CIR V. ST.

LUKES MEDICAL CENTER

[SEPTEMBER 26, 2012]

DOCTRINE: A proprietary non-profit hospital is

subject to 10% tax under Section 27(B) of the Tax
Code.

FACTS: St. Lukes Medical Center is a hospital

organized as a non-stock and non-profit corporation.
It admits both paying and non-paying patients. The
CIR claimed that St. Lukes was liable for income tax
at 10% as provided under Section 27(B)10 of the
NIRC. St. Lukes argues that it is a non-stock, non-
profit institution for charitable and social welfare
purposes exempt from income tax under Section
30(E) and (G) of the NIRC. Section 30(E), NIRC
provides that a non-stock corporation or association
organized and operated exclusively for charitable
purposes is exempt from income tax while Section
30(G) provides that a civic league or organization not
organized for profit but operated exclusively for the
promotion of social welfare is likewise exempt.

HELD: St. Lukes cannot claim full tax exemption

under Section 30 because it has paying patients and
this is notwithstanding the fact that it is a non-profit
hospital. For Section 27(B) to apply, the hospital must
be non-profit which means that no net income or
asset accrues to or benefits any member or specific
person and all the activities of the hospital are non-
profit. On the other hand, Section 30(E) and (G), while
providing for an exemption is qualified by the last
paragraph which, in turn, provides that activities
conducted for profit shall be taxable. Section 30(E)
and (G) requires that an institution be operated
exclusively for charitable purposes to be completely
exempt from income tax. In this case, however, St.
Lukes is not operated exclusively for charitable
purposes insofar as its revenues from paying patients
are concerned. Such revenue is subject to income tax
at 10% under Section 27(B).

Note: This case is very important because it

reconciles the following constitutional and statutory
provisions: Section 28, Article VI (tax exemption of
real property actually, directly, and exclusively used
for religious, charitable or educational purposes);
Section 4(3) Article XIV (tax exemption of income of
non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational
purposes); Section 27(B), Tax Code (10% preferential
tax rate to income of proprietary educational
institutions); Section 30(E) and (G) (tax exemption of
the income of non-stock non-profit corporations
organized and operated exclusively for charitable
purposes.).

With regard to taxation of real property, the doctrine

laid down in LUNG CENTER OF THE PHILIPPINES V.
QUEZON CITY [433 SCRA 119] still holds. The lands,
buildings, and improvements actually, directly and
exclusively used for religious, charitable and
educational purposes shall remain exempt from real
property taxes even if there is, in the case of a
hospital, admission of paying patients. If the hospital
were to lease to private persons portions of its
property for profit, the real property will not be
exempt from real property taxes. That’s for real
property taxes. Income taxation is another thing.

With regard to income taxation, the statement of the

Court must be noted: “Non-profit does not
necessarily mean charitable.” This is affirmed in the
constitutional provision with regard to non-stock,
non-profit educational institutions. For their income
to be exempt, their revenues and assets must be used
actually, directly, and exclusively for educational
purposes. The rule now can be laid down as follows:
For the income of a non-stock, non-profit
corporation to be totally exempt, it must be
organized and operated exclusively for educational
or charitable purposes. In such case, it will fall within
the coverage of Section 30(E) and (G) of the Tax Code.
However, if it conducts for-profit activities, like the
admission of paying patients, it will not be exempt
with regard to that particular income. Section 27(B)
will apply and the income will be taxed at the
preferential rate of 10%.

RMC 67-2012 [October 31, 2012] was issued by the

BIR to implement this decision of the Supreme Court
on all private non-profit hospitals and educational
institutions starting from January 1, 1998.

Q: Is the existence of paying patients material to

the real property tax exemption of the building,
land and improvements of St. Lukes?

No. The lands, buildings, and improvements of St.

Lukes remain exempt from real property taxes even
if it admits paying patients. This is consistent with the
ruling in LUNG CENTER OF THE PHILIPPINES V.
QUEZON CITY [433 SCRA 119] where the Supreme
Court held that a charitable institution does not lose
its character as such and its exemption from real
property taxes simply because it derives income from
paying patients

Q: If St. Lukes were to lease to private persons

portions of its property for profit, is the property
and the profits exempt from taxes?

The property will not be exempt from real property

taxes and also the profits will not be exempt from
income tax. Pursuant to the ruling in LUNG CENTER
OF THE PHILIPPINES V. QUEZON CITY [433 SCRA
119], those portions of real property not actually
used for charitable purposes shall not be exempt
from real property taxes. Consistent with the ruling in
CIR V. CA [298 SCRA 83], profits realized from real
property by exempt institutions from whatever
source or wherever used are taxable.

CIR vs. St. Luke’s 2017

Another assessment by the CIR. SLMC again

reiterated that they are exempt.

Issues:

CIR argues that under the doctrine of stare decisis

SLMC is subject to 10% income tax under Section
27(B) of the 1997 NIRC.29 It likewise asserts that
SLMC is liable to pay compromise penalty pursuant
to Section 248(A)30 of the 1997 NIRC for failing to
file its quarterly income tax returns.

As to the alleged payment of the basic tax, CIR

contends that this does not render the instant case
moot as the payment confirmation submitted by
SLMC is not a competent proof of payment of its tax
liabilities.

SLMC, on the other hand, begs the indulgence of the

Court to revisit its ruling in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.)33 positing that earning a
profit by a charitable, benevolent hospital or
educational institution does not result in the
withdrawal of its tax exempt privilege.34 SLMC
further claims that the income it derives from
operating a hospital is not income from "activities
conducted for profit."35 Also, it maintains that in
accordance with the ruling of the Court in G.R. Nos.
195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.),36 it is not
liable for compromise penalties.
In any case, SLMC insists that the instant case should
be dismissed in view of its payment of the basic taxes
due for taxable years 1998, 2000-2002, and 2004-
2007 to the BIR on April 30, 2013.

Ruling:

The issue of whether SLMC is liable for income tax

under Section 27(B) of the 1997 NIRC insofar as its
revenues from paying patients are concerned has
been settled in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.)

A careful review of the pleadings reveals that there is

no countervailing consideration for the Court to
revisit its aforequoted ruling in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.). Thus, under the doctrine
of stare decisis, which states that "[o]nce a case has
been decided in one way, any other case involving
exactly the same point at issue x x x should be
decided in the same manner,"41 the Court finds that
SLMC is subject to 10% income tax insofar as its
revenues from paying patients are concerned.

To be clear, for an institution to be completely

exempt from income tax, Section 30(E) and (G) of the
1997 NIRC requires said institution to operate
exclusively for charitable or social welfare purpose.
But in case an exempt institution under Section 30(E)
or (G) of the said Code earns income from its for-
profit activities, it will not lose its tax exemption.
However, its income from for-profit activities will be
subject to income tax at the preferential 10% rate
pursuant to Section 27(B) thereof.

IS SLMC Liable for Compromise Penalty?

As to whether SLMC is liable for compromise penalty

under Section 248(A) of the 1997 NIRC for its alleged
failure to file its quarterly income tax returns, this has
also been resolved in G.R Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.),42 where the imposition of
surcharges and interest under Sections 24843 and
24944 of the 1997 NIRC were deleted on the basis of
good faith and honest belief on the part of SLMC that
it is not subject to tax. Thus, following the ruling of
the Court in the said case, SLMC is not liable to pay
compromise penalty under Section 248(A) of the
1997 NIRC.

The Petition is rendered moot by the payment

made by SLMC on April 30, 2013.

However, in view of the payment of the basic taxes

made by SLMC on April 30, 2013, the instant Petition
has become moot.

While the Court agrees with the CIR that the payment
confirmation from the BIR presented by SLMC is not
a competent proof of payment as it does not indicate
the specific taxable period the said payment covers,
the Court finds that the Certification issued by the
Large Taxpayers Service of the BIR dated May 27,
2013, and the letter from the BIR dated November
26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove
payment especially since CIR never questioned the
authenticity of these documents. In fact, in a related
case, G.R. No. 200688, entitled Commissioner of
Internal Revenue v. St. Luke's Medical Center, lnc.,45
the Court dismissed the petition based on a letter
issued by CIR confirming SLMC's payment of taxes,
which is the same letter submitted by SLMC in the
instant case.
CIR vs DE LA SALLE

FACTS:
• BIR issued to DLSU Letter of Authority (LOA) No.
2794 authorizing its revenue officers to examine
the latter's books of accounts and other
accounting records for all internal revenue taxes
for the period Fiscal Year Ending 2003 and
Unverified Prior Years
• May 19, 2004, BIR issued a Preliminary Assessment
Notice (PAN) to DLSU.
• August 18, 2004, the BIR through a Formal Letter
of Demand assessed DLSU the following
deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and
bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and
(3) documentary stamp tax (DST) on loans and
lease contracts.
• The BIR demanded the payment of
P17,303,001.12, inclusive of surcharge, interest
and penalty for taxable years 2001, 2002 and 2003.
• DLSU protested the assessment. The
Commissioner failed to act on the protest; thus,
DLSU filed petition for review with the CTA
Division

CTA Division and CTA En Banc: DST assessment on

the loan transactions but retained other deficiency
taxes. CTA En Banc ruled the ff:

Tax on rental income

DLSU was able to prove that a portion of the assessed
rental income was used actually, directly and
exclusively for educational purposes; hence, exempt
from tax. Rental income had indeed been used to pay
the loan it obtained to build the university's Physical
Education - Sports Complex.
However, other unsubstantiated claim for exemption
must be subjected to income tax and VAT.

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU
proved its remittance of the DST due on its loan and
mortgage documents, evidenced by the stamp on
the documents made by a DST imprinting machine.

Admissibility of DLSU's supplemental evidence

Supplemental pieces of documentary evidence were
admissible even if DLSU formally offered them upon
MR. Law creating the CTA provides that proceedings
before it shall not be governed strictly by the
technical rules of evidence. (Affirmed by SC)

On the validity of the Letter of Authority

LOA should cover only one taxable period and that
the practice of issuing a LOA covering audit of
unverified prior years is prohibited. If the audit
includes more than one taxable period, the other
periods or years shall be specifically indicated in the
LOA.
In the present case, the LOA issued to DLSU is for
Fiscal Year Ending 2003 and Unverified Prior Years.
Hence, the assessments for deficiency income tax,
VAT and DST for taxable years 2001 and 2002 are
void, but the assessment for taxable year 2003 is
valid.
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's
appreciation of DLSU's evidence. It held that while
DLSU successfully proved that a portion of its rental
income was transmitted and used to pay the loan
obtained to fund the construction of the Sports
Complex, the rental income from other sources were
not shown to have been actually, directly and
exclusively used for educational purposes. (Affirmed
by SC)

ISSUE #1: Whether DLSU's income and revenues

proved to have been used actually, directly and
exclusively for educational purposes are exempt from
duties and taxes

CIR’s Arguments:
DLSU's rental income is taxable regardless of how
such income is derived, used or disposed of. Section
30 (H) of the Tax Code, which states among others,
that the income of whatever kind and character of a
non-stock and non-profit educational institution
from any of its properties, real or personal, or from
any of its activities conducted for profit regardless of
the disposition made of such income, shall be subject
to tax. Commissioner posits that a tax-exempt
organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned
from property.

DLSU’s Arguments:
Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit
educational institutions used actually, directly and
exclusively for educational purposes are exempt from
taxes and duties.

HELD: Article XIV, Section 4 (3) of the Constitution

refers to 2 kinds of institutions; (1) non-stock, non-
profit educational institutions and (2) proprietary
educational institutions. DLSU falls on the first
category. The difference is that The tax exemption
granted to non-stock, non-profit educational
institutions is conditioned only on the actual, direct
and exclusive use of their revenues and assets for
educational purposes. While tax exemptions may
also be granted to proprietary educational
institutions, these exemptions may be subject to
limitations imposed by Congress.

The tax exemption granted by the Constitution to

non-stock, non-profit educational institutions, unlike
the exemption that may be availed of by proprietary
educational institutions, is not subject to limitations
imposed by law.

Article XIV, Section 4 (3) does not require that the

revenues and income must have also been sourced
from educational activities or activities related to the
purposes of an educational institution. The phrase all
revenues is unqualified by any reference to the
source of revenues. Thus, so long as the revenues
and income are used actually, directly and
exclusively for educational purposes, then said
revenues and income shall be exempt from taxes
and duties.

Court laid down the requisites for availing the tax

exemption under Article XIV, Section 4 (3), namely:
(1) the taxpayer falls under the classification non-

stock, non-profit educational institution; and

(2) the income it seeks to be exempted from taxation

is used actually, directly and exclusively for

educational purposes.

We find that unlike Article VI, Section 28 (3) of the

Constitution (pertaining to charitable institutions,
churches, parsonages or convents, mosques, and
non-profit cemeteries), which exempts from tax only
the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used
for religious, charitable, or educational purposes...,"
Article XIV, Section 4 (3) categorically states that
"all revenues and assets... used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties."

ISSUE #2: Whether the entire assessment should be

voided because of the defective LOA
DLSU’s Argument:
First, RMO No. 43-90 prohibits the practice of issuing
a LOA with any indication of unverified prior years.
An assessment issued based on such defective LOA
must also be void.
CIR’s Argument:
Commissioner submits that DLSU is estopped from
questioning the LOA's validity because it failed to
raise this issue in both the administrative and judicial
proceedings.

HELD: The LOA issued to DLSU is not entirely void.

The assessment for taxable year 2003 is valid.

A LOA is the authority given to the appropriate

revenue officer to examine the books of account and
other accounting records of the taxpayer in order to
determine the taxpayer's correct internal revenue
liabilities and for the purpose of collecting the correct
amount of tax, in accordance with Section 5 of the
Tax Code, which gives the CIR the power to obtain
information, to summon/examine, and take
testimony of persons. The LOA commences the audit
process and informs the taxpayer that it is under
audit for possible deficiency tax assessment.

What this provision clearly prohibits is the practice of

issuing LOAs covering audit of unverified prior years.
RMO 43-90 does not say that a LOA which contains
unverified prior years is void. It merely prescribes that
if the audit includes more than one taxable period,
the other periods or years must be specified.

In the present case, the LOA issued to DLSU is for

Fiscal Year Ending 2003 and Unverified Prior Years.
The LOA does not strictly comply with RMO 43-90
because it includes unverified prior years. This does
not mean, however, that the entire LOA is void. As the
CTA correctly held, the assessment for taxable year
2003 is valid because this taxable period is specified
in the LOA. DLSU was fully apprised that it was being
audited for taxable year 2003. Corollarily, the
assessments for taxable years 2001 and 2002 are void
for having been unspecified on separate LOAs as
required under RMO No. 43-90.

Wherefore, SC denied the petition of CIR and

affirmed the ruling of CTA En Banc.

CIR vs CTA, CA, YMCA

In 1980, YMCA earned an income of 676,829.80 from

leasing out a portion of its premises to small shop
owners, like restaurants and canteen operators and
44,259 from parking fees collected from non-
members. On July 2, 1984, the CIR issued an
assessment to YMCA for deficiency taxes which
included the income from lease of YMCA’s real
property. YMCA formally protested the assessment
but the CIR denied the claims of YMCA. On appeal,
the CTA ruled in favor of YMCA and excluded income
from lease to small shop owners and parking fees.
However, the CA reversed the CTA but affirmed the
CTA upon motion for reconsideration.

Issue: Whether the rental income of YMCA is taxable

Ruling:

Yes. Supreme Court ruled that the income from the

lease and parking fees were not exempt. The last
paragraph of Section 27 of the NIRC clearly provides
that profits realized by exempt organizations (non-
profit clubs) from real property from whatever source
and wherever used are taxable. The Court noted that
while YMCA is exempt from real property taxes, it is
not exempt from income tax on the rentals from its
property. Further, YMCA failed to prove that it was a
non-stock, non-profit educational institution under
Article XIV, Section 4(3) of the Constitution.

SMI-ED Philippine Technology vs CIR

Facts:

MI-Ed Philippines is a PEZA-registered corporation

authorized "to engage in the business of
manufacturing ultra high-density microprocessor
unit package." After its registration on June 29, 1998,
SMI-Ed Philippines constructed buildings and
purchased machineries and equipment. However it
"failed to commence operations." Its factory was
temporarily closed, effective October 15, 1999. On
August 1, 2000, it sold its buildings and some of its
installed machineries and equipment to Ibiden
Philippines, Inc., another PEZA-registered enterprise.

In its quarterly income tax return for year 2000, SMI-

Ed Philippines subjected the entire gross sales of its
properties to 5% final tax on PEZA-registered
corporations. SMI-Ed Philippines paid taxes
amounting to P44,677,500.00. On February 2, 2001,
after requesting the cancellation of its PEZA
registration and amending its articles of
incorporation to shorten its corporate term, SMI-Ed
Philippines filed an administrative claim for the
refund of P44,677,500.00 with the Bureau of Internal
Revenue (BIR). SMI-Ed Philippines alleged that the
amount was erroneously paid. It also indicated the
refundable amount in its final income tax return filed
on March 1, 2001. It also alleged that it incurred a net
loss of P2,233,464,538.00.

The BIR did not act on SMI-Ed Philippines' claim,

which prompted the latter to file a petition for review
before the Court of Tax Appeals. The Court of Tax
Appeals Second Division denied SMI-Ed Philippines'
claim for refund. The Court of Tax Appeals denied
SMI-Ed Philippines' motion for reconsideration. SMI-
Ed Philippines filed a petition for review before the
Court of Tax Appeals En Banc. The Court of Tax
Appeals En Banc dismissed SMI-Ed Philippines'
petition and affirmed the Court of Tax Appeals
Second Division's decision and resolution.

Petitioner’s contentions:

1. Argued that the Court of Tax Appeals Second

Division erroneously assessed the 6% capital gains
tax on the sale of SMI-Ed Philippines' equipment,
machineries, and buildings.
2. It also argued that the Court of Tax Appeals
Second Division cannot make an assessment at the
first instance.
3. Even if the Court of Tax Appeals Second
Division has such power, the period to make an
assessment had already prescribed.
4. Argued that the Court of Tax Appeals has no
jurisdiction to make an assessment since its
jurisdiction, with respect to the decisions of
respondent, is merely appellate.
5. Argued that the Court of Tax Appeals En Banc
erroneously subjected petitioner's machineries to 6%
capital gains tax.
Respondent’s Contentions
1. Argued that the Court of Tax Appeals'
determination of petitioner's liability for capital gains
tax was not an assessment. Such determination was
necessary to settle the question regarding the tax
consequence of the sale of the properties.
2. Argued that "petitioner failed to justify its claim
for refund”.

Lower Court Rulings:

CTA 2nd Division - found that SMI-Ed Philippines'

administrative claim for refund and the petition for
review with the Court of Tax Appeals were filed within
the two-year prescriptive period. However, fiscal
incentives given to PEZA-registered enterprises may
be availed only by PEZA registered enterprises that
had already commenced operations. Since SMI-Ed
Philippines had not commenced operations, it was
not entitled to the incentives of either the income tax
holiday or the 5% preferential tax rate. Payment of
the 5% preferential tax amounting to P44,677,500.00
was erroneous.

After finding that SMI-Ed Philippines sold properties

that were capital assets under Section 39 (A) (1) of
the National Internal Revenue Code of 1997, the
Court of Tax Appeals Second Division subjected the
sale of SMI-Ed Philippines' assets to 6% capital gains
tax under Section 27 (D) (5) of the same Code and
Section 2 of Revenue Regulations No. 8-98. It was
found liable for capital gains tax amounting to
P53,613,000.00. Therefore, SMI-Ed Philippines must
still pay the balance of P8,935,500.00 as deficiency
tax, which respondent should perhaps look into.

CA EN BANC - dismissed SMI-Ed Philippines' petition

and affirmed the Court of Tax Appeals Second
Division's decision and resolution.

Issue #1
Whether or not the CTA has jurisdiction to
make assessments? NO.
Whether or not the CTA acquired jurisdiction
over the case? YES.

Ruling:
The Court of Tax Appeals has no power to make an
assessment at the first instance. On matters such as
tax collection, tax refund, and others related to the
national internal revenue taxes, the Court of Tax
Appeals' jurisdiction is appellate in nature.

Section 7 (a) (1) and Section 7 (a) (2) of Republic Act

No. 1125, as amended by Republic Act No. 9282,
provide that the Court of Tax Appeals reviews
decisions and inactions of the Commissioner of
Internal Revenue in disputed assessments and claims
for tax refunds.

Based on these provisions, the following must be

present for the Court of Tax Appeals to have
jurisdiction over a case involving the BIR's decisions
or inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees, or other
charges, penalties in relation thereto; and
iii. Other matters arising under the National Internal
Revenue Code of 1997.
b) Commissioner of Internal Revenue's decision or
inaction in a case submitted to him or her

The BIR first has to make an assessment of the

taxpayer's liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that
assessment before the BIR. If the BIR issues a decision
that is unfavorable to the taxpayer or if the BIR fails
to act on a dispute brought by the taxpayer, the BIR's
decision or inaction may be brought on appeal to the
Court of Tax Appeals. The Court of Tax Appeals then
acquires jurisdiction over the case.
In this case, the Court of Tax Appeals' jurisdiction was
acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR
had failed to act on petitioner's claim for refund of
erroneously paid taxes. The Court of Tax Appeals did
not acquire jurisdiction as a result of a disputed
assessment of a BIR decision.

Issue #2
Whether or not the CTA made an assessment
when it subjected the petitioner to a 6% capital gains
tax
Ruling
NO. As earlier established, the Court of Tax
Appeals has no assessment powers. In stating that
petitioner's transactions are subject to capital gains
tax, however, the Court of Tax Appeals was not
making an assessment. It was merely determining the
proper category of tax that petitioner should have
paid, in view of its claim that it erroneously imposed
upon itself and paid the 5% final tax imposed upon
PEZA-registered enterprises.

The determination of the proper category of tax that

petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue,
which is whether petitioner was entitled to a refund.

Issue # 3
Whether or not the respondent’s are entitled to
benefits given to PEZA registered entprises

Ruling
NO. Petitioner is not entitled to benefits given
to PEZA-registered enterprises, including the 5%
preferential tax rate under Republic Act No. 7916 or
the Special Economic Zone Act of 1995. This is
because it never began its operation.

According to RA 7916 Sections 23 and 24 the fiscal

incentives and the 5% preferential tax rate are
available only to businesses operating within the
Ecozone. A business is considered in operation when
it starts entering into commercial transactions that
are not merely incidental to but are related to the
purposes of the business.

Petitioner never started its operations since its

registration on June 29, 1998 because of the Asian
financial crisis. Petitioner admitted this. Therefore, it
cannot avail the incentives provided under Republic
Act No. 7916. It is not entitled to the preferential tax
rate of 5% on gross income in lieu of all taxes.
Because petitioner is not entitled to a preferential
rate, it is subject to ordinary tax rates under the
National Internal Revenue Code of 1997.

Issue #4
Whether or not the petitioner’s sale of
properties is subject to capital gains tax

Ruling
Yes, but only the land and buildings are subject
to CGT and not the machineries and equipment.
Under the NIRC of 1997, for corporation the law
treats the sale of lands and buildings, and the sale of
machineries and equipment, differently.

Domestic corporations are imposed a 6% capital

gains tax only on the presumed gain realized from
the sale of lands and/or buildings. The National
Internal Revenue Code of 1997 does not impose the
6% capital gains tax on the gains realized from the
sale of machineries and equipment.

Therefore, only the presumed gain from the sale of

petitioner's land and/or building may be subjected to
the 6% capital gains tax. The income from the sale of
petitioner's machineries and equipment is subject to
the provisions on normal corporate income tax.

Issue #5
Whether or not the period to make an
assessment has prescribed
Ruling:
Yes. Section 203 of the National Internal Revenue
Code of 1997 provides that as a general rule, the BIR
has three (3) years from the last day prescribed by
law for the filing of a return to make an assessment.
If the return is filed beyond the last day prescribed by
law for filing, the three-year period shall run from the
actual date of filing.

The BIR had three years from the filing of petitioner's

final tax return in 2000 to assess petitioner's taxes.
Nothing stopped the BIR from making the correct
assessment. The elevation of the refund claim with
the Court of Tax Appeals was not a bar against the
BIR's exercise of its assessment powers. The BIR,
however, did not initiate any assessment for
deficiency capital gains tax. Since more than a
decade have lapsed from the filing of petitioner'
return, the BIR can no longer assess petitioner for
deficiency capital gains taxes, if petitioner is later
found to have capital gains tax liabilities in excess of
the amount claimed for refund.

The Court of Tax Appeals should not be expected to

perform the BIR's duties of assessing and collecting
taxes whenever the BIR, through neglect or oversight,
fails to do so within the prescriptive period allowed
by law.

Republic vs. Soriano

Facts:
On October 20, 2010, petitioner Republic of the
Philippines, represented by the Department of Public
Works and Highways (DPWH), filed a Complaint3 for
expropriation against respondent Arlene R. Soriano,
the registered owner of a parcel of land.

In its Complaint, petitioner averred that pursuant to

Republic Act (RA) No. 8974, otherwise known as “An
Act to Facilitate the Acquisition of Right-Of-Way, Site
or Location for National Government Infrastructure
Projects and for other Purposes,” the property sought
to be expropriated shall be used in implementing the
construction of the North Luzon Expressway (NLEX)-
Harbor Link Project (Segment 9) from NLEX to
MacArthur Highway, Valenzuela City.

Petitioner duly deposited to the Acting Branch Clerk

of Court the amount of P420,000.00 representing
100% of the zonal value of the subject property. RTC
ordered the issuance of a Writ of Possession and a
Writ of Expropriation for failure of respondent, or any
of her representatives, to appear despite notice
during the hearing called for the purpose.

RTC appointed the following members of the Board

of Commissioners for the determination of just
compensation: (1) Ms. Eunice O. Josue, Officer-in-
Charge, RTC, Branch 270, Valenzuela City; (2) Atty.
Cecilynne R. Andrade, Acting Valenzuela City
Assessor, City Assessor’s Office, Valenzuela City; and
(3) Engr. Restituto Bautista, of Brgy. Bisig, Valenzuela
City.
However, the trial court subsequently revoked the
appointment of the Board for their failure to submit
a report as to the fair market value of the property to
assist the court in the determination of just
compensation. Petitioner alleged that pursuant to a
Certification issued by the Bureau of Internal
Revenue (BIR), Revenue Region No. 5, the zonal value
of the subject property in the amount of P2,100.00
per square meter is reasonable, fair, and just to
compensate the defendant for the taking of her
property in the total area of 200 square meters.9

Accordingly, the RTC considered respondent to have

waived her right to adduce evidence and to object to
the evidence submitted by petitioner for her
continued absence despite being given several
notices to do so.

Petitioner filed a Motion for Reconsideration

maintaining that pursuant to Bangko Sentral ng
Pilipinas (BSP) Circular No. 799, interest rate imposed
by the RTC on just compensation should be lowered
to 6% for the instant case falls under a loan or
forbearance of money.11 In its Order12 dated March
10, 2014, the RTC reduced the interest rate to 6% per
annum.

However, the term “judgments” as used in Section 1

of the Usury Law and the previous Central Bank
Circular No. 416, should be interpreted to mean only
judgments involving loan or forbearance of money,
goods or credits, following the principle of ejusdem
generis. And applying said rule on statutory
construction, the general term “judgments” can refer
only to judgments in cases involving loans or
forbearance of any money, goods, or credits.

Further in that case, the Supreme Court explained

that the transaction involved is clearly not a loan or
forbearance of money, goods or credits but
expropriation of certain parcels of land for a public
purpose.

ISSUES: Whether or not RESPONDENT IS ENTITLED

TO THE LEGAL INTEREST OF 6% PER ANNUM ON THE
AMOUNT OF JUST COMPENSATION OF THE
SUBJECT PROPERTY; Whether or not, IT IS
RESPONDENT’S OBLIGATION TO PAY THE TRANSFER
TAXES.

HELD:

The petition is partly meritorious. At the outset, it

must be noted that the RTC’s reliance on National
Power Corporation v. Angas is misplaced for the
same has already been overturned by our more
recent ruling in Republic v. Court of Appeals,16
wherein we held that the payment of just
compensation for the expropriated property
amounts to an effective forbearance on the part of
the State, to wit:

Aside from this ruling, Republic notably

overturned the Court’s previous ruling in
National Power Corporation v. Angas which
held that just compensation due for
expropriated properties is not a loan or
forbearance of money but indemnity for
 damages for the delay in payment; since the
interest involved is in the nature of damages
rather than earnings from loans, then Art. 2209
of the Civil Code, which fixes legal interest at
6%, shall apply.

In Republic, the Court recognized that the just

compensation due to the landowners for their
expropriated property amounted to an effective
forbearance on the part of the State. Effectively,
therefore, the debt incurred by the government on
account of the taking of the property subject of an
expropriation constitutes a forbearance18 which runs
contrary to the trial court’s opinion that the same is
in the nature of indemnity for damages calling for the
application of Article 2209 of the Civil Code.

Nevertheless, in line with the recent circular of the

Monetary Board of the Bangko Sentral ng Pilipinas
(BSP-MB) No. 799, Series of 2013, effective July 1,
2013, the prevailing rate of interest for loans or
forbearance of money is six percent (6%) per annum,
in the absence of an express contract as to such rate
of interest.
Notwithstanding the foregoing, We find that the
imposition of interest in this case is unwarranted in
view of the fact that as evidenced by the
acknowledgment receipt19 signed by the Branch
Clerk of Court, petitioner was able to deposit with the
trial court the amount representing the zonal value
of the property before its taking. However, when
there is no delay in the payment of just
compensation, We have not hesitated in deleting the
imposition of interest thereon for the same is justified
only in cases where delay has been sufficiently
established.

The records of this case reveal that petitioner did not

delay in its payment of just compensation. The
amount deposited was deemed by the trial court to
be just, fair, and equitable, taking into account the
well-established factors in assessing the value of
land, such as its size, condition, location, tax
declaration, and zonal valuation as determined by
the BIR. Considering, therefore, the prompt payment
by the petitioner of the full amount of just
compensation as determined by the RTC, We find
that the imposition of interest thereon is unjustified
and should be deleted.

x x x The general rule is that the just compensation

to which the owner of the condemned property is
entitled to is the market value. Market value is that
sum of money which a person desirous but not
compelled to buy, and an owner willing but not
compelled to sell, would agree on as a price to be
paid by the buyer and received by the seller. The
general rule, however, is modified where only a part
of a certain property is expropriated. In such a case,
the owner is not restricted to compensation for the
portion actually taken, he is also entitled to recover
the consequential damage, if any, to the remaining
part of the property.

Consequential damages are awarded if as a result of

the expropriation, the remaining property of the
owner suffers from an impairment or decrease in
value.
Anent petitioner’s contention that it cannot be made
to pay the value of the transfer taxes in the nature of
capital gains tax and documentary stamp tax, which
are necessary for the transfer of the subject property
from the name of the respondent to that of the
petitioner, the same is partly meritorious. With
respect to the capital gains tax, We find merit in
petitioner’s posture that capital gains tax due on the
sale of real property is a liability for the account of
the seller

Thus, it has been held that since capital gains is a tax

on passive income, it is the seller, not the buyer, who
generally would shoulder the tax. As far as the
government is concerned, therefore, the capital gains
tax remains a liability of the seller since it is a tax on
the seller's gain from the sale of the real estate.25

As to the documentary stamp tax, however, this Court

finds inconsistent petitioner’s denial of liability to the
same.

As a general rule, therefore, any of the parties to a

transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree
among themselves on who shall be liable for the
same. In this case, there is no agreement as to the
party liable for the documentary stamp tax due on
the sale of the land to be expropriated.

SUPREME TRANSLINER VS BPI FAMILY

SAVINGS BANK
Facts:

Supreme Transliner, Inc. represented by its Managing

Director, Moises C. Alvarez, and Paulita S. Alvarez,
obtained a loan in the amount of ₱9,853,000.00 from
BPI Family Savings Bank with a 714-square meter lot
covered by Transfer Certificate of Title No. T-79193 in
the name of Moises C. Alvarez and Paulita S. Alvarez,
as collateral.

For non-payment of the loan, the mortgage was

extrajudicially foreclosed and the property was sold
to the bank as the highest bidder in the public
auction.

Before the expiration of the one-year redemption

period, the mortgagors notified the bank of their
intention to redeem the property. Accordingly, A
Statement of Account was prepared by the bank
which include capital gains tax paid by the
mortgagee and attorney’s fees and liquidated
damages.

The mortgagors requested for the elimination of

liquidated damages and reduction of attorney’s fees
and interest (1% per month) but the bank refused. On
May 21, 1997, the mortgagors redeemed the
property by paying the sum of ₱15,704,249.12. A
Certificate of Redemption4 was issued by the bank
on May 27, 1997.

On June 11, 1997, the mortgagors filed a complaint

against the bank to recover the allegedly unlawful
and excessive charges totaling ₱5,331,237.77, with
prayer for damages and attorney’s fees.
The mortgagors specifically prayed for the return of
all asset-acquired expenses consisting of
documentary stamps tax, capital gains tax,
foreclosure fee, registration and filing fee, and
additional registration and filing fee totaling
₱906,142.79, with 6% interest thereon from May 21,
1997.

RTC ruling:
The trial court rendered its decision5 dismissing the
complaint and the bank’s counterclaims.
The trial court held that plaintiffs-mortgagors are
bound by the terms of the mortgage loan documents
which clearly provided for the payment of the
following interest, charges and expenses: 18% p.a. on
the loan, 3% post-default penalty, 15% liquidated
damages, 15% attorney’s fees and collection and
legal costs.

CA Ruling:
The CA ruled that attorney’s fees and liquidated
damages were already included in the bid price of
₱10,372,711.35 as per the recitals in the Certificate of
Sale that said amount was paid to the foreclosing
mortgagee to satisfy not only the principal loan but
also "interest and penalty charges, cost of publication
and expenses of the foreclosure proceedings."

Complainant’s (Supreme Transliner) Contentions:

The charges were unlawful and excessive charges
totaling ₱5,331,237.77, with prayer for damages and
attorney’s fees.

Respondent’s Contentions:

The bank asserted that the redemption price

reflecting the stipulated interest, charges and/or
expenses, is valid, legal and in accordance with
documents duly signed by the mortgagors. The bank
further contended that the claims are deemed
waived and the mortgagors are already estopped
from questioning the terms and conditions of their
contract
Issue #1: Whether or not the asset acquired expenses
of the mortgagee bank should be shouldered by the
mortgagee upon redemption/

Ruling:
Yes, the asset acquired expenses should be
shouldered by the mortagee.

On the correct computation of the redemption price,

Section 78 of Republic Act No. 337, otherwise known
as the General Banking Act, governs in cases where
the mortgagee is a bank.

SEC. 78. x x x In the event of foreclosure, whether

judicially or extrajudicially, of any mortgage on real
estate which is security for any loan granted before
the passage of this Act or under the provisions of this
Act, the mortgagor or debtor whose real property has
been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an
obligation to any bank, banking or credit institution,
within the purview of this Act shall have the right,
within one year after the sale of the real estate as a
result of the foreclosure of the respective mortgage,
to redeem the property by paying the amount fixed
by the court in the order of execution, or the amount
due under the mortgage deed, as the case may be,
with interest thereon at the rate specified in the
mortgage, and all the costs, and judicial and other
expenses incurred by the bank or institution
concerned by reason of the execution and sale and
as a result of the custody of said property less the
income received from the property.

Under the Mortgage Loan Agreement, petitioners-

mortgagors undertook to pay the attorney’s fees and
the costs of registration and foreclosure.

The terms of the contract show that the said items

are separate and distinct from the bid price which
represents only the outstanding loan balance with
stipulated interest thereon. attorney’s fees and
liquidated damages were not yet included in the bid
price of ₱10,372,711.35 is clearly shown by the
Statement of Account as of April 4, 1997 prepared by
the petitioner bank and given to petitioners-
mortgagors.

Par. 23 of the Mortgage Loan Agreement indicated

that asset acquired expenses were to be added to the
redemption price as part of "costs and other
expenses incurred" by the mortgagee bank in
connection with the foreclosure sale.
Issue #2: whether the foreclosing mortgagee should
pay capital gains tax upon execution of the certificate
of sale, and if paid by the mortgagee, whether the
same should be shouldered by the redemptioner

Ruling:
No, there is no legal basis for the inclusion of this
charge in the redemption price.

Under Revenue Regulations (RR) No. 13-85

(December 12, 1985), every sale or exchange or other
disposition of real property classified as capital asset
under Section 34(a)17 of the Tax Code shall be
subject to the final capital gains tax. The term sale
includes pacto de retro and other forms of
conditional sale. Section 2.2 of Revenue
Memorandum Order (RMO) No. 29-86 (as amended
by RMO No. 16-88 and as further amended by RMO
Nos. 27-89 and 6-92) states that these conditional
sales "necessarily include mortgage foreclosure sales
(judicial and extrajudicial foreclosure sales)." Further,
for real property foreclosed by a bank on or after
September 3, 1986, the capital gains tax and
documentary stamp tax must be paid before title to
the property can be consolidated in favor of the bank.

Where the right of redemption exists, the certificate

of title of the mortgagor shall not be cancelled, but
the certificate of sale and the order confirming the
sale shall be registered by brief memorandum
thereof made by the Register of Deeds upon the
certificate of title. In the event the property is
redeemed, the certificate or deed of redemption shall
be filed with the Register of Deeds, and a brief
memorandum thereof shall be made by the Register
of Deeds on the certificate of title. It is therefore clear
that in foreclosure sale, there is no actual transfer of
the mortgaged real property until after the expiration
of the one-year redemption period as provided in Act
No. 3135 and title thereto is consolidated in the
name of the mortgagee in case of non-redemption.
In the interim, the mortgagor is given the option
whether or not to redeem the real property. The
issuance of the Certificate of Sale does not by itself
transfer ownership.

RR No. 4-99 issued on March 16, 1999, further

amends RMO No. 6-92 relative to the payment of
Capital Gains Tax and Documentary Stamp Tax on
extrajudicial foreclosure sale of capital assets
initiated by banks, finance and insurance companies.

SEC. 3. CAPITAL GAINS TAX. –

(1) In case the mortgagor exercises his right of
redemption within one year from the issuance
of the certificate of sale, no capital gains tax
shall be imposed because no capital gains has
been derived by the mortgagor and no sale or
transfer of real property was realized. x x x

(2) In case of non-redemption, the capital gains

[tax] on the foreclosure sale imposed under
Secs. 24(D)(1) and 27(D)(5) of the Tax Code of
1997 shall become due based on the bid price
of the highest bidder but only upon the
expiration of the one-year period of
redemption provided for under Sec. 6 of Act
No. 3135, as amended by Act No. 4118, and
 shall be paid within thirty (30) days from the
expiration of the said one-year redemption
period.
SEC. 4. DOCUMENTARY STAMP TAX. –
(1) In case the mortgagor exercises his right of
redemption, the transaction shall only be
subject to the P15.00 documentary stamp tax
imposed under Sec. 188 of the Tax Code of
1997 because no land or realty was sold or
transferred for a consideration.

(2) In case of non-redemption, the

corresponding documentary stamp tax shall be
levied, collected and paid by the person
making, signing, issuing, accepting, or
transferring the real property wherever the
document is made, signed, issued, accepted or
transferred where the property is situated in
the Philippines. x x x

Although the subject foreclosure sale and

redemption took place before the effectivity of RR
No. 4-99, its provisions may be given retroactive
effect in this case pursuant to Section 246 of the NCC.

In this case, the retroactive application of RR No. 4-

99 is more consistent with the policy of aiding the
exercise of the right of redemption. As the Court of
Tax Appeals concluded in one case, RR No. 4-99 "has
curbed the inequity of imposing a capital gains tax
even before the expiration of the redemption period
[since] there is yet no transfer of title and no profit or
gain is realized by the mortgagor at the time of
foreclosure sale but only upon expiration of the
redemption period."

Considering that herein petitioners-mortgagors

exercised their right of redemption before the
expiration of the statutory one-year period,
petitioner bank is not liable to pay the capital gains
tax due on the extrajudicial foreclosure sale. There
was no actual transfer of title from the owners-
mortgagors to the foreclosing bank. Hence, the
inclusion of the said charge in the total redemption
price was unwarranted and the corresponding
amount paid by the petitioners-mortgagors should
be returned to them.

Doctrines:

Every sale or exchange or other disposition of real

property classified as capital asset under Section
34(a)17 of the Tax Code shall be subject to the final
capital gains tax. The term sale includes pacto de
retro and other forms of conditional sale. Section 2.2
of Revenue Memorandum Order (RMO) No. 29-86
(as amended by RMO No. 16-88 and as further
amended by RMO Nos. 27-89 and 6-92) states that
these conditional sales "necessarily include mortgage
foreclosure sales (judicial and extrajudicial
foreclosure sales)." Further, for real property
foreclosed by a bank on or after September 3, 1986,
the capital gains tax and documentary stamp tax
must be paid before title to the property can be
consolidated in favor of the bank.
It is therefore clear that in foreclosure sale, there is
no actual transfer of the mortgaged real property
until after the expiration of the one-year redemption
period as provided in Act No. 3135 and title thereto
is consolidated in the name of the mortgagee in case
of non-redemption. In the interim, the mortgagor is
given the option whether or not to redeem the real
property. The issuance of the Certificate of Sale does
not by itself transfer ownership.

RR No. 4-99 issued on March 16, 1999, further

amends RMO No. 6-92 provides:

SEC. 3. CAPITAL GAINS TAX. –

(1) In case the mortgagor exercises his right of
redemption within one year from the issuance
of the certificate of sale, no capital gains tax
shall be imposed because no capital gains has
been derived by the mortgagor and no sale or
transfer of real property was realized. x x x

(2) In case of non-redemption, the capital gains

[tax] on the foreclosure sale imposed under
Secs. 24(D)(1) and 27(D)(5) of the Tax Code of
1997 shall become due based on the bid price
of the highest bidder but only upon the
expiration of the one-year period of
redemption provided for under Sec. 6 of Act
No. 3135, as amended by Act No. 4118, and
shall be paid within thirty (30) days from the
expiration of the said one-year redemption
period.
RR No. 4-99 "has curbed the inequity of imposing a
capital gains tax even before the expiration of the
redemption period [since] there is yet no transfer of
title and no profit or gain is realized by the
mortgagor at the time of foreclosure sale but only
upon expiration of the redemption period."

BDO vs. Comissioner

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. These PEACe Bonds would initially be
purchased by a special purpose vehicle on behalf of
Caucus of Development NGO Networks (CODE-
NGO), repackaged and sold at a premium to
investors. The net proceeds from the sale will be used
to endow a permanent fund to finance meritorious
activities and projects of accredited non-government
organizations (NGOs) throughout the country. In
relation to this, CODE-NGO wrote a letter to the
Bureau of Internal Revenue (BIR) to inquire as to
whether the PEACe Bonds will be subject to
withholding tax of 20%. The BIR issued several
rulings beginning with BIR Ruling No.020-2001
(issued on May 31, 2001) and was subsequently
reiterated its points in BIR Ruling No. 035-200119
dated August 16, 2001 and BIR Ruling No. DA-175-
0120. The rulings basically say that in determining
whether financial assets such as a debt instrument
are deposit substitute, the “20 or more individual or
corporate lenders rule” should apply. Likewise, the “at
any one time” stated in the rules should be construed
as “at the time of the original issuance.”

With this BTr made a public offering of the PEACe

Bonds to the Government Securities Eligible Dealers
(GSED) whereby RCBC won as the highest bidder for
approximately 10.17 billion, resulting in a discount of
approximately 24.83 billion. RCBC Capital entered
into an underwriting agreement with CODE-NGO,
whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the
PEACe Bonds.

In October 7, 2011, BIR issued BIR RULING NO. 370-

2011 in response to the query of the Secretary of
Finance as to the proper tax treatment of the
discounts and interest derived from Government
Bonds. It cited three other rulings issued in 2004 and
2005. The above ruling states that the all treasury
bonds (including PEACe Bonds), regardless of the
number of purchasers/lenders at the time of
origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the
discount (i.e. difference between face value and
purchase price/discounted value of the bond) is
treated as interest income of the purchaser/holder.

Tax treatment of deposit substitutes

Ruling:

Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the

1997 National Internal Revenue Code, a final
withholding tax at the rate of 20% is imposed on
interest on any currency bank deposit and yield or
any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements.

This tax treatment of interest from bank deposits and

yield from deposit substitutes was first introduced in
the 1977 National Internal Revenue Code through
Presidential Decree No. 1739168 issued in 1980.
Later, Presidential Decree No. 1959, effective on
October 15, 1984, formally added the definition of
deposit substitutes:
Deposit substitutes’ shall mean 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,
for the purpose of relending or purchasing of
receivables and other obligations, or financing
their own needs or the needs of their agent or
dealer. These promissory notes, repurchase
agreements, certificates of assignment or
participation and similar instrument with
recourse as may be authorized by the Central
Bank of the Philippines, for banks and non-
bank financial intermediaries or by the
Securities and Exchange Commission of the
Philippines for commercial, industrial, finance
companies and either non-financial companies:
Provided, however, that only debt instruments
issued for inter-bank call loans to cover
deficiency in reserves against deposit liabilities
including those between or among banks and
quasi-banks shall not be considered as deposit
substitute debt instruments.
Revenue Regulations No. 17-84, issued to implement
Presidential Decree No. 1959, adopted verbatim the
same definition and specifically identified the
following borrowings as “deposit substitutes”;

1. All interbank borrowings by or among banks

and non-bank financial institutions authorized
to engage in quasi-banking functions
evidenced by deposit substitutes instruments,
except interbank call loans to cover deficiency
in reserves against deposit liabilities as
evidenced by interbank loan advice or
repayment transfer tickets.

2. All borrowings of the national and local

government and its instrumentalities including
the Central Bank of the Philippines, evidenced
by debt instruments denoted as treasury
bonds, bills, notes, certificates of indebtedness
and similar instruments.

3. All borrowings of banks, non-bank financial

intermediaries, finance companies, investment
companies, trust companies, including the
trust department of banks and investment
houses, evidenced by deposit substitutes
instruments.

The definition of deposit substitutes was amended

under the 1997 National Internal Revenue Code with
the addition of the qualifying phrase for public –
borrowing from 20 or more individual or corporate
lenders at any one time. Under Section 22(Y), deposit
substitute is defined thus:

The term ‘deposit substitutes’ shall mean an

alternative form of obtaining funds from the
public (the term 'public' means borrowing from
twenty (20) or more individual or corporate
lenders at any one time) other than deposits,
through the issuance, endorsement, or
acceptance of debt instruments for the
borrower’s own account, for the purpose of
relending or purchasing of receivables and
other obligations, or financing their own needs
or the needs of their agent or dealer. These
instruments may include, but need not be
limited to, bankers’ acceptances, promissory
notes, repurchase agreements, including
reverse repurchase agreements entered into by
and between the Bangko Sentral ng Pilipinas
(BSP) and any authorized agent bank,
certificates of assignment or participation and
similar instruments with recourse: Provided,
however, That debt instruments issued for
interbank call loans with maturity of not more
than five (5) days to cover deficiency in reserves
against deposit liabilities, including those
between or among banks and quasi-banks,
shall not be considered as deposit substitute
debt instruments.

Issue # 3: Interpretation of the phrase “borrowing

from twenty (20) or more individual or corporate
lenders at any one time” under Section 22(Y) of the
1997 National Internal Revenue Code
Ruling:

Under the 1997 National Internal Revenue Code,

Congress specifically defined “public” to mean
“twenty (20) or more individual or corporate lenders
at any one time.” Hence, the number of lenders is
determinative of whether a debt instrument should
be considered a deposit substitute and consequently
subject to the 20% final withholding tax.

Meaning of “at any one time”

From the point of view of the financial market, the

phrase “at any one time”, for purposes of
determining the “20 or more lenders”, would mean
every transaction executed in the primary or
secondary market, in connection with the purchase
or sale of securities.

For example, where the financial assets involved are

government securities like bonds, the reckoning of
“20 or more lenders/investors” is made at any
transaction in connection with the purchase or sale
of the Government Bonds, such as:
· Issuance by the Bureau of Treasury of the
bonds to GSEDs in the primary market;
· Sale and distribution by GSEDs to various
lenders/investors in the secondary market;
· Subsequent sale or trading by a bondholder
to another lender/investor in the secondary
market usually through a broker or dealer; or
· Sale by a financial intermediary-bondholder
of its participation interests in the bonds to
 individual or corporate lenders in the
secondary market.

When, through any of the foregoing transactions,

funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public
borrowing and the bonds at that point in time are
deemed deposit substitutes. Consequently, the seller
is required to withhold the 20% final withholding tax
on the imputed interest income from the bonds.

For debt instruments that are not deposit

substitutes, regular income tax applies

It must be emphasized, however, that debt

instruments that do not qualify as deposit substitutes
under the 1997 National Internal Revenue Code are
subject to the regular income tax.

The phrase “all income derived from whatever

source” in Chapter VI, Computation of Gross Income,
Section 32(A) of the 1997 National Internal Revenue
Code discloses a legislative policy to include all
income not expressly exempted as within the class of
taxable income under our laws.

“The definition of gross income is broad enough to

include all passive incomes subject to specific tax
rates or final taxes.”197 Hence, interest income from
deposit substitutes are necessarily part of taxable
income. “However, since these passive incomes are
already subject to different rates and taxed finally at
source, they are no longer included in the
computation of gross income, which determines
taxable income.”198 “Stated otherwise . . . if there
were no withholding tax system in place in this
country, this 20 percent portion of the ‘passive’
income of [creditors/lenders] would actually be paid
to the [creditors/lenders] and then remitted by them
to the government in payment of their income tax.”

This court, in Chamber of Real Estate and Builders’

Associations, Inc. v. Romulo,200 explained the
rationale behind the withholding tax system

The withholding [of tax at source] was devised for

three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax
liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially
reduced through failure to file the corresponding
returns[;] and third, to improve the government’s
cash flow. This results in administrative savings,
prompt and efficient collection of taxes, prevention
of delinquencies and reduction of governmental
effort to collect taxes through more complicated
means and remedies.201 (Citations omitted)
“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.”
Hence, when there are 20 or more lenders/investors
in a transaction for a specific bond issue, the seller is
required to withhold the 20% final income tax on the
imputed interest income from the bonds.
Issue # 4: Whether the reckoning of the 20 lenders
includes trading of the bonds in the secondary
market

Ruling:

Financial markets
Financial markets provide the channel through which
funds from the surplus units (households and
business firms that have savings or excess funds) flow
to the deficit units (mainly business firms and
government that need funds to finance their
operations or growth). They bring suppliers and
users of funds together and provide the means by
which the lenders transform their funds into financial
assets, and the borrowers receive these funds now
considered as their financial liabilities. The transfer
of funds is represented by a security, such as stocks
and bonds. Fund suppliers earn a return on their
investment; the return is necessary to ensure that
funds are supplied to the financial markets.

“The financial markets that facilitate the transfer of

debt securities are commonly classified by the
maturity of the securities,” namely: (1) the money
market, which facilitates the flow of short-term funds
(with maturities of one year or less); and (2) the
capital market, which facilitates the flow of long-term
funds (with maturities of more than one year).
Whether referring to money market securities or
capital market securities, transactions occur either in
the primary market or in the secondary market.
“Primary markets facilitate the issuance of new
securities. Secondary markets facilitate the trading of
existing securities, which allows for a change in the
ownership of the securities.” The transactions in
primary markets exist between issuers and investors,
while secondary market transactions exist among
investors.

Fund transfers are accomplished in three ways: (1)

direct finance; (2) semidirect finance; and (3) indirect
finance.
With direct financing, the “borrower and lender meet
each other and exchange funds in return for financial
assets” (e.g., purchasing bonds directly from the
company issuing them). This method provides
certain limitations such as: (a) “both borrower and
lender must desire to exchange the same amount of
funds at the same time”; and (b) “both lender and
borrower must frequently incur substantial
information costs simply to find each other.”

In semidirect financing, a securities broker or dealer

brings surplus and deficit units together, thereby
reducing information costs. In semidirect financing,
“the ultimate lender still winds up holding the
borrower’s securities, and therefore the lender must
be willing to accept the risk, liquidity, and maturity
characteristics of the borrower’s debt security. There
still must be a fundamental coincidence of wants and
needs between lenders and borrowers for semidirect
financial transactions to take place.”

“The limitations of both direct and semidirect finance

stimulated the development of indirect financial
transactions, carried out with the help of financial
intermediaries” or financial institutions, like banks,
investment banks, finance companies, insurance
companies, and mutual funds. Financial
intermediaries accept funds from surplus units and
channel the funds to deficit units. “Depository
institutions such as banks accept deposits from
surplus units and provide credit to deficit units
through loans and purchase of debt securities.”
Nondepository institutions, like mutual funds, issue
securities of their own (usually in smaller and
affordable denominations) to surplus units and at the
same time purchase debt securities of deficit units.
“By pooling the resources of small savers, a financial
intermediary can service the credit needs of large
firms simultaneously.”

Dumaguete Cathedral Coop vs CIR

Facts:

Dumaguete Cathedral Credit Cooperative (the

Cooperative) was assessed by the Commissioner of
Internal Revenue (CIR) on deficiency withholding
taxes for taxable years 1999 and 2000 which it
protested on July 23, 2002. Thereafter, on October
16, 2002, the Cooperative received two (2) other Pre-
Assessment Notices for deficiency withholding taxes
also for taxable years 1999 and 2000. The deficiency
withholding taxes cover the payments of the
honorarium of the Board of Directors, security and
janitorial services, legal and professional fees, and
interest on savings and time deposits of its members.
In another letter dated November 8, 2002, the
Cooperative informed the CIR, that it would pay the
withholding taxes due on the honorarium and per
diems of the Board of Directors, security and
jjanitorial services, commissions and legal and
professional fees for the year 2000 excluding
penalties and interest, and that it would avail of the
Voluntary Assessment and Abatement Program
(VAAP) of the BIR under Revenue Regulations No. 17-
2002.

On November 29, 2002, the Cooperative availed of

the VAAP and paid the amounts corresponding to
the withholding taxes on the payments for the
compensation, honorarium of the Board of Directors,
security and janitorial services, and legal and
professional services, for the years 1999 and 2000.

On April 24, 2003, the Cooperative received from the

BIR Regional Director, Sonia L. Flores, Letters of
Demand Nos. 00027-2003 and 00026-2003, with
attached Transcripts of Assessment and Audit
Results/Assessment Notices, ordering it to pay the
deficiency withholding taxes, inclusive of penalties,
for the years 1999 and 2000 in the amounts of
P1,489,065.30 and P1,462,644.90, respectively.

Proceedings before the Commissioner of Internal

Revenue

Petitioner protested the Letters of Demand and

Assessment Notices with the Commissioner of
Internal Revenue (CIR).15 However, the latter failed to
act on the protest within the prescribed 180-day
period. Hence, on December 3, 2003, petitioner filed
a Petition for Review before the CTA.

Proceedings before the CTA First Division

The Petition for Review is PARTIALLY GRANTED.

Assessment Notice Nos. 00026-2003 and 00027-

2003 are MODIFIED and the assessment for
deficiency withholding taxes on the honorarium and
per diems of petitioner’s Board of Directors, security
and janitorial services, commissions and legal and
professional fees are CANCELLED. However, the
assessments for deficiency withholding taxes on
interests are AFFIRMED.

Petitioner is ordered to pay the respondent the

respective amounts of ₱1,280,145.89 and
₱1,357,881.14 representing deficiency withholding
taxes on interests from savings and time deposits of
its members for the taxable years 1999 and 2000. In
addition, petitioner is ordered to pay the 20%
delinquency interest from May 26, 2003 until the
amount of deficiency withholding taxes are fully paid
pursuant to Section 249 (C) of the Tax Code.

Proceedings before the CTA En Banc

The CTA En Banc denied the Petition for Review as

well as petitioner’s Motion for Reconsideration. It
held that Section 57 of the NIRC requires the
withholding of tax at source. Pursuant thereto,
Revenue Regulations No. 2-98 was issued
enumerating the income payments subject to final
withholding tax, among which is "interest from any
peso bank deposit and yield, or any other monetary
benefit from deposit substitutes and from trust funds
and similar arrangements x x x". According to the CTA
En Banc, petitioner’s business falls under the phrase
"similar arrangements;" as such, it should have
withheld the corresponding 20% final tax on the
interest from the deposits of its members.

Plaintiff’s Contentions:

Petitioner argues that Section 24(B)(1) of the NIRC

applies only to banks and not to cooperatives, since
the phrase "similar arrangements" is preceded by
terms referring to banking transactions that have
deposit peculiarities. Petitioner thus posits that the
savings and time deposits of members of
cooperatives are not included in the enumeration,
and thus not subject to the 20% final tax. To bolster
its position, petitioner cites BIR Ruling No. 551-888
and BIR Ruling [DA-591-2006] where the BIR ruled
that interests from deposits maintained by members
of cooperative are not subject to withholding tax
under Section 24(B)(1) of the NIRC. Petitioner further
contends that pursuant to Article XII, Section 15 of
the Constitution and Article 2 of Republic Act No.
6938 (RA 6938) or the Cooperative Code of the
Philippines cooperatives enjoy a preferential tax
treatment which exempts their members from the
application of Section 24(B)(1) of the NIRC.

Defendants’s Contentions:
As a counter-argument, respondent invokes the legal
maxim "Ubi lex non distinguit nec nos distinguere
debemos" (where the law does not distinguish, the
courts should not distinguish). Respondent maintains
that Section 24(B)(1) of the NIRC applies to
cooperatives as the phrase "similar arrangements" is
not limited to banks, but includes cooperatives that
are depositaries of their members. Regarding the
exemption relied upon by petitioner, respondent
adverts to the jurisprudential rule that tax
exemptions are highly disfavored and construed
strictissimi juris against the taxpayer and liberally in
favor of the taxing power. In this connection,
respondent likewise points out that the deficiency tax
assessments were issued against petitioner not as a
taxpayer but as a withholding agent.

Issue #1:

Whether or not it is liable to pay the deficiency

withholding taxes on interest from savings and time
deposits of its members for the taxable years 1999
and 2000, as well as the delinquency interest of 20%
per annum.

Ruling:

No. The Supreme Court held petitioner is not liable

to pay the assessed deficiency withholding taxes on
interest from the savings and time deposits of its
members, as well as the delinquency interest of 20%
per annum.
The Supreme Court found that the BIR has previously
issued rulings dealing with the subject matter. In BIR
Ruling No. 551-888, the BIR stated that cooperatives
are not required to withhold taxes on interest from
savings and time deposits of their members which
ruling was reiterated in BIR Ruling [DA- 591-2006]
dated October 5, 2006. The Court found that both BIR
Ruling No. 551-888 and BIR Ruling[DA-591-2006] are
in perfect harmony with the Constitution and the
laws they seek to implement.

Also, given that the Cooperative is duly registered

with the Cooperative Development Authority (CDA),
Section 24(B)(1) of the NIRC must be read together
with RA 6938, as amended by RA 9520.

Under Article 2 of RA 6938, as amended by RA 9520,

it is a declared policy of the State to foster the
creation and growth of cooperatives as a practical
vehicle for promoting self-reliance and harnessing
people power towards the attainment of economic
development and social justice. Thus, to encourage
the formation of cooperatives and to create an
atmosphere conducive to their growth and
development, the State extends all forms of
assistance to them, one of which is providing
cooperatives a preferential tax treatment. The
legislative intent to give cooperatives a preferential
tax treatment is apparent in Articles 61 and 62 of RA
6938.

ART. 61. Tax Treatment of Cooperatives. — Duly

registered cooperatives under this
Code which do not transact any business with non-
members or the general public shall
not be subject to any government taxes and fees
imposed under the Internal Revenue
Laws and other tax laws. Cooperatives not falling
under this article shall be governed by
the succeeding section.

ART. 62. Tax and Other Exemptions. —

Cooperatives transacting business with both
members and nonmembers shall not be subject to
tax on their transactions to members.
Notwithstanding the provision of any law or
regulation to the contrary, such cooperatives dealing
with nonmembers shall enjoy the following tax
exemptions; x x x.

This exemption extends to members of cooperatives.

It must be emphasized that cooperatives exist for the
benefit of their members. In fact, the primary
objective of every cooperative is to provide goods
and services to its members to enable them to attain
increased income, savings, investments, and
productivity. Therefore, limiting the application of the
tax exemption to cooperatives would go against the
very purpose of a credit cooperative. Extending the
exemption to members of cooperatives, on the other
hand, would be consistent with the intent of the
legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to
include the members, pursuant to Article 126 of RA
6938, which provides:
ART. 126. Interpretation and Construction. – In
case of doubt as to the meaning of any
provision of this Code or the regulations issued in
pursuance thereof, the same shall be
resolved liberally in favor of the cooperatives and
their members.

The Supreme Court likewise noted that the tax

exemption in RA 6938 was retained in RA 9520.

The only difference is that Article 61 of RA 9520

(formerly Section 62 of RA 6938) now expressly states
that transactions of members with the cooperatives
are not subject to any taxes and fees.

ART. 61. Tax and Other Exemptions. Cooperatives

transacting business with both members and non-
members shall not be subjected to tax on their
transactions with members. In relation to this, the
transactions of members with the cooperative shall
not be subject to any taxes and fees, including but
not limited to final taxes on members’ deposits and
documentary tax. Notwithstanding the provisions of
any law or regulation to the contrary, such
cooperatives dealing with nonmembers shall enjoy
the following tax exemptions: (Underscoring
Supplied)

This amendment in Article 61 of RA 9520, specifically

providing that members of cooperatives are not
subject to final taxes on their deposits, affirms the
interpretation of the BIR that Section 24(B)(1) of the
NIRC does not apply to cooperatives and confirms
that such ruling carries out the legislative intent.
Under the principle of legislative approval of
administrative interpretation by reenactment, the
reenactment of a statute substantially unchanged is
persuasive indication of the adoption by Congress of
a prior executive construction.
Moreover, no less than the Constitution guarantees
the protection of cooperatives. Section 15, Article XII
of the Constitution considers cooperatives as
instruments for social justice and economic
development. At the same time, Section 10 of Article
II of the Constitution declares that it is a policy of the
State to promote social justice in all phases of
national development. In relation thereto, Section 2
of Article XIII of the Constitution states that the
promotion of social justice shall include the
commitment to create economic opportunities
based on freedom of initiative and self-reliance.
Bearing in mind the foregoing provisions, the Court
found that an interpretation exempting the members
of cooperatives from the imposition of the final tax
under Section 24(B)(1) of the NIRC is more in keeping
with the letter and spirit of the Constitution.

Doctrines:
Interpretation exempting the members of
cooperatives from the imposition of the final tax
under Section 24(B)(1) of the NIRC is more in keeping
with the letter and spirit of the Constitution.