1. Madrigal v. Rafferty
The aims and purposes of
On February 25, 1915, Vicente Madrigal filed a sworn declaration on the
prescribed form with the Collector of Internal Revenue, showing, as his
total net income for the year 1914, the sum of P296,302.73. Subsequently
Madrigal submitted the claim that the said P296,302.73 did not represent
his income for the year 1914, but was in fact the income of the conjugal
partnership existing between himself and his wife Susana Paterno, and that
in computing and assessing the additional income tax provided by the Act
of Congress of October 3, 1913, the income declared by Vicente Madrigal
should be divided into two equal parts, one-half to be considered the
income of Vicente Madrigal and the other half the income of Susana
Paterno.
The income of Vicente Madrigal and his wife Susana Paterno for the year
1914 was made up of three items: (1) P362,407.67, the profits made by
Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the
profits made by Susana Paterno in her embroidery business; (3) P16,687.80,
the profits made by Vicente Madrigal in a pawnshop company. The sum of
these three items is P383,181.97, the gross income of Vicente Madrigal and
Susana Paterno for the year 1914. General deductions were claimed and
allowed in the sum of P86,879.24. The resulting net income was
P296,302.73.
ISSUES.
The contentions of plaintiffs and appellants, having to do solely with the
additional income tax, is that it should be divided into two equal parts,
because of the conjugal partnership existing between them. The learned
argument of counsel is mostly based upon the provisions of the Civil Code
establishing the sociedad de gananciales. The counter contentions of
appellees are that the taxes imposed by the Income Tax Law are as the
name implies taxes upon income and not upon capital and property; that the
fact that Madrigal was a married man, and his marriage contracted under
the provisions governing the conjugal partnership, has no bearing on
income considered as income, and that the distinction must be drawn
between the ordinary form of commercial partnership and the conjugal
partnership of spouses resulting from the relation of marriage.
The essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of time is
called capital. A flow of services rendered by that capital by the payment of
money from it or any other benefit rendered by a fund of capital in relation
to such fund through a period of time is called income. Capital is wealth,
while income is the service of wealth. (See Fisher, "The Nature of Capital
and Income.") The Supreme Court of Georgia expresses the thought in the
following figurative language: "The fact is that property is a tree, income is
the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit."
(Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a
tax on property. "Income," as here used, can be defined as "profits or
gains."
With these general observations relative to the Income Tax Law in force in
the Philippine Islands, we turn for a moment to consider the provisions of
the Civil Code dealing with the conjugal partnership. Recently in two
elaborate decisions in which a long line of Spanish authorities were cited,
this court, in speaking of the conjugal partnership, decided that "prior to
the liquidation, the interest of the wife, and in case of her death, of her
heirs, is an interest inchoate, a mere expectancy, which constitutes
neither a legal nor an equitable estate, and does not ripen into title until
there appears that there are assets in the community as a result of the
liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off.
Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of the conjugal
partnership. She has an interest in the ultimate property rights and in the
ultimate ownership of property acquired as income after such income has
become capital. Susana Paterno has no absolute right to one-half the
income of the conjugal partnership. Not being seized of a separate estate,
Susana Paterno cannot make a separate return in order to receive the
benefit of the exemption which would arise by reason of the additional
tax. As she has no estate and income, actually and legally vested in her
and entirely distinct from her husband's property, the income cannot
properly be considered the separate income of the wife for the purposes of
the additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The husband
and wife are only entitled to the exemption of P8,000, specifically granted
by the law. The higher schedules of the additional tax directed at the
incomes of the wealthy may not be partially defeated by reliance on
provisions in our Civil Code dealing with the conjugal partnership and
having no application to the Income Tax Law.
the Income Tax Law must be given effect.
"The statute and the regulations promulgated in accordance therewith
provide that each person of lawful age (not excused from so doing) having
a net income of $3,000 or over for the taxable year shall make a return
showing the facts; that from the net income so shown there shall be
deducted $3,000 where the person making the return is a single person, or
married and not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that where the
husband and wife both make returns (they living together), the amount of
deduction from the aggregate of their several incomes shall not exceed
$4,000.
"The only occasion for a wife making a return is where she has income
from a sole and separate estate in excess of $3,000, or where the husband
and wife neither separately have an income of $3,000, but together they
have an income in excess of $4,000, in which latter event either the
husband or wife may make the return but not both. In all instances the
income of husband and wife whether from separate estates or not, is
taken as a whole for the purpose of the normal tax. Where the wife has
income from a separate estate and makes return thereof, or where her
income is separately shown in the return made by her husband, while the
incomes are added together for the purpose of the normal tax they are
taken separately for the purpose of the additional tax. In this case,
however, the wife has no separate income within the contemplation of the
Income Tax Law.
2. Fisher v. Trinidad
STOCK DIVIDENDS – A REPRESENTATION OF THE INCREASED
VALUE OF THE ASSETS OF CORPORATION.
The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation.
There has been no separation or segregation of his interest. All the
property or capital of the corporation still belongs to the corporation.
There has been no separation of the interest of the stockholder from the
general capital of the corporation. The stockholder, by virtue of the stock
dividend, has no separate or individual control over the interest
represented thereby, further than he had before the stock dividend was
issued. He cannot use it for the reason that it is still the property of the
corporation and not the property of the individual holder of stock
dividend. A certificate of stock represented by the stock dividend is simply
a statement of his proportional interest or participation in the capital of
the corporation. For bookkeeping purposes, a corporation, by issuing
stock dividend, acknowledges a liability in form to the stockholders,
evidenced by a capital stock account. The receipt of a stock dividend in no
way increases the money received of a stockholder nor his cash account
at the close of the year. It simply shows that there has been an increase in
the amount of the capital of the corporation during the particular period,
which may be due to an increased business or to a natural increase of the
value of the capital due to business, economic, or other reasons. We
believe that the Legislature, when it provided for an "income tax,"
intended to tax only the "income" of corporations, firms or individuals,
as that term is generally used in its common acceptation; that is that the
income means money received, coming to a person or corporation for
services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or
assets of a corporation, firm, or individual, should be taxed as "income."
Such property can be reached under the ordinary from of taxation.
There is a clear distinction between an extraordinary cash dividend, no
matter when earned, and stock dividends declared, as in the present
case. The one is a disbursement to the stockholder of accumulated
earnings, and the corporation at once parts irrevocably with all interest
thereon. The other involves no disbursement by the corporation. It
parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in
the entire capital, including such as by investment of accumulated
profits has been added to the original capital. They are not income to
him, but represent additions to the source of his income, namely, his
invested capital.
The latter receives, not an actual dividend, but certificates of stock which
evidence in a new proportion his interest in the entire capital. When a
cash becomes the absolute property of the stockholders and cannot be
reached by the creditors of the corporation in the absence of fraud. A
stock dividend however, still being the property of the corporation and not
the stockholder, it may be reached by an execution against the
corporation, and sold as a part of the property of the corporation. In such
a case, if all the property of the corporation is sold, then the stockholder
certainly could not be charged with having received an income by virtue of
the issuance of the stock dividend. Until the dividend is declared and paid,
the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well
established that cash dividend, whether large or small, are regarded as
"income" and all stock dividends, as capital or assets
An income subject to taxation under the law must be an actual income
and not a promised or prospective income.
Of course, income received as dividends is taxable as an income but an
income from "dividends" is a very different thing from receipt of a "stock
dividend." One is an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of corporation.
Having reached the conclusion, supported by the great weight of the
authority, that "stock dividends" are not "income," the same cannot be
taxes under that provision of Act No. 2833 which provides for a tax upon
income. Under the guise of an income tax, property which is not an
income cannot be taxed.
3. Conwi v. CTA (deemed superceded since prevailing doctrine is that
non-resident citizens are taxable only on income derived from sources
within the Philippines)
The issue now is, what exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income tax purposes.
Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual
inward remittances, and, therefore, they are not included in the coverage of
Central Bank Circular No. 289 which provides for the specific instances
when the par value of the peso shall not be the conversion rate used. They
conclude that their earnings should be converted for income tax purposes
using the par value of the Philippine peso.
A careful reading of said CB Circular No. 289 8 8a shows that the subject
matters involved therein are export products, invisibles, receipts of foreign
exchange, foreign exchange payments, new foreign borrowing and
investments — nothing by way of income tax payments. Thus, petitioners
are in error by concluding that since C.B. Circular No. 289 does not apply
to them, the par value of the peso should be the guiding rate used for
income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which
came to them within a specified period of time of two years as payment for
their services.
Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribe a uniform rate of exchange from US dollars to Philippine pesos
for INTERNAL REVENUE TAX PURPOSES for the years 1970 and
1971, respectively. Said revenue circulars were a valid exercise of the
authority given to the Secretary of Finance by the Legislature which
enacted the Internal Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary of Finance
himself. 12
Petitioners argue that since there were no remittances and acceptances of
their salaries and wages in US dollars into the Philippines, they are exempt
from the coverage of such circulars. Petitioners forget that they are
citizens of the Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax. Sec. 21, NIRC, as
amended, does not brook any exemption.
4. CIR v. Filinvest
No deficiency income tax can be assessed on the gain on the supposed
dilution and/or increase in the value of FDC's shareholdings in FAC
which the CIR, at any rate, failed to establish. Bearing in mind the
meaning of "gross income" as above discussed, it cannot be gainsaid,
even then, that a mere increase or appreciation in the value of said shares
cannot be considered income for taxation purposes. Since "a mere
advance in the value of the property of a person or corporation in no
sense constitute the 'income' specified in the revenue law," it has been
held in the early case of Fisher vs. Trinidad, 74 that it "constitutes and
can be treated merely as an increase of capital." Hence, the CIR has no
factual and legal basis in assessing income tax on the increase in the
value of FDC's shareholdings in FAC until the same is actually sold at a
profit. CIDTcH
Despite the broad parameters provided, however, we find that the CIR's
powers of distribution, apportionment or allocation of gross income and
deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue
Regulations No. 2 does not include the power to impute "theoretical
interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of
the 1993 NIRC, 42 after all, the term "gross income" is understood to mean
all income from whatever source derived, including, but not limited to the
following items: compensation for services, including fees, commissions,
and similar items; gross income derived from business; gains derived from
dealings in property;" interest; rents; royalties; dividends; annuities; prizes
and winnings; pensions; and partner's distributive share of the gross income
of general professional partnership. 43 While it has been held that the
phrase "from whatever source derived" indicates a legislative policy to
include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted
to mean "cash received or its equivalent", "the amount of money coming
to a person within a specific time" or "something distinct from principal
or capital." 44 Otherwise stated, there must be proof of the actual or, at
the very least, probable receipt or realization by the controlled taxpayer of
the item of gross income sought to be distributed, apportioned or
allocated by the CIR. DAcaIE
Our circumspect perusal of the record yielded no evidence of actual or
possible showing that the advances FDC extended to its affiliates had
resulted to the interests subsequently assessed by the CIR. For all its
harping upon the supposed fact that FDC had resorted to borrowings from
commercial banks, the CIR had adduced no concrete proof that said funds
were, indeed, the source of the advances the former provided its affiliates.
While admitting that FDC obtained interest- bearing loans from commercial
banks, 45 Susan Macabelda — FDC's Funds Management Department
Manager who was the sole witness presented before the CTA — clarified
that the subject advances were sourced from the corporation's rights
offering in 1995 as well as the sale of its investment in Bonifacio Land in
1997. 46 More significantly, said witness testified that said advances: (a)
were extended to give FLI, FAI, DSCC and FCI financial assistance for
their operational and capital expenditures; and, (b) were all temporarily in
nature since they were repaid within the duration of one week to three
months and were evidenced by mere journal entries, cash vouchers and
instructional letters." 47
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross
income, there would still be no factual basis for the imputation of
theoretical interests on the subject advances and assess deficiency income
taxes thereon. More so, when it is borne in mind that, pursuant to Article
1956 of the Civil Code of the Philippines, no interest shall be due unless it
has been expressly stipulated in writing. Considering that taxes, being
burdens, are not to be presumed beyond what the applicable statute
expressly and clearly declares,48 the rule is likewise settled that tax
statutes must be construed strictly against the government and
liberally in favor of the taxpayer. 49 Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. 50 While it is true that taxes are the lifeblood of
the government, it has been held that their assessment and collection should
be in accordance with law as any arbitrariness will negate the very reason
for government itself.
5. Baier-Nickel v. CIR
The fact that recipient of commission income is the President
and majority stockholder of the Philippine company, does not alter the
source of income. There are only two ways by which the President and
other members of the Board can be granted compensation apart from
reasonable per diems: (1) when there is a provision in the by-laws fixing
their compensation; and (2) when the stockholders agree to give it to them.
If none of these conditions are present, commission income cannot be
automatically attributed to petitioner’s position in the company (Juliane
Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)
6. CIR v. Baier-Nickel
The facts show that respondent Juliane Baier-Nickel, a non-resident
German citizen, i s t h e P r e s i d e n t o f J U B A N I T E X , I n c. , a d o
m e s t i c co r p o r a t i o n e n g a g e d i n " [m]anufacturing, marketing
on wholesale only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile products."4 Through
JUBANITEX's General Manager, Marina Q. Guzman, the corporation
appointed and engaged the services of respondent as commission agent. It
was agreed that respondent will receive 10% sales commission on all sales
actually concluded and collected through her efforts. 5In 1995, respondent
received the amount of P1,707,772.64, representing her sales commission
income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the
Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed
her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26. 6On April 14, 1998, respondent filed a claim
to refund the amount of P170,777.26 alleged to have been mistakenly
withheld and remitted by JUBANITEX to the BIR. Respondent contended
that her sales commission income is not taxable in the Philippines because
the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.
The issue here is whether respondent's sales commission income is
taxable in the Philippines.
SEC. 25. Tax on Nonresident Alien Individual. —
( A ) N o n r e s i d e n t A l i e n E n g a g e d i n Tr a d e o r B u s i n e s s
W i t h i n t h e Philippines. —
(1) In General. — A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the same
manner as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident alien doing business in the
Philippines,' Section 22(G) of this Code notwithstanding.
Non-resident aliens, whether or not engaged in trade or business, are
subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the
taxability of non-resident aliens is the income's "source." In construing
the meaning of "source" in Section 25 of the NIRC, resort must be had
on the origin of the provision.
Under the said Code, compensation for labor and personal services
performed in the U.S., is generally treated as income from U.S. sources;
while compensation for said services performed outside the U.S., is treated
as income from sources outside the U.S. 1
If the income is from labor the place where the labor is done should be
decisive; if it is done in this country, the income should be from "sources
within the United States." If the income is from capital, the place where
the capital is employed should be decisive; if it is employed in this
country, the income should be from "sources within the United States." If
the income is from the sale of capital assets, the place where the sale is
made should be likewise decisive.
"Source" in this fundamental light. It is not a place, it is an activity or
property. As such, it has a situs or location, and if that situs or location
is within the United States the resulting income is taxable to
nonresident aliens and foreign corporations. HSTAcI
The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered. 17
The source of an income is the property, activity or service that produced
the income.
The Situs of the activity that determines whether such income is taxable
in the Philippines
BOAC, during the periods covered by the subject assessments, maintained
a general sales agent in the Philippines. That general sales agent, from 1959
to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down
the whole trip into series of trips — each trip in the series corresponding to
a different airline company; (3) receiving the fare from the whole trip; and
(4) consequently allocating to the various airline companies on the basis of
their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the
IATA Agreement."
The source of an income is the property, activity or service that produced
the income. For the source of income to be considered as coming from
the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged
hands here and payments for fares were also made here in Philippine
currency. The situs of the source of payments is the Philippines. The flow
of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden
of supporting the government.
The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With respect to
rendition of labor or personal service, as in the instant case, it is the place
where the labor or service was performed that determines the source of
the income. There is therefore no merit in petitioner's interpretation
which equates source of income in labor or personal service with the
residence of the payor or the place of payment of the income.
Tax refunds are in the nature of tax exemptions and are to be construed
strictissimi juris against the taxpayer. 24 To those therefore, who claim a
refund rest the burden of proving that the transaction subjected to tax is
actually exempt from taxation. aDHCAE
What she presented as evidence to prove that she performed income
producing activities abroad, were copies of documents she allegedly faxed
to JUBANITEX and bearing instructions as to the sizes of, or designs and
fabrics to be used in the finished products as well as samples of sales
orders purportedly relayed to her by clients. However, these documents do
not show whether the instructions or orders faxed ripened into concluded
or collected sales in Germany. At the very least, these pieces of evidence
show that while respondent was in Germany, she sent instructions/orders
to JUBANITEX.
She pointed out that respondent presented no contracts or orders signed by
the customers in Germany to prove the sale transactions therein. The
concern raised by petitioner's counsel as to the absence of substantial
evidence that w ould constitute proof that the sale transactions for which
respondent was paid commission actually transpired outside the
Philippines, is relevant because respondent stayed in the Philippines for 89
days in 1995. Except for the months of July and September 1995,
respondent was in the Philippines in the months of March, May, June, and
August 1995, 30 the same months when she earned commission income for
services allegedly performed abroad.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a
reasonable mind might accept as adequate to support the conclusion 31
that it was in Germany where she performed the income producing
service which gave rise to the reported monthly sales in the months of
March and May to September of 1995. She thus failed to discharge the
burden of proving that her income was from sources outside the
Philippines and exempt from the application of our income tax law.
Hence, the claim for tax refund should be denied.
That respondent is entitled to refund the sum withheld from her sales
commission income for the year 1994. This ruling has no bearing in the
instant controversy because the subject matter thereof is the income of
respondent for the year 1994 while, the instant case deals with her income
in 1995. Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that rendered
the judgment must have jurisdiction over the subject matter and the parties;
(3) it must be a judgment on the merits; (4) there must be between the two
cases identity of parties, of subject matter, and of causes of action.
7. CIR v. Marubeni Corp.
Respondent Marubeni Corporation is a foreign corporation organized and
existing under the laws of Japan. It is engaged in general import and export
trading, financing and the construction business. It is duly registered to
engage in such business in the Philippines and maintains a branch office in
Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue
issued a letter of authority to examine the books of accounts of the Manila
branch office of respondent corporation for the fiscal year ending March
1985. In the course of the examination, petitioner found respondent to have
undeclared income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the National
Development Company (NDC) in connection with the construction and
installation of a wharf/port complex at the Leyte Industrial Development
Estate in the municipality of Isabel, province of Leyte. The other contract
was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
co n s t r u ct i o n o f a n a m m o n i a s t o r a g e co m p l e x a l s o a t t h
e L e y t e I n d u s t r i a l Development Estate. On March 1, 1986,
petitioner's revenue examiners recommended an assessment for deficiency
income, branch profit remittance, contractor's and commercial broker's
taxes. Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August
15, 1986 from petitioner assessing respondent several deficiency taxes. The
assessed deficiency internal revenue taxes, inclusive of surcharge and
interest
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a
one-time amnesty covering unpaid income taxes for the years 1981 to 1985
was issued.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of
the Court of Tax Appeals which ruled that herein respondent's deficiency
tax liabilities were extinguished upon respondent's availment of tax
amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit
remittance, and contractor's taxes assessed by petitioner." 5
The main controversy in this case lies in the interpretation of the exception
to the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types
of taxes involved herein — income tax, branch profit remittance tax and
contractor's tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very
clear and unambiguous. It excepts from income tax amnesty those
taxpayers "with income tax cases already filed in court as of the effectivity
hereof." The point of reference is the date of effectivity of E.O. No. 41. The
filing of income tax cases in court must have been made before and as of
the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be
disqualified under Section 4 (b) there must have been no income tax cases
filed in court against him when E.O. No. 41 took effect. This is regardless
of when the taxpayer filed for income tax amnesty, provided of course he
files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit remittance and
contractor's tax assessments was filed by respondent with the Court of Tax
Appeals on September 26, 1986. When E.O. No. 41 became effective on
August 22, 1986, CTA Case No. 4109 had not yet been filed in court.
Respondent corporation did not fall under the said exception in Section 4
(b), hence, respondent was not disqualified from availing of the amnesty for
income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax
assessment. A branch profit remittance tax is defined and imposed in
Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue
Code. 6 In the tax code, this tax falls under Title II on Income Tax. It is a
tax on income. Respondent therefore did not fall under the exception in
Section 4 (b) when it filed for amnesty of its deficiency branch profit
remittance tax assessment.
The diffi culty herein is w ith respect to the contractor's tax assessment and
respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64
expanded the coverage of E.O. No. 41 by including estate and donor's taxes
and tax on business. Estate and donor's taxes fall under Title III of the Tax
Code while business taxes fall under Chapter II, Title V of the same. The
contractor's tax is provided in Section 205, Chapter II, Title V of the Tax
Code; it is defined and imposed under the title on business taxes, and is
therefore a tax on business. 7
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot
be construed to refer to E.O. No. 41 and its date of effectivity. The general
rule is that an amendatory act operates prospectively. 9 While an
amendment is generally construed as becoming a part of the original act as
if it had always been contained therein, 10 it may not be given a retroactive
effect unless it is so provided expressly or by necessary implication and no
vested right or obligations of contract are thereby impaired. 11
There is nothing in E.O. No. 64 that provides that it should retroact to the
date of effectivity of E.O. No. 41, the original issuance. It has been held
that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to
subject to tax past transactions not subject to tax under the original act.
E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or violation of a revenue or
tax law. A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. 17 If granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer and liberally in
favor of the taxing authority.
the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax
cases" should be read as to refer to estate and donor's taxes and taxes on
business while the word "hereof," to E.O. No. 64. Since Executive Order
No. 64 took effect on November 17, 1986, consequently, insofar as the
taxes in E.O. No. 64 are concerned, the date of effectivity referred to in
Section 4 (b) of E.O. No. 41 should be November 17, 1986. HEISca
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O.
No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already
filed and pending in court. By the time respondent filed its supplementary
tax amnesty
return on December 15, 1986, respondent already fell under the exception
in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing
of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of
the amnesty under the two Executive Orders, it is still not liable for the
deficiency contractor's tax because the income from the projects came
from the "Offshore Portion" of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion.
All materials and equipment in the contract under the "Offshore
Portion" were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes.
An independent contractor is a person whose activity consists essentially of
the sale of all kinds of services for a fee, regardless of whether or not the
performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees. The word
"contractor" refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his
own means and methods without submitting himself to control as to the
petty details. 44
A contractor's tax is a tax imposed upon the privilege of engaging in
business. 45 It is generally in the nature of an excise tax on the exercise
of a privilege of selling services or labor rather than a sale on products;
46 and is directly collectible from the person exercising the privilege. 47
Being an excise tax, it can be levied by the taxing authority only when the
acts, privileges or business are done or performed within the jurisdiction
of said authority. 4
Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control
of testing and commissioning, coordination. . . " 72 of the two projects
involved two taxing jurisdictions. These acts occurred in two countries —
Japan and the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that some
pieces of equipment and supplies were completely designed and
engineered in Japan. The two sets of ship unloader and loader, the boats
and mobile equipment for the NDC project and the ammonia storage
tanks and refrigeration units were made and completed in Japan. They
were already finished products when shipped to the Philippines. The
other construction supplies listed under the Offshore Portion such as the
steel sheets, pipes and structures, electrical and instrumental apparatus,
these were not finished products when shipped to the Philippines. They,
how ever, w ere likewise fabricated and m a n u f a ct u r e d b y t h e s u b
- co n t r a ct o r s i n J a p a n . A l l s e r v i ce s f o r t h e d e s i g n ,
fabrication, engineering and manufacture of the materials and equipment
under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to contractor's tax.
8. Tuazon v. Lingad
In 1948 the petitioner inherited from his mother several tracts of land,
among which were two contiguous parcels situated on Pureza and Sta.
Mesa streets in Manila, with an area of 318 and 67,684 square meters,
respectively. When the petitioner's mother was yet alive she had these two
parcels subdivided into twenty-nine lots. Twenty-eight were allocated to
their then occupants who had lease contracts with the petitioner's
predecessor at various times from 1900 to 1903, which contracts expired on
December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an
area of 48,000 square meters, more or less, was not leased to any person. It
needed filling because of its very low elevation, and was planted to
kangkong and other crops. After the petitioner took possession of the
mentioned parcels in 1950, he instructed his attorney-in-fact, J. Antonio
Araneta, to sell them. There was no difficulty encountered in selling the 28
small lots as their respective occupants bought them on a 10-year
installment basis. Lot 29 could not however be sold immediately due to its
low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29
filled, then subdivided into small lots and paved with macadam roads. The
small lots were then sold over the years on a uniform 10-year annual
amortization basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did
not employ any broker nor did he put up advertisements in the matter of the
sale thereof.
In his 1957 tax return the petitioner as before treated his income from the
sale of the small lots (P119,072.18) as capital gains and included only 1/2
thereof as taxable income. In this return, the petitioner deducted the real
estate dealer's tax he paid for 1957. It was explained, however, that the
payment of the dealer's tax was on account of rentals received from the
mentioned 28 lots and other properties of the petitioner. On the basis of the
1957 opinion of the Collector of Internal Revenue, the revenue examiner
approved the petitioner's treatment of his income from the sale of the lots in
question. In a memorandum dated July 16, 1962 to the Commissioner of
Internal Revenue, the chief of the BIR Assessment Department advanced
the same opinion, which was concurred in by the Commissioner of Internal
Revenue.
The basic issue thus raised is whether the properties in question which
the petitioner had inherited and subsequently sold in small lots to other
persons should be regarded as capital assets.
As thus defined by law, the term "capital assets" includes all the
properties of a taxpayer whether or not connected with his trade or
business, except: (1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale to customers in the
ordinary course of his trade or business; (3) property used in the trade or
business of the taxpayer and subject to depreciation allowance; and (4)
real property used in trade or business. 1 If the taxpayer sells or
exchanges any of the properties above-enumerated, any gain or loss
relative thereto is an ordinary gain or an ordinary loss; the gain or loss
from the sale or exchange of all other properties of the taxpayer is a
capital gain or a capital loss. 2
Under section 34(b) (2) of the Tax Code, if a gain is realized by a
taxpayer (other than a corporation) from the sale or exchange of capital
assets held for more than twelve months, only 50% of the net capital gain
shall be taken into account in computing the net income.
The Tax Code's provision on so-called long-term capital gains constitutes a
statute of partial exemption. In view of the familiar and settled rule that tax
exemptions are construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority, 3 the field of application of the
term "capital assets" is necessarily narrow, while its exclusions must be
interpreted broadly.
the petitioner's thesis is bereft of merit.
When the petitioner obtained by inheritance the parcels in question,
transferred to him was not merely the duty to respect the terms of any
contract thereon, but as well the correlative right to receive and enjoy the
fruits of the business and property which the decedent had established
and maintained. 7 Moreover, the record discloses that the petitioner
owned other real properties which he was putting out for rent, from
which he periodically derived a substantial income, and for which he had
to pay the real estate dealer's tax (which he used to deduct from his gross
income). 8 In fact, as far back as 1957 the petitioner was receiving rental
payments from the mentioned 28 small lots, even if the leases executed by
his deceased mother thereon expired in 1953. Under the circumstances,
the petitioner's sales of the several lots forming part of his rental business
cannot be characterized as other than sales of non-capital assets.
The sales concluded on installment basis of the subdivided lots
comprising Lot 29 do not deserve a different characterization for tax
purposes. The following circumstances in combination show
unequivocally that the petitioner was, at the time material to this case,
engaged in the real estate business: (1) the parcels of land involved have
in totality a substantially large area, nearly seven (7) hectares, big enough
to be transformed into a subdivision, and in the case at bar, the said
properties are located in the heart of Metropolitan Manila; (2) they were
subdivided into small lots and then sold on installment basis (this manner
of selling residential lots is one of the basic earmarks of a real estate
business); (3) comparatively valuable improvements were introduced in
the subdivided lots for the unmistakable purpose of not simply liquidating
the estate but of making the lots more saleable to the general public; (4)
the employment of J. Antonio Araneta, the petitioner's attorney-in-fact,
for the purpose of developing, managing, administering and selling the
lots in question indicates the existence of owner-realty broker
relationship; (5) the sales were made with frequency and continuity, and
from these the petitioner consequently received substantial income
periodically; (6) the annual sales volume of the petitioner from the said
lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954;
and P119,072.18 in 1957; and (7) the petitioner, by his own tax returns,
was not a person who can be indubitably adjudged as a stranger to the
real estate business. Under the circumstances, this Court finds no error in
the holding below that the income of the petitioner from the sales of the
lots in question should be considered as ordinary income.
This Court notes, however, that in ordering the petitioner to pay the
deficiency income tax, the Tax Court also required him to pay a 5%
surcharge plus 1% monthly interest. In our opinion this additional
requirement should be eliminated because the petitioner relied in good faith
upon opinions rendered by no less than the highest officials of the Bureau
of Internal Revenue, including the Commissioner himself.
9. Republic v. De La rama
The estate of the late Esteban de la Rama was the subject of Special
Proceedings No. 401 of the Court of First Instance of Iloilo. The executor-
administrator, Eliseo Hervas, filed on March 12, 1951, income tax returns
of the estate corresponding to the taxable year 1950, declaring a net income
of P22,796.59, on the basis of which the amount of P3,919.00 was assessed
and was paid by the estate as income tax. The Bureau of Internal Revenue
later claimed that it had found out that there had been received by the estate
in 1950 from the De la Rama Steamship Company, Inc. cash dividends
amounting to P86,800.00 which amount was not declared in the income tax
return of the estate for the year 1950. The Bureau of Internal Revenue then,
on March 7, 1956, made an assessment as deficiency income tax against the
estate in the sum of P56,032.50, of which amount P37,355.00 was the
deficiency and P18,677.60 was the 50% surcharge.
The defendants-appellees, Lourdes de la Rama-Osmeña, Leonor de la
Rama, Estefania de la Rama-Pirovano, Dolores de la Rama-Lopez, Charles
Miller, and Aniceta de la Rama-Sian, thru counsel, filed their respective
answers, the gist of their allegations and/or defenses being (1) that no cash
dividends of P86,800.00 had been paid to the estate; (2) that the
administration of the estate had been extended by the probate court
precisely for the purpose of collecting said dividends; (3) that Leonor de la
Rama had never been administratrix of the estate; (4) that the executor of
the estate, Eliseo Hervas, had never been given notice of the assessment,
and consequently the assessment had never become final; and (5) that the
collection of the alleged deficiency income tax had prescribed. Fausto F.
Gonzales, Jr., one of the defendants, not having filed an answer, was
declared in default.
The plaintiff-appellant maintains that this crediting of accounts in the
books of the company constituted a constructive receipt by the estate or
the heirs of Esteban de la Rama of the dividends, and this dividend was
an income of the estate and was, therefore, taxable.
It is not disputed that the dividends in question were not actually paid
either to the estate, or to the heirs, of the late Esteban de la Rama. The
question to be resolved is whether or not the said application of the
dividends to the personal accounts of the deceased Esteban de la Rama
constituted constructive payment to, and hence, constructively received
by, the estate or the heirs. If the debts to which the dividends were applied
really existed, and were legally demandable and chargeable against the
deceased, there was constructive receipt of the dividends; if there were no
such debts, then there was no constructive receipt.
The first debt, as above indicated, had been contested by the executor-
administrator of the estate. It does not even appear that the De la Rama
Steamship Co., Inc. had ever filed a claim against the estate in connection
with that indebtedness. The existence and the validity of the debt is,
therefore, in dispute, and there was no proof adduced to show the existence
and validity of the debt.
The second debt to which the dividends were partly applied were accounts
"due from Hijos de I. de la Rama, Inc." The alleged debtor here was an
entity separate and distinct from the deceased. If that was so, its debts could
not be charged against the deceased, even if the deceased was the principal
owner thereof, in the absence of proof of substitution of debtor. There is no
evidence in the instant case that the late Esteban de la Rama substituted the
"Hijos de I. de la Rama" as debtor to the De la Rama Steamship Co., Inc.;
nor was there evidence that the estate of the late Esteban de la Rama owned
the "Hijos de I. de la Rama, Inc.," this fact being, as found by the lower
court, not a settled question because the same was denied by the
administrator.
Under the National Internal Revenue Code, income tax is assessed on
income that has been received, Thus, Section 21 of the Code requires that
the income must be received by an individual before a tax can be levied
thereon. Section 56 also requires receipt of income by an estate before an
income tax can be assessed thereon. Hence, if income has not been
received, no income tax can be assessed thereon. Inasmuch as the income
was not received either by the estate, or by the heirs, neither the estate nor
the heirs can be liable for the payment of income tax therefor.
“the fundamental issue that there could have been no correct and real basis
for the assessment or that there is no proof that the income in question had
been received; it was not actually delivered unto the Estate since it was
retained by the De la Rama Steamship Co., Inc.; which applied said
dividends to certain accounts receivable due from the deceased allegedly,
Exh. A-1; now if truly there had been such indebtedness owing from the
deceased unto said De La Rama Steamship Co., Inc., the Court will agree
with plaintiff that the offsetting of the dividends against such indebtedness
amounted to constructive delivery; but there has not been presented any
proof to that effect, i.e., that there was such an indebtedness due from
deceased; on the contrary what the evidence shows is that the former
administrator of the Estate had challenged the validity of said indebtedness,
Exh. D, motion of 4 June, 1951; this being the case, there is no clear
showing that income in the form of said dividends had really been received,
which is the verb used in Section 21 of the Internal Revenue Code, by the
Estate whether actually or constructively; and the income tax being
collected by the Government on income received, the Government's
position is here without a clear basis; the position becomes worse when it
be considered that it is not even the Estate that is being sued but the heirs
themselves, who admittedly had not received any of said dividends
themselves;”
Appellant cites the case of Herbert vs. Commissioner of Internal Revenue
81 F (2d) 912 as authority that the crediting of dividends against accounts
constitutes payment and constructive receipt of the dividends. The citation
of authority misses the point in issue. In that case the existence of the
indebtedness of Leon S. Herbert to the corporation that declared the
dividends and against which indebtedness the dividends were applied,
was never put in issue, and was admitted. In the instant case, the
existence of the obligations has been disputed and, as the trial court
found, has not been proved. It having been shown in the instant case that
there was no basis for the assessment of the income tax, the assessment
itself and the sending of notices regarding the assessment would neither
have basis, and so the assessment and the notices produced no legal effect
that would warrant the collection of the tax.
The appellant also contends that the assessment had become final.
The estate was still under the administration of Eliseo Hervas as regards the
collection of said dividends. The administrator was the representative of the
estate, whose duty it was to pay and discharge all debts and charges on the
estate and to perform all orders of the court by him to be performed (Rule
71, Section 1), and to pay the taxes and assessments due to the Government
or any branch or subdivision thereof (Section 7, Rule 89, Old Rules of
Court). The tax must be collected from the estate of the deceased, and it is
the administrator who is under obligation to pay such claim. The notice of
assessment, therefore, should have been sent to the administrator. In this
case, notice was first sent to Lourdes de la Rama-Osmeña on February 29,
1956, and later to Leonor de la Rama on November 27, 1956, neither of
whom had authority to represent the estate. As the lower court said in its
decision: "Leonor de la Rama was not the administratrix of the estate of the
late Esteban de la Rama and as such the demand unto her, Exh. Def. 8, p.
112, was not a correct demand before November 27, 1956, because the real
administrator was the late Eliseo Hervas;.." (p. 45, Record on Appeal) The
notice was not sent to the taxpayer for the purpose of giving effect to
the assessment, and said notice could not produce any effect. This Court
had occasion to state that "the assessment is deemed made when the notice
to this effect is released, mailed or sent to the taxpayer for the purpose of
giving effect to said assessment." It appearing that the person liable for
the payment of the tax did not receive the assessment, the assessment
could not become final and executory
The Court of Tax Appeals has exclusive jurisdiction to review by appeal
decisions of the Collector of Internal Revenue in cases involving disputed
assessments, and the disputed assessment must be appealed by the person
adversely affected by the decision within thirty days after the receipt of the
decision. In the instant case, the person adversely affected should have
been the administrator of the estate, and the notice of the assessment
should have been sent to him. The administrator had not received the
notice of assessment, and he could not appeal the assessment to the Court
of Tax Appeals within 30 days from notice. Hence the assessment did not
fall within the exclusive jurisdiction of the Court of Tax Appeals.
10. CIR v. Pilipinas Shell Petroleum Corp.
Respondent is engaged in the business of processing, treating and refining
petroleum for the purpose of producing marketable products and the
subsequent sale thereof. 5
On July 18, 2002, respondent filed with the Large Taxpayers Audit &
Investigation Division II of the Bureau of Internal Revenue (BIR) a formal
claim for refund or tax credit in the total amount of P28,064,925.15,
representing excise taxes it allegedly paid on sales and deliveries of gas and
fuel oils to various international carriers during the period October to
December 2001.
The Solicitor General argues that the obvious intent of the law is to grant
excise tax exemption to international carriers and exempt entities as buyers
of petroleum products and not to the manufacturers or producers of said
goods. Since the excise taxes are collected from manufacturers or producers
before removal of the domestic products from the place of production,
respondent paid the subject excise taxes as manufacturer or producer of the
petroleum products pursuant to Sec. 148 of the NIRC.
The instant petition squarely raised the issue of whether respondent as
manufacturer or producer of petroleum products is exempt from the
payment of excise tax on such petroleum products it sold to
international carriers.
Excise taxes, as the term is used in the NIRC, refer to taxes applicable to
certain specified goods or articles manufactured or produced in the
Philippines for domestic sales or consumption or for any other disposition
and to things imported into the
Philippines. These taxes are imposed in addition to the value-added tax
(VAT). 16
Beginning January 1, 1999, excise taxes levied on locally manufactured
petroleum products and indigenous petroleum are required to be paid before
their removal from the place of production. 17 However, Sec. 135 provides:
Respondent claims it is entitled to a tax refund because those petroleum
products it sold to international carriers are not subject to excise tax, hence
the excise taxes it paid upon withdrawal of those products were erroneously
or illegally collected and should not have been paid in the first place. Since
the excise tax exemption attached to the petroleum products themselves, the
manufacturer or producer is under no duty to pay the excise tax thereon.
We disagree.
While the exemption found in Sec. 134 makes reference to the nature and
quality of the goods manufactured (domestic denatured alcohol) without
regard to the tax status of the buyer of the said goods, Sec. 135 deals with
the tax treatment of a specified article (petroleum products) in relation to its
buyer or consumer. Respondent's failure to make this important distinction
apparently led it to mistakenly assume that the tax exemption under Sec.
135 (a) "attaches to the goods themselves" such that the excise tax should
not have been paid in the first place.
Thus, if an airline company purchased jet fuel from an unregistered supplier
who could not present proof of payment of specific tax, the company is
liable to pay the specific tax on the date of purchase. 19 Since the excise tax
must be paid upon withdrawal from the place of production, respondent
cannot anchor its claim for refund on the theory that the excise taxes due
thereon should not have been collected or paid in the first place.
Sec. 229 of the NIRC allows the recovery of taxes erroneously or
illegally collected. An "erroneous or illegal tax" is defined as one levied
without statutory authority, or upon property not subject to taxation
or by some officer having no authority to levy the tax, or one which is
some other similar respect is illegal. 20
Respondent's locally manufactured petroleum products are clearly subject
to excise tax under Sec. 148. Hence, its claim for tax refund may not be
predicated on Sec. 229 of the NIRC allowing a refund of erroneous or
excess payment of tax. Respondent's claim is premised on what it
determined as a tax exemption "attaching to the goods themselves," which
must be based on a statute granting tax exemption, or "the result of
legislative grace." Such a claim is to be construed strictissimi juris against
the taxpayer, meaning that the claim cannot be made to rest on vague
inference. Where the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an exemption,
the claimant must show that he clearly falls under the exempting statute. 21
The exemption from excise tax payment on petroleum products under
Sec. 135 (a) is conferred on international carriers who purchased the
same for their use or consumption outside the Philippines. The only
condition set by law is for these petroleum products to be stored in a
bonded storage tank and may be disposed of only in accordance with
the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
According to the Solicitor General, Sec. 135 (a) in relation to the other
provisions on excise tax and from the nature of indirect taxation, may only
be construed as prohibiting the manufacturers-sellers of petroleum products
from passing on the tax to international carriers by incorporating previously
paid excise taxes into the selling price. In other words, respondent cannot
shift the tax burden to international carriers who are allowed to purchase its
petroleum products without having to pay the added cost of the excise tax.
We agree with the Solicitor General.
In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue 22
this Court held that petitioner manufacturer who sold its oxygen and
acetylene gases to NPC, a tax-exempt entity, cannot claim exemption from
the payment of sales tax simply because its buyer NPC is exempt from
taxation. The Court explained that the percentage tax on sales of
merchandise imposed by the Tax Code is due from the manufacturer and
not from the buyer.
Considering that the excise taxes attaches to petroleum products "as soon
as they are in existence as such," 23 there can be no outright exemption
from the payment of excise tax on petroleum products sold to
international carriers. The sole basis then of respondent's claim for
refund is the express grant of excise tax exemption in favor of
international carriers under Sec. 135 (a) for their purchases of locally
manufactured petroleum products. Pursuant to our ruling in Philippine
Acetylene, a tax exemption being enjoyed by the buyer cannot be the basis
of a claim for tax exemption by the manufacturer or seller of the goods
for any tax due to it as the manufacturer or seller. The excise tax imposed
on petroleum products under Sec. 148 is the direct liability of the
manufacturer who cannot thus invoke the excise tax exemption granted
to its buyers who are international carriers. EHSCcT
An excise tax is basically an indirect tax. Indirect taxes are those that are
demanded, in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to someone else.
Stated elsewise, indirect taxes are taxes wherein the liability for the
payment of the tax falls on one person but the burden thereof can be shifted
or passed on to another person, such as when the tax is imposed upon goods
before reaching the consumer who ultimately pays for it. When the seller
passes on the tax to his buyer, he, in effect, shifts the tax burden, not the
liability to pay it, to the purchaser as part of the price of goods sold or
services rendered.
Because an excise tax is a tax on the manufacturer and not on the
purchaser, and there being no express grant under the NIRC of
exemption from payment of excise tax to local manufacturers of
petroleum products sold to international carriers, and absent any
provision in the Code authorizing the refund or crediting of such excise
taxes paid, the Court holds that Sec. 135 (a) should be construed as
prohibiting the shifting of the burden of the excise tax to the international
carriers who buys petroleum products from the local manufacturers. Said
provision thus merely allows the international carriers to purchase
petroleum products without the excise tax component as an added cost in
the price fixed by the manufacturers or distributors/sellers. Consequently,
the oil companies which sold such petroleum products to international
carriers are not entitled to a refund of excise taxes previously paid on the
goods. D
Time and again, we have held that tax refunds are in the nature of tax
exemptions which result to loss of revenue for the government. Upon the
person claiming an exemption from tax payments rests the burden of
justifying the exemption by words too plain to be mistaken and too
categorical to be misinterpreted, 29 it is never presumed 30 nor be
allowed solely on the ground of equity. 31 These exemptions, therefore,
must not rest on vague, uncertain or indefinite inference, but should be
granted only by a clear and unequivocal provision of law on the basis of
language too plain to be mistaken. Such exemptions must be strictly
construed against the taxpayer, as taxes are the lifeblood of the
government.
11. Renato Diaz v. Secretary of Finance
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of "sale of services" that are
subject to VAT; that a toll fee is a "user's tax," not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non- impairment clause of the constitution.
ITSacC
1. Whether or not the government is unlawfully expanding VAT
coverage by including tollway operators and tollway operations in the
terms "franchise grantees" and "sale of services" under Section 108 of
the Code; and
2. Whether or not the imposition of VAT on tollway operators a)
amounts to a tax on tax and not a tax on services; b) will impair the
tollway operators' right to a reasonable return of investment under
their TOAs; and c) is not administratively feasible and cannot be
implemented. SICaDA
VAT is levied, assessed, and collected, according to Section 108, on the
gross receipts derived from the sale or exchange of services as well as
from the use or lease of properties.
It is plain from the above that the law imposes VAT on "all kinds of
services" rendered in the Philippines for a fee, including those specified
in the list. The enumeration of affected services is not exclusive.11 By
qualifying "services" with the words "all kinds," Congress has given the
term "services" an all-encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and broad is the VAT's
reach rather than establish concrete limits to its application. Thus, every
activity that can be imagined as a form of "service" rendered for a fee
should be deemed included unless some provision of law especially
excludes it.
Now, do tollway operators render services for a fee? Presidential Decree
(P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the
services that tollway operators render. Essentially, tollway operators
construct, maintain, and operate expressways, also called tollways, at the
operators' expense. Tollways serve as alternatives to regular public
highways that meander through populated areas and branch out to local
roads. Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense, the
operators are allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover their expenses
and earn reasonable returns from their investments. cITAaD
It does not help petitioners' cause that Section 108 subjects to VAT "all
kinds of services" rendered for a fee "regardless of whether or not the
performance thereof calls for the exercise or use of the physical or mental
faculties." This means that "services" to be subject to VAT need not fall
under the traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of
services," they also come under the specific class described in Section 108
as "all other franchise grantees" who are subject to VAT, "except those
under Section 119 of this Code."
The word "franchise" broadly covers government grants of a special
right to do an act or series of acts of public concern. 14The term
"franchise" has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a special law
, but also to those granted by administrative agencies to which the
power to grant franchises has been delegated by Congress. 16
Tollway operators are, owing to the nature and object of their business,
"franchise grantees." The construction, operation, and maintenance of
toll facilities on public improvements are activities of public consequence
that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways.
Tollway fees are not taxes. Indeed, they are not assessed and collected by
the BIR and do not go to the general coffers of the government.
What the government seeks to tax here are fees collected from tollways that
are constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that the
government has adopted for expressways. 26 Except for a fraction given to
the government, the toll fees essentially end up as earnings of the tollway
operators.
In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures. 27 Toll fees, on the other hand, are collected by private
tollway operators as reimbursement for the costs and expenses incurred
in the construction, maintenance and operation of the tollways, as well as
to assure them a reasonable margin of income. Although toll fees are
charged for the use of public facilities, therefore, they are not government
exactions that can be properly treated as a tax. Taxes may be imposed
only by the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or entities, as
an attribute of ownership. 28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax
due to the nature of VAT as an indirect tax. In indirect taxation, a
distinction is made between the liability for the tax and burden of the tax.
The seller who is liable for the VAT may shift or pass on the amount of
VAT it paid on goods, properties or services to the buyer. In such a case,
what is transferred is not the seller's liability but merely the burden of the
VAT. 29 Consequently, VAT on tollway operations is not really a tax on
the tollway user, but on the tollway operator. Under Section 105 of the
Code, 31 VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for
VAT. The latter merely shifts the burden of VAT to the tollway user as
part of the toll fees.
12. Philippine Amusement and Gaming Corp. v. BIR
13. United Airlines, Inc. v. CIR
The main issue to be resolved is whether the petitioner is entitled to a
refund of the amount of P5,028,813.23 it paid as income tax on its
passenger revenues in 1999.
Petitioner argues that its claim for refund of erroneously paid GPB tax on
off-line passenger revenues cannot be denied based on the finding of the
CTA that petitioner allegedly underpaid the GPB tax on cargo revenues by
P31,431,171.09, which underpayment is allegedly higher than the GPB tax
of P5,028,813.23 on passenger revenues, the amount of the instant claim.
The denial of petitioner's claim for refund on such ground is tantamount to
an offsetting of petitioner's claim for refund of erroneously paid GPB
against its alleged tax liability. Petitioner thus cites the well-entrenched rule
in taxation cases that internal revenue taxes cannot be the subject of set-off
or compensation. 14
The petition has no merit.
The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return
which, by itself and without unquestionable evidence, cannot be the basis
for the grant of the refund.
Moreover, to grant the refund without determination of the proper
assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes which recourse must be filed
within the prescriptive period of ten years after discovery of the falsity,
fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part of
the Government, impose a burden on and a drain of government funds, and
impede or delay the collection of much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or
expenses, it is both logically necessary and legally appropriate that the
issue of the deficiency tax assessment against Citytrust be resolved
jointly with its claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or
refundable.
In the case at bar, the CTA explained that it merely determined whether
petitioner is entitled to a refund based on the facts. On the assumption
that petitioner filed a correct return, it had the right to file a claim for
refund of GPB tax on passenger revenues it paid in 1999 when it was not
operating passenger flights to and from the Philippines. However, upon
examination by the CTA, petitioner's return was found erroneous as it
understated its gross cargo revenue for the same taxable year due to
deductions of two (2) items consisting of commission and other incentives
of its agent. Having underpaid the GPB tax due on its cargo revenues for
1999, petitioner is not entitled to a refund of its GPB tax on its passenger
revenue, the amount of the former being even much higher (P31.43
million) than the tax refund sought (P5.2 million). The CTA therefore
correctly denied the claim for tax refund after determining the proper
assessment and the tax due. Obviously, the matter of prescription raised
by petitioner is a non-issue. The prescriptive periods under Sections 203
22 and 222 23 of the NIRC find no application in this case.
14.CIR v. Smart Communications Inc.
On May 25, 2001, respondent entered into three Agreements for
Programming and Consultancy Services 3 with Prism Transactive (M) Sdn.
Bhd. (Prism), a non-resident corporation duly organized and existing under
the laws of Malaysia. Under the agreements, Prism was to provide
programming and consultancy services for the installation of the Service
Download Manager (SDM) and the Channel Manager (CM), and for the
installation and implementation of Smart Money and Mobile Banking
Service SIM Applications (SIM Applications) and Private Text Platform
(SIM Application).
Thinking that these payments constitute royalties, respondent withheld the
amount of US$136,955.61 or P7,008,840.43, 5 representing the 25%
royalty tax under the RP-Malaysia Tax Treaty. 6 ITScAE
On September 24, 2003, or within the two-year period to claim a refund,
respondent filed with the Bureau of Internal Revenue (BIR), through the
International Tax Affairs Division (ITAD), an administrative claim for
refund 8 of the amount of P7,008,840.43. In its Petition for Review,
respondent claimed that it is entitled to a refund because the payments
made to Prism are not royalties 10 but "business profits," 11 pursuant to the
definition of royalties under the RP-Malaysia Tax Treaty, 1
petitioner filed his Answer 16 arguing that respondent, as withholding
agent, is not a party-in-interest to file the claim for refund, 17 and that
assuming for the sake of argument that it is the proper party, there is no
showing that the payments made to Prism constitute "business profits." 18
The two issues to be resolved are: (1) whether respondent has the right
to file the claim for refund; and (2) if respondent has the right, whether
the payments made to Prism constitute "business profits" or royalties.
Withholding agent may file a claim for refund
The person entitled to claim a tax refund is the taxpayer. However, in case
the taxpayer does not file a claim for refund, the withholding agent may file
the claim.
"Taxpayer" is defined in our NIRC as referring to "any person subject to tax
imposed by the Title [on Tax on Income]." It thus becomes important to
note that under Section 53(c) 41 of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made "personally liable for
such tax" and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of payments
effected by the withholding agent in accordance with the provisions of the
NIRC.
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms "liable for tax" and "subject to
tax" both connote legal obligation or duty to pay a tax. It is very difficult,
indeed conceptually impossible, to consider a person who is statutorily
made "liable for tax" as not "subject to tax." By any reasonable
standard, such a person should be regarded as a party in interest, or as
a person having sufficient legal interest, to bring a suit for refund of
taxes he believes were illegally collected from him.
A withholding agent is in fact the agent both of the government and of
the taxpayer, and that the withholding agent is not an ordinary
government agent: "The law sets no condition for the personal liability of
the withholding agent to attach. The reason is to compel the withholding
agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both
the Government and the taxpayer. With respect to the collection and/or
withholding of the tax, he is the Government's agent. In regard to the
filing of the necessary income tax return and the payment of the tax to
the Government, he is the agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent especially because under
Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas the Commissioner and his deputies are not made liable
by law."
Petitioner, however, submits that this ruling applies only when the
withholding agent and the taxpayer are related parties, i.e., where the
withholding agent is a wholly owned subsidiary of the taxpayer. TaDSHC
We do not agree.
Although such relation between the taxpayer and the withholding agent is
a factor that increases the latter's legal interest to file a claim for refund,
there is nothing in the decision to suggest that such relationship is
required or that the lack of such relation deprives the withholding agent
of the right to file a claim for refund. Rather, what is clear in the decision
is that a withholding agent has a legal right to file a claim for refund for
two reasons. First, he is considered a "taxpayer" under the NIRC as he is
personally liable for the withholding tax as well as for deficiency
assessments, surcharges, and penalties, should the amount of the tax
withheld be finally found to be less than the amount that should have
been withheld under law. Second, as an agent of the taxpayer, his
authority to file the necessary income tax return and to remit the tax
withheld to the government impliedly includes the authority to file a claim
for refund and to bring an action for recovery of such claim.
As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal
Revenue 43 cited by the petitioner, we find the same inapplicable as it
involves excise taxes, not withholding taxes. In that case, it was ruled
that the proper party to question, or seek a refund of, an indirect tax
"is the statutory taxpayer, the person on whom the tax is imposed by
law and who paid the same even if he shifts the burden thereof to
another."
Under the RP-Malaysia Tax Treaty, the term royalties is defined as
payments of any kind received as consideration for: "(i) the use of, or the
right to use, any patent, trade mark, design or model, plan, secret formula or
process, any copyright of literary, artistic or scientific work, or for the use
of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or scientific experience; (ii)
the use of, or the right to use, cinematograph films, or tapes for radio or
television broadcasting." 44 These are taxed at the rate of 25% of the gross
amount. 45 CHcTIA
Under the same 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.4
The provisions in the agreements are clear. Prism has intellectual property
right over the SDM program, but not over the CM and SIM Application
programs as the proprietary rights of these programs belong to respondent.
In other words, out of the payments made to Prism, only the payment for
the SDM program is a royalty subject to a 25% withholding tax. A refund
of the erroneously withheld royalty taxes for the payments pertaining to the
CM and SIM Application Agreements is therefore in order.
15. Miguel G. Osorio Pension Foundation, Inc. v. CA
The law expressly allows a co-owner (first co-owner) of a parcel of land to
register his proportionate share in the name of his co-owner (second co-
owner) in whose name the entire land is registered. The second co-owner
serves as a legal trustee of the first co-owner insofar as the proportionate
share of the first co-owner is concerned. The first co-owner remains the
owner of his proportionate share and not the second co-owner in whose
name the entire land is registered. Article 1452 of the Civil Code provides:
Art. 1452. If two or more persons agree to purchase a property and by
common consent the legal title is taken in the name of one of them for the
benefit of all, a trust is created by force of law in favor of the others in
proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is
"common consent" among the purchasing co-owners to put the legal title to
the purchased property in the name of one co-owner for the benefit of all.
Once this "common consent" is shown, "a trust is created by force of
law." The BIR has no option but to recognize such legal trust as well as the
beneficial ownership of the real owners because the trust is created by force
of law. The fact that the title is registered solely in the name of one person
is not conclusive that he alone owns the property.
No particular words are required for the creation of a trust, it being
sufficient that a trust is clearly intended. 36 It is immaterial whether or not
the trustor and the trustee know that the relationship which they intend to
create is called a trust, and whether or not the parties know the precise
characteristic of the relationship which is called a trust because what is
important is whether the parties manifested an intention to create the kind
of relationship which in law is known as a trust. 37
Petitioner is a corporation that was formed to administer the
Employees' Trust Fund. Petitioner invested P5,504,748.25 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 P40,500,000. The 7.5% withholding tax of
P3,037,500 and broker's commission were deducted from the proceeds.
In Commissioner of Internal Revenue v. Court of Appeals, 44 the
Court explained the 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. This would run afoul of
the very intendment of the law.

the earnings of the trust funds of the pension plan are exempt from
income tax under Sec. 56(b) of the Tax Code

The tax-exempt character of petitioner's Employees' Trust Fund is not at

issue in this case. The tax-exempt character of the Employees' Trust
Fund has long been settled. It is also settled that petitioner 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.

Since petitioner has proven that 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 P3,037,500 which was erroneously paid in the sale of the MBP lot.