CORDILLERA CAREER

DEVELOPMENT COLLEGE
TAXATION LAW II

JENNYLYN D. FLORESCA

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 ESTATE TAX CASES

1) GONZALO VILLANUEVA v. SPS. FROILAN AND LEONILA BRANOCO, GR No. 172804, 2011-01-24

Facts:

Petitioner Gonzalo Villanueva, herein represented by his heirs,[3] sued respondents, spouses Froilan
and Leonila Branoco to recover a 3,492 square-meter parcel of land in Amambajag, Culaba, Leyte
(Property) and collect damages.

Petitioner claimed ownership over the Property through purchase in July 1971 from Casimiro Vere,
who, in turn, bought the Property from Alvegia Rodrigo in August 1970. Petitioner declared the
Property in... his name for tax purposes soon after acquiring it.

In their Answer, respondents similarly claimed ownership over the Property through purchase in July
1983 from Eufracia Rodriguez to whom Rodrigo donated the Property in May 1965. The two-page
deed of donation, signed at the bottom by the parties and two witnesses, reads in full:

“KNOW ALL MEN BY THESE PRESENTS:

That I, ALVEGIA RODRIGO, Filipino, of legal age, widow of the late Juan Arcillas, a resident of Barrio Bool,
municipality of Culaba, subprovince of Biliran, Leyte del Norte, Philippines, hereby depose and say:

That as we live[d] together as husband and wife with Juan Arcillas, we begot children, namely: LUCIO,
VICENTA, SEGUNDINA, and ADELAIDA, all surnamed ARCILLAS, and by reason of poverty which I suffered
while our children were still young; and because my husband Juan Arcillas... aware as he was with our
destitution separated us [sic] and left for Cebu; and from then on never cared what happened to his
family; and because of that one EUFRACIA RODRIGUEZ, one of my nieces who also suffered with our
poverty, obedient as she was to all the works in our... house, and because of the love and affection
which I feel [for] her, I have one parcel of land located at Sitio Amambajag, Culaba, Leyte bearing Tax
Decl. No. 1878 declared in the name of Alvegia Rodrigo, I give (devise) said land in favor of EUFRACIA
RODRIGUEZ, her heirs,... successors, and assigns together with all the improvements existing thereon,
which parcel of land is more or less described and bounded as follows:

Bounded North by Amambajag River; East, Benito Picao; South, Teofilo Uyvico; and West, by Public land;
2. It has an area of 3,492 square meters more or less; 3. It is planted to coconuts now bearing fruits; 4.
Having an assessed value of P240.00; 5. It is now in the... possession of EUFRACIA RODRIGUEZ since May
21, 1962 in the concept of an owner, but the Deed of Donation or that ownership be vested on her upon
my demise.

That I FURTHER DECLARE, and I reiterate that the land above described, I already devise in favor of
EUFRACIA RODRIGUEZ since May 21, 1962, her heirs, assigns, and that if the herein Donee predeceases
me, the same land will not be reverted to the Donor, but will be inherited by... the heirs of EUFRACIA
RODRIGUEZ;

That I EUFRACIA RODRIGUEZ, hereby accept the land above described from Inay Alvegia Rodrigo and I
am much grateful to her and praying further for a longer life; however, I will give one half (1/2) of the
produce of the land to Apoy Alve during her lifetime.”

The trial court rejected respondents' claim of ownership after treating the Deed as a donation mortis
causa which Rodrigo effectively cancelled by selling the Property to Vere in 1970.

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Thus, by the time Rodriguez sold the Property to respondents in 1983, she had no title to transfer.
The CA granted respondents' appeal and set aside the trial court's ruling. The Deed's consideration
was not Rodrigo's death but her "love and affection" forRodriguez, considering the services the
latter rendered Rodrigo waived dominion over the Property in case Rodriguez predeceases her,
implying its inclusion in Rodriguez's estate; Rodriguez accepted the donation in the Deed itself, an
act necessary to effectuate donations inter vivos, not devises.

Issues:

whether petitioner's title over the Property is superior to respondents'... whether the contract
between the parties' predecessors-in-interest, Rodrigo and Rodriguez, was a donation or a devise.

Ruling:

Naked Title Passed from Rodrigo to Rodriguez Under a Perfected Donation Post-mortem
dispositions typically

(1) Convey no title or ownership to the transferee before the death of the transferor; or, what
amounts to the same thing, that the transferor should retain the ownership (full or naked) and
control of the property while alive;

(2) That before the [donor's] death, the transfer should be revocable by the transferor at will, ad
nutum; but revocability may be provided for indirectly by means of a reserved power in the donor to
dispose of the properties conveyed;

(3) That the transfer should be void if the transferor should survive the transferee.

[4] [T]he specification in a deed of the causes whereby the act may be revoked by the donor
indicates that the donation is inter vivos, rather than a disposition mortis causa;

[5] That the designation of the donation as mortis causa, or a provision in the deed to the effect that
the donation is "to take effect at the death of the donor" are not controlling criteria; such
statements are to be construed together with the rest of the... instrument, in order to give effect to
the real intent of the transferor; and

(6) That in case of doubt, the conveyance should be deemed donation inter vivos rather than mortis
causa, in order to avoid uncertainty as to the ownership of the property subject of the deed.

Rodrigo passed naked title to Rodriguez under a perfected donation inter vivos.

First. Rodrigo stipulated that "if the herein Donee predeceases me, the [Property] will not be
reverted to the Donor, but will be inherited by the heirs of x x... x Rodriguez," signaling the
irrevocability of the passage of title to Rodriguez's estate, waiving Rodrigo's right to reclaim title.
This transfer of title was perfected the moment Rodrigo learned of Rodriguez's acceptance of the
disposition... which, being... reflected in the Deed, took place on the day of its execution on 3 May
1965.

Rodrigo's acceptance of the transfer underscores its essence as a gift in presenti, not in futuro, as
only donations inter vivos need acceptance by the recipient.

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Indeed, had Rodrigo wished to retain full title over the Property, she could have easily stipulated, as
the testator did in another case, that "the donor, may transfer, sell, or encumber to any person or
entity the properties here donated x x x"14 or used words to that effect. Instead, Rodrigo expressly
waived title over the Property in case Rodriguez predeceases her.

In a bid to diffuse the non-reversion stipulation's damning effect on his case, petitioner tries to profit
from it, contending it is a fideicommissary substitution clause.

The question of the Deed's juridical nature, whether it is a will or a donation By treating the clause in
question as mandating fideicommissary substitution, a mode of testamentary disposition by which
the first heir instituted is entrusted with the obligation to... preserve and to transmit to a second heir
the whole or part of the inheritance,[16] petitioner assumes that the Deed is a will. Neither the
Deed's text nor the import of the contested clause supports petitioner's theory.

Second. What Rodrigo reserved for herself was only the beneficial title to the Property, evident from
Rodriguez's undertaking to "give one [half] x x x of the produce of the land to Apoy Alve during her
lifetime." Thus, the Deed's stipulation that "the ownership shall be vested on [Rodriguez] upon my
demise," taking into account the non-reversion clause, could only refer to Rodrigo's beneficial title.
We arrived at the same conclusion in Balaqui v. Dongso[18] where, as here, the donor, while
"b[inding] herself to answer to the [donor] and her heirs x x x that none shall question or disturb
[the donee's] right," also stipulated that the donation "does not pass title to [the donee] during my
lifetime; but when I die, [the donee] shall be the true owner" of the donated parcels of land.

In finding the disposition as a gift inter vivos the donor meant nothing else than that she reserved of
herself the possession and usufruct of said two parcels of land until her death, at which time the
donee would be able to dispose of them freely.

Indeed, if Rodrigo still retained full ownership over the Property, it was unnecessary for her to
reserve partial usufructuary right over it.

Third. The existence of consideration other than the donor's death, such as the donor's love and
affection to the donee and the services the latter rendered, while also true of devises, nevertheless
"corroborates the express irrevocability of x x x [inter vivos] transfers." that "the designation of the
donation as mortis causa, or a provision in the deed to the effect that the donation is `to take effect
at the death of the donor' are not controlling criteria [but] x x x are to be construed together with
the rest of the instrument, in order to give effect to the real intent of the transferor." Indeed, doubts
on the nature of dispositions are resolved to favor inter vivos transfers "to avoid uncertainty as to
the ownership of the property subject of the deed."

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2) ROMARICO G. VITUG VS THE HONORABLE COURT OF APPEALS & ROWENA FAUSTINO CORNOA
GR No. 82027, March 29, 1990

Facts:

Spouses Dolores and Romarico Vitug entered into a survivorship agreement with the Bank of
American National Trust and Savings Association. The said agreement contained the following
stipulations:

(1) All money deposited and to be deposited with the Bank in their joint savings current account shall
be both their property and shall be payable to and collectible or withdrawable by either or any of
them during their lifetime; and

(2) After the death of one of them, the same shall belong to and be the sole property of the surviving
spouse and payable to and collectible or withdrawable by such survivor

Dolores died naming Rowena Corona in her wills as executrix. Romarico later filed a motion asking
authority to sell certain shares of stock and real property belonging to the estate to cover his
advances to the estate which he claimed were personal funds withdrawn from their savings account.
Rowena opposed on the ground that the same funds withdrawn from the savings account were
conjugal partnership properties and part of the estate. Hence, there should be no reimbursement.
On the other hand, Romarico insists that the same are his exclusive property acquired through the
survivorship agreement.

Issue:

Whether or not the funds of the savings account subject of the survivorship agreement were
conjugal partnership properties and part of the estate

Ruling:

No. The Court ruled that a Survivorship Agreement is neither a donation mortis causa nor a donation
inter vivos. It is in the nature of an aleatory contract whereby one or both of the parties reciprocally
bind themselves to give or to do something in consideration of what the other shall give or do upon
the happening of an event which is to occur at an indeterminate time or is uncertain, such as death.
The Court further ruled that a survivorship agreement is per se not contrary to law and thus is valid
unless its operation or effect may be violative of a law such as in the following instances: (1) it is used
as a mere cloak to hide an inofficious donation; (2) it is used to transfer property in fraud of creditors;
or (3) it is used to defeat the legitime of a compulsory heir. In the instant case, none of the foregoing
instances were present. Consequently, the Court upheld the validity of the survivorship agreement
entered into by the spouses Vitug. As such, Romarico, being the surviving spouse, acquired a vested
right over the amounts under the savings account, which became his exclusive property upon the
death of his wife pursuant to the survivorship agreement. Thus, the funds of the savings account are
not conjugal partnership properties and not part of the estate of the deceased Dolores.

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3) RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate of the
deceased JOSE P. FERNANDEZ v. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE. G.R. No. 140944. April 30, 2008

FACTS:

Decedent Jose P. Fernandez's estate was administered by Arsenio P. Dizon and petitioner Rafael
Dizon (petitioner) as Special and Assistant Special Administrator, respectively. Petitioner filed a
request for extension with the BIR to determine and collate the assets and claims of the estate,
which the BIR granted. Jesus Gonzales, an agent of Arsenio filed the estate tax return with the same
BIR Regional Office, showing therein a NIL estate tax liability.

The BIR then issued Certifications allowing decedent's properties may be transferred to his heirs.

Petitioner requested the probate court's authority to sell several properties forming part of the
Estate, for the purpose of paying its creditors. Petitioner manifested that Manila Bank, a major
creditor of the Estate was not included, as it did not file a claim with the probate court since it had
security over several real estate properties forming part of the Estate. However, the BIR issued an
Estate Tax Assessment Notice demanding the payment of P66,973,985.40 as deficiency estate tax.
Gonzales moved for the reconsideration but was denied.

The CTA and CA who affirmed, ruled that the evidence introduced by the BIR were admissible.

ISSUES:

Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence
which were not formally offered by the BIR.

Whether the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax
imposed against the Estate.

RULING:

YES. The CTA is categorically described as a court of record. As cases filed before it are litigated de
novo, party-litigants shall prove every minute aspect of their cases. As such, those evidence
submitted by the BIR has no evidentiary weight, as the rules on documentary evidence require that
these documents must be formally offered before the CTA. The Revised Rules on Evidence which
reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been formally offered.
The purpose for which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous
rulings in People v. Napat-a and People v. Mate on the admission and consideration of exhibits which
were not formally offered during the trial.

The Court reiterates that Vda. de Oate is merely an exception to the general rule. Being an exception,
it may be applied only when there is strict compliance with the requisites mentioned therein;
otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should prevail.

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A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case.
In the aforementioned cases, the exhibits were marked at the pre-trial proceedings to warrant the
pronouncement that the same were duly incorporated in the records of the case.

YES. The specific question is whether the actual claims of the aforementioned creditors may be fully
allowed as deductions from the gross estate of Jose despite the fact that the said claims were
reduced or condoned through compromise agreements entered into by the Estate with its creditors.

The Court agreed with an American ruling relating to the date-of-death valuation, a tax imposed on
the act of transferring property by will or intestacy and, because the act on which the tax is levied
occurs at a discrete time, i.e., the instance of death, the net value of the property transferred should
be ascertained, as nearly as possible, as of that time, to be followed. Also the Court, emphasized the
definition of claims which are debts or demands of a pecuniary nature which could have been
enforced against the deceased in his lifetime, or liability contracted by the deceased before his
death. Therefore, the claims existing at the time of death are significant to, and should be made the
basis of, the determination of allowable deductions.

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4) COMMISSIONER OF INTERNAL REVENUE v. COURT OF APPEALS G.R. No. 123206, March 22, 2000

CIR v. CA G.R. No. 123206; MARCH 22,2016

CIR v. CA

Doctrine:

Facts:

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War,
was a part of the infamous Death March by reason of which he suffered shock and became insane.

His sister Josefina Pajonar became the guardian over his person, while his property was placed under
the guardianship of PNB.

He died on January 10, 1988. He was survived by his two brothers Isidro P. Pajonar and Gregorio
Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece
Conchita Jandog.

PNB filed an accounting of the decedent's property under guardianship valued at P3,037,672.09.
However, the PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to
execute an extrajudicial settlement and to pay the taxes on his estate.

Pursuant to the assessment by the BIR, the estate of Pedro Pajonar paid taxes in the amount of
P2,557.

The trial court appointed Josefina as the regular administratrix of Pedro Pajonar's estate.

Pursuant to a second assessment by the BIR for deficiency estate tax, the estate of Pedro Pajonar
paid estate tax in the amount of P1,527,790.98.

Josefina, in her capacity as administratrix and heir of Pedro Pajonar's estate, filed a protest with the
BIR praying that the estate tax payment in the amount of

P1,527,790.98, or at least some portion of it, be returned to the heirs.

However, without waiting for her protest to be resolved by the BIR, Josefina filed a petition for
review with the Court of Tax Appeals praying for the refund of P1,527,790.98, or in the alternative,
P840,202.06, as erroneously paid estate tax.

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CTA ordered the CIR to refund Josefina the amount of P252,585.59, representing

erroneously paid estate tax for the year 1988.

Among the deductions from the gross estate allowed by the CTA were the amounts of P60,753
representing the notarial fee for the Extrajudicial Settlement and the amount of P50,000 as the
attorney's fees in Special

Proceedings No. 1254 for guardianship

Commissioner of Internal Revenue filed a motion for reconsideration of the CTA's decision asserting,
among others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in the
guardianship proceedings are not deductible expenses.

CTA issued the assailed Resolution ordering the Commissioner of Internal Revenue to refund
Josefina, as

administratrix of the estate of Pedro Pajonar, the amount of P76,502.42 representing erroneously
paid estate tax for the year 1988. Also, the CTA upheld the validity of the deduction of the notarial
fee for the Extrajudicial Settlement and the attorney's fees in the guardianship proceedings

Commissioner of Internal Revenue filed with the Court of Appeals a petition for review questioning
the validity of the abovementioned deductions.

Issue:

whether the notarial fee paid for the extrajudicial settlement in the amount of P60,753 and the
attorney's fees in the guardianship proceedings in the amount of P50,000 may be allowed as
deductions from the gross estate of decedent in order to arrive at the value of the net estate.

Ruling:

YES

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are
allowed as a deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a
mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial
settlement of the estate should be allowed as a deduction from the gross estate. "There is no
requirement of formal administration. It is sufficient that the expense be a necessary contribution
toward the settlement of the case."

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Attorney's fees in order to be deductible from the gross estate must be essential to the collection of
assets, payment of debts or the distribution of the property to the persons entitled to it. The services
for which the fees are charged must relate to the proper settlement of the estate. In this case, the
guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar
to his rightful heirs.

PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of
his death, was incompetent by reason of insanity. The expenses incurred in the guardianship
proceeding was but a necessary expense in the settlement of the decedent's estate. Therefore, the
attorney's fee incurred in the guardianship proceedings amounting to P50,000.00 is a reasonable
and necessary business expense deductible from the gross estate of the decedent.

Attorney's fees are allowable deductions if incurred for the settlement of the estate. It is noteworthy
to point that PNB was appointed the guardian over the assets of the deceased. Necessarily the
assets of the deceased formed part of his gross estate. Accordingly, all expenses incurred in relation
to the estate of the deceased will be deductible for estate tax purposes provided these are
necessary and ordinary expenses for administration of the settlement of the estate.

Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings,"
there is no reason why expenses incurred in the administration and settlement of an estate in
extrajudicial proceedings should not be allowed. However, deduction is limited to such
administration expenses as are actually and necessarily incurred in the collection of the assets of the
estate, payment of the debts, and distribution of the remainder among those entitled thereto

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the
distribution of the estate to the heirs. The execution of the extrajudicial settlement necessitated the
notarization of the same. Hence the Contract of Legal Services of March 28, 1988 entered into
between respondent Josefina Pajonar and counsel was presented in evidence for the purpose of
showing that the amount of P60,753.00 was for the notarization of the Extrajudicial Settlement. It
follows then that the notarial fee of P60,753.00 was incurred primarily to settle the estate of the
deceased Pedro Pajonar. Said amount should then be considered an administration expenses
actually and necessarily incurred in the collection of the assets of the estate, payment of debts and
distribution of the remainder among those entitled thereto. Thus, the notarial fee of P60,753
incurred for the Extrajudicial Settlement should be allowed as a deduction from the gross estate.

Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial expenses of the testamentary or
intestate proceedings" as not including the compensation paid to a trustee of the decedent's estate
when it appeared that such trustee was appointed for the purpose of managing the decedent's real
estate for the benefit of the testamentary heir.

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible
expense since such settlement effected a distribution of Pedro Pajonar's estate to his lawful heirs.
Similarly, the attorney's fees paid to PNB for acting as the guardian of Pedro Pajonar's property
during his lifetime should also be considered as a deductible administration expense. PNB provided a
detailed accounting of decedent's property and gave advice as to the proper settlement of the
latter's estate, acts which contributed towards the collection of decedent's assets and the
subsequent settlement of the estate.

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 DONOR’S TAX CASES

1) SPS AGRIPINO GESTOPA V CA GR No. 111904, October 5, 2000

FACTS:

Spouses Danlag are the owners of 6 parcels of land. They executed 3 deeds of donation mortis causa
in favour of herein respondent Mercedes. All deeds contained the reservation of the rights of the
donors to (1) amend, cancel, or revoke the donation during their lifetime, and (2) to sell, mortgage or
encumber the properties donated during the donors’ lifetime if necessary. 7 years later, spouses
Danlag executed a deed of donation inter vivos covering the same lots covered by the previous
donation plus 2 other parcels in favor of respondent Mercedes. It contains the following conditions:
(1) donor shall continue to enjoy the fruits of the land during their lifetime and (2) done cannot sell or
dispose of the land during the lifetime of the donor without their approval. Subsequently, the
spouses sold 2 of the parcels covered by the previous donation to herein petitioners, spouses
Gestopa. Spouses Danlag executed a deed of revocation recovering the 6parcels of land previously
donated to Mercedes. Mercedes then filed with the RTC a petition against spouses Danlags and
Gestopas for quieting oftitle over the 6 parcels of land alleging that the second donation executed
by the spouses Danlag in her favour transferred the ownership over the same lands to her name.
Gestopa and spouses Danlags opposes contending that it was the intention of the latter for
thedonation to be a donation mortis causa.

ISSSUE:

W/N The second donation was inter vivos or mortis causa?This has to be resolved first in order to
determine whether the donor intended to transfer the ownership over the properties upon the
execution of the deed.

RULING:

It was a donation inter vivos, therefor, ownership has transferred to the done (Mercedes).The
spouses were aware of the difference between the two donations, if they did not intend to donate
inter vivos, they would not again donate the four lots already donated mortis causa. Also, the court
stated four reasons to the matter:(1) That the spouses donated the parcels of land out of love and
affection, a clear indication of a donation inter vivos; (2) The reservation of a lifetime usufruct;(3)
Reservation of sufficient properties for maintenance that shows the intention to part with their six
lot; and (4) Respondent's acceptance, contained in the deed of donation. Once a deed of donation
has been accepted, it cannot be revoked, except for officiousness or ingratitude, which the spouses
failed to invoke.

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2) DE LUNA V ABRIGO GR No. L-57455, January 18, 1990

FACTS:

De Luna donated a portion of a 75 sq. m. lot to the Luzonian University Foundation. The donation
was embodied in a Deed of Donation Intervivos and was subject to certain terms and conditions. In
case of violation or non-compliance, the property would automatically revert to the donor. When the
Foundation failed to comply with the conditions, de Luna “revived” the said donation by executing a
Revival of Donation Intervivos with the following terms and conditions:

1) The Donee shall construct on the land and at its expense a Chapel, Nursery, and Kindergarten
School to be named after St. Veronica

2) Construction shall start immediately and must be at least 70% completed three years from the date
of the Deed unless the Donor grants extensions

3) Automatic reversion in case of violation

The Foundation accepted and the donation was registered and annotated in the TCT. By a Deed of
Segregation, the foundation was issued a TCT for area the lot donated while the remaining area was
retained by the De Luna

The children and only heirs of the late De Luna (died after the donation) filed a complaint with the
RTC for the cancellation of the donation on the ground that the terms were violated. The Foundation
defended itself by saying that it had partially and substantially complied with the conditions and that
the donor granted it an indefinite extension of time to complete construction.

The RTC dismissed the petition on the ground of prescription (for being filed after 4 years). The heirs
did not file an MR and went straight to the SC.

ISSUE:

Whether the action prescribes in 4 years (based on art. 764 NCC-judicial decree of revocation of the
donation) or in 10 years (based on art. 1144 –enforcement of a written contract)

RULING: 10 years

The donation subject of this case is one with an onerous cause.

Under the old Civil Code, it is a settled rule that donations with an onerous cause are governed not
by the law on donations but by the rules on contract. On the matter of prescription of actions for the
revocation of onerous donation, it was held that the general rules on prescription apply. The same
rules apply under the New Civil Code as provided in Article 733 thereof which provides:

Donations with an onerous cause shall be governed by the rules on contracts, and remuneratory
donations by the provisions of the present Title as regards that portion which exceeds the value of
the burden imposed.

It is true that under Article 764 of the New Civil Code, actions for the revocation of a donation must
be brought within four (4) years from the non-compliance of the conditions of the donation.
However, said article does not apply to onerous donations in view of the specific provision of Article
733 providing that onerous donations are governed by the rules on contracts. The rules on
prescription and not the rules on donation applies in the case at bar.

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 VALUE ADDED TAX CASES

1) CONTEX CORPORATION VS COMMISSIONER OF INTERNAL REVENUE (G.R. NO.151135, JULY 2,

2004)

Facts:

Petitioner Contex Corporation (CONTEX) is a domestic corporation engaged in the business of

manufacturing hospital textiles and garments and other hospital supplies for export. Petitioner’s
place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay
Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of RA
7227. As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the 5% preferential tax provided in RA 7227. Petitioner also registered with the BIR
as a

The Court of Appeals reversed the CTA’s ruling, hence, this petition.

Issue/s:

Was COMASERCO engaged in the sale of services, and thus, liable to pay VAT?

Held:

Yes. Section 99 of the National Internal Revenue Code of 1986 provides that: “Any person who, in
the course of trade or business, sells, barters or exchanges goods, renders services, or engages in
similar transactions and any person, who, imports goods shall be subject to VAT imposed in Sections
100 to 102 of this Code. The Higher Court clarified the meaning of the term “in the course of trade or
business” by citing Section 105 of RA 8424 which took effect on January 1, 1998. The phrase “in the
course of trade or business” means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a non-stock, non-profit organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity.

It is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-of-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides
services for a fee, remuneration or consideration, then the service rendered is subject to VAT.

Secondly, it is a rule that business taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the government.
Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language
of the law, it cannot be merely implied therefrom. In the case of the VAT, Section 109, RA 8424
clearly enumerates the transactions exempted from VAT. The services rendered by COMASERCO do
not fall within the exemptions.

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2) CASE DIGEST: COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY
(PHILIPPINES), respondent. (G.R. No. 153866; February 11, 2005)

PRINCIPLE:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu are
entities exempt from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not deemed exempt transactions,
they are nonetheless zero-rated. Hence, the distinction between exempt entities and exempt
transactions has little significance, because the net result is that the taxpayer is not liable for the
VAT. A VAT-registered enterprise may comply with all requisites to claim a tax refund of or credit for
the input VAT it paid on capital goods it purchased. In short, after compliance with all requisites, such
enterprise is entitled to refund or credit.

FACTS:

A VAT-registered enterprise, STP has principal office address at the new Cebu Township One, Special
Economic Zone, Barangay Cantao-an, Naga, Cebu. STP is registered with the Philippine Export Zone
Authority (PEZA) and certified to engage in the manufacture of recording components primarily used
in computers for export. VAT returns were filed for the period 1 April 1998 to 30 June 1999. With
supporting documents, a claim for refund of VAT input taxes in the amount of 28 million pesos
(inclusive of the 12-million VAT input taxes subject of this Petition for Review) was filed on 4 October
1999.

CIR did not act promptly upon STP's claim so the latter elevated the case to the CTA for review in
order to toll the running of the two-year prescriptive period.

On appeal, CIR asserted that by virtue of the PEZA registration alone of STP, the latter is not subject
to the VAT. According to CIR, STP's sales transactions intended for export are not exempt.

ISSUE:

Is STP entitled to refund or tax credit for puchases?

HELD:

Yes, STP is entitled to refund or tax credit

As a PEZA-registered enterprise within a special economic zone, STP is entitled to the fiscal
incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.

Page | 14
3) COMMISSIONER OF INTERNAL REVENUE v. CEBU TOYO CORPORATION. G.R. No. 149073.
February 16, 2005

FACTS:

Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses
and various optical components. Its principal office is located at the Mactan Export Processing Zone
(MEPZ) in Lapu-Lapu City, Cebu and is a subsidiary of Toyo Lens Corporation, a non-resident
corporation organized under the laws of Japan. It is a zone export enterprise registered with the
Philippine Economic Zone Authority (PEZA), pursuant PD 66 and is also registered with the BIR as a
VAT taxpayer.

The sales of respondent are considered export sales subject to VAT at 0% rate under Section 106 of
the NIRC, as amended.

Respondent then filed, an application for tax credit/refund of VAT paid for the period April 1, 1996 to
December 31, 1997 amounting to P4,439,827.21 representing excess VAT input payments.
Respondents claim that they can avail of the tax credits as they are VAT-registered exporter of goods
at the rate of 0%.

The CIR oppose such stating that they are not entitled to the tax credit as the claims for refund are
strictly construed against respondents as it is of the nature of tax exemption.

The CTA granted the motion partially to the respondents as they only lowered the tax credits to
P2,158,714.46 representing unutilized input tax payments. The CIR filed a petition with the CA which
was denied.

ISSUE: Whether Cebu Toyo Corporation can avail of the tax credits.

RULING:

YES. Respondents availed of an income tax holiday as provided in the Omnibus Investments Code
( EO 226). It is one of the fiscal incentives granted to PEZA-registered enterprises and one of the
options to its tax burden. Both the CA and CTA found that respondent availed of the income tax
holiday for four (4) years as it was shown in their Annual Corporate Income Tax Returns. In it also is
where respondent specified that it was availing of the tax relief under EO 226. Hence, respondent is
not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in
taxable rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added tax either at the rate of
ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax
credit for the value-added tax paid on purchases and leases of goods, properties or services.

An exemption means that the sale of goods, properties or services and the use or lease of properties
is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax)
previously paid. The person making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-
registered purchaser of goods, properties or services that are VAT-exempt, is not entitled to any
input tax on such purchases despite the issuance of a VAT invoice or receipt.

The court also held that respondent is subjected to VAT at 0% rate as it is engaged in the export
business.

Page | 15
4) KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC VS. TAN G.R NO. L-
81311 JUNE 30, 1988

FACTS:

The petitioners seeks to nullify Executive Order No. 273 issued by the President of the Philippines on
July 25, 1987, to take effect on January 1, 1988, and which amended certain sections of the National
Internal Revenue Code and adopted the Value-added tax (VAT), for being unconstitutional in that its
enactment is not allegedly within the powers of the President; that the Vat is oppressive, and
violates the due process and equal protection clauses and other provisions of the 1987 Constitution.

ISSUES:

1. Whether or not Executive Order No. 273 is unconstitutional on the ground that the President had
no authority to issue the said EO.

2. Whether or not Executive Order No.273 is oppressive, discriminatory, unjust and

regressive, in violation of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution.

3. Whether or not EO 273 unduly discriminates against custom brokers.

HELD:

1. The EO 273 issued by the President is constitutional. Under the Proclamation No. 3, which decreed
a Provisional Constitution, sole legislative authority was vested upon the President. Art. II, sec. 1 of
the Provisional Constitution states that, “Sec. 1 Until the Legislature is elected and convened under a
new Constitution, the President shall continue to exercise legislative powers”. On October 15, 1986,
the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the
Philippines which was ratified in a plebiscite conducted on February 2, 1987. Art. XVIII, sec.6 of said
Constitution, provides that, “Sec. 6 The incumbent President shall continue to exercise legislative
powers until the first Congress is convened”. Under both the Provisional and 1987 Constitution, the
President is vested with legislative powers until a legislature under a new Constitution is convened.
The First Congress, created and elected under the 1987 Constitution, was convened on July 27, 1987.
Hence, the enactment of EO 273 on July 25, 1987, two days before Congress convened on July 27,
1987, was within the President’s constitutional power and authority to legislate.

2. EO 273 satisfies all the requirements of a valid tax. It is uniform.

Equality and uniformity in taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The sales tax adopted in EO 273 is applied similarly on all goods
and services sold to the public, which are not exempt, at constant rate of 0% or 10%. The disputed tax
is also equitable. It is imposed only on sales of goods and services by persons engaged in business
with an aggregate gross annual sales exceeding Php 200, 000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and
marine products, so that the cost of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the general public.

3. The phrase “except customs brokers” under Sec. 103 of EO 273 is not meant to discriminate
against customs brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of
the Code, which makes the services of customs brokers subject to the payment of the VAT and to

Page | 16
distinguish customs brokers from other professionals who are subject to the payment of an
occupation tax under the Local Tax Code. The distinction is based upon material differences, in that
the activities of customs brokers partake more of a business, rather than a profession and were thus
subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its
amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT.

5) CIR VS. MAGSAYSAY LINES INC., GR No. 146984, July 28,2006

FACTS:

Pursuant to a government program of privatization, The NDC decided to sell in one lot its NMC
shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.The
vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred
and leased, on a bareboat basis, to the NMC. The NMC shares and the vessels were offered for
public bidding. Among the stipulated terms and conditions for the public auction was that the
winning bidder was to pay "a value added tax of 10% on the value of the vessels." On 3 June 1988,
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the shares and the
vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company
still to be formed composed of itself and was approved by the Committee on Privatization, and a
Notice of Award dated 1 July 1988 was issued to Magsaysay Lines who in turn was assessed of VAT
through VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of the
vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered
enterprise, and thus its "transactions incident to its normal VAT registered activity of leasing out
personal property including sale of its own assets that are movable, tangible objects which are
appropriable or transferable are subject to the 10% [VAT].

CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary course of
NDC’s business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was
applied only to sales in the course of trade or business. The CTA further held that the sale of the
vessels could not be "deemed sale," and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax Code, or
Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of
private respondents since Section 99 of the Tax Code which implemented VAT is not an exemption
provision, but a classification provision which warranted the resolution of doubts in favor of the
taxpayer. Hence CIR appealed the CTA Decision.

ISSUE:

Whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986
(Tax Code) then prevailing at the time of the sale. The facts are culled primarily from the ruling of the
CTA.

Page | 17
HELD: NOT SUBJECT TO VAT.

VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on
the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately
shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these
goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT
payments they receive from the final consumer (or output VAT). The final purchase by the end
consumer represents the final link in a production chain that itself involves several transactions and
several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes
on every level of consumption, yet assuages the manufacturers or providers of goods and services by
enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of
the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange
of goods or services by persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably contribute to the
production chain, but they do so only as a matter of accident or incident. As the sales of goods or
services do not occur within the course of trade or business, the providers of such goods or services
would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their
own accumulated VAT collections since the accumulation of output VAT arises in the first place only
through the ordinary course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered. We cite with approval the CTA’s explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
term "carrying on business" does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts normally
incident thereof; while "doing business" conveys the idea of business being done, not from time to
time, but all the time."Course of business" is what is usually done in the management of trade or
business

Court explained that "course of business" or "doing business" connotes regularity of activity. In the
instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant
to the declared policy of Government for privatization could no longer be repeated or carried on
with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing
personal property.

This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC
was created for the primary purpose of selling real property. The conclusion that the sale was not in
the course of trade or business, which the CIR does not dispute before this Court, should have
definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of
trade or business is not subject to VAT. Accordingly, the Court rules that given the undisputed finding
that the transaction in question was not made in the course of trade or business of the seller, NDC
that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said
sale may hew to those transactions deemed sale as defined under Section 100. Petition Denied.

Page | 18
6) CIR vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. G.R. No. 150154. August 9, 2005 / 466
SCRA 211

FACTS:

Toshiba registered with the PEZA as an ECOZONE Export Enterprise and it registered with the BIR as
a VAT taxpayer and a withholding agent.

Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input
VAT in the amount of P13,118,542.00 and P5,128,761.94, respectively, or a total of P18,247,303.94. It
alleged that the said input VAT was from its purchases of capital goods and services which remained
unutilized since it had not yet engaged in any business activity or transaction for which it may be
liable for any output VAT.

Toshiba filed with DOF applications for tax credit/refund of its unutilized input VAT. To toll the
running of the two-year prescriptive period for judicially claiming a tax credit/refund Toshiba, filed
with the CTA a Petition for Review.

CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to Toshiba in the
amount of P16,188,045.44. CA AFFIRMED.

ISSUE:

WON Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods
and services.

HELD:

YES. An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by
persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent
(0%).

It would seem that CIR failed to differentiate between VAT-exempt transactions from VAT-exempt
entities.

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status – VAT-exempt or not – of the party to the transaction…

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from VAT…

CIR, bases its argument on VAT-exempt transactions. Since such transactions are not subject to VAT,
the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and
they may not claim tax credit/refund of the input VAT they had paid thereon.

This cannot apply to transactions of Toshiba because although the transactions covered by special
laws may be exempt from VAT, those falling under Presidential Decree No. 66 (EPZA) are not.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities because ECOZONES are foreign territory. As a result,
sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as

Page | 19
an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE
to a purchaser in the Customs Territory shall be considered as an importation into the Customs
Territory.

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border
of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while, those destined for use or consumption within the Philippines
shall be imposed with ten percent (10%) VAT.

No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT
treatment of sales to it, however, varies depending on whether the supplier from the Customs
Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-
registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same
time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-
rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs
Territory), who is directly and legally liable for the VAT, making it internationally competitive by
allowing it to credit/refund the input VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only
be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-

exempt entity that could not have engaged in a VAT-taxable business, this Court still believes, given
the particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

The sale of capital goods by suppliers from the Customs Territory to Toshiba took place way before
the issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less
than the BIR itself. Since Toshiba opted to avail itself of the income tax holiday under Exec. Order No.
226, as amended, then it was deemed subject to the ten percent (10%) VAT. It was very likely
therefore that suppliers from the Customs Territory had passed on output VAT to Toshiba, and the
latter, thus, incurred input VAT. Accordingly, this Court gives due respect to and adopts herein the
CTA’s findings that the suppliers of capital goods from the Customs Territory did pass on output VAT
to Toshiba and the amount of input VAT which Toshiba could claim as credit/refund.

RULING: WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of
Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering said
petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba,
in the amount of P16,188,045.44, representing unutilized input VAT for the first and second quarters
of 1996.

Page | 20
7) CIR V AMERICAN EXPRESS INTERNATIONAL, INC. (Phil. Branch) GR 152609, June 29, 2005

FACTS:

Respondent, a VAT taxpayer, is the Philippine Branch of AMEX USA and was tasked with servicing a
unit of AMEX-Hongkong Branch and facilitating the collections of AMEX-HK receivables from card
members situated in the Philippines and payment to service establishments in the Philippines.

It filed with BIR a letter-request for the refund of its 1997 excess input taxes, citing as basis Section
110B of the 1997 Tax Code, which held that “xxx Any input tax attributable to the purchase of capital
goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions of Section 112.”

In addition, respondent relied on VAT Ruling No. 080-89, which read, “In Reply, please be informed
that, as a VAT registered entity whose service is paid for in acceptable foreign currency which is
remitted inwardly to the Philippine and accounted for in accordance with the rules and regulations of
the Central Bank of the Philippines, your service income is automatically zero rated xxx”

Petitioner claimed, among others, that the claim for refund should be construed strictly against the
claimant as they partake of the nature of tax exemption.

CTA rendered a decision in favor of respondent, holding that its services are subject to zero-rate. CA
affirmed this decision and further held that respondent’s services were “services other than the
processing, manufacturing or repackaging of goods for persons doing business outside the
Philippines” and paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of BSP.

ISSUE:

W/N AMEX Phils is entitled to refund

HELD:

Yes. Section 102 of the Tax Code provides for the VAT on sale of services and use or lease of
properties. Section 102B particularly provides for the services or transactions subject to 0% rate:

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP;

(2) Services other than those mentioned in the preceding subparagraph, e.g. those rendered by
hotels and other service establishments, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP

Under subparagraph 2, services performed by VAT-registered persons in the Philippines (other than
the processing, manufacturing or repackaging of goods for persons doing business outside the
Philippines), when paid in acceptable foreign currency and accounted for in accordance with the
R&R of BSP, are zero-rated. Respondent renders service falling under the category of zero rating.

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach
of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.

In the present case, the facilitation of the collection of receivables is different from the utilization of
consumption of the outcome of such service. While the facilitation is done in the Philippines, the

Page | 21
consumption is not. The services rendered by respondent are performed upon its sending to its
foreign client the drafts and bulls it has gathered from service establishments here, and are
therefore, services also consumed in the Philippines. Under the destination principle, such service is
subject to 10% VAT.

However, the law clearly provides for an exception to the destination principle; that is 0% VAT rate
for services that are performed in the Philippines, “paid for in acceptable foreign currency and
accounted for in accordance with the R&R of BSP.” The respondent meets the following
requirements for exemption, and thus should be zero-rated:

(1) Service be performed in the Philippines

(2) The service fall under any of the categories in Section 102B of the Tax Code

(3) It be paid in acceptable foreign currency accounted for in accordance with BSP R&R.

8) CIR V. CA AND COMASERCO (G.R. NO. 125355) CA AND COMMONWEALTH MANAGEMENT AND
SERVICES CORPORATION

FACTS:

1. Commonwealth Management and Services Corp. (COMASERCO) is a corporation duly organized

and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance
Co. (Philamlife), organized by the latter to perform collection, consultative and other technical
services, including functioning as an internal auditor, of Philamlife and its other affiliates.

2. On January 24, 1992, the BIR issued an assessment to Commonwealth Management and Services
Corp. (COMASERCO) for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year
1988

3. On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a
collection letter to COMASERCO demanding payment of the deficiency VAT.

4. On September 29,1992, COMASERCO filed with the CTA a petition for review contesting the
Commissioner's assessment. Its arguments are as follows:

The services it rendered to Philamlife and its affiliates, relating to collections, consultative and other
technical assistance, including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis;

That it was not engaged in the business of providing services to Philamlife and its affiliates and that it
was established to ensure operational orderliness and administrative efficiency of Philamlife and its
affiliates, and not in the sale of services; and

Page | 22
That it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but
suffered a net loss in taxable year 1988. Since it was not engaged in business, it was not liable to pay
VAT.

CTA: Denied COMASERCO's petition. Affirmed the Commissioner's deficiency VAT assessment for the
year 1988.

CA: Reversed CTA ruling. Cancelled the assessment for deficiency VAT for the year 1988. The basis for
the CA's ruling was a prior ruling it made in another case involving COMASERCO, where it was held
that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife
and its affiliates and as such was not engaged in business of providing services to Philamlife and its
affiliates.

Hence, the instant petition for review on certiorari by the Commissioner.

ISSUE:

Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

HELD:

Petition granted. Reversed CA ruling. Reinstated CTA ruling. COMASERCO ordered to pay deficiency
VAT as per the assessment issued by the Commissioner for the taxable year 1988.

1. Who are the persons liable for VAT?

"Section 99, NIRC. Persons liable. - Any person who, in the course of trade or business, sells, barters
or exchanges goods, renders services, or engages in similar transactions and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this
Code.""

2. What does "in the course of trade or business" mean?

COMASERCO: The term "in the course of trade or business" requires that the "business" is carried
on with a view to profit or livelihood. In other words, the activities of the entity must be profit-
oriented.

SC: Under Sec. 105 (Persons Liable) of R.A. No. 7716, or the Expanded VAT Law (EVAT), the phrase
"in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition
of its net income and whether or not it sells exclusively to members of their guests), or government
entity.

This definition applies to all transactions even to those made prior to the enactment of the EVAT
Law, which merely stresses that even a nonstock, nonprofit organization or government entity is
liable to pay VAT for the sale of goods and services.

3. Are non-stock, nonprofit organizations or government entities (such as COMASERCO) liable to pay
VAT for the sale of goods and services?

Page | 23
COMASERCO: No, profit motive is material in ascertaining who to tax for purposes of determining
liability for VAT.

SC: Yes, even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the
sale of goods or services.

It is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered. As long as the entity provides service
for a fee, remuneration or consideration, then the service rendered is subject to VAT.

This contention finds support in BIR Ruling No. 010-98 issued by the Commissioner on February 5,
1998, which provides that a domestic corporation that provided technical, research, management
and technical assistance to its affiliated companies and received payments on a reimbursement-of-
cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact,
even if such corporation was organized without any intention of realizing profit, any income or profit
generated by the entity in the conduct of its activities, was subject to income tax.

4. Is COMASERCO liable to pay VAT?

COMASERCO: Because COMASERCO is not motivated by profit, as defined by its primary purpose in
the articles of incorporation, stating that it is operating "only on reimbursement-of-cost basis,
without any profit," it couldn't be said that it is performing acts in the course of trade or business.
Hence, it is not liable for the payment of VAT.

SC: The services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. The
performance of all kinds of services for others for a fee, remuneration or consideration is considered
as sale of services subject to VAT. (See items 1-3 in ratio.)

5. Can the CA's ruling in a prior case involving COMASERCO be made applicable in the instant case?

SC: No. The issue in the first case (i.e., whether COMASERCO is engaged in business to determine
liability for the payment of fixed and percentage taxes), is different from the present case, which
involves COMASERCO's liability for VAT.

Page | 24
9) COMMISSIONER OF INTERNAL REVENUE v. PHILIPPINE HEALTH CARE PROVIDERS, INC. G.R. No.
168129. April 24, 2007

FACTS:

On 1987, CIR issued VAT Ruling No. 231-88 stating that Philhealth, as a provider of medical services, is
exempt from the VAT coverage. When RA 8424 or the new Tax Code was implemented it adopted
the provisions of VAT and E-VAT. On 1999, the BIR sent Philhealth an assessment notice for
deficiency VAT and documentary stamp taxes for taxable years 1996 and 1997. After CIR did not act
on it, Philhealth filed a petition for review with the CTA. The CTA withdrew the VAT assessment. The
CIR then filed an appeal with the CA which was denied.

ISSUES:

Whether Philhealth is subject to VAT.

Whether VAT Ruling No. 231-88 exempting Philhealth from payment of VAT has retroactive
application.

RULING:

YES. Section 103 of the NIRC exempts taxpayers engaged in the performance of medical, dental,
hospital, and veterinary services from VAT. But, in Philhealth's letter requesting of its VAT-exempt
status, it was held that it showed Philhealth provides medical service only between their members
and their accredited hospitals, that it only provides for the provision of pre-need health care services,
it contracts the services of medical practitioners and establishments for their members in the
delivery of health services.

Thus, Philhealth does not fall under the exemptions provided in Section 103, but merely arranges for
such, making Philhealth not VAT-exempt. YES. Generally, the NIRC has no retroactive application
except when:

where the taxpayer deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue;

where the facts subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or

where the taxpayer acted in bad faith.

The Court held that Philhealth acted in good faith. The term health maintenance organization was
first recorded in the Philippine statute books in 1995. It is apparent that when VAT Ruling No. 231-88
was issued in Philhealth's favor, the term health maintenance organization was unknown and had no
significance for taxation purposes. Philhealth, therefore, believed in good faith that it was VAT
exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88. The rule is that
the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of
the taxpayer.

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10) COMMISSIONER OF INTERNAL REVENUE vs. SAN ROQUE POWER CORP. G.R. No. 187485,
February 12, 2013

FACTS:

On October 11, 1997, San Roque Power Corporation (San Roque) entered into a Power Purchase
Agreement (PPA) with the National Power Corporation (NPC) by building the San Roque Multi-
Purpose Project in San Manuel, Pangasinan. The San Roque Multi-Purpose Project allegedly incurred,
excess input VAT in the amount of P559,709,337.54 for taxable year 2001 which it declared in its
Quarterly VAT Returns filed for the same year. San Roque duly filed with the BIR separate claims for
refund, amounting to P559,709,337.54, representing unutilized input taxes as declared in its VAT
returns for taxable year 2001.

However, on March 28, 2003, San Roque filed amended Quarterly VAT Returns for the year 2001
since it increased its unutilized input VAT To the amount of P560,200,283.14. San Roque filed with the
BIR on the same date, separate amended claims for refund in the aggregate amount of
P560,200,283.14. On April 10, 2003, a mere 13 days after it filed its amended administrative claim with
the CIR on March 28, 2003, San Roque filed a Petition for Review with the CTA. CIR alleged that the
claim by San Roque was prematurely filed with the CTA.

ISSUE:

WON San Roque is entitled to tax refund?

HELD:

No. San Roque is not entitled to a tax refund because it failed to comply with the mandatory and
jurisdictional requirement of waiting 120 days before filing its judicial claim. On April 10, 2003, a mere
13 days after it filed its amended administrative claim with the CIR on March 28, 2003, San Roque
filed a Petition for Review with the CTA, which showed that San Roque did not wait for the 120-day
period to lapse before filing its judicial claim. Compliance with the 120-day waiting period is
mandatory and jurisdictional, under RA 8424 or the Tax Reform Act of 1997. Failure to comply
renders the petition void. It violates the doctrine of exhaustion of administrative remedies and
renders the petition premature and without a cause of action, with the effect that the CTA does not
acquire jurisdiction over the taxpayer’s petition.

Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory
laws shall be void, except when the law itself authorizes their validity." Thus, San Roque’s petition
with the CTA is a mere scrap of paper. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer. Whether the Atlas doctrine or the Mirant
doctrine is applied to San Roque is immaterial because what is at issue in the present case is San
Roque’s non-compliance with the 120-day mandatory and jurisdictional period, which is counted from
the date it filed its administrative claim with the CIR. The 120-day period may extend beyond the two-
year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive
period. However, San Roque’s fatal mistake is that it did not wait for the CIR to decide within the 120-
day period, a mandatory period whether the Atlas or the Mirant doctrine is applied. Section 112(D) of
the 1997 Tax Code is clear, unequivocal, and categorical that the CIR has 120 days to act on an
administrative claim. The taxpayer can file the judicial claim

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(1) Only within 30 days after the CIR partially or fully denies the claim within the 120- day period, or

(2) only within 30 days from the expiration of the 120- day period if the CIR does not act within the
120-day period.

Even if, contrary to all principles of statutory construction as well as plain common sense, we
gratuitously apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque cannot
recover any refund or credit because San Roque did not wait for the 60-day period to lapse, contrary
to the express requirement in Section 4.106-2(c).

SC granted the petition of CIR to deny the tax refund or credit claim of San Roque.

11) CIR VS. SONY PHILIPPINES G.R. NO. 178697 NOVEMBER 17, 2010

NATURE OF THE CASE: Petition for review on certiorari seeks to set aside the Decision and the
Resolution of the Court of Tax Appeals En Banc, affirming the Decision of the CTA-First Division which
partially granted the petition for review of respondent Sony Philippines, Inc.

FACTS:

On November 24, 1998, the CIR issued Letter of Authority to examine Sony’s books of accounts and
other accounting records regarding revenue taxes for the period 1997 and unverified prior years.

On December 6, 1999, a preliminary assessment and demand letter for 1997 VAT, EWT, FWT
deficiencies and penalties was issued by the CIR. The VAT deficiency resulted from its disallowance of
the input VAT tax credit from Sony’s advertising expense. Sony sought a re-evaluation of these tax
deficiency assessments by filing a protest. Acting on the protest, the CIR issued final assessment
notices with formal letter of demand. Thereafter, Sony filed a petition for review before the Court of
Tax Appeals First Division.

Before the CTA First Division, CIR argued that since Sony’s advertising expense was reimbursed by
Sony Singapore, the former never incurred any advertising expense. As a result, Sony is not entitled
to a tax credit. At most, the CIR continues, the said advertising expense should be for the account of
Sony Singapore, and not Sony Philippines.

The CTA-First Division partly granted Sony’s petition by cancelling the deficiency VAT assessment but
upheld a modified deficiency EWT assessment as well as the penalties.

This finding was later affirmed by the CTA-EB. Unfazed, the CIR filed the instant petition for review.

ISSUES:

1.) Whether or not the LOA , although it states the period 1997 and unverified prior years, should be
understood to mean the fiscal year ending in March 31, 1998; and

2.) Whether or not the advertising expense, which amount was reimbursed by Sony-Singapore, is an
income of Sony and thus, VAT-taxable transaction under the NIRC?

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HELD:

ON ISSUE No. 1: NO, the period 1997 and unverified prior years should not be understood to mean
the fiscal year ending March 31, 1998?

As earlier stated, the LOA covered the period 1997 and unverified prior years. For said reason, the CIR
acting through its revenue officers went beyond the scope of their authority because the deficiency
VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal
year which ended in March 31, 1998. In the absence of such an authority, the assessment or
examination is a nullity.

On this point alone, the deficiency VAT assessment should have been disallowed.

HELD ISSUE No. 2: NO, the reimbursement for the advertising expense incurred by Sony Phils., by
Sony Singapore was not an income and was not VAT taxable.

As aptly founded by the CTA-First Division and later affirmed by the CTA-EB, Sony’s deficiency VAT
assessment stemmed from the CIR’s disallowance of the input VAT credits that should have been
realized from the advertising expense of the latter.

The Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic
conditions, and was only equivalent to Sony’s advertising expenses.

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be
paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied.
Certainly, there was no such sale, barter or exchange in the subsidy given by Sony Singapore to Sony.
It was but a dole out by Sony Singapore and not in payment for goods or properties sold, bartered or
exchanged by Sony.

In the present case, the services rendered by the advertising companies, paid for by Sony using Sony
Singapore dole-out, were for Sony Phils. Sony Singapore just gave assistance to Sony Phils. in the
amount equivalent to the latter’s advertising expense but never received any goods, properties or
service in return.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

RULING: WHEREFORE, the petition is DENIED.

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12) KEPCO PHILIPPINES CORP. VS. CIR G.R NO. 179356, DECEMBER 14,2009

FACTS:

Petitioner KEPCO Philippines Corporation (Kepco) is a VAT-registered independent power producer

engaged in the business of generating electricity. It exclusively sells electricity to National Power
Corporation (NPC), an entity exempt from taxes under Section 13 of Republic Act No. 6395 (RA No.
6395).

Kepco filed an application for zero-rated sales and subsequently approved

In the course of doing business with NPC, Kepco claimed expenses reportedly sustained in
connection with the production and sale of electricity with NPC, thus, paying input va andt
attributing the same to its zero-rated sales of electricity with NPC.

Afterwards, Kepco filed before CIR a claim for tax refund covering unutilized input VAT payments
attributable to its zero-rated sales transactions. It also filed a petition for review before the CTA.

Respondent CIR averred that claims for refund were strictly construed against the taxpayer as it was
similar to a tax exemption

Petitioner argues that the 1997 National Internal Revenue Code (NIRC) does not require the
imprinting of the word zero-rated on invoices and/or official receipts covering zero-rated sales. It
claims that Section 113 in relation to Section 237 of the 1997 NIRC "does not mention the requirement
of imprinting the words ‘zero-rated’ to purchases covering zero-rated transactions." Only Section
4.108-1 of Revenue Regulation No. 7-95 (RR No. 7-95) "required the imprinting of the word ‘zero-
rated’ on the VAT invoice or receipt." "Thus, Section 4.108-1 of RR No. 7-95 cannot be considered as a
valid legislation considering the long settled rule that administrative rules and regulations cannot
expand the letter and spirit of the law they seek to enforce."

The CTA Second Division ruled that out of the total declared zero-rated sales ofP3,285,308,055.85,
Kepco was only able to properly substantiate P1,451,788,865.52 as its zero-rated sales. Only 44.19% of
the validly supported input VAT payments being claimed could be considered. The CTA Second
Division likewise disallowed the P5,170,914.20 of Kepco’s claimed input VAT due to its failure to
comply with the substantiation requirement. ccordingly, the CTA Second Division partially granted
Kepco’s claim for refund of unutilized input VAT

Kepco moved for partial reconsideration, but the CTA Second Division denied it

Kepco appeal to the CTA En Banc, but dismissed the petition and ruled that "in order for Kepco to be
entitled to its claim for refund/issuance of tax credit certificate representing unutilized input VAT
attributable to its zero-rated sales for taxable year 2002, it must comply with the substantiation
requirements under the appropriate Revenue Regulations, i.e. Revenue Regulations 7-95.

ISSUE:

1. Whether the word "zero-rated" should be imprinted on invoices and/or official receipts as
part of the invoicing requirement? WON non-compliance of invoicing requirements should result in
the denial of the taxpayer’s refund claim?

2. WON Section 4.108.1 of Revenue Regulation 07-95 does requires the word "TIN-VAT" to be
imprinted on a VAT-registered person’s supporting invoices and official receipts?

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HELD:

1. Yes. The SC held that Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted
to the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the
efficient enforcement of the tax code and of course its amendments. The requirement is reasonable
and is in accord with the efficient collection of VAT from the covered sales of goods and services. The
appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents
buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If,
absent such word, a successful claim for input VAT is made, the government would be refunding
money it did not collect.

Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject
to 10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the proper invoices,
petitioner Panasonic has been unable to substantiate its claim for refund.

Section 4.108-1 of RR 7-95, neither expanded nor supplanted the tax code but merely supplemented
what the tax code already defined and discussed. In fact, the necessity of indicating "zero-rated" into
VAT invoices/receipts became more apparent when the provisions of this revenue regulation was
later integrated into RA No. 9337, the amendatory law of the 1997 NIRC

Evidently, as it failed to indicate in its VAT invoices and receipts that the transactions were zero-
rated, Kepco failed to comply with the correct substantiation requirement for zero-rated
transactions

Automatic denial of claim

2. Yes. The SC held that only VAT registered persons are required to print their TIN followed by the
word "VAT" in their invoice or receipts and this shall be considered as a "VAT" Invoice. All purchases
covered by invoices other than ‘VAT Invoice’ shall not give rise to any input tax.

Under the law, a VAT invoice is necessary for every sale, barter or exchange of goods or properties
while a VAT official receipt properly pertains to every lease of goods or properties, and for every sale,
barter or exchange of services

The SC distinguished an invoice from a receipt:

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and
client or customer.

In other words, the VAT invoice is the seller’s best proof of the sale of the goods or services to the
buyer while the VAT receipt is the buyer’s best evidence of the payment of goods or services
received from the seller. Even though VAT invoices and receipts are normally issued by the
supplier/seller alone, the said invoices and receipts, taken collectively, are necessary to substantiate
the actual amount or quantity of goods sold and their selling price (proof of transaction), and the
best means to prove the input VAT payments (proof of payment). Hence, VAT invoice and VAT
receipt should not be confused as referring to one and the same thing. Certainly, neither does the
law intend the two to be used alternatively.

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