT is imposed only on the 4th taxable year
immediately following the year in which the corporation commenced its operations.

Secondly, the law allows the carry-forward of any excess of the MCIT paid over the
normal income tax which shall be credited against the normal income tax for the three
immediately succeeding years.
Thirdly, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation
suffers losses due to prolonged labor dispute, force majeure and legitimate business
reverses.
(2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of
real property classified as ordinary assets remains as the entity’s net taxable income as
provided in the Tax Code, i.e., gross income less allowable costs and deductions. The
seller shall file its income tax return and credit the taxes withheld by the withholding
agent-buyer against its tax due. If the tax due is greater than the tax withheld, then the
taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit.
The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality
and convenience. The knowledge of the withholding agent-buyer is limited to the
particular transaction in which he is a party. Hence, his basis can only be the GSP or
FMV which figures are reasonably known to him.
Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon
consummation of the sale, is not contrary to the Tax Code which calls for the payment
of the net income at the end of the taxable period. The taxes withheld are in the nature
of advance tax payments by a taxpayer in order to cancel its possible future tax
obligation. They are installments on the annual tax which may be due at the end of the
taxable year. The withholding agent-buyer’s act of collecting the tax at the time of the
transaction, by withholding the tax due from the income payable, is the very essence
of the withholding tax method of tax collection.
On the alleged violation of the equal protection clause, the taxing power has the
authority to make reasonable classifications for purposes of taxation. Inequalities which
result from singling out a particular class for taxation, or exemption, infringe no
constitutional limitation. The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
What distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of
their goods sold and the number of transactions involved. The income from the sale of
a real property is bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme. On the other
hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial
amounts.

23
#19. MANILA BANKING CORP VS. CIR- Minimum Corporate Income Tax
(MCIT) G.R. No. 168118 August 28, 2006 SANDOVAL-GUTIERREZ, J.

The intent of Congress relative to the minimum corporate income tax (MCIT) is to grant
a 4-year suspension of tax payment to newly formed corporations. Corporations still
starting their business operations have to stabilize their venture in order to obtain a
stronghold in the industry.

Facts:
Manila Banking Corporation (Manila Bank) was incorporated in 1961 and since had
engaged in the commercial banking business until it was ordered closed by the BSP in
1987 due to insolvency. On June 23, 1999, the BSP authorized it to operate as a thrift
bank. The following year, specifically on April 7, 2000, it filed its annual corporate
income tax return and paid P33,816,164.00 as MCIT for taxable year 1999. It filed a claim
for refund maintaining the position that since CTA denied the claim for refund (which
was affirmed by the CA) on the ground that petitioner is not a new corporation hence
not entitled to the grace period of four years.

Issue:
Whether or not Manila Bank is entitled to a refund of its minimum corporate income tax
paid to the BIR for taxable year 1999.

Held:
Yes. Respondent CIR was directed to refund to petitioner bank the sum of
P33,816,164.00 prematurely paid as minimum corporate income tax.

CIR’s contentions are without merit. He contended that based on RR# 9-98, Manila
Bank should pay the minimum corporate income tax beginning 1998 as it did not close
its operations in 1987 but merely suspended it. Even if placed under suspended
receivership, its corporate existence was never affected. Thus, it falls under the
category of an existing corporation recommencing its banking business operations.

Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (MCIT) on
Domestic Corporations.
(1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as
defined here in, is hereby imposed on a corporation taxable under this title,
beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the MCIT is greater than
the tax computed under Subsection A of this section for the taxable year.
(2) Any excess in the MCIT over the normal income tax… shall be carried forward and
credited against the normal income tax for the 3 succeeding taxable years.

24
Let it be stressed that RR 9-98 imposed the MCIT on corporations, the date when
business operations commence is the year in which the domestic corporation registered
with the BIR. But under RR 4-95, the date of commencement of operations of thrift
banks, is the date of issuance of certificate by Monetary Board or registration with SEC,
whichever comes later. Clearly then, RR 4-95 applies to Manila Bank, being a thrift bank,
the 4-year period is counted from June 1999.

#. 20: BANK OF AMERICA VS CA

(This case is about - Branch Profit Remittance Tax (BPRT)
Reason for imposition of BPRT)

Ruling: The term any profit remitted abroad can only mean such profit as is forwarded,
sent, or transmitted abroad as the word remitted is commonly and popularly accepted
and understood. To say that the tax on branch profit remittance is imposed and
collected at source and necessarily the tax base should be the amount actually applied
for the branch with the Central Bank as profit to be remitted abroad is to ignore the
unmistakable meaning of plain words.
In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted
abroad. There is absolutely nothing equivocal or uncertain about the language of the
provision.
The remittance tax was conceived in an attempt to equalize the income tax burden on
foreign corporations maintaining, on the one hand, local branch offices and organizing,
on the other hand, subsidiary domestic corporations where at least a majority of all the
latter's shares of stock are owned by such foreign corporations. Prior to the amendatory
provisions of the Revenue Code, local branches were made to pay only the usual
corporate income tax of 25% to 35% on net income (now a uniform 35%) applicable to
resident foreign corporations (foreign corporations doing business in the Philippines).
While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%
to 35% (now also a uniform 35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%). In
order to avert what would otherwise appear to be an unequal tax treatment on such
subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit remittance
tax was imposed on local branches on their remittances of profits abroad. But this is
where the tax pari-passu ends between domestic branches and subsidiaries of foreign
corporation.
#21. CYANAMID PHILIPPINES, INC. vs.THE COURT OF APPEALS, THE COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL REVENUE

FACTS : Cynamid Philippines, Inc., a corporation organized under Philippine laws, is a

wholly owned subsidiary of American Cyanamid, engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished good an
importer/indentor.

25
The Commissioner of the Internal Revenue (CIR for brevity) assessed Cynamid the amount
of P119,817.00 and P3,774,867.50 as deficiency on income tax and 25% surtax on
improperly accumulation of profits for 1981, plus 10% surcharge and 20% annual interest
from January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal Revenue
Code.
Petitioner contends that it should not be assessed for surtax on improperly accumulation
of profits for the reasons : a) petitioner accumulated its earnings and profits for
reasonable business requirements to meet working capital needs and retirement of
indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid
Company, a corporation organized under the laws of the State of Maine, in the United
States of America, whose shares of stock are listed and traded in New York Stock
Exchange. This being the case, no individual shareholder income taxes by petitioner's
accumulation of earnings and profits, instead of distribution of the same.
Petitioner appealed with the Court of Tax Appeal against the decision of the CIR. The
Court of Tax Appeal affirmed the decision of the CIR in toto.
Petitioner disputes the decision of the Court of Appeals which affirmed the decision of
the Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of Internal
Revenue the amount of three million, seven hundred seventy-four thousand, eight
hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on improperly
accumulation of profits for 1981, plus 10% surcharge and 20% annual interest from
January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal Revenue
Code.
Petitioner feeling aggrieved then filed an appeal with the Court of Appeals which again
affirmed the decision of the Court of Tax Appeal. Left with no recourse, petitioner now
went to the Supreme Court for relief.
ISSUE : Whether or not the assessment of the CIR for the deficiency income tax and surtax
on improperly accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 plus 10% surcharge and 20% annual interest from January 30, 1985 to
January 30, 1987, under Sec. 25 of the National Internal Revenue Code justifiable?
HELD: The Court ruled that Cynamid is liable for the assessment made by the CIR on it s
liabilities on the improperly accumulated profits and penalties. The contention of
Cynamid that it will use the surplus or profits as additional capitalization and payment for
its obligation does not hold water for the reason that it had a considerable liquid fund to
tide up its obligations. the ratio of its current asset against liabilities is at the ratio of 2.21:
Clearly there is no need of infusing additional capitalization from its surplus or profits to
tide up its obligation. Secondly the Court stated that the provision of the NIRC particularly
Section 25 is intended to prevent its shareholders or members of another corporation,
through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, hence avoiding the imposition of income tax on such profit or
dividend of the shareholders. itThe provision discouraged tax avoidance through
corporate surplus accumulation. When corporations do not declare dividends, income
taxes are not paid on the undeclared dividends received by the shareholders. The tax
on improper accumulation of surplus is essentially a penalty tax designed to compel

26
corporations to distribute earnings so that the said earnings by shareholders could, in turn,
be taxed.
#22. Iconic Beverages, Inc vs. CIR, CTA Case No. 8607, dated August 14, 2015

Facts:
Iconic Beverages, Inc. is primarily engaged in the business of manufacturing, buying,
selling (on wholesale) and dealing in alcoholic and non-alcoholic beverages and to own,
purchase, license and/or acquire such trademarks and other intellectual property rights
necessary for the furtherance of its business; Petitioner seeks the cancellation of the
assessment issued against it for alleged deficiency income tax for calendar year 2009,
inclusive of interest and penalties; Petitioner filed a protest against the assessment,
arguing that it properly declared its royalties as passive income subject to the final
withholding tax of twenty percent (20%) on the gross amount; CIR averred that Royalties
received by Iconic Beverages, Inc. from the active conduct of trade or business is
considered ordinary business income subject to the 30% regular corporate income tax;
An examination of the evidence shows that income from royalties is the main source of
income of petitioner for the taxable year.

Issue: Whether or not royalties received by Iconic Beverages is considered ordinary

business income subject to the 30% regular income tax.

Ruling: Royalties received forms part of the gross income and should be subject to regular
income tax. The payment received as Royalties by Iconic Beverages "from the active
conduct of trade or business is considered ordinary business income subject to the 30%
regular corporate income tax pursuant to Section 27 (A) of the Tax Code. Royalties, to
be subject to 20% final tax, must be in the nature of passive income. In the case of
Chamber of Real Estate and Builders Associations, Inc. vs. The Hon. Executive Secretary
Alberto Romulo, et al., the Supreme Court explained that the BIR defines passive income
by stating what it is not: xxx if the income is generated in the active pursuit and
performance of the corporation's primary purposes, the same is not passive income xxx
In other words, passive income is "income generated by the taxpayer's assets. These
assets can be in the form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings.

#23. BDO v. Republic (G.R. No. 198756. January 13, 2015)

FACTS
This case involves P35 billion worth of 10-year zero-coupon treasury bonds issued
by the Bureau of Treasury (BTr) denominated as the Poverty Eradication and Alleviation
Certificates or the PEACe Bonds. It is designed to endow a permanent fund to finance
meritorious activities and projects of accredited non-government organizations (NGOs)
throughout the country. Zero-coupon bonds are bonds issued at a deep discount or at
a price substantially lower than its face value. It does not make periodic interest
payments and the face value is repaid at the time of maturity.

27
 On the other hand, deposit substitutes, as defined under Section 22(Y) of the 1997
National Internal Revenue Code, as amended (Tax Code), is an alternative form of
obtaining funds from the public, other than deposits through the issuance, endorsement
or acceptance of debt instruments for the borrower’s own account. The Tax Code
likewise gave a definition of the word “public” in connection with deposit substitutes
stating that the term public means borrowing from twenty (20) or more individual or
corporate lenders at any one time.
In BIR Ruling No. 370-11, the Commissioner of Internal Revenue (CIR) opined that
the PEACe Bonds are deposit substitutes and should be subject to 20 percent final tax on
interest income from deposit substitutes. The CIR further stated that it is a settled rule that
all treasury bonds (including PEACe Bonds), regardless of the number of
purchasers/lender at the time of origination/issuance are considered deposit substitutes.
ISSUE:
WON the classification of PEACe Bonds as deposit substitute is subject to Taxation.
HELD:
SC held that the PEACe Bonds are not subject to the 20 percent final withholding
tax and ordered the BTr to release and pay to the bondholders the amount it withheld.
The Supreme Court declared BIR Ruling No. 370-11 as void because it completely
disregarded the 20 or more rule and created a distinction for government debt
instruments as against those issued by private corporations when there was none.
In deciding that the PEACe Bonds are not to be taxed as deposit substitutes, the
Supreme Court clarified that the 20-lender rule – 20 or more individuals or corporate
lenders at any one time, is determinative of whether a debt instrument should be
considered a deposit substitute and consequently subject to 20 percent final withholding
tax. The court likewise expounded on the meaning of the phrase “at any one time”.
The Supreme Court ruled that for the purpose of determining the “20 or more
lenders”, the phrase “at any one time” would mean every transaction executed in the
primary or secondary market in connection with the purchase or sale of securities. Further,
the obligation to withhold the 20 percent final tax on the corresponding interest from the
PEACe Bonds would likewise be required of any lender/investor had the latter turned
around and sold the PEACe Bonds, in whole or in part, simultaneously to 20 or more
lenders or investors.

#24. CIR vs. Filinvest Development Corporation, GR Nos. 163653 and 167689 dated July
19, 2011

FACTS:
Filinvest Development Corporation extended advances in favor of its affiliates and
supported the same with instructional letters and cash and journal vouchers. The BIR
assessed Filinvest for deficiency income tax by imputing an “arm’s length” interest rate
on its advances to affiliates. Filinvest disputed this by saying that the CIR lacks the
authority to impute theoretical interest and that the rule is that interests cannot be
demanded in the absence of a stipulation to the effect.
ISSUE:
Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

28
HELD:
NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate
gross income under (now) Section 50 of the Tax Code, the same does not include the
power to impute theoretical interests even with regard to controlled taxpayers’
transactions. This is true even if the CIR is able to prove that interest expense (on its own
loans) was in fact claimed by the lending entity. The term in the definition of gross income
that even those income “from whatever source derived” is covered still requires that
there must be actual or at least probable receipt or realization of the item of gross
income sought to be apportioned, distributed, or allocated. Finally, the rule under the
Civil Code that “no interest shall be due unless expressly stipulated in writing” was also
applied in this case.

The Court also ruled that the instructional letters, cash and journal vouchers qualify as
loan agreements that are subject to DST.

#25. CIR vs. MANNING

G.R. No. L-28398, August 6, 1975

Income Tax on Stock Dividends

FACTS:
Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5
million divided into 25,000 common shares: 24,700 were owned by Reese and the rest at
100 shares each by the respondents John L. Manning, W.D. McDonald and E.E. Simmons.
Reese entered into a trust agreement whereby it is stated that upon Reese’s death, the
company would purchase back all of its shares. Reese died. MANTRASCO repurchased
the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700 shares
be declared as stock dividends to be distributed to the stockholders. The BIR ordered an
examination of MANTRASCO’s books and discovered that the 24,700 shares declared as
dividends were not disclosed by respondents as part of their taxable income for the year
1958. Hence, the CIR issued notices of assessment for deficiency income taxes to
respondents. Respondents protested but the CIR denied. Respondents appealed to the
CTA. The CTA ruled in their favor. Hence, this petition was filed.

ISSUE:
Whether respondents are liable for deficiency income taxes on the stock dividends?

HELD:
Dividends mean any distribution made by a corporation to its shareholders out of its
earnings or profits. Stock dividends which represent transfer of surplus to capital account
are not subject to income tax. But if a corporation redeems stock issued so as to make a
distribution, this is essentially equivalent to the distribution of a taxable dividend the
amount so distributed in the redemption considered as taxable income.

29
The distinction between a stock dividend which does not and one which does constitute
taxable income to the shareholders is that a stock dividend constitutes income if it gives
the shareholder an interest different from that which his former stockholdings
represented. On the other hand, it does constitute income if the new shares confer no
different rights or interests than did the old shares. Therefore, whenever the companies
involved parted with a portion of their earnings to buy the corporate holdings of Reese,
they were making a distribution of such earnings to respondents. These amounts are thus
subject to income tax as a flow of cash benefits to respondents. Hence, respondents are
liable for deficiency income taxes.

#27. CIR vs Goodyear

FACTS:

 Respondent Goodyear Philippines, Inc. (Goodyear PH) is a domestic corporation

duly organized and existing under the laws of the Philippines, and registered with
the Bureau of Internal Revenue (BIR).

 On August 19, 2003, the authorized capital stock of Goodyear PH was increased
from P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00
each, to P1,731,863,000.00 divided into 4,000,000 common shares and 13,318,630
preferred shares with a par value of P100.00 each.

 All of its preferred shares were solely and exclusively subscribed by Goodyear Tire
and Rubber Company (Goodyear US), a foreign company organized and existing
under the laws of the State of Ohio, USA, and is unregistered in the Philippines.

 Goodyear PH was allowed by it's Board of Directors to redeemed the preferred

shares held by Goodyear US, at the redemption price of P470,653,914.00, broken
down as follows: P372,921,600.00 representing the aggregate par value and
P97,732,314.00, representing accrued and unpaid dividends.

 But before the payment of the redemption price, Goodyear PH filed an

application for relief from double taxation before the International Tax Affairs
Division of the BIR to confirm that the redemption was not subject to Philippine

30
 income tax, pursuant to the PH-US Tax Treaty, on October 15, 2008.

 Notwithstanding the application, on November 3, 2008 , Goodyear PH withheld

and remitted to the BIR a 15% final withholding tax on dividends, in the sum of
P14,659,847.10, based on the difference between the redemption price and the
aggregate par value of the shares redeemed.

 On October 21, 2010, Goodyear PH filed an administrative claim for refund of the
15% final withholding tax with the BIR or issuance of Tax Clearance Certificate.
Thereafter, on November 3, 2010, filed a judicial claim by way of Petition for
Review with the CTA.

 The CTA Division granted the petition and thereby ordered petitioner to refund or
issue a Tax Clearance Certificate.

 The CTA ruled that when preferred shares are redeemed and classified as treasury
shares, the net capital gain on the redemption is subject to the 5%-10% Capital
Gains Tax. For foreign corporations, such as Goodyear US, the capital gain from
sale of shares of stock not traded in the stock exchange, that are reclassified as
treasury shares, is subject to the 5%-10% Capital Gains Tax, pursuant to Section
28(B)(5)(c) of the Tax Code, but subject to the provisions of the PH-US Tax Treaty.
PH-US Tax Treaty provides for exclusive resident country taxation on gains from the
sale of shares of stock of a Philippine company, provided the Philippine
corporation's assets do not consist principally of real property interest located in
the Philippines. This criterion was met by Goodyear PH. Accordingly, the net
capital gain derived by Goodyear US from the redemption of its shares is exempt
from the Capital Gains Tax.

 The CTA further explained that the net capital gain cannot be treated as dividend
subject to the 15% final withholding tax, since an ordinary dividend is a distribution
in the nature of a recurring return of stock, made in the ordinary course of business
and with intent to maintain the corporation as a going concern. On the other
hand, a distribution made when the corporation is winding up its business or
recapitalizing and narrowing its activities may be treated as a complete or partial
liquidation and as payment for the stockholder's stock. In those cases, the excess

31
 of the purchase price over the original acquisition cost of the shares should be
considered as a capital gain and subject to ordinary income tax rates.

 Goodyear US's net capital gain could not be classified as dividends since it did not
come from the Goodyear PH's unrestricted retained earnings or profits and did not
represent a recurring return on the shares redeemed. Without the redemption,
Goodyear US would not have derived the net capital gain. The only instance
where the gain derived from redemption may be treated as a dividend is the case
of redemption of stock dividends, whether pursuant to a partial or complete
liquidation. Accordingly, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock will be considered as taxable income to the extent of
earnings or profits.

 Dissatisfied, petitioner moved for reconsideration, which was denied.

 Thereafter, appealed to the CTA en banc. The CTA en banc affirmed the findings
of the CTA Division that the net capital gain received by Goodyear US was not
subject to Philippine income tax.

 Petitioner filed a motion for reconsideration, which was, however, denied. Hence,
this petition.

ISSUE:

Whether or not the CTA en banc correctly ruled that the gain derived by Goodyear US
was not subject to 15% final withholding tax on dividends.

HELD:

YES.

The imposition of 15% final withholding tax on intercorporate dividends received by a

non-resident foreign corporation is found in Section 28 (B) (5) (b) of the Tax Code which
reads:

32
 SEC. 28. Rates of Income Tax on Foreign Corporations. –
xxxx
(B) Tax on Nonresident Foreign Corporation. –
xxxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign
Corporation. –
(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen
percent (15%) is hereby imposed on the amount of cash and/or property
dividends received from a domestic corporation, which shall be collected
and paid as provided in Section 57 (A) of this Code, subject to the
condition that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the nonresident
foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%), which represents the difference
between the regular income tax of thirty-five percent (35%) and the fifteen
percent (15%) tax on dividends as provided in this subparagraph:Provided,
that effective January 1, 2009, the credit against the tax due shall be
equivalent to fifteen percent (15%), which represents the difference
between the regular income tax of thirty percent (30%) and the fifteen
percent (15%) tax on dividends;

It must be noted that Goodyear US is a non-resident foreign corporation, specifically a

resident of the US. Thus, pursuant to the cardinal principle that treaties have the force
and effect of law in this jurisdiction, the PH-US Tax Treaty complementarily governs the
tax implications of Goodyear PH's transactions with Goodyear US.

Under Article 11 (5) of the PH-US Tax Treaty, the term "dividends" should be understood
according to the taxation law of the State in which the corporation making the
distribution is a resident, which, in this case, pertains to Goodyear PH, a resident of the
Philippines. Accordingly, attention should be drawn to the statutory definition of what
constitutes "dividends," pursuant to Section 73 (A) of the Tax Code which provides that
"[t]he term 'dividends' x x x means any distribution made by a corporation to its

33
shareholders out of its earnings or profits and payable to its shareholders, whether in
money or in other property."

The Court therefore holds that the redemption price representing the amount of
P97,732,314.00 received by Goodyear US could not be treated as accumulated
dividends in arrears that could be subjected to 15% final withholding tax. Verily,
Goodyear PH's Annual Financial Statements covering the years 2003 to 2009 show that it
did not have unrestricted retained earnings, and in fact, operated from a position of
deficit. Thus, absent the availability of unrestricted retained earnings, the board of
directors of Goodyear PH had no power to issue dividends. Consistent with Section 73 (A)
of the Tax Code, this rule on dividend declaration was further edified in Section 43 of The
Corporation Code of the Philippines which reads:

Section 43. Power to Declare Dividends. – The board of directors of a stock

corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided,
that any cash dividends due on delinquent stock shall first be applied to
the unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, that no stock dividend
shall be issued without the approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose.

It is also worth mentioning that one of the primary features of an ordinary dividend is that
the distribution should be in the nature of a recurring return on stock which, however,
does not obtain in this case. As aptly pointed out by the CTA en banc, the amount of
P97,732,314.00 received by Goodyear US did not represent a periodic distribution of
dividend, but rather a payment by Goodyear PH for the redemption of Goodyear US's
3,729,216 preferred shares. In Wise & Co., Inc. v. Meer :

34
 The amounts thus distributed among the plaintiffs were not in the nature of
a recurring return on stock — in fact, they surrendered and relinquished
their stock in return for said distributions, thus ceasing to be stockholders of
the Hongkong Company, which in turn ceased to exist in its own right as a
going concern during its more or less brief administration of the business as
trustee for the Manila Company, and finally disappeared even as such
trustee.

"The distinction between a distribution in liquidation and an ordinary dividend is factual;

the result in each case depending on the particular circumstances of the case and the
intent of the parties. If the distribution is in the nature of a recurring return on stock it is an
ordinary dividend. However, if the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may properly be treated as in
complete or partial liquidation and as payment by the corporation to the stockholder for
his stock. The corporation is, in the latter instances, wiping out all parts of the stockholders'
interest in the company* * * ." (Montgomery, Federal Income Tax Handbook [1938-1939],
258 x x x)

All told, the amount of P97,732,314.00 received by Goodyear US from Goodyear PH for
the redemption of its 3,729,216 preferred shares were not accumulated dividends in
arrears. Contrary to petitioner's claims, it is therefore not subject to 15% final withholding
tax on dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.
_____________________________________________________________________________________

#28. CIR VS. Wander Philippines, Inc.

Facts:

Wander Philippines, Inc. (Wander) is a domestic corporation which is a wholly-owned

subsidiary of Glaro S.A. Ltd. (Glaro), a Swiss corporation not engaged in trade/business in
the Philippines. In two instances, Wander filed its withholding tax return and remitted to
Glaro (the parent company) dividends on which 35% tax was withheld and paid to the
BIR.

Wander now files a claim for refund of the withheld tax contending that it is liable only to

35
15% withholding tax pursuant to Section 24 (B) (1) of the Tax Code, as amended by PD
Nos. 369 and 778. The BIR did not act upon the claim filed by Wander so the corporation
filed a petition to the Court of Tax Appeals which held that Wander is entitled to 15%
withholding tax rate on dividends remitted to Glaro, a non-resident foreign corporation.

Issue:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax on
dividends declared and remitted to Glaro.

Held:

Yes. According to Sec. 24 (B) (1) of the Tax Code, as amended by PD Nos. 369 and 778,
the dividends received from a domestic corporation liable to tax, the tax shall be 15% of
the dividends received, subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends.

In the instant case, the fact that Switzerland did not impose any tax on the dividends
received by Glaro from the Philippines should be considered as a full satisfaction of the
given condition. To deny Wander the privilege to withhold only 15% tax provided for
under PD No. 369, amending Sec. 24 (B) (1) of the tax Code would run counter to the
very spirit and intent of the said law and will adversely affect the foreign corporations’
interest and discourage them from investing capital in our country.

***Conditions for Tax Sparing Rule:

1. The country in which the non-resident foreign corporation is domiciled allows a tax
credit against the tax due from the NRFC taxes deemed to have been paid in the
Philippines equivalent to 15%; or
2. Such country does not impose tax on dividends (NIRC, Sec. 28(B)(5)(b).

#29. CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204

SCRA 377)

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

36
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF the country of domicile of the foreign stockholder corporation
“shall allow” such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and
sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35%
dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a
claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that
pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF he country of domicile of the foreign stockholder corporation
“shall allow” such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35% dividend tax rate and the
reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes
deemed paid in the Philippines” applicable against the US taxes of P&G USA, and such
tax credit must reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic
corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid
a proportionate extent of taxes paid by such foreign corporation upon its remittance of
dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00
- 35.00

37
65. 00 -- available for remittance

P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax

P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA

Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax
‘deemed paid’ by the parent company. Since P29.75 is much higher than P13, Sec 902
US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand why
these were divided and multiplied. Point is, requirements were met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same income
stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines
but “deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on

Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend
tax to a maximum of 20% of he gross amount of dividends paid to US parent corporations,
and established a treaty obligation on the part of the United States that it “shall allow” to
a US parent corporation receiving dividends from its Philippine subsidiary “a [tax] credit
for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary].

Note:
The NIRC does not require that the US tax law deem the parent corporation to have paid
the 20 percentage points of dividend tax waived by the Philippines. It only requires that
the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the
20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax
exemption nor does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.

38
Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in
the Philippines by reducing the tax cost of earning profits here and thereby increasing
the net dividends remittable to the investor. The foreign investor, however, would not
benefit from the reduction of the Philippine dividend tax rate unless its home country
gives it some relief from double taxation by allowing the investor additional tax credits
which would be applicable against the tax payable to such home country. Accordingly
Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the investor
corporation a “deemed paid” tax credit at least equal in amount to the 20 percentage
points of dividend tax foregone by the Philippines, in the assumption that a positive
incentive effect would thereby be felt by the investor.

#32 SMI-ED Philippines Technology vs. Commissioner of Internal Revenue

G.R. No. 175410, November 12, 2014

Doctrine: A Philippine Economic Zone Authority (PEZA)-registered corporation that

has never commenced operations may not avail of the tax incentives and preferential
rates given to PEZA-registered enterprises. Such corporation is subject to ordinary taxes
under the NIRC of 1997.

Facts:

SMI-Ed Philippines (SMI) is a PEZA-registered corporation authorized to engage in

the business of manufacturing high-density microprocessor unit package. SMI failed to
commence operations. In 2000, it sold its buildings and some of its installed machineries
and equipment to Ibiden, another PEZA-registered enterprise for P 893 M. Subsequently,
SMI was dissolved on November 2000.

For its Quarterly income tax return for 2000, SMI subjected the sale of properties to
5% FINAL TAX on PEZA-registered corporations and paid the corresponding taxes thereto.
In 2001, SMI filed an administrative claim for the refund of the amount it paid as taxes for
the sale of its assets. The BIR did not act on the claim, this prompted SMI to file a Petition
for Review before the CTA in 2002.

The CTA ruled against SMI stating that fiscal incentives given to PEZA-registered
enterprises may be availed only by PEZA-registered enterprises that had already
commenced operations. Since, SMI did not commence operations the sale of its assets
must be subjected to 6% capital gains tax under Section 27(D)(5) of the NIRC. SMI filed a
Motion for Reconsideration before the CTA-en banc, the motion was denied, and the
CTA affirmed the CTA 2nd division’s decision and resolution.

Issue: Whether or not the sale of SMI’s land, building, equipment and machineries is
subject to capital gains tax (CGT) under Section 27 of the NIRC.

39
Ruling:

Yes. SMI is not entitled to the benefits given to PEZA-registered enterprises and
should be held liable for CGT under Section 27 of the NIRC for the sale of its land and
building but not for the sale of equipment and machineries.

SMI is not entitled to benefits given to PEZA-registered enterprises, including the

preferential 5% tax rate under RA No. 7916 for the sale of its assets. This is because it never
began its operations. Section 23 of RA 7916 of the Special Economic Zone Act of 2005
provides:

Section 23. Fiscal Incentives. Business establishments operating within the

ECOZONE shall be entitled to fiscal incentives…(emphasis supplied)

Furthermore, tax credits for exporters using local materials as inputs shall enjoy the
same benefits provided for in the export Development Act of 1994.

Section 24. Exemption from Taxes Under the NIRC. Any provision of existing
laws, rules and regulations to the contrary notwithstanding, no taxes, local
and national, shall be imposed on business establishments operating within
the ECOZONE. In lieu of taxes, 5% of the gross income earned by all business
and enterprises within the ECOZONE shall be remitted to the national
government…(emphasis supplied)

Based on these provisions, the fiscal incentives and the 5% preferential tax rate is
available only to business operating within the ECOZONE. A business is considered in
operation when its starts entering into commercial transactions that are not merely
incidental to but are related to the purposes of the business. Doing or engaging in
business or transacting in business imply a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive prosecution
of, the purpose and object of its organization.

Now, as regards the imposition of CGT, the CTA found that SMI’s sale of its
properties is subject to CGT. For SMI’s properties to be subjected to CGT, the properties
must form part of SMI’s capital assets. Section 39 (A) (1) of the NIRC defines capital assets:

(1) Capital Assets – the term “capital assets” means property held by the
taxpayer (whether or not connected with his trade or business), but
does not include stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory of the taxpayer
if on hand at the close of the taxabale year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of a

40
 character which is subject to the allowance for depreciation provided
in Subsection (F) of Section 34; or real property used in trade or business
of the taxpayer. (emphasis supplied)

The properties involved in this case includes SMI’s land and buildings, equipment
and machineries. They are not among the exclusions enumerated in Section 39 (A)(1) of
the NIRC. None of the properties were used in SMI’s trade or ordinary course of business
because SMI never commenced operations. They were not part of the inventory. None
of them were stocks in trade. Based on the definition of capital assets under Section 39
of the NIRC, they are capital assets.

However, the sale of SMI’s machineries and equipment classified as capital assets
is subject to normal corporate income tax. For corporations, the NIRC treats the sale of
land and buildings, and the sale of machineries and equipment, differently. Domestic
corporations are imposed 6% CGT only on presumed gain realized from the sale of lands
and or buildings. The NIRC does not impose the 6%CGT on the gains realized from the
sale of machineries and equipment. Section 24 (D)(1) of the NIRC provides:

(1) In General – The provisions of Section 39 (B) notwithstanding, a final tax

of 6% based on the gross selling price or current fair market value as
determined in accordance with Section (E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to have been
realized from sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets…(emphasis
supplied)

Section 27 (D)(5) of the NIRC also provides:

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings. – A final tax of 6% is hereby imposed on the gain presumed
to have been realized on the sale, exchange or disposition of lands and/or
buildings which are not actually used in the business of a corporation are
treated as capital assets…(emphasis supplied)

Therefore, only the presumed gain from the sale of SMI’s land and building may
be subjected to the 6% capital gains tax. The income from the sale of petitioner’s
machineries and equipment id subject to the provisions on normal corporate income tax.

#36 Income Taxation : Exclusion from Gross Income -Terminal Leave Pay

CIR vs CA, GR No. 96016, October 17,1991

41
Issue:
Whether or not terminal leave pay received by a government official or employee
on the occasion of his compulsory retirement from the government service is subject to
withholding (income tax).
Held:
No. The Court ruled that the terminal leave pay received by government official
or employee is not subject to withholding (income) tax. The Court explained that in the
exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. It recognizes that for most public servants, retirement pay is always less
than generous if not meager and scrimpy. A modest nest egg which the senior citizen
may look forward to is thus avoided. Terminal leave payments are given not only at the
same time but also for the same policy consideration governing retirement benefits.
Hence, it is not part of the gross salary or income of a government official or
employee but a retirement benefit.

#37 RE: REQUEST OF ATTY. BERNARDO ZIALCITA FOR RECONSIDERATION OF THE ACTION
OF THE FINANCIAL AND BUDGET OFFICE A.M. No. 90-6-015-SC October 18, 1990

Since terminal leave is applied for by an officer or employee who has already severed
his connection with his employer and who is no longer working, then it follows that the
terminal leave pay, which is the cash value of his accumulated leave credits, is no
longer compensation for services rendered. It cannot be viewed as salary.

Facts: In a resolution of the Court En Banc, it held that the terminal leave pay of Atty.
Zialcita by virtue of his compulsory retirement can never be part of his salary subject of
income tax, the said resolution provides:

The terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement
can never be considered a part of his salary subject to the payment of income tax but
falls under the phrase "other similar benefits received by retiring employees and
workers", within the meaning of Section 1 of PD No. 220 and is thus exempt from the
payment of income tax.

That the money value of his accrued leave credits is not a part of his salary is further
buttressed by Sec. 3 of PD No. 985, otherwise known as The "Budgetary Reform Decree
on Compensation nd Position Classification of 1976" particularly Sec. 3 (a) thereof,
which makes it clear that the actual service is the period of time for which pay has
been received, excluding the period covered by terminal leave.

Accordingly, the Court ordered the Fiscal Management and Budget Office to refund
Atty. Zialcita the amount which was withheld from him.

However, the Commissioner of Internal Revenue, as intervenor-movant filed a motion

for clarification and/or reconsideration.

42
Issue: Whether or not the terminal leave pay of Atty. Zialcita is taxable on the ground
that the amount to be received is salary.

Held: No, the Court held that the terminal leave pay of Atty. Zialcita is not taxable.

After careful deliberation, the Court resolved to deny the motion for reconsideration
and hereby holds that the money value of the accumulated leave credits of Atty.
Bernardo Zialcita are not taxable for the following reasons:

1) Atty. Zialcita opted to retire under the provisions of Republic Act 660, which is
incorporated in Commonwealth Act No. 186. Section 12(c) of CA 186 states:

Officials and employees retired under this Act shall be entitled to the commutation of
the unused vacation leave and sick leave, based on the highest rate received, which
they may have to their credit at the time of retirement.

Section 28(c) of the same Act, in turn, provides:

(c) Except as herein otherwise provided, the Government Service Insurance System, all
benefits granted under this Act, and all its forms and documents required of the
members shall be exempt from all types of taxes, documentary stamps, duties and
contributions, fiscal or municipal, direct or indirect, established or to be established;
(Emphasis supplied)

Applying the two aforesaid provisions, it can be concluded that the amount received
by Atty. Zialcita as a result of the conversion of these unused leaves into cash is exempt
from income tax.

2) The commutation of leave credits is commonly known as terminal leave. Terminal

leave is applied for by an officer or employee who retires, resigns or is separated from
the service through no fault of his own.

Since terminal leave is applied for by an officer or employee who has already severed
his connection with his employer and who is no longer working, then it follows that the
terminal leave pay, which is the cash value of his accumulated leave credits, is no
longer compensation for services rendered. It cannot be viewed as salary.

3) Executive Order No. 1077, Section 1, provides:

Any officer or employee of the government who retires or voluntarily resigns or is

separated from the service through no fault of his own and whose leave benefits are
not covered by special law, shag be entitled to the commutation of all the
accumulated vacation and/or sick leaves to his credit, exclusive of Saturdays, Sundays

43
and holidays, without litigation as to the number of days of vacation and sick leaves
that he may accumulate.

Meanwhile, Section 28(b) 7(b) of the National Internal Revenue Code (NIRC) states:

Sec. 28 (b) — Exclusions from gross income. — The following items shall not be included
in gross income and shall be exempt from taxation under this title:

xxx xxx xxx

(7) Retirement benefits, pensions, gratuities, etc.

xxx xxx xxx

(b) Any amount received by an official or employee or by his heirs from the employer
as a consequence of separation of such official or employee from the service of the
employer due to death, sickness or other physical disability or for any cause beyond the
control of the said official or employee. (Emphasis supplied)
In the case of Atty. Zialcita, he rendered government service from March 13, 1962 up to
February 15, 1990. The next day, or on February 16, 1990, he reached the compulsory
retirement age of 65 years. Upon his compulsory retirement, he is entitled to the
commutation of his accumulated leave credits to its money value. Within the purview
of the above-mentioned provisions of the NLRC, compulsory retirement may be
considered as a "cause beyond the control of the said official or employee".
Consequently, the amount that he received by way of commutation of his
accumulated leave credits as a result of his compulsory retirement, or his terminal leave
pay, fags within the enumerated exclusions from gross income and is therefore not
subject to tax.

4. The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement
gratuity received by government officials and employees" which is also another
exclusion from gross income as provided for in Section 28(b), 7(f) of the NLRC.

A gratuity is that paid to the beneficiary for past services rendered purely out of
generosity of the giver or grantor. (Peralta v. Auditor General, 100 Phil. 1051 [1957]) It is a
mere bounty given by the government in consideration or in recognition of meritorious
services and springs from the appreciation and graciousness of the government.
(Pirovano v. De la Rama Steamship Co., 96 Phil. 335, 357 [1954])

When a government employee chooses to go to work rather than absent himself and
consume his leave credits, there is no doubt that the government is thereby benefited
by the employee's uninterrupted and continuous service. It is in cognizance of this fact
that laws were passed entitling retiring government employees, among others, to the
commutation of their accumulated leave credits.

44
That which is given to him after retirement is out of the Government's generosity and an
appreciation for his having continued working when he could very well have gone on
vacation. Section 286 of Revised Administrative Code, as amended by RA 1081,
provides that "whenever any officer, employee or laborer of the Government of the
Philippines shall voluntarily resign or be separated from the service through no fault of
his own, he shall be entitled to the commutation of all accumulated vacation and/or
sick leave to his credit" (Emphasis supplied) Executive Order No. 1077, mentioned
above, later amended Section 286 by removing the limitation on the number of leave
days that may be accumulated and explicitly allowing retiring government employees
to commute their accumulated leaves.

The commutation of accumulated leave credits may thus be considered a retirement

gratuity, within the import of Section 28(b), 7(f) of the NLRC, since it is given only upon
retirement and in consideration of the retiree's meritorious services.

It is clear that the law expresses the government's appreciation for many years of
service already rendered and the clear intention to reward faithful and often
underpaid workers after the official relationship had been terminated.

5) Section 284 of the Revised Administrative Code grants to a government employee 15

days vacation leave and 15 days sick leave for every year of service. Hence, even if the
government employee absents himself and exhausts his leave credits, he is still deemed
to have worked and to have rendered services. His leave benefits are already imputed
in, and form part of, his salary which in turn is subjected to withholding tax on income.

He is taxed on the entirety of his salaries without any deductions for any leaves not
utilized. It follows then that the money values corresponding to these leave benefits
both the used and unused have already been taxed during the year that they were
earned. To tax them again when the retiring employee receives their money value as a
form of government concern and appreciation plainly constitutes an attempt to tax the
employee a second time. This is tantamount to double taxation.

#38. CIR vs Mitsubishi, GR No L-54908, January 22, 1990

Atlas Consolidated Mining and Dev Corp (Atlas) entered into a loan and sales contract
with Mitsubishi, a Japanese corp licenses to engage in business in the Phils., for purposes
of the projected expansion of the productive capacity of Atlas.

45
Mitsubishi agreed to extend a loan to Atlas for the installation of a new concentrator for
copper production and Atlas to sell to Mitsubishi all the copper concentrates produced
for 15 years.

Mitsubishi applied for a loan with Export-Import Bank of Japan (Eximbank) for purpose of
its obligation under said contract. Pursuant to the contract between Atlas and Mitsubishi,
interest payments were made by Atlas to Mitsubishi for the years 1974-75. The
corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to
sec. 24(b)(1) and sec. 53 (b)(2) of NIRC, as amended by PD 131, and duly remitted to the
government.

Private respondent filed a claim for the tax credit requesting the sum of P1,971,595.01 be
applied against their existing and future tax liabilities. It was later noted by respondent
CTA that Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax
credit in favor of Atlas.

Mitsubishi filed a petition for review with respondent court on the ground that Mitsubishi
was a mere agent of Eximbank, which is a financing institution owned, controlled and
financed by the Japanese Government. Such government status of Eximbank, if it may
be so called, is the basis for private respondents claim for exemption from paying the tax
on the interest payment on the loan. It was further claimed that the interest payments on
the loan from the consortium of Japanese banks were likewise exempt because loan
supposedly came from or were fniancé by Eximbank. Relying on the provision of sec.
29(b)(7)(A) NIRC.

CTA promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas
and the court declared that all papers and documents pertaining to the loan obtained
by Mitsubishi from Eximbank shows that this was the same amount given to Atlas. It also
observed that the money for the loan from the consortium of private Japanese banks
originated from Eximbank. From these, respondent court concluded that the ultimate
creditor of Atlas was Eximbank. Mitsubishi was acting as a mere “arranger or conduit
through which the loan flowed from the creditor Eximbank to the debtor Atlas.

ISSUE: 1) WON the interest income from the loan extended to Atlas by Mitsubishi is
excludible from gross income taxation pursuant to sec. 29(b)(7)(A), NIRC and therefore,
exempt from withholding tax.

46
 2) WON Mitsubishi is a mere conduit of Eximbank which will then be considered as
the creditor whose investment in the Phils. On loans are exempt from taxes.

HELD:

1) NO

The signatories on the loans and sales contract were Mitsubishi and Atlas, nowhere in the
contract can it be inferred that Mitsubishi acted for and behalf of Eximbank of Japan nor
of any entity, private or public, for that matter. When Mitsubishi obtained the loan of USD
20M from Eximbank of Japan said amount ceased to be the property of the bank and
become property of Mitsubishi.

Mitsubishi and not Eximbank is the sole creditor of Atlas, the former being the owner of
the USD 20M upon completion of its loan contract with Eximbank of Japan. The interest
income of the loan paid by Atlas to Mitsubishi is therefore entirely different from the
interest income paid by Mitsubishi to Eximbank of Japan. What was the subject of the
15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the
interest income earned by Mitsubishi from the loan to Atlas.

2) NO

When Mitsubishi secured the loan, it was in its own independent capacity as a private
entity and not as a conduit of the consortium of Japanese banks or the Eximbank of
Japan. While loans were secured by Mitsubishi primarily “as a loan to and in
consideration for importing copper concentrates from Atlas, the fact remains that it was
a loan by Eximbank of Japan to Mitsubishi and not to Atlas.

#39. CIR V SECRETARY OF JUSTICE AND PAGCOR

Facts: Petitioner CIR filed petition for certiorari to annul resolution of secretary of justice
alleging that respondent Secretary of Justice acted without or in excess of his jurisdiction,
or in grave abuse of discretion amounting to lack or excess of jurisdiction. The dispositive
portion of the assailed December 22, 2006 resolution states:

WHEREFORE, premises considered, PAGCOR is declared exempt from payment [of] all
taxes, save for the franchise tax as provided for under Section 13 of PD 1869, as
amended,

47
Respondent Philippine Amusement and Gaming Corporation (PAGCOR) has operated
under a legislative franchise granted by Presidential Decree No. 1869 (P.D. No. 1869), its
Charter, whose Section 13(2) provides:

(2) Income and other Taxes - (a) Franchise Holder:

No tax of any kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall be assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in any way to
the earnings of the Corporation, except a Franchise Tax of five percent (5%) of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise.
Such tax shall be due and payable quarterly to the National Government and shall be in
lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial or national government
authority. (bold emphasis supplied)

Notwithstanding the aforesaid 5% franchise tax imposed, the Bureau of Internal Revenue
(BIR) issued several assessments against PAGCOR for alleged deficiency value-added
tax (VAT), final withholding tax on FRINGE BENEFITS (related to the car plan granted to
PAGCOR's employees), and expanded withholding tax

ISSUE: WON respondent SOJ acted without or in excess of his jurisdiction, and gravely
abused his discretion in ABSOLVING PAGCOR OF ITS DUTY AND RESPONSIBILITY AS
WITHHOLDING AGENT TO WITHHOLD AND REMIT FRINGE BENEFITS TAX, (among others).

Held: Respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION is DIRECTED TO

PAY to the Bureau of Internal Revenue:

(1) its deficiency final withholding tax on fringe benefits arising from the car plan it
granted to its qualified officers and employees

Under Section 33 of the NIRC, FBT is imposed as:

A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%)
effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and
thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the
employer). The tax herein imposed is payable by the employer which tax shall be paid in
the same manner as provided for under Section 57 (A) of this Code.

48
FBT is treated as a final income tax on the employee that shall be withheld and paid by
the employer on a calendar quarterly basis. As such, PAGCOR is a mere withholding
agent inasmuch as the FBT is imposed on PAGCOR's employees who receive the fringe
benefit. PAGCOR's liability as a withholding agent is not covered by the tax exemptions
under its Charter.

The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe
benefit as defined under Section 33 of the NIRC. To avoid the imposition of the FBT on the
benefit received by the employee, and, consequently, to avoid the withholding of the
payment thereof by the employer, PAGCOR must sufficiently establish that the fringe
benefit is required by the nature of, or is necessary to the trade, business or profession of
the employer, or when the fringe benefit is for the convenience or advantage of the
employer.

PAGCOR asserted that the car plan was granted "not only because it was necessary to
the nature of the trade of PAGCOR but it was also granted for its convenience."47 The
records are lacking in proof as to whether such benefit granted to PAGCOR's officers
were, in fact, necessary for PAGCOR's business or for its convenience and advantage.
Accordingly, PAGCOR should have withheld the FBT from the officers who have availed
themselves of the benefits of the car plan and remitted the same to the BIR.

#41 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS (PHILS.),

INC., respondent.
G.R. No. 143672. April 24, 2003

FACTS:
CIR Commissioner, petitioner, assails the resolution of the Court of Appeals reversing the
decision of the Court of Tax Appeals which denied the protest filed by respondent
General Foods (Phils.), Inc., regarding the assessment made against the latter for
deficiency taxes.
On June 14, 1985, General Foods, manufacturer of beverages such as “Tang,” “Calumet”
and “Kool-Aid,” filed its ITR for the fiscal year ending February 28, 1985. In said tax return,
it claimed as a deduction for business expenses, the amount of P9,461,246 for media
advertising for “Tang.”
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation.
The parties are in agreement that the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, their views conflict as to whether or not it
was ordinary.
To be deductible, an advertising expense should not only be necessary but also ordinary.
These two requirements must be met.

49
The Commissioner maintains that the subject advertising expense was not ordinary on
the ground that it failed the two conditions set by U.S. jurisprudence:
a) “reasonableness” of the amount incurred
b) the amount incurred must not be a capital outlay to create “goodwill”
for the product and/or private respondent’s business.
 Otherwise, the expense must be considered a capital expenditure to be spread
out over a reasonable time.
Consequently, General Foods was assessed deficiency income taxes in the amount of
P2,635, 141.42. The latter filed a motion for reconsideration but the same was denied.
On September 1989, General Foods appealed to the CTA but the appeal was dismissed.
General foods, filed a petition for review at the CA which rendered a decision reversing
and setting aside the decision of the CTA: claiming that the deduction was not
sufficiently established as excessive.
ISSUE:
Whether or not the subject media advertising expense for “Tang” incurred by
respondent corporation was an ordinary and necessary expense fully deductible under
the National Internal Revenue Code (NIRC).

HELD:
No, CA committed reversible error when it declared the subject media advertising
expense to be deductible as an ordinary and necessary expense on the ground that “it
has not been established that the item being claimed as deduction is excessive.
We find the subject expense for the advertisement of a single product to be
inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary
expense deductible under then Section 29 (a) (1) (A) of the NIRC.
The P9,461,246 media advertising expense for the promotion of a single product, almost
one-half of petitioner corporation’s entire claim for marketing expenses for that year,
inclusive of other advertising and promotion expenses of P2,678,328 and P1,548,614 for
consumer promotion, is doubtlessly unreasonable.
Furthermore, the subject advertising expense was of the second kind. Not only was the
amount staggering; Gen Foods also admitted that the subject media expense was
incurred in order to protect its brand franchise.
The protection of brand franchise is analogous to the maintenance of goodwill or title to
one’s property. To protect its brand franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital assets and therefore expenses
related thereto were not to be considered as business expenses but as capital
expenditures
Hence, we consider that the subject advertising expense as a capital outlay since it
created goodwill for its business and/or product.
CA decision REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax
Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its deficiency
income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment and
20% annual interest computed from August 25, 1989, the date of the denial of its
protest, until the same is fully paid.

50
DOCTRINE INVOLVED:
1. Deductions for income tax purposes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.

2. To be deductible from gross income, the subject advertising expense must comply
with the following requisites:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year;
c. it must have been paid or incurred in carrying on the trade or business of
the taxpayer;
d. it must be supported by receipts, records or other pertinent papers

3. Advertising is generally of two kinds:

a. 1stkind: Advertising to stimulate the current sale of merchandise or use of
service: except as to the question of the reasonableness of amount, there
is no doubt such expenditures are deductible as business expenses.

b. 2nd kind: Advertising designed to stimulate the future sale of merchandise

or use of services: The second type involves expenditures incurred, in
whole or in part, to create or maintain some form of goodwill for the
taxpayer’s trade or business or for the industry or profession of which the
taxpayer is a member.

If, however, the expenditures are for advertising of the second kind, then normally they
should be spread out over a reasonable period of time.

#44. CIR vs Consuelo L. VDA. De Prieto

Income Taxation Deductions from Gross Income – Interest

FACTS:

Respondent Vda. de Prieto conveyed by way of gifts a real property to her

children. The Commissioner of Internal Revenue appraised the property donated at
P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, interest and
compromises due thereon. Of the total sum of P117,706.50 paid by respondent on April
29, 1954, the sum of P55,978.65 represents the total interest on account of deliquency.
Said sum was claimed as deduction, among others, by respondent in her 1954 income
tax return. Petitioner disallowed the claim and as a consequence of such disallowance
assessed respondent for 1954 deficiency income tax due on the aforesaid P55,978.65,
including interest 1957, surcharge and compromise for the late payment.

ISSUE:

51
 Whether or not interest paid for the late payment of tax is deductible from gross
income.

HELD:

YES.
For interest to be deductible, it must be shown that:
(1) there be an indebtedness,
(2) there should be interest upon it, and
(3) what is claimed as an interest deduction should have been paid or accrued
within the year.

In this case, the last two requirements are undisputed. The only question is if interest
on account of late payments of taxes be considered as indebtedness. Indebtedness has
been defined as an unconditional and legally enforceable obligation for the payment
of money. Within the meaning of that definition, it is apparent that a tax may be
considered indebtedness. Although taxes already due have not, strictly speaking, the
same concept as debts, they are, however, obligations that may be considered as such.
Where statute imposes a personal liability for a tax, the tax becomes, at least in a board
sense, a debt. It follows that the interest paid by herein respondent for the late payment
of her donor's tax is deductible from her gross income.

In conclusion, interest payment for delinquent taxes is not deductible as tax but
the taxpayer is not precluded thereby from claiming said payment as deduction on
account of interest.

#45. Paper Industries Corporation of the Philippines (PICOP) vs. CA, CIR and CTA, G.R.
Nos. 106949-150 December 01, 1995
Facts:
Paper Industries Corporation of the Philippines (PICOP) is a Philippine corporation
registered with the Board of Investment (BI) as a preferred pioneer enterprise with
respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise
with respect to its integrated plywood and venner mills. Petitioner received from the
Commissioner of Internal Revenue (CIR) two (2) letters of assessment and demand (a)
one for deficiency transaction tax and for documentary and science stamp tax; and
(b) for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00.
PICOP protested the assessment of deficiency transaction tax, the documentary
and science stamp taxes, and the deficiency income tax assessment. CIR did not
formally act upon these protests, but issued a warrant of distraint on personal property
and a warrant of levy on real property against PICOP, to enforce collection of the

52
contested assessments, thereby denying PICOP's protests. Thereupon, PICOP went
before (CTA) appealing the assessments.
On 15 August 1989, CTA rendered a decision, modifying the CIR's findings and
holding PICOP liable for the reduced aggregate amount of P20,133,762.33. Both parties
went to the Supreme Court, which referred the case to the Court of Appeals (CA).
CA denied the appeal of CIR and modified the judgment against PICOP holding
it liable for transaction tax and absolved it from payment of documentary and science
stamp tax and compromise penalty. It also held PICOP liable for deficiency of income
tax.
Issues:
1. Whether or not PICOP is liable for transaction tax
2. Whether or not PICOP is liable for documentary and science tax
3. Whether or not PICOP is liable for deficiency income tax
Held:
1. YES, PICOP is liable for transaction tax.
A transaction tax is an income tax as held by the Supreme Court in the case of Western
Minolco Corporation vs. Commissioner of Internal Revenue. The 35% transaction tax is
an income tax on interest earnings to the lenders or placers. The latter are actually the
taxpayers, Therefore, the tax cannot be a tax imposed upon the petitioner. The
contention of the PICOP that they are exempted from the payment of trasaction tax
by virtue of its tax exemption under R.A. No. 5186, as amended, known as the
Invesment Incentives Act is not tenable. The PICOP tax exemption under R.A. 5186, as
amended, does not include exemption from the 35% transaction tax which is
considered an income tax.
2. NO, PICOP is not liable for documentary and science tax.
The CIR assessed documentary and science stamp taxes, amounting to P300,000.00,
on the issuance of PICOP's debenture bonds. Tax exemption are, to be strictly
construed, that is, they are not to be extended beyond the ordinary and reasonable
intendment of the language actually used by the legislative authority in granting
exemption. The issuance of debenture bonds is certainly conceptually distinct from
pulping and paper manufacturing operations. But no one contends that issuance of
bonds was a principal or regular business activity of PICOP. Only banks or other
financial institutions are in the regular business of raising money by issuing bonds or
other instruments to the public. The actual dedication of the proceeds of the bonds to
the carrying out of PICOP's registered operations constituted a sufficient nexus with
such registered operaqtions so as to exempt PICOP from taxes ordinarily imposed upon
or in connection with issuance of such bonds.
The Supreme Court agrees with the Court of Appeals on this matter that the CTA and
CIR had erred in rejecting PICOP's claim for exemption from stamp taxes.
3. YES, PICOP is liable for deficiency income tax.
PICOP did not deny the existence of discrefancy in their Incom Tax Return and Books of
Account owing to their procedure of recording its export sales (US Dollars) on the basis
of a fixed rate, day to day and month to month, regardless of the actual exchange
rate and without waiting when the actual proceeds are received. In other words,

53
PICOP recorded its export sales at a pre-determined fixed exchange rate. That the pre-
determined rate was decided upon at the beginning of the year and continued to be
used throughout the year. Because of this, the CIR has made out at least a prima facie
case that PICOP had understated its sales aand overstated its cost of sales as set out in
its Income Tax Return. For the CIR has a right to assume that PICOP's Books of Accounts
speak the truth in this case since, as already noted, they embody what must appear to
be admissions against PICOP's own interest.
Dispositive:
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby
MODIFIED and PICOP is hereby ORDERED to pay the CIR the aggregate amount of
P43,794,252.51 itemized as follows:
(1) Thirty Five Percent (35%) transaction tax P 3,578,543.51
(2) Total Deficiency Income Tax Due P40,215,709.00
Aggregate amount due and payable P43,794,252.51

#46. Sky Internet, Inc. V CIR

Facts:
- Respondent (CIR) assessed Petitioner (Sky Internet) of deficiency income taxes
due to the disallowance of the following interest expenses claimed by the petitioner:

1. Interest expense of P 3,872,767.82 which it paid to Sky Vision (a wholly owned

subsidiary of the petitioner);
2. Interest expense of P 90,954.22, which was not deducted against interest
income, subjected to final withholding tax.

- The disallowance on the first item was made pursuant to Sec. 34 (B)(2) of the 1997
NIRC which states that if both the taxpayer and the person to whom the payment has
been made or is to be made are persons under Section 36(B), then the interest expense
incurred or shall be incurred shall not be allowed as deduction from gross income. Further
Section 36 (B)(3) of the 1997 NIRC provides, two corporations will be considered related
parties, if they satisfy the following requirements:

a.) More than 50% in value of the outstanding stock of each is owned directly or
indirectly by or for the same individual; and
b.) If either one of such corporations is with respect to the taxable year of the
corporation preceding the date of the sale or exchange, was, under the law
applicable to such taxable year, a personal holding company or a foreign
personal holding company.

54
ISSUE:

- Whether or not the interest expense claimed is allowable as deduction?

- Whether or not Sky Internet and Sky Vision are related parties?

HELD:

The interest expense should be ALLOWED as deduction. It was shown that there
was an indebtedness incurred by the petitioner and there was legal liability to pay
interest.

The subject transaction is NOT AN EXCEPTION under Section 34 (B)(2) in relation to

Section 36 of the 1997 NIRC because Sky Internet and Sky Vision are NOT RELATED PARTIES
since no individual owns, directly or indirectly more than 50% of the outstanding capital
stock of petitioner and Sky Vision.

As to item no. 2, it was erroneous on the part of the respondent to disallow the
interest expense of P 90,954.22 claimed by petitioner since this amount was never
claimed as deduction. The total interest expense claimed was already net of the amount
of P 90,954.22 (the reduction in the interest expense claimed based on 41% interest
income earned by the petitioner pursuant to Section 34 (B)(1) of the 1997 NIRC)

PETITION FOR REVIEW WAS GRANTED

___________________________________________________________________________________

#43 TAMBUNTING PAWNSHOP, INC. v. COMMISSIONER OF INTERNAL REVENUE. G.R. No.

179085. January 21, 2010

FACTS:
Petitioner was issued an assessment for deficiency VAT for the taxable year of 1999.
Petitioner, after his protest with the CIR merited no response, it filed a Petition for Review
with the CTA raising that pawnshops are not subject to VAT under the NIRC and that
pawn tickers are not subject to documentary stamp tax. The CTA ruled that petitioner is
liable for the deficiency VAT and the documentary stamp tax. The petitioner argues that
a pawnshop is not enumerated as one of those engaged in sale or exchange of services
in Section 108 of the National Internal Revenue Code and citing the case of
Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshops, Inc. as basis.

ISSUE: Whether petitioner is liable for the deficiency VAT. Whether the petitioner is liable
for the documentary stamp tax.

55
RULING: YES. The Court cited the case of First Planters Pawnshop, Inc. v. Commissioner of
Internal Revenue. In the foregoing case, since the imposition of VAT on pawnshops, which
are non-bank financial intermediaries, was deferred for the tax years 1996 to 2002,
petitioner is not liable for VAT for the tax year 1999. NO. Sections 195 of the NIRC provides
that on the pledge of personal property, there shall be collected a documentary stamp
tax. The Court held in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal
Revenue that the documentary stamp tax is an excise tax on the exercise of a right or
privilege and that pledge is among the privileges, the exercise of which is subject to
documentary stamp taxes. For purposes of taxation, pawn tickets are proof of an
exercise of a taxable privilege of concluding a contract of pledge.

#47. PHILIPPINE REFINING COMPANY (now known as UNILEVER [PRC], INC.) v. COURT OF
APPEALS

FACTS: Out of the sixteen (16) accounts alleged as bad debts, only three (3) accounts
have met the requirements of the worthlessness of the accounts, hence were properly
written off as bad debts.

ISSUE: What are the requirements for a debt to be considered as worthless?

HELD:
For debts to be considered as worthless, and thereby qualify as bad debts making
them deductible, the taxpayer should show that:
(1) there is a valid and subsisting debt;
(2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the taxpayer.

Additionally, before a debt can be considered worthless, the taxpayer must also
show that it is indeed uncollectible even in the future. Furthermore, there are steps
outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz:
(1) sending of statement of accounts;
(2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.

Mere allegations cannot prove the worthlessness of debts.

56
#48 FERNANDEZ HERMANOS INC. vs CIR and CTA

Facts: The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized

for the principal purpose of engaging in business as an "investment company". Upon
verification of the taxpayer's income tax returns, the assessments of CIR resulted to
alleged deficiency income taxes against the taxpayer from 1950-1954. Said
assessments were the result of alleged discrepancies found upon the examination
and verification of the taxpayer's income tax returns for the said years wherein
Hermanos declared some items as deductibles and which were disallowed by CIR.
CIR’s deficiency assessments were modified by the CTA. Hence, this appeal.

Issue: WON CTA was correct in modifying CIR’s deficiency assessment

Held:
1.Re:allowances/disallowancesoflosses.

(a)AllowanceoflossesinMatiLumberCo.(1950)

Discussion: the taxpayer had shares of stocks in the Mati Lumber which were
declared as worthless securities when Mati Lumber ceased to operate.

When the company ceased to operate, it had no assets, in other words, completely
insolvent. This information as to the insolvency of the Company — reached (the
taxpayer) in 1950, when it properly claimed the loss as a deduction in its 1950 tax return,
pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the National Internal Revenue
Code. Thus, there was adequate basis for the writing off of the stock as worthless
securities.

(b)Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc.(1951).

Discussion: Sometime in 1945, Palawan Manganese Mines, Inc., a subsidiary of the

petitioner corporation, requested financial help from petitioner to enable it to
resume its mining operations. But despite these advances and the resumption of
operations by Palawan Manganese Mines, Inc., it continued to suffer losses. By 1951,
petitioner became convinced that those advances could no longer be recovered
and were declared as losses or bad debts. But still it continued to give advances
until 1952.

The advances made by the taxpayer to Palawan were investments.

The memorandum agreement signed by the parties appears to be very clear that
the consideration for the advances made by petitioner was 15% of the net profits of

57
Palawan Manganese Mines,Inc.In other words, if there were no earnings or profits,
there was no obligation to repay those advances.

It has been held that the voluntary advances made without expectation of
repayment do not result in deductible losses.

The said amount deductible as a bad debt?

Petitioner could not sue for recovery under the memorandum agreement because
the obligation of Palawan Manganese Mines, Inc. was to pay petitioner 15% of its net
profits, not the advances. No bad debt could arise where there is no valid and
subsisting debt.

(c)Disallowance of losses in Balamban Coal Mines (1950 and 1951). — The Court
sustains the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent
by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and
1951, respectively, and claimed as losses in the taxpayer's returns for said years.

The Tax Court correctly held that the losses "are deductible in 1952, when the mines
were abandoned, and not in 1950and 1951, when they were still in operation."

(d)and(e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda

Samal(1951-1952).Discussion: In both Haciendas, CIR disallowed the declaration of
losses because it claimed that the farms were operated solely for pleasure or as a
hobby and not for profit.

TheCourtisconvincedthattheHaciendaDalupiri(andSama
l ) w a s o p e r a t e d b y petitioner for business and not pleasure.
It was mainly a cattle farm, although a few race horses were also raised. It does not
appear that the farm was used by petitioner for entertainment, social activities or
other non-business purpose. Therefore, it is entitled to deduct expenses and loses in
connection with the operation of said farm. Under section 100 of Revenue
Regulations No. 2, losses are to be determined by means of inventories. Thus, CIR
erred in disallowing he deductions of said losses.

2. Disallowance of excessive depreciation of buildings (1950-1954)

Discussion: Taxpayer claimed a depreciation allowance for its buildings at the

annual rate of 10%. The commissioner claimed that the reasonable depreciation
rate is only 3% per annum, and hence, disallowed as excessive the amount claimed
as depreciation allowance in excess of 3% annually.

We sustain the Tax Court’s finding that the taxpayer did not submit adequate proof
of the correctness of the taxpayer’s claim that the depreciable assets or buildings in

58
question had a useful life only of 10 years so as to justify its 10% depreciation per
annum claim.

3. Taxable increase in net worth (1950-1951).

Discussion: Respondent contends that the reduction of petitioner’s liability to Manila

Insurance Company resulted in the increase of petitioner’s net worth to the extent of
P30,050.00 which is taxable.

This is erroneous. The principle underlying the taxability of an increase in the net
worth of a taxpayer rests in the theory that such an increase in net worth, if
unreported and unexplained by the tax payer, comes from income derived from a
taxable source. In this case, the increase in the net worth of petitioner for 1950 to the
extent of P30,050.00 was not the result of the receipt of taxable income. It was
merely the outcome of the correction of an error in the entry in its books relating to
its indebtedness to the Manila Insurance Company. The Income Tax Law imposes a
tax on income; it does not tax any or every increase in net worth whether or not
derived from income. Surely, the said sum of P30,050.00 was not income to
petitioner, and it was error for respondent to assess a deficiency income tax on said
amount.

The same is true for the increase in taxpayer’s net worth as a result of the correction
of error in its entries in its books relating to its indebtedness to certain creditors, which
had been erroneously overstated or listed as outstanding when they had in fact
been duly paid.

4. Gain realized from sale of real property (1950).

The evidence shows that this property was acquired in 1926 for P11,852.74 and was
sold in 1950 for P60,000.0, apparently, resulting in a gain of P48, 147.26. The taxpayer
reported in its return a gain of P37,000.00 or a discrepancy of P11,147.26. It was
sufficiently proved from the taxpayer’s books that after acquiring the property, the
tax payer had made improvements totaling P11,147.26, accounting for the
apparent discrepancy in the reported gain. In other words, this figure added to the
original acquisition cost of P11,852.74 remains in a total cost of P23,000.00 and the
gain derived from the sale of the property for P60,000.00 was correctly reported by
the taxpayer at P37,000.00

59
#49 CALASANZ v CIR
DOCTRINE:
To determine whether it is in trade or business, the decision should be based on
circumstances. Land was improved after acceptance and subdivided and sold incurring
a large amount of receivables.

SUMMARY: Ursula Calasanz inherited from her father an agricultural land. Improvements
were introduced to make such land saleable and later in it was sold to the public at a
profit. The Revenue examiner adjudged Ursula and her spouse as engaged in business as
real estate dealers and required them to pay the real estate dealer’s tax. The activities
of Calasanz are indistinguishable from those invariably employed by one engaged in the
business of selling real estate. One strong factor is the business element of development
which is very much in evidence. They did not sell the land in the condition in which they
acquired it. Inherited land which an heir subdivides and makes improvements several
times higher than the original cost of the land is not a capital asset but an ordinary asses.
Thus, in the course of selling the subdivided lots, they engaged in the real estate business
and accordingly the gains from the sale of the lots are ordinary income taxable in full.

Facts: Petitioner Ursula Calasanz inherited from her father de Torres an agricultural land
located in Rizal with an area of 1.6M sqm. In order to liquidate her inheritance, Ursula
Calasanz had the land surveyed and subdivided into lots. Improvements, such as good
roads, concrete gutters, drainage and lighting system, were introduced to make the lots
saleable. Soon after, the lots were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue
on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale of
the subdivided lots, and reported fifty per centum thereof or P15,530.03 as taxable
capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged
petitioners engaged in business as real estate dealers, as defined in the NIRC, and
required them to pay the real estate dealer's tax and assessed a deficiency income tax
on profits derived from the sale of the lots based on the rates for ordinary income.
Tax court upheld the finding of the CIR, hence, the present appeal.

ISSUES:
a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed
tax. YES
b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates. ORDINARY INCOME

RATIO:

60
The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines
capital assets as follows:

[1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether
or not connected with his trade or business], but does not include, stock in trade of the
taxpayer or other property of a kind which would properly be included, in the inventory
of the taxpayer if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of his trade or business, or
property used in the trade or business of a character which is subject to the allowance
for depreciation provided in subsection [f] of section thirty; or real property used in the
trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. If the asset is not among
the exceptions, it is a capital asset; conversely, assets falling within the exceptions are
ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset
is a capital gain or an ordinary gain depending on the kind of asset involved in the
transaction.

However, there is no rigid rule or fixed formula by which it can be determined with finality
whether property sold by a taxpayer was held primarily for sale to customers in the
ordinary course of his trade or business or whether it was sold as a capital asset. Although
several factors or indices have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the absence of these
factors conclusive. Each case must in the last analysis rest upon its own peculiar facts and
circumstances.

Also a property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of
inherited real property usually gives capital gain or loss even though the property has to
be subdivided or improved or both to make it salable. However, if the inherited property
is substantially improved or very actively sold or both it may be treated as held primarily
for sale to customers in the ordinary course of the heir's business.

In this case, the subject land is considered as an ordinary asset. Petitioners did not sell
the land in the condition in which they acquired it. While the land was originally devoted
to rice and fruit trees, it was subdivided into small lots and in the process converted into
a residential subdivision and given the name Don Mariano Subdivision. Extensive
improvements like the laying out of streets, construction of concrete gutters and
installation of lighting system and drainage facilities, among others, were undertaken to
enhance the value of the lots and make them more attractive to prospective buyers. The
audited financial statements submitted together with the tax return in question disclosed
that a considerable amount was expanded to cover the cost of improvements. There is

61
authority that a property ceases to be a capital asset if the amount expended to improve
it is double its original cost, for the extensive improvement indicates that the seller held
the property primarily for sale to customers in the ordinary course of his business.

Another distinctive feature of the real estate business discernible from the records is the
existence of contracts receivables, which stood at P395,693.35. The sizable amount of
receivables in comparison with the sales volume of P446,407.00 during the same period
signifies that the lots were sold on installment basis and suggests the number, continuity
and frequency of the sales. Also of significance is the circumstance that the lots were
advertised for sale to the public and that sales and collection commissions were paid
out during the period in question.

Petitioners argument that they are merely liquidating the land must also fail. In Ehrman
vs. Commissioner, the American court in clear and categorical terms rejected the
liquidation test in determining whether or not a taxpayer is carrying on a trade or business
The court observed that the fact that property is sold for purposes of liquidation does not
foreclose a determination that a "trade or business" is being conducted by the seller.

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale may
be conducted in the most advantageous manner to the seller and he will not lose the
benefits of the capital gain provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which such a business is ordinarily
conducted. In that event, the liquidation constitutes a business and a sale in the ordinary
course of such a business and the preferred tax status is lost.

#50. Case: China Banking Corporation vs. CA, GR No. 125508 dated July 19, 2000
Topic: Capital Assets vs Ordinary Assets and Loss Limitation Rule

Facts: Sometime in 1980, petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hong kong subsidiary engaged in
financing and investment with "deposit-taking" function. In the course of the regular
examination of the financial books and investment portfolios of petitioner conducted by
Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as
a bad debt or as an ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed
petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of
surcharge, interest and compromise penalty. The disallowance of the deduction was
made on the ground that the investment should not be classified as being "worthless"
and that, although the Hongkong Banking Commissioner had revoked the license of First

62
CBC Capital as a "deposit-taking" company, the latter could still exercise, however, its
financing and investment activities. Assuming that the securities had indeed become
worthless, respondent Commissioner of Internal Revenue held the view that they should
then be classified as "capital loss," and not as a bad debt expense there being no
indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court
sustained the Commissioner, holding that the securities had not indeed become
worthless and ordered petitioner to pay its deficiency income tax for 1987 of
P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was
appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.

Issue: 1. Is the equity investment capital asset or an ordinary asset?

2. If the equity investment is wrote-off as being worthless, should it be treated as
capital loss?

Ruling: 1. An equity investment is a capital, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital loss. The gain or the loss is
ordinary when the property sold or exchanged is not a capital asset. A capital asset is
defined negatively in Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in subsection (f) of section twenty-nine; or real
property used in the trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC, would
be ordinary assets only to a dealer in securities or a person engaged in the purchase and
sale of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC
defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and their resale to customers; that is, one who as
a merchant buys securities and sells them to customers with a view to the gains and
profits that may be derived therefrom."

2. In the hands, however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets. When the shares held by such
investor become worthless, the loss is deemed to be a loss from the sale or exchange of
capital assets.
Section 29(d)(4)(B) of the NIRC states:

63
"(B) Securities becoming worthless. - If securities as defined in Section 20 become
worthless during the tax" year and are capital assets, the loss resulting therefrom shall,
for the purposes of his Title, be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets."
The above provision conveys that the loss sustained by the holder of the securities, which
are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or
exchange transaction. A capital gain or a capital loss normally requires the concurrence
of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or
exchanged is a capital asset. When securities become worthless, there is strictly no sale
or exchange but the law deems the loss anyway to be "a loss from the sale or exchange
of capital assets. A similar kind of treatment is given, by the NIRC on the retirement of
certificates of indebtedness with interest coupons or in registered form, short sales and
options to buy or sell property where no sale or exchange strictly exists. In these cases, the
NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the
application of the capital gain and loss provisions of the code.

Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains
derived from the sale or exchange of capital assets, and not from any other income of
the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation are not
intended for purchase or sale but as an investment. Unquestionably then, any loss
therefrom would be a capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only
to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section
29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
x x x x x x x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall
be allowed only to the extent of the gains from such sales or exchanges. If a bank or
trust company incorporated under the laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells any bond, debenture, note, or certificate
or other evidence of indebtedness issued by any corporation (including one issued by a
government or political subdivision thereof), with interest coupons or in registered form,
any loss resulting from such sale shall not be subject to the foregoing limitation and shall
not be included in determining the applicability of such limitation to other losses.
The exclusionary clause found in the foregoing text of the law does not include all forms
of securities but specifically covers only bonds, debentures, notes, certificates or other
evidence of indebtedness, with interest coupons or in registered form, which are the
instruments of credit normally dealt with in the usual lending operations of a financial
institution.Equity holdings cannot come close to being, within the purview of "evidence
of indebtedness" under the second sentence of the aforequoted paragraph. Verily, it is

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for a like thesis that the loss of petitioner bank in its equity investment in the Hongkong
subsidiary cannot also be deductible as a bad debt. The shares of stock in question do
not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt subject
to obligatory repayment by the latter, essential elements to constitute a bad debt, but a
long term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain
or loss upon the sale or exchange of property, as the case may be, shall be recognized.
The complete text reads:
SECTION 34. Determination of amount of and recognition of gain or loss.-
"(a) Computation of gain or loss. - The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis or adjusted basis for
determining gain and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other
disposition of property shall be to sum of money received plus the fair market value of
the property (other than money) received. (As amended by E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of
property shall be - (1) The cost thereof in cases of property acquired on or before
March 1, 1913, if such property was acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was acquired
by inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if it would be in
the hands of the donor or the last preceding owner by whom it was not acquired by
gift, except that if such basis is greater than the fair market value of the property at the
time of the gift, then for the purpose of determining loss the basis shall be such fair
market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired
for less than an adequate consideration in money or moneys worth, the basis of such
property is (i) the amount paid by the transferee for the property or (ii) the transferor's
adjusted basis at the time of the transfer whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired
in a transaction where gain or loss is not recognized under paragraph (c) (2) of this
section. (As amended by E.O. No. 37)
(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange of property,
the entire amount of the gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation (a) a corporation which is a party to a merger or consolidation
exchanges property solely for stock in a corporation which is, a party to the merger or
consolidation, (b) a shareholder exchanges stock in a corporation which is a party to
the merger or consolidation solely for the stock in another corporation also a party to
the merger or consolidation, or (c) a security holder of a corporation which is a party to
the merger or consolidation exchanges his securities in such corporation solely for stock
or securities in another corporation, a party to the merger or consolidation.

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"No gain or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for stock in such corporation of which as a result of such exchange
said person, alone or together with others, not exceeding four persons, gains control of
said corporation: Provided, That stocks issued for services shall not be considered as
issued in return of property."
The above law should be taken within context on the general subject of the
determination, and recognition of gain or loss; it is not preclusive of, let alone renders
completely inconsequential, the more specific provisions of the code. Thus, pursuant, to
the same section of the law, no such recognition shall be made if the sale or exchange
is made in pursuance of a plan of corporate merger or consolidation or, if as a result of
an exchange of property for stocks, the exchanger, alone or together with others not
exceeding four, gains control of the corporation. Then, too, how the resulting gain might
be taxed, or whether or not the loss would be deductible and how, are matters properly
dealt with elsewhere in various other sections of the NIRC. At all events, it may not be
amiss to once again stress that the basic rule is still that any capital loss can be deducted
only from capital gains under Section 33(c) of the NIRC.

In sum -
(a) The equity investment in shares of stock held by CBC of approximately 53% in its
Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a
capital, not an ordinary, asset.
(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss
sustained is a capital, not an ordinary, loss.
(c) The capital loss sustained by CBC can only be deducted from capital gains if any
derived by it during the same taxable year that the securities have become "worthless."
51. MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED, Petitioner, vs. COURT OF
APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

Facts:
Petitioner, a non-stock and non-profit corporation, was organized for the purpose of
holding title to and administering the employees’ trust or retirement funds (Employees’
Trust Fund) established for the benefit of the employees of Victorias Milling Company, Inc.
(VMC).
Petitioner decided to invest part of the Employees’ Trust Fund to purchase a lot in the
Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner bought the MBP lot
through VMC. Petitioner’s share in the MBP lot is 49.59%.
Petitioner invested ₱5,504,748.25 of the funds of the Employees' Trust Fund to purchase
the MBP lot. When the MBP lot was sold, the gross income of the Employees’ Trust Fund
from the sale of the MBP lot was ₱40,500,000. However, 7.5% withholding tax of ₱3,037,500
and broker’s commission were deducted from the proceeds.
Petitioner maintains that the tax exemption of the Employees’ Trust Fund rendered the
payment of ₱3,037,500 as illegal or erroneous; and that it should be refunded.

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The BIR, through its Revenue District Officer, wrote petitioner stating that under Section 26
of the Tax Code, petitioner is not exempt from tax on its income from the sale of real
property.
The CTA held that under Section 53(b) [now Section 60(b)] of the Tax Code, it is not
petitioner that is entitled to exemption from income tax but the income or earnings of the
Employees’ Trust Fund. The CTA stated that petitioner is not the pension trust itself but it is
a separate and distinct entity whose function is to administer the pension plan for some
VMC employees.
The CA affirmed said decision, stating that petitioner's claim for refund of withheld
creditable tax is bereft of solid juridical basis.

Issue: WON petitioner or the Employees’ Trust Fund is entitled to tax exemption for its share
in the proceeds from the sale of the MBP lot.

Ruling: Yes. According to the SC, the tax-exempt character of the Employees’ Trust Fund
has long been settled.
In an earlier case held by the CTA involving the same petitioner, it affirmed the BIR ruling
that the pension plan funds and assets, as assigned and transferred to petitioner in trust,
is exempt from income tax pursuant to Republic Act 4917, in relation to in relation to
Section 56(b), now Section 60 (b), of the Tax Code.
It is also settled that petitioner, under a Memorandum of Understanding with VMC, exists
for the purpose of holding title to, and administering, the tax-exempt Employees’ Trust
Fund established for the benefit of VMC’s employees. As such, petitioner has the
personality to claim tax refunds due the Employees' Trust Fund.
As held in the case of Commissioner of Internal Revenue vs. The Honorable Court of
Appeals, The Court of Tax Appeals and GCL Retirement Plan, the Supreme Court held:
There can be no denying either that the final withholding tax is collected from
income in respect of which employees’ trusts are declared exempt (Sec. 56(b),
now 53(b), Tax Code). The application of the withholdings system to interest on
bank deposits or yield from deposit substitutes is essentially to maximize and
expedite the collection of income taxes by requiring its payment at the source. If
an employees’ trust like the GCL enjoys a tax-exempt status from income, we see
no logic in withholding a certain percentage of that income which it is not
supposed to pay in the first place.
Similarly, the income of the trust funds involved herein is exempt from the payment of the
creditable withholding tax on the sale of their real property.
Since the income from the sale of the MBP lot came from an investment by the
Employees' Trust Fund, petitioner, as trustee of the Employees’ Trust Fund, is entitled to
claim the tax refund of ₱3,037,500 which was erroneously paid in the sale of the MBP lot.

Rationale for the tax-exemption privilege of income derived from employees’ trusts
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension
trust. Otherwise, taxation of those earnings would result in a diminution of accumulated
income and reduce whatever the trust beneficiaries would receive out of the trust fund.

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This would run afoul of the very intendment of the law (Commissioner of Internal Revenue
v. Court of Appeals).

52. ING BANK N.V v. COMMISSIONER OF INTERNAL REVENUE

FACTS:
Petitioner ING Bank, N.V. (ING Bank) received a Final Assessment Notice covering
deficiency assessments for several internal revenue taxes for taxable years 1996 and 1997.
ING Bank filed a protest on the deficiency assessments with the BIR but were denied by
the latter.

The CTA Division held that ING Bank is liable for the withholding tax on compensation and
documentary stamp tax (DST) on special savings accounts and deficiency onshore tax.
ING Bank then filed a Petition for Review before the CTA En Banc in which the latter
dismissed for lack of merit. While the case was pending before the SC, ING Bank availed
for the tax amnesty under R.A. No. 9480 or the Tax Amnesty Act of 2007 with respect to its
liabilities for deficiency DST and onshore tax.

As to the deficiency assessment on the withholding tax on compensation, ING Bank insists
that the bonus accruals in 1996 and 1997 were not yet subject to withholding tax because
the bonuses were actually distributed only in the succeeding years of their accrual
(namely, 1997 and 1998) when the amounts were finally determined. The CIR contends
that ING Bank’s act of claiming the subject bonuses as deductible expenses in its taxable
income although it has not yet withheld and remitted the corresponding withholding tax
to the BIR contravened Section 34(k) of the NIRC.

ISSUE:
Whether or not the bonus accruals in 1996 and 1997 are not yet subject to withholding
tax since the bonuses were only to be distributed in the succeeding years of their accrual
when the amounts are fully determined.

RULING:
Yes, the bonus accruals in 1996 and 1997 are subject to withholding tax because the duty
to withhold income tax arises upon its accrual. The obligation of the employer to deduct
and withhold the related withholding tax arises at the time the income was paid or
accrued or recorded as an expense in the employer’s books, whichever comes first.

The tax on compensation income is withheld at source under the creditable withholding
tax system wherein the tax withheld is intended to equal or at least approximate the tax
due of the payee on the said income. It was designed to enable (a) the individual
taxpayer to meet his or her income tax liability on compensation earned; and (b) the
government to collect at source the appropriate taxes on compensation. Taxes withheld
are creditable in nature. Thus, the employee is still required to file an income tax return to
report the income and/or pay the difference between the tax withheld and the tax due

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on the income. For over withholding, the employee is refunded. Therefore, absolute or
exact accuracy in the determination of the amount of the compensation income is not
a prerequisite for the employer’s withholding obligation to arise.

Furthermore, the duty to withhold the tax on compensation depends on the method of
accounting income and expenses adopted by the taxpayer. If the taxpayer is on cash
basis, the expense is deductible in the year it was paid regardless of the year it was
incurred; or if he is on the accrual method, he can deduct the expense upon accrual
thereof.

In the case at bar, ING Bank accrued or recorded the bonuses as deductible business
expense in its books. In this sense, there was already a constructive payment for income
tax purposes as these accrued bonuses were already allotted or made available to its
officers and employees.

Therefore, ING Bank’s obligation to withhold the realted withholding tax due from the
deductions for accrued bonuses arose at the time of accrual and not at the time of
actual payment.

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