CLASSIFICATION OF TAXES accrual and liability for the payment of the excise tax are imposed directly on

the manufacturer or producer of the taxable goods,20 and arise before the

G.R. No. 188497               February 19, 2014 removal of the goods from the place of their production.21

COMMISSIONER OF INTERNAL REVENUE, Petitioner, The manufacturer’s or producer’s direct liability to pay the excise taxes
vs. similarly operates although the goods produced or manufactured within the
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent. country are intended for export and are "actually exported without returning
to the Philippines, whether so exported in their original state or as ingredients
or parts of any manufactured goods or products." This is implied from the
Excise tax is essentially a tax
grant of a tax credit or refund to the manufacturer or producer by Section
on goods, products or articles
130(4)(D) of the NIRC, thereby presupposing that the excise tax
corresponding to the goods exported were previously paid. Section 130(4)(D)
Taxes are classified, according to subject matter or object, into three groups, reads:
to wit: (1) personal, capitation or poll taxes; (2) property taxes; and (3) excise
or license taxes. Personal, capitation or poll taxes are fixed amounts imposed
xxxx
upon residents or persons of a certain class without regard to their property
or business, an example of which is the basic community tax.13 Property
taxes are assessed on property or things of a certain class, whether real or (D) Credit for Excise Tax on Goods Actually Exported. - When goods locally
personal, in proportion to their value or other reasonable method of produced or manufactured are removed and actually exported without
apportionment, such as the real estate tax.14 Excise or license taxes are returning to the Philippines, whether so exported in their original state or as
imposed upon the performance of an act, the enjoyment of a privilege, or the ingredients or parts of any manufactured goods or products, any excise tax
engaging in an occupation, profession or business.15 Income tax, value- paid thereon shall be credited or refunded upon submission of the proof of
added tax, estate and donor’s tax fall under the third group. actual exportation and upon receipt of the corresponding foreign exchange
payment: Provided, That the excise tax on mineral products, except coal and
coke, imposed under Section 151 shall not be creditable or refundable even if
Excise tax, as a classification of tax according to object, must not be
the mineral products are actually exported. (Emphasis supplied.)
confused with the excise tax under Title VI of the NIRC. The term "excise tax"
under Title VI of the 1997 NIRC derives its definition from the 1986
NIRC,16 and relates to taxes applied to goods manufactured or produced in Simply stated, the accrual and payment of the excise tax under Title VI of the
the Philippines for domestic sale or consumption or for any other disposition NIRC materially rest on the fact of actual production, manufacture or
and to things imported.17 In contrast, an excise tax that is imposed directly on importation of the taxable goods in the Philippines and on their presumed or
certain specified goods – goods manufactured or produced in the Philippines, intended domestic sale, consumption or disposition. Considering that the
or things imported – is undoubtedly a tax on property.18 excise tax attaches to the goods upon the accrual of the manufacturer’s
direct liability for its payment, the subsequent sale, consumption or other
disposition of the goods becomes relevant only to determine whether any
The payment of excise taxes is the direct
exemption or tax relief may be granted thereafter.
liability of the manufacturer or producer

The actual sale, consumption or disposition

The production, manufacture or importation of the goods belonging to any of
of the taxable goods confirms the proper tax
the categories enumerated in Title VI of the NIRC (i.e., alcohol products,
treatment of goods previously subjected
tobacco products, petroleum products, automobiles and non-essential goods,
to the excise tax
mineral products) are not the sole determinants for the proper levy of the
excise tax. It is further required that the goods be manufactured, produced or
imported for domestic sale, consumption or any other disposition.19 The Conformably with the foregoing discussion, the accrual and payment of the
accrual of the tax liability is, therefore, contingent on the production, excise tax on the goods enumerated under Title VI of the NIRC prior to their
manufacture or importation of the taxable goods and the intention of the removal from the place of production are absolute and admit of no exception.
manufacturer, producer or importer to have the goods locally sold or As earlier mentioned, even locally manufactured goods intended for export
consumed or disposed in any other manner. This is the reason why the cannot escape the imposition and payment of the excise tax, subject to a
future claim for tax credit or refund once proof of actual exportation has been Article 24
submitted to the Commissioner of Internal Revenue (CIR).22 Verily, it is the Customs duty
actual sale, consumption or disposition of the taxable goods that confirms the
proper tax treatment of goods previously subjected to the excise tax. If any of (a) Aircraft on a flight to, from, or across the territory of another contracting
the goods enumerated under Title VI of the NIRC are manufactured or State shall be admitted temporarily free of duty, subject to the customs
produced in the Philippines and eventually sold, consumed, or disposed of in regulations of the State. Fuel, lubricating oils, spare parts, regular equipment
any other manner domestically, therefore, there can be no claim for any tax and aircraft stores on board an aircraft of a contracting State, on arrival in the
relief inasmuch as the excise tax was properly levied and collected from the territory of another contracting State and retained on board on leaving the
manufacturer-seller. territory of that State shall be exempt from customs duty, inspection fees or
similar national or local duties and charges. This exemption shall not apply to
Here, the point of interest is the proper tax treatment of the petroleum any quantities or articles unloaded, except in accordance with the customs
products sold by Pilipinas Shell to various international carriers. An regulations of the State, which may require that they shall be kept under
international carrier is engaged in international transportation or contract of customs supervision. x x x (Bold emphasis supplied.)
carriage between places in different territorial jurisdictions.23
This provision was extended by the ICAO Council in its 1999 Resolution,
Pertinent is Section 135(a) of the NIRC, which provides: which stated that "fuel … taken on board for consumption" by an aircraft from
a contracting state in the territory of another contracting State departing for
SEC. 135. Petroleum Products Sold to International Carriers and Exempt the territory of any other State must be exempt from all customs or other
Entities or Agencies. - Petroleum products sold to the following are exempt duties. The Resolution broadly interpreted the scope of the Article 24
from excise tax: prohibition to include "import, export, excise, sales, consumption and internal
duties and taxes of all kinds levied upon . . . fuel."24
(a) International carriers of Philippine or foreign registry on their use or
consumption outside the Philippines: Provided, That the petroleum products Given the nature of the excise tax on petroleum products as a tax on
sold to these international carriers shall be stored in a bonded storage tank property, the tax exemption espoused by Article 24(a) of the Chicago
and may be disposed of only in accordance with the rules and regulations to Convention, as now embodied in Section 135(a) of the NIRC, is clearly
be prescribed by the Secretary of Finance, upon recommendation of the conferred on the aviation fuel or petroleum product on-board international
Commissioner; x x x carriers. Consequently, the manufacturer’s or producer’s sale of the
petroleum products to international carriers for their use or consumption
outside the Philippines operates to bring the tax exemption of the petroleum
xxxx
products into full force and effect.
As the taxpayer statutorily and directly liable for the accrual and payment of
Pilipinas Shell, the statutory taxpayer, is
the excise tax on the petroleum products it manufactured and it intended for
the proper party to claim the refund of
future domestic sale or consumption, Pilipinas Shell paid the corresponding
the excise taxes paid on petroleum
excise taxes prior to the removal of the goods from the place of production.
products sold to international carriers
However, upon the sale of the petroleum products to the international
carriers, the goods became exempt from the excise tax by the express
provision of Section 135(a) of the NIRC. In the latter instance, the fact of sale The excise taxes are of the nature of indirect taxes, the liability for the
to the international carriers of the petroleum products previously subjected to payment of which may fall on a person other than whoever actually bears the
the excise tax confirms the proper tax treatment of the goods as exempt from burden of the tax.25
the excise tax.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone
It is worthy to note that Section 135(a) of the NIRC is a product of the 1944 Company,26 the Court has discussed the nature of indirect taxes in the
Convention of International Civil Aviation, otherwise known as the Chicago following manner:
Convention, of which the Philippines is a Member State. Article 24(a) of the
Chicago Convention provides –
[I]ndirect taxes are those that are demanded, in the first instance, from, or are It may indeed be that the economic burden of the tax finally falls on the
paid by, one person in the expectation and intention that he can shift the purchaser; when it does the tax becomes a part of the price which the
burden to someone else. Stated elsewise, indirect taxes are taxes wherein purchaser must pay. It does not matter that an additional amount is billed as
the liability for the payment of the tax falls on one person but the burden tax to the purchaser. x x x The effect is still the same, namely, that the
thereof can be shifted or passed on to another person, such as when the tax purchaser does not pay the tax. He pays or may pay the seller more for the
is imposed upon goods before reaching the consumer who ultimately pays goods because of the seller’s obligation, but that is all and the amount added
for it. When the seller passes on the tax to his buyer, he, in effect, shifts the because of the tax is paid to get the goods and for nothing else.
tax burden, not the liability to pay it, to the purchaser, as part of the price of
goods sold or services rendered.27 But the tax burden may not even be shifted to the purchaser at all. A decision
to absorb the burden of the tax is largely a matter of economics. Then it can
In another ruling, the Court has observed: no longer be contended that a sales tax is a tax on the purchaser.30

Accordingly, the party liable for the tax can shift the burden to another, as The Silkair rulings involving the excise taxes on the petroleum products sold
part of the purchase price of the goods or services. Although the to international carriers firmly hold that the proper party to claim the refund of
manufacturer/seller is the one who is statutorily liable for the tax, it is the excise taxes paid is the manufacturer-seller.
buyer who actually shoulders or bears the burden of the tax, albeit not in the
nature of a tax, but part of the purchase price or the cost of the goods or In the February 2008 Silkair ruling,31 the Court declared:
services sold.28
The proper party to question, or seek a refund of, an indirect tax is the
Accordingly, the option of shifting the burden to pay the excise tax rests on statutory taxpayer, the person on whom the tax is imposed by law and who
the statutory taxpayer, which is the manufacturer or producer in the case of paid the same even if he shifts the burden thereof to another. Section 130 (A)
the excise taxes imposed on the petroleum products. Regardless of who (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the
shoulders the burden of tax payment, however, the Court has ruled as early return shall be filed and the excise tax paid by the manufacturer or producer
as in the 1960s that the proper party to question or to seek a refund of an before removal of domestic products from place of production." Thus, Petron
indirect tax is the statutory taxpayer, the person on whom the tax is imposed Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a
by law and who paid the same, even if he shifts the burden thereof to refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air
another.29 The Court has explained: Transport Agreement between RP and Singapore.

In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, the Even if Petron Corporation passed on to Silkair the burden of the tax, the
Court held that the sales tax is imposed on the manufacturer or producer and additional amount billed to Silkair for jet fuel is not a tax but part of the price
not on the purchaser, "except probably in a very remote and inconsequential which Silkair had to pay as a purchaser
sense." Discussing the "passing on" of the sales tax to the purchaser, the
Court therein cited Justice Oliver Wendell Holmes’ opinion in Lash’s Products In the November 2008 Silkair ruling,32 the Court reiterated:
v. United States wherein he said:
Section 129 of the NIRC provides that excise taxes refer to taxes imposed on
"The phrase ‘passed the tax on’ is inaccurate, as obviously the tax is laid and specified goods manufactured or produced in the Philippines for domestic
remains on the manufacturer and on him alone. The purchaser does not sale or consumption or for any other disposition and to things imported. The
really pay the tax. He pays or may pay excise taxes are collected from manufacturers or producers before removal
of the domestic products from the place of production. Although excise taxes
the seller more for the goods because of the seller’s obligation, but that is all. can be considered as taxes on production, they are really taxes on property
x x x The price is the sum total paid for the goods. The amount added as they are imposed on certain specified goods.
because of the tax is paid to get the goods and for nothing else. Therefore it
is part of the price x x x." Section 148(g) of the NIRC provides that there shall be collected on aviation
jet fuel an excise tax of ₱3.67 per liter of volume capacity. Since the tax
Proceeding from this discussion, the Court went on to state: imposed is based on volume capacity, the tax is referred to as "specific tax."
However, excise tax, whether classified as specific or ad valorem tax, is (b) Credit or refund taxes erroneously or illegally received or penalties
basically an indirect tax imposed on the consumption of a specified list of imposed without authority, refund the value of internal revenue stamps when
goods or products. The tax is directly levied on the manufacturer upon they are returned in good condition by the purchaser, and, in his discretion,
removal of the taxable goods from the place of production but in reality, the redeem or change unused stamps that have been rendered unfit for use and
tax is passed on to the end consumer as part of the selling price of the goods refund their value upon proof of destruction. No credit or refund of taxes or
sold penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the
xxxx payment of the tax or penalty: Provided, however, That a return filed showing
an overpayment shall be considered as a written claim for credit or refund.
(Emphasis and underscoring supplied)
When Petron removes its petroleum products from its refinery in Limay,
Bataan, it pays the excise tax due on the petroleum products thus removed.
Petron, as manufacturer or producer, is the person liable for the payment of The person entitled to claim a tax refund is the statutory taxpayer. Section
the excise tax as shown in the Excise Tax Returns filed with the BIR. Stated 22(N) of the NIRC defines a taxpayer as "any person subject to tax." In
otherwise, Petron is the taxpayer that is primarily, directly and legally liable Commissioner of Internal Revenue v. Procter and Gamble Phil. Mfg. Corp.,
for the payment of the excise taxes. However, since an excise tax is an the Court ruled that:
indirect tax, Petron can transfer to its customers the amount of the excise tax
paid by treating it as part of the cost of the goods and tacking it on to the A "person liable for tax" has been held to be a "person subject to tax" and
selling price. properly considered a "taxpayer." The terms "liable for tax" and "subject to
tax" both connote a legal obligation or duty to pay a tax.
As correctly observed by the CTA, this Court held in Philippine Acetylene
Co., Inc. v. Commissioner of Internal Revenue: The excise tax is due from the manufacturers of the petroleum products and
is paid upon removal of the products from their refineries. Even before the
It may indeed be that the economic burden of the tax finally falls on the aviation jet fuel is purchased from Petron, the excise tax is already paid by
purchaser; when it does the tax becomes part of the price which the Petron. Petron, being the manufacturer, is the "person subject to tax." In this
purchaser must pay. case, Petron, which paid the excise tax upon removal of the products from its
Bataan refinery, is the "person liable for tax." Petitioner is neither a "person
liable for tax" nor "a person subject to tax." There is also no legal duty on the
Even if the consumers or purchasers ultimately pay for the tax, they are not
part of petitioner to pay the excise tax; hence, petitioner cannot be
considered the taxpayers. The fact that Petron, on whom the excise tax is
considered the taxpayer.
imposed, can shift the tax burden to its purchasers does not make the latter
the taxpayers and the former the withholding agent.
Even if the tax is shifted by Petron to its customers and even if the tax is
billed as a separate item in the aviation delivery receipts and invoices issued
Petitioner, as the purchaser and end-consumer, ultimately bears the tax
to its customers, Petron remains the taxpayer because the excise tax is
burden, but this does not transform petitioner's status into a statutory
imposed directly on Petron as the manufacturer. Hence, Petron, as the
taxpayer.
statutory taxpayer, is the proper party that can claim the refund of the excise
taxes paid to the BIR.33
In the refund of indirect taxes, the statutory taxpayer is the proper party who
can claim the refund.
It is noteworthy that the foregoing pronouncements were applied in two more
Silkair cases34 involving the same parties and the same cause of action but
Section 204(c) of the NIRC provides: pertaining to different periods of taxation.

Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund The shifting of the tax burden by manufacturers-sellers is a business
or Credit Taxes. The Commissioner may – prerogative resulting from the collective impact of market forces. Such forces
include government impositions like the excise tax. Hence, the additional
xxxx amount billed to the purchaser as part of the price the purchaser pays for the
goods acquired cannot be solely attributed to the effect of the tax liability Section 204. Authority of the Commissioner to Compromise, Abate and
imposed on the manufacture-seller. It is erroneous to construe Section Refund or Credit Taxes. – The Commissioner may – x x x
135(a) only as a prohibition against the shifting by the manufacturers-sellers
of petroleum products of the tax burden to international carriers, for such xxxx
construction will deprive the manufacturers-sellers of their business
prerogative to determine the prices at which they can sell their products. (C) Credit or refund taxes erroneously or illegally received or penalties
imposed without authority, refund the value of internal revenue stamps when
Section 135(a) of the NIRC cannot be further construed as granting the they are returned in good condition by the purchaser, and, in his discretion,
excise tax exemption to the international carrier to whom the petroleum redeem or change unused stamps that have been rendered unfit for use and
products are sold considering that the international carrier has not been refund their value upon proof of destruction. No credit or refund of taxes or
subjected to excise tax at the outset. To reiterate, the excise tax is levied on penalties shall be allowed unless the taxpayer files in writing with the
the petroleum products because it is a tax on property. Levy is the act of Commissioner a claim for credit or refund within two (2) years after payment
imposition by the Legislature such as by its enactment of a law.35 The law of the tax or penalty: Provided, however, That a return filed showing an
enacted here is the NIRC whereby the excise tax is imposed on the overpayment shall be considered as a written claim for credit or refund.
petroleum products, the liability for the payment of which is further statutorily
imposed on the domestic petroleum manufacturer. Accordingly, the IN VIEW OF THE FOREGOING, I VOTE TO GRANT the Motion for
exemption must be allowed to the petroleum products because it is on them Reconsideration and Supplemental Motion for Reconsideration of Pilipinas
that the tax is imposed. The tax status of an international carrier to whom the Shell Petroleum Corporation and, accordingly:
petroleum products are sold is not based on exemption; rather, it is based on
the absence of a law imposing the excise tax on it. This further supports the
position that the burden passed on by the domestic petroleum manufacturer (a) TO AFFIRM the decision dated March 25, 2009 and resolution
is not anymore in the nature of a tax – although resulting from the previously- dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB
paid excise tax – but as an additional cost component in the selling price. No. 415; and
Consequently, the purchaser of the petroleum products to whom the burden
of the excise tax has been shifted, not being the statutory taxpayer, cannot (b) TO DIRECT petitioner Commissioner of Internal Revenue to
claim a refund of the excise tax paid by the manufacturer or producer. refund or to issue a tax credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of ₱95,014,283.00 representing the excise
Applying the foregoing, the Court concludes that: (1) the exemption under taxes it paid on the petroleum products sold to international carriers
Section 135(a) of the NIRC is conferred on the petroleum products on which in the period from October 2001 to June 2002.
the excise tax was levied in the first place; (2) Pilipinas Shell, being the
manufacturer or producer of petroleum products, was the statutory taxpayer
of the excise tax imposed on the petroleum products; (3) as the statutory
taxpayer, Pilipinas Shell’s liability to pay the excise tax accrued as soon as
the petroleum products came into existence, and Pilipinas Shell accordingly
paid its excise tax liability prior to its sale or disposition of the taxable goods
to third parties, a fact not disputed by the CIR; and (3) Pilipinas Shell’s sale of
the petroleum products to international carriers for their use or consumption
outside the Philippines confirmed the proper tax treatment of the subject
goods as exempt from the excise tax.1âwphi1

Under the circumstances, therefore, Pilipinas Shell erroneously paid the

excise taxes on its petroleum products sold to international carriers, and was
entitled to claim the refund of the excise taxes paid in accordance with
prevailing jurisprudence and Section 204(C) of the NIRC, viz:
FEES V CHARGES V TAXES (1) whether petitioner is exempt from the payment of building permit and
related fees imposed under the National Building Code; and (2) whether the
G.R. No. 189999               June 27, 2012 parcel of land owned by petitioner which has been assessed for real property
tax is likewise exempt.
ANGELES UNIVERSITY FOUNDATION, Petitioner,
vs. RULING:
CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as Treasurer
of Angeles City and ENGR. DONATO N. DIZON, in his capacity as R.A. No. 6055 granted tax exemptions to educational institutions like
Acting Angeles City Building Official, Respondents. petitioner which converted to non-stock, non-profit educational foundations.
Section 8 of said law provides:
FACTS:
SECTION 8. The Foundation shall be exempt from the payment of all taxes,
Petitioner AUF filed with the Office of the City Building Official an application import duties, assessments, and other charges imposed by the Government
for a building permit for the construction of an 11-storey building of the on all income derived from or property, real or personal, used exclusively for
Angeles University Foundation Medical Center. The OCBO issued a Building the educational activities of the Foundation.
Permit Fee Assessment and an Order of Payment was also issued by the
City Planning and Development Office, Zoning Administration Unit requiring On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued
petitioner to pay a Locational Clearance Fee. adopting the National Building Code of the Philippines. The said Code
requires every person, firm or corporation, including any agency or
Petitioner claimed that it is exempt from the payment of the building permit instrumentality of the government to obtain a building permit for any
and locational clearance fees and also reminded the respondents that they construction, alteration or repair of any building or structure. Building permit
have previously issued building permits acknowledging such exemption from refers to "a document issued by the Building Official x x x to an
payment of building permit fees on the construction of petitioner’s previously owner/applicant to proceed with the construction, installation, addition,
built sites. alteration, renovation, conversion, repair, moving, demolition or other work
activity of a specific project/building/structure or portions thereof after the
accompanying principal plans, specifications and other pertinent documents
Despite the request to reverse the disputed assessments and invoking the
with the duly notarized application are found satisfactory and substantially
DOJ legal opinions which have been affirmed by Secretary Gonzales,
conforming with the National Building Code of the Philippines x x x and its
respondents refused to issue the building permits to which the petitioner paid
Implementing Rules and Regulations (IRR)."20 Building permit fees refers to
under protest.
the basic permit fee and other charges imposed under the National Building
Code.
Petitioner filed a Complaint before the trial court seeking the refund of the
amount they paid plus interest at the rate of 12% per annum, and also
Exempted from the payment of building permit fees are: (1) public buildings
praying for the award of attorney’s fees and litigation expenses.
and (2) traditional indigenous family dwellings.21 Not being expressly included
in the enumeration of structures to which the building permit fees do not
The trial court rendered judgment in favor of the petitioner and against the apply, petitioner’s claim for exemption rests solely on its interpretation of the
respondents. term "other charges imposed by the National Government" in the tax
exemption clause of R.A. No. 6055.
Respondents appealed to the CA which reversed the trial court, holding that
while petitioner is a tax-free entity, it is not exempt from the payment of A "charge" is broadly defined as the "price of, or rate for, something," while
regulatory fees. the word "fee" pertains to a "charge fixed by law for services of public officers
or for use of a privilege under control of government."22 As used in the Local
ISSUES: Government Code of 1991 (R.A. No. 7160), charges refers to pecuniary
liability, as rents or fees against persons or property, while fee means a
charge fixed by law or ordinance for the regulation or inspection of a That a building permit fee is a regulatory imposition is highlighted by the fact
business or activity. that in processing an application for a building permit, the Building Official
shall see to it that the applicant satisfies and conforms with approved
That "charges" in its ordinary meaning appears to be a general term which standard requirements on zoning and land use, lines and grades, structural
could cover a specific "fee" does not support petitioner’s position that building design, sanitary and sewerage, environmental health, electrical and
permit fees are among those "other charges" from which it was expressly mechanical safety as well as with other rules and regulations implementing
exempted. Note that the "other charges" mentioned in Sec. 8 of R.A. No. the National Building Code. Thus, ancillary permits such as electrical permit,
6055 is qualified by the words "imposed by the Government on all x x x sanitary permit and zoning clearance must also be secured and the
property used exclusively for the educational activities of the foundation." corresponding fees paid before a building permit may be issued. And as can
Building permit fees are not impositions on property but on the activity be gleaned from the implementing rules and regulations of the National
subject of government regulation. While it may be argued that the fees relate Building Code, clearances from various government authorities exercising
to particular properties, i.e., buildings and structures, they are actually and enforcing regulatory functions affecting buildings/structures, like local
imposed on certain activities the owner may conduct either to build such government units, may be further required before a building permit may be
structures or to repair, alter, renovate or demolish the same. This is evident issued.
from the following provisions of the National Building Code:
Since building permit fees are not charges on property, they are not
Section 102. Declaration of Policy impositions from which petitioner is exempt.

It is hereby declared to be the policy of the State to safeguard life, health, As to petitioner’s argument that the building permit fees collected by
property, and public welfare, consistent with the principles of sound respondents are in reality taxes because the primary purpose is to raise
environmental management and control; and to this end, make it the purpose revenues for the local government unit, the same does not hold water.
of this Code to provide for all buildings and structures, a framework of
minimum standards and requirements to regulate and control their location, A charge of a fixed sum which bears no relation at all to the cost of inspection
site, design quality of materials, construction, use, occupancy, and and regulation may be held to be a tax rather than an exercise of the police
maintenance. power. In this case, the Secretary of Public Works and Highways who is
mandated to prescribe and fix the amount of fees and other charges that the
Section 103. Scope and Application Building Official shall collect in connection with the performance of regulatory
functions, has promulgated and issued the Implementing Rules and
Regulations which provide for the bases of assessment of such fees, as
(a) The provisions of this Code shall apply to the design, location, sitting,
follows:
construction, alteration, repair, conversion, use, occupancy, maintenance,
moving, demolition of, and addition to public and private buildings and
structures, except traditional indigenous family dwellings as defined herein. 1. Character of occupancy or use of building

xxxx 2. Cost of construction " 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F),

6,000 (J)
Section 301. Building Permits
3. Floor area
No person, firm or corporation, including any agency orinstrumentality of the
government shall erect, construct, alter, repair, move, convert or demolish 4. Height
any building or structure or causethe same to be done without first obtaining
a building permittherefor from the Building Official assigned in the place Petitioner failed to demonstrate that the above bases of assessment were
where thesubject building is located or the building work is to be done. (Italics arbitrarily determined or unrelated to the activity being regulated. Neither has
supplied.) petitioner adduced evidence to show that the rates of building permit fees
imposed and collected by the respondents were unreasonable or in excess of
the cost of regulation and inspection.
In Chevron Philippines, Inc. v. Bases Conversion Development Authority, this Considering that exemption from payment of regulatory fees was not among
Court explained: those "incentives" granted to petitioner under R.A. No. 6055, there is no such
incentive that is retained under the Local Government Code of 1991.
In distinguishing tax and regulation as a form of police power, the Consequently, no reversible error was committed by the CA in ruling that
determining factor is the purpose of the implemented measure. If the purpose petitioner is liable to pay the subject building permit and related fees.
is primarily to raise revenue, then it will be deemed a tax even though the
measure results in some form of regulation. On the other hand, if the purpose Now, on petitioner’s claim that it is exempted from the payment of real
is primarily to regulate, then it is deemed a regulation and an exercise of the property tax assessed against its real property presently occupied by informal
police power of the state, even though incidentally, revenue is generated. settlers.
Thus, in Gerochi v. Department of Energy, the Court stated:
Section 28(3), Article VI of the 1987 Constitution provides:
"The conservative and pivotal distinction between these two (2) powers rests
in the purpose for which the charge is made. If generation of revenue is the xxxx
primary purpose and regulation is merely incidental, the imposition is a tax;
but if regulation is the primary purpose, the fact that revenue is incidentally (3) Charitable institutions, churches and parsonages or convents appurtenant
raised does not make the imposition a tax." thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable
Concededly, in the case of building permit fees imposed by the National or educational purposes shall be exempt from taxation.
Government under the National Building Code, revenue is incidentally
generated for the benefit of local government units. Thus: x x x x (Emphasis supplied.)

Section 208. Fees Section 234(b) of the Local Government Code of 1991 implements the
foregoing constitutional provision by declaring that --
Every Building Official shall keep a permanent record and accurate account
of all fees and other charges fixed and authorized by the Secretary to be SECTION 234. Exemptions from Real Property Tax.– The following are
collected and received under this Code. exempted from payment of the real property tax:

Subject to existing budgetary, accounting and auditing rules and regulations, xxxx
the Building Official is hereby authorized to retain not more than twenty
percent of his collection for the operating expenses of his office.
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit or religious cemeteries and all lands, buildings,
The remaining eighty percent shall be deposited with the provincial, city or and improvements actually, directly, and exclusively used for religious,
municipal treasurer and shall accrue to the General Fund of the province, city charitable or educational purposes;
or municipality concerned.
x x x x (Emphasis supplied.)
Petitioner’s reliance on Sec. 193 of the Local Government Code of 1991 is
likewise misplaced. Said provision states:
In Lung Center of the Philippines v. Quezon City, this Court held that only
portions of the hospital actually, directly and exclusively used for charitable
SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise purposes are exempt from real property taxes, while those portions leased to
provided in this Code, tax exemptions or incentives granted to, or presently private entities and individuals are not exempt from such taxes. We explained
enjoyed by all persons, whether natural or juridical, including government- the condition for the tax exemption privilege of charitable and educational
owned or controlled corporations, except local water districts, cooperatives institutions, as follows:
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied.)
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively." If real property is used for one or more commercial purposes, it
is not exclusively used for the exempted purposes but is subject to taxation.
The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitutions and the
law. Solely is synonymous with exclusively.1âwphi1

What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is organized.
It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.

Petitioner failed to discharge its burden to prove that its real property is
actually, directly and exclusively used for educational purposes. While there
is no allegation or proof that petitioner leases the land to its present
occupants, still there is no compliance with the constitutional and statutory
requirement that said real property is actually, directly and exclusively used
for educational purposes. The respondents correctly assessed the land for
real property taxes for the taxable period during which the land is not being
devoted solely to petitioner’s educational activities. Accordingly, the CA did
not err in ruling that petitioner is likewise not entitled to a refund of the real
property tax it paid under protest.

WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009
and Resolution dated October 12, 2009 of the Court of Appeals in CA-G.R.
CV No. 90591 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

ARE TAXES SUBJECT TO SET OFF

G.R. No. L-67649 June 28, 1988 (1) that each one of the obligors be bound principally and
that he be at the same time a principal creditor of the other;
ENGRACIO FRANCIA, petitioner,
vs. xxx xxx xxx
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
(3) that the two debts be due.
FACTS:
xxx xxx xxx
A 125 sqm portion of property was expropriated by the government from the
property of the petitioner. Additionally, due to failure to pay his taxes, This principal contention of the petitioner has no merit. We have consistently
petitioner’s property was sold at public auction in order to satisfy a tax ruled that there can be no off-setting of taxes against the claims that the
delinquency. Ho Fernandez was the highest bidder for the property. taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or
Francia was not present during the auction sale since he was in Iligan City at greater than the tax being collected. The collection of a tax cannot await the
that time helping his uncle ship bananas. He received a notice of hearing for results of a lawsuit against the government.
the purpose of cancelling his TCT and the issuance of a new one. Petitioner
also discovered that a Final Bill of Sale had been issued in favor of In the case of  Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court
Fernandez. He therefore filed a complaint to annul the auction sale. ruled that Internal Revenue Taxes cannot be the subject of set-off or
compensation. We stated that:
The lower court rendered a decision, dismissing the complaint and ordering
the RoD of Pasay to issue a new TCT in favor of the defendant. A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-
The Intermediate Appellate Court affirmed the decision of the lower court  in off, which are construed uniformly, in the light of public
toto. policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable
ISSUE: to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of
the contract or transaction sued on. ... (80 C.J.S., 7374).
Whether petitioner’s tax delinquency was set-off by the legal compensation
"The general rule based on grounds of public policy is well-
for the appropriated portion of his property.
settled that no set-off admissible against demands for taxes
levied for general or local governmental purposes. The
RULING: reason on which the general rule is based, is that taxes are
not in the nature of contracts between the party and party but
No. Francia contends that his tax delinquency of P2,400.00 has been grow out of duty to, and are the positive acts of the
extinguished by legal compensation. He claims that the government owed government to the making and enforcing of which, the
him P4,116.00 when a portion of his land was expropriated on October 15, personal consent of individual taxpayers is not required. ..."
1977. Hence, his tax obligation had been set-off by operation of law as of
October 15, 1977. We stated that a taxpayer cannot refuse to pay his tax when called upon by
the collector because he has a claim against the governmental body not
There is no legal basis for the contention. By legal compensation, obligations included in the tax levy.
of persons, who in their own right are reciprocally debtors and creditors of
each other, are extinguished (Art. 1278, Civil Code). The circumstances of
the case do not satisfy the requirements provided by Article 1279, to wit:
G.R. No. 125704 August 28, 1998 RULING:

PHILEX MINING CORPORATION, petitioner, We see no merit in this contention.

vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and In several instances prior to the instant case, we have already made the
THE COURT OF TAX APPEALS, respondents. pronouncement that taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not creditors and debtors of
FACTS: each other. There is a material distinction between a tax and debt. Debts are
due to the Government in its corporate capacity, while taxes are due to the
The BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, Government in its sovereign capacity. We find no cogent reason to deviate
3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the from the aforementioned distinction.
total amount of P123,821.982.52.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we
Philex protested the demand for payment of the tax liabilities stating that it categorically held that taxes cannot be subject to set-off or compensation,
has pending claims for VAT input credit/refund for the taxes it paid for the thus:
years 1989 to 1991 in the amount of P119,977,037.02 plus interest.
Therefore, these claims for tax credit/refund should be applied against the tax We have consistently ruled that there can be no off-setting of
liabilities. The BIR found no merit in Philex's position because the pending taxes against the claims that the taxpayer may have against
claims have not yet been established or determined with certainty, it follows the government. A person cannot refuse to pay a tax on the
that no legal compensation can take place. Hence, the BIR reiterated its ground that the government owes him an amount equal to or
demand that Philex settle the amount plus interest within 30 days from the greater than the tax being collected. The collection of a tax
receipt of the letter. cannot await the results of a lawsuit against the government.

Philex raised the issue to the Court of Tax Appeals. In the course of the The ruling in Francia has been applied to the subsequent case of Caltex
proceedings, the BIR issued a Tax Credit Certificate effectively lowering the Philippines, Inc. v. Commission on Audit, 20 which reiterated that:
latter's tax obligation to P110,677,688.52.
. . . a taxpayer may not offset taxes due from the claims that
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay he may have against the government. Taxes cannot be the
the remaining balance of P110,677,688.52 plus interest. subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other
Philex appealed the case before the Court of Appeals who affirmed the and a claim for taxes is not such a debt, demand, contract or
decision of the CTA. Philex filed a Motion for Reconsideration which was judgment as is allowed to be set-off.
denied.
Further, Philex's reliance on our holding in Commissioner of Internal
However, a few days after the denial of its motion for reconsideration, Philex Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund
was able to obtain its VAT input credit/refund not only for the taxable year may be set off against an existing tax liability even though the refund has not
1989 to 1991 but also for 1992 and 1994. yet been approved by the Commissioner, is no longer without any support in
statutory law.
ISSUE:
It is important to note, that the premise of our ruling in the aforementioned
case was anchored on Section 51 (d) of the National Revenue Code of 1939.
Whether Philex is correct in stating that it may ipso jure, off-set its excise tax
However, when the National Internal Revenue Code of 1977 was enacted,
liabilities since both had already become "due and demandable, as well as
the same provision upon which the Itogon-Suyoc pronouncement was based
fully liquidated;" hence, legal compensation can properly take place.
was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot
be invoked by Philex.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities Nowhere is this more true than in the field of taxation. Again, while we
on the ground that it has a pending tax claim for refund or credit against the understand Philex's predicament, it must be stressed that the same is not a
government which has not yet been granted. It must be noted that a valid reason for the non-payment of its tax liabilities.
distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If To be sure, this is not to state that the taxpayer is devoid of remedy against
any taxpayer can defer the payment of taxes by raising the defense that it still public servants or employees, especially BIR examiners who, in investigating
has a pending claim for refund or credit, this would adversely affect the tax claims are seen to drag their feet needlessly. First, if the BIR takes time in
government revenue system. A taxpayer cannot refuse to pay his taxes when acting upon the taxpayer's claim for refund, the latter can seek judicial
they fall due simply because he has a claim against the government or that remedy before the Court of Tax Appeals in the manner prescribed by law.
the collection of the tax is contingent on the result of the lawsuit it filed Second, if the inaction can be characterized as willful neglect of duty, then
against the government. Moreover, Philex's theory that would automatically recourse under the Civil Code and the Tax Code can also be availed of.
apply its VAT input credit/refund against its tax liabilities can easily give rise
to confusion and abuse, depriving the government of authority over the Art. 27 of the Civil Code provides:
manner by which taxpayers credit and offset their tax liabilities.
Art. 27. Any person suffering material or moral loss because
Corollarily, the fact that Philex has pending claims for VAT input claim/refund a public servant or employee refuses or neglects, without
with the government is immaterial for the imposition of charges and penalties just cause, to perform his official duty may file an action for
prescribed under Section 248 and 249 of the Tax Code of 1977. The damages and other relief against the latter, without prejudice
payment of the surcharge is mandatory and the BIR is not vested with any to any disciplinary action that may be taken.
authority to waive the collection thereof.
More importantly, Section 269 (c) of the National Internal Revenue Act of
Finally, Philex asserts that the BIR violated Section 106 (e) of the National 1997 states:
Internal Revenue Code of 1977, which requires the refund of input taxes
within 60 days, when it took five years for the latter to grant its tax claim for
VAT input credit/refund. x x x           x x x          x x x

In this regard, we agree with Philex. While there is no dispute that a claimant (c) Wilfully neglecting to give receipts, as by law required for
has the burden of proof to establish the factual basis of his or her claim for any sum collected in the performance of duty or  wilfully
tax credit or refund, however, once the claimant has submitted all the neglecting to perform, any other duties enjoyed by law.
required documents it is the function of the BIR to assess these documents
with purposeful dispatch. After all, since taxpayers owe honestly to Simply put, both provisions abhor official inaction, willful neglect and
government it is but just that government render fair service to the unreasonable delay in the performance of official duties. In no uncertain
taxpayers.  terms must we stress that every public employee or servant must strive to
render service to the people with utmost diligence and efficiency. Insolence
In the instant case, the VAT input taxes were paid between 1989 to 1991 but and delay have no place in government service. The BIR, being the
the refund of these erroneously paid taxes was only granted in 1996. government collecting arm, must and should do no less. It simply cannot be
Obviously, had the BIR been more diligent and judicious with their duty, it apathetic and laggard in rendering service to the taxpayer if it wishes to
could have granted the refund earlier. We need not remind the BIR that remain true to its mission of hastening the country's development. We take
simple justice requires the speedy refund of wrongly-held taxes. Fair dealing judicial notice of the taxpayer's generally negative perception towards the
and nothing less, is expected by the taxpayer from the BIR in the latter's BIR; hence, it is up to the latter to prove its detractors wrong.
discharge of its function.
In sum, while we can never condone the BIR's apparent callousness in
Despite our concern with the lethargic manner by which the BIR handled performing its duties, still, the same cannot justify Philex's non-payment of its
Philex's tax claim, it is a settled rule that in the performance of governmental tax liabilities. The adage "no one should take the law into his own hands"
function, the State is not bound by the neglect of its agents and officers. should have guided Philex's action.
G.R. No. L-18994             June 29, 1963 And when sale or mortgage of real estate is to be made, the
regulations contained in Rule 90, section 7, should be complied with.
MELECIO R. DOMINGO, as Commissioner of Internal
Revenue, petitioner, Execution may issue only where the devisees, legatees or heirs have
vs. entered into possession of their respective portions in the estate prior
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of to settlement and payment of the debts and expenses of
First Instance of Leyte, administration and it is later ascertained that there are such debts
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the and expenses to be paid, in which case "the court having jurisdiction
late Walter Scott Price, respondents. of the estate may, by order for that purpose, after hearing, settle the
amount of their several liabilities, and order how much and in what
FACTS: manner each person shall contribute, and may issue execution if
circumstances require" (Rule 89, section 6; see also Rule 74,
Section 4; Emphasis supplied.) And this is not the instant case.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, this
Court declared as final and executory the order for the payment by the estate
of the estate and inheritance taxes, charges and penalties, issued by the The legal basis for such a procedure is the fact that in the testate or intestate
Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the proceedings to settle the estate of a deceased person, the properties
matter of the Intestate Estate of the Late Walter Scott Price." In order to belonging to the estate are under the jurisdiction of the court and such
enforce the claims against the estate the fiscal presented a petition to the jurisdiction continues until said properties have been distributed among the
court below for the execution of the judgment. The petition was, however, heirs entitled thereto. During the pendency of the proceedings all the estate
denied by the court which held that the execution is not justifiable as the is in custodia legis  and the proper procedure is not to allow the sheriff, in
Government is indebted to the estate under administration. case of the court judgment, to seize the properties but to ask the court for an
order to require the administrator to pay the amount due from the estate and
required to be paid.
ISSUE:

Another ground for denying the petition of the provincial fiscal is the fact that
Whether the said orders for the payment of inheritance taxes are valid
the court having jurisdiction of the estate had found that the claim of the
estate against the Government has been recognized and an amount of
RULING: P262,200 has already been appropriated for the purpose by a corresponding
law (Rep. Act No. 2700). Under the above circumstances, both the claim of
The petition to set aside the above orders of the court below and for the the Government for inheritance taxes and the claim of the intestate for
execution of the claim of the Government against the estate must be denied services rendered have already become overdue and demandable is well as
for lack of merit. The ordinary procedure by which to settle claims of fully liquidated. Compensation, therefore, takes place by operation of law, in
indebtedness against the estate of a deceased person, as an inheritance tax, accordance with the provisions of Articles 1279 and 1290 of the Civil Code,
is for the claimant to present a claim before the probate court so that said and both debts are extinguished to the concurrent amount, thus:
court may order the administrator to pay the amount thereof. To such effect is
the decision of this Court in Aldamiz vs. Judge of the Court of First Instance ART. 1200. When all the requisites mentioned in article 1279 are
of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus: present, compensation takes effect by operation of law, and
extinguished both debts to the concurrent amount, eventhough the
. . . a writ of execution is not the proper procedure allowed by the creditors and debtors are not aware of the compensation.
Rules of Court for the payment of debts and expenses of
administration. The proper procedure is for the court to order the sale It is clear, therefore, that the petitioner has no clear right to execute the
of personal estate or the sale or mortgage of real property of the judgment for taxes against the estate of the deceased Walter Scott Price.
deceased and all debts or expenses of administrator and with the Furthermore, the petition for certiorari and mandamus is not the proper
written notice to all the heirs legatees and devisees residing in the remedy for the petitioner. Appeal is the remedy.
Philippines, according to Rule 89, section 3, and Rule 90, section 2.
G.R. No. 169507 (3) International Carrier. - An international carrier doing
business in the Philippines shall pay a tax of two and onehalf
AIR CANADA, Petitioner, percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined
vs. hereunder:
COMMISSIONER OF INTERNAL REVENUE, Respondent.
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers
LEONEN, J.: to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted
An offline international air carrier selling passage tickets in the Philippines,
flight, irrespective of the place of sale or issue and the
through a general sales agent, is a resident foreign corporation doing
place of payment of the ticket or passage document:
business in the Philippines. As such, it is taxable under Section 28(A)(l), and
Provided, That tickets revalidated, exchanged and/or
not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
indorsed to another international airline form part of the
any applicable tax treaty to which the Philippines is a signatory. Pursuant to
Gross Philippine Billings if the passenger boards a plane in a
Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada
port or point in the Philippines: Provided, further, That for a
may only be imposed a maximum tax of 1 ½%  of its gross revenues earned
flight which originates from the Philippines, but
from the sale of its tickets in the Philippines.
transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of
Air Canada is a "foreign corporation organized and existing under the laws of the cost of the ticket corresponding to the leg flown from the
Canada[.]" On April 24, 2000, it was granted an authority to operate as an Philippines to the point of transshipment shall form part of
offline carrier by the Civil Aeronautics Board, subject to certain conditions, Gross Philippine Billings. (Emphasis supplied)
which authority would expire on April 24, 2005. "As an off-line carrier, [Air
Canada] does not have flights originating from or coming to the Philippines
To prevent the running of the prescriptive period, Air Canada filed a Petition
[and does not] operate any airplane [in] the Philippines[.]"
for Review before the Court of Tax Appeals which the CTA denied because it
found that Air Canada was engaged in business in the Philippines through a
Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its local agent that sells airline tickets on its behalf. As such, it should be taxed
general sales agent in the Philippines. Aerotel "sells [Air Canada’s] passage as a resident foreign corporation at the regular rate of 32%.Further,
documents in the Philippines." according to the Court of Tax Appeals First Division, Air Canada was
deemed to have established a "permanent establishment" in the Philippines
For the period ranging from the third quarter of 2000 to the second quarter of under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty by
2002, Air Canada, through Aerotel, filed quarterly and annual income tax the appointment of the local sales agent, "in which [the] petitioner uses its
returns and paid the income tax on Gross Philippine Billings. premises as an outlet where sales of [airline] tickets are made[.]"

On November 28, 2002, Air Canada filed a written claim for refund of alleged Air Canada filed a Motion for Reconsideration which was denied in the CTA.
erroneously paid income taxes amounting to claiming it found basis from the It then appealed to the Court of Tax Appeals En Banc. The Court of Tax
revised definition of Gross Philippine Billings under Section 28(A)(3)(a) of the Appeals En Banc affirmed the findings of the First Division.
1997 National Internal Revenue Code:
ISSUE:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
Whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77
(A) Tax on Resident Foreign Corporations. - pertaining allegedly to erroneously paid tax on Gross Philippine Billings from
the third quarter of 2000 to the second quarter of 2002.
....
RULING:
We reject petitioner’s contention that the Court of Tax Appeals erred in In this case, petitioner’s claim that it erroneously paid the 5% final tax is an
denying its claim for refund of erroneously paid Gross Philippine Billings tax admission that the quarterly tax return it filed in 2000 was improper. Hence,
on the ground that it is subject to income tax under Section 28(A)(1) of the to determine if petitioner was entitled to the refund being claimed, the Court
National Internal Revenue Code because (a) it has not been assessed at all of Tax Appeals has the duty to determine if petitioner was indeed not liable
by the Bureau of Internal Revenue for any income tax liability; and (b) internal for the 5% final tax and, instead, liable for taxes other than the 5% final tax.
revenue taxes cannot be the subject of set-off or compensation. As in South African Airways,  petitioner’s request for refund can neither be
granted nor denied outright without such determination.
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal
Revenue, we have ruled that "[i]n an action for the refund of taxes allegedly If the taxpayer is found liable for taxes other than the erroneously paid 5%
erroneously paid, the Court of Tax Appeals may determine whether there are final tax, the amount of the taxpayer’s liability should be computed and
taxes that should have been paid in lieu of the taxes paid." The determination deducted from the refundable amount.
of the proper category of tax that should have been paid is incidental and
necessary to resolve the issue of whether a refund should be granted. Thus: Any liability in excess of the refundable amount, however, may not be
collected in a case involving solely the issue of the taxpayer’s entitlement to
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject refund. The question of tax deficiency is distinct and unrelated to the question
it to 6% capital gains tax or other taxes at the first instance. The Court of Tax of petitioner’s entitlement to refund. Tax deficiencies should be subject to
Appeals has no power to make an assessment. assessment procedures and the rules of prescription. The court cannot be
expected to perform the BIR’s duties whenever it fails to do so either through
As earlier established, the Court of Tax Appeals has no assessment powers. neglect or oversight. Neither can court processes be used as a tool to
In stating that petitioner’s transactions are subject to capital gains tax, circumvent laws protecting the rights of taxpayers.
however, the Court of Tax Appeals was not making an assessment. It was
merely determining the proper category of tax that petitioner should have Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund
paid, in view of its claim that it erroneously imposed upon itself and paid the of allegedly erroneously paid tax on its Gross Philippine Billings, on the
5% final tax imposed upon PEZA-registered enterprises. ground that it was liable instead for the regular 32% tax on its taxable income
received from sources within the Philippines. Its determination of petitioner’s
The determination of the proper category of tax that petitioner should have liability for the 32% regular income tax was made merely for the purpose of
paid is an incidental matter necessary for the resolution of the principal issue, ascertaining petitioner’s entitlement to a tax refund and not for imposing any
which is whether petitioner was entitled to a refund. deficiency tax.

The issue of petitioner’s claim for tax refund is intertwined with the issue of In this regard, the matter of set-off raised by petitioner is not an issue.
the proper taxes that are due from petitioner. A claim for tax refund carries Besides, the cases cited are based on different circumstances. In both cited
the assumption that the tax returns filed were correct. If the tax return filed cases, the taxpayer claimed that his (its) tax liability was off-set by his (its)
was not proper, the correctness of the amount paid and, therefore, the claim claim against the government.
for refund become questionable. In that case, the court must determine if a
taxpayer claiming refund of erroneously paid taxes is more properly liable for The general rule, based on grounds of public policy is well-settled that no set-
taxes other than that paid. off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is
In South African Airways v. Commissioner of Internal Revenue, South that taxes are not in the nature of contracts between the party and party but
African Airways claimed for refund of its erroneously paid 2½% taxes on its grow out of a duty to, and are the positive acts of the government, to the
gross Philippine billings. This court did not immediately grant South African’s making and enforcing of which, the personal consent of individual taxpayers
claim for refund. This is because although this court found that South African is not required. * * * If the taxpayer can properly refuse to pay his tax when
Airways was not subject to the 2½% tax on its gross Philippine billings, this called upon by the Collector, because he has a claim against the
court also found that it was subject to 32% tax on its taxable income. governmental body which is not included in the tax levy, it is plain that some
legitimate and necessary expenditure must be curtailed. If the taxpayer’s
claim is disputed, the collection of the tax must await and abide the result of a
lawsuit, and meanwhile the financial affairs of the government will be thrown
into great confusion.

In sum, the rulings in [the previous cases] were to the effect that the taxpayer
cannot simply refuse to pay tax on the ground that the tax liabilities were off-
set against any alleged claim the taxpayer may have against the government.
Such would merely be in keeping with the basic policy on prompt collection of
taxes as the lifeblood of the government.1âwphi1

Here, what is involved is a denial of a taxpayer’s refund claim on account of

the Court of Tax Appeals’ finding of its liability for another tax in lieu of the
Gross Philippine Billings tax that was allegedly erroneously paid.

The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return
which, by itself and without unquestionable evidence, cannot be the basis for
the grant of the refund.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the
1997 NIRC. The above pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it
filed was correct. Given, however, the finding of the CTA that petitioner,
although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under
Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in
doubt. As such, we cannot grant the prayer for a refund.

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by

petitioner was computed at the rate of 1 ½%  of its gross revenues amounting
to P345,711,806.08 from the third quarter of 2000 to the second quarter of
2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the
1997 National Internal Revenue Code [32% of taxable income, that is, gross
income less deductions] will exceed the maximum ceiling of 1 ½% of gross
revenues as decreed in Article VIII of the Republic of the Philippines-Canada
Tax Treaty. Hence, no refund is forthcoming.
DOUBLE TAXATION The CA held that the 20% FWT on a bank’s interest income did not form part
of the taxable gross receipts in computing the 5% GRT, because the FWT
G.R. No. 148191               November 25, 2003 was not actually received by the bank but was directly remitted to the
government. The appellate court curtly said that while the Tax Code "does
not specifically state any exemption, x x x the statute must receive a sensible
COMMISSIONER OF INTERNAL REVENUE, petitioner,
construction such as will give effect to the legislative intention, and so as to
vs.
avoid an unjust or absurd conclusion."8
SOLIDBANK CORPORATION, respondent.
Hence, this appeal.9
FACTS:
ISSUE:
For the calendar year 1995, [respondent] seasonably filed its Quarterly
Percentage Tax Returns reflecting gross receipts (pertaining to 5% [Gross
Receipts Tax] rate) in the total amount of ₱1,474,691,693.44 with Whether or not the 20% final withholding tax on [a] bank’s interest income
corresponding gross receipts tax payments in the sum of ₱73,734,584.60. forms part of the taxable gross receipts in computing the 5% gross receipts
tax.
[Respondent] alleges that the total gross receipts in the amount of
₱1,474,691,693.44 included the sum of ₱350,807,875.15 representing gross RULING:
receipts from passive income which was already subjected to 20% final
withholding tax. The Petition is meritorious.

The Court of Tax Appeals rendered a decision wherein it was held that the Petitioner claims that although the 20% FWT on respondent’s interest income
20% final withholding tax on [a] bank’s interest income should not form part was not actually received by respondent because it was remitted directly to
of its taxable gross receipts for purposes of computing the gross receipts tax. the government, the fact that the amount redounded to the bank’s benefit
makes it part of the taxable gross receipts in computing the 5% GRT.
On the strength of the aforementioned decision, [respondent] filed with the Respondent, on the other hand, maintains that the CA correctly ruled
Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance otherwise.
of [a] tax credit certificate in the aggregate amount of ₱3,508,078.75,
representing allegedly overpaid gross receipts tax for the year 1995. We agree with petitioner. In fact, the same issue has been raised recently
in China Banking Corporation v. CA,11 where this Court held that the amount
Without waiting for an action from the [petitioner], [respondent] on the same of interest income withheld in payment of the 20% FWT forms part of gross
day filed [a] petition for review with the CTA in order to toll the running of the receipts in computing for the GRT on banks.
two-year prescriptive period to judicially claim for the refund of [any] overpaid
internal revenue tax[,] pursuant to Section 230 [now 229] of the Tax Code The FWT and the GRT:
[also ‘National Internal Revenue Code’]
Two Different Taxes
The CTA rendered its decision ordering petitioner to refund in favor of
respondent the reduced amount of ₱1,555,749.65 as overpaid [gross The 5% GRT is imposed by Section 119 of the Tax Code, which provides:
receipts tax] for the year 1995. The legal issue was resolved by the CTA on
the strength of its earlier pronouncement in Asian Bank Corporation vs. "SEC. 119. Tax on banks and non-bank financial intermediaries. – There
Commissioner of Internal Revenue x x x, wherein it was held that the 20% shall be collected a tax on gross receipts derived from sources within the
[final withholding tax] on [a] bank’s interest income should not form part of its Philippines by all banks and non-bank financial intermediaries in accordance
taxable gross receipts for purposes of computing the [gross receipts tax]. with the following schedule:

Ruling of the CA
"(a) On interest, commissions and discounts from lending activities as well as Section 50, and paid in the same manner and subject to the same conditions
income from financial leasing, on the basis of remaining maturities of as provided for in Section 51.
instruments from which such receipts are derived.
A perusal of these provisions clearly shows that two types of taxes are
Short-term maturity not in excess of two (2) years…………………… involved in the present controversy: (1) the GRT, which is a percentage tax;
5% and (2) the FWT, which is an income tax. As a bank, petitioner is covered by
both taxes.
Medium-term maturity – over two (2) years
A percentage tax is a national tax measured by a certain percentage of the
but not exceeding four (4) years…………………………………. gross selling price or gross value in money of goods sold, bartered or
…...3% imported; or of the gross receipts or earnings derived by any person engaged
in the sale of services.22 It is not subject to withholding.
Long-term maturity:
An income tax, on the other hand, is a national tax imposed on the net or the
gross income realized in a taxable year.23 It is subject to withholding.
(i) Over four (4) years but not exceeding

In a withholding tax system, the payee is the taxpayer, the person on whom
seven (7) years……………………………………………1%
the tax is imposed; the payor, a separate entity, acts as no more than an
agent of the government for the collection of the tax in order to ensure its
(ii) Over seven (7) years………………………………….….0% payment. Obviously, this amount that is used to settle the tax liability is
deemed sourced from the proceeds constitutive of the tax base. These
"(b) On dividends……………………………….……..0% proceeds are either actual or constructive. Both parties herein agree that
there is no actual receipt by the bank of the amount withheld. What needs to
"(c) On royalties, rentals of property, real or personal, profits from be determined is if there is constructive receipt thereof. Since the payee --
exchange and all other items treated as gross income under Section not the payor -- is the real taxpayer, the rule on constructive receipt can be
2814 of this Code………....................................................................5% easily rationalized, if not made clearly manifest.

Provided, however, That in case the maturity period referred to in paragraph No Double Taxation
(a) is shortened thru pretermination, then the maturity period shall be
reckoned to end as of the date of pretermination for purposes of classifying Double taxation means taxing the same property twice when it should be
the transaction as short, medium or long term and the correct rate of tax shall taxed only once; that is, "x x x taxing the same person twice by the same
be applied accordingly. jurisdiction for the same thing."117 It is obnoxious when the taxpayer is taxed
twice, when it should be but once.118 Otherwise described as "direct duplicate
"Nothing in this Code shall preclude the Commissioner from imposing the taxation,"119 the two taxes must be imposed on the same subject matter, for
same tax herein provided on persons performing similar banking activities." the same purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and they must be of the same kind or
The 5% GRT is included under "Title V. Other Percentage Taxes" of the Tax character.120
Code and is not subject to withholding. The banks and non-bank financial
intermediaries liable therefor shall, under Section 125(a)(1), file quarterly First, the taxes herein are imposed on two different subject matters. The
returns on the amount of gross receipts and pay the taxes due thereon within subject matter of the FWT is the passive income generated in the form of
twenty (20) days after the end of each taxable quarter. interest on deposits and yield on deposit substitutes, while the subject matter
of the GRT is the privilege of engaging in the business of banking.
The 20% FWT, on the other hand, falls under Section 24(e)(1) of "Title II. Tax
on Income." It is a tax on passive income, deducted and withheld at source A tax based on receipts is a tax on business rather than on the property;
by the payor-corporation and/or person as withholding agent pursuant to hence, it is an excise121 rather than a property tax.122 It is not an income tax,
unlike the FWT. In fact, we have already held that one can be taxed for amended, as a condition for the renewal of their respective business licenses
engaging in business and further taxed differently for the income derived for the year 1999.
therefrom.123 Akin to our ruling in Velilla v. Posadas,124 these two taxes are
entirely distinct and are assessed under different provisions. To comply with the City of Manila’s assessment of taxes under Section 21,
supra, the petitioners paid under protest the assessed amounts
Second, although both taxes are national in scope because they are imposed corresponding to the first quarter of 1999.
by the same taxing authority -- the national government under the Tax Code
-- and operate within the same Philippine jurisdiction for the same purpose of Petitioners formally requested, twice, the Office of the City Treasurer for the
raising revenues, the taxing periods they affect are different. The FWT is tax credit or refund of the local business taxes paid under protest. However,
deducted and withheld as soon as the income is earned, and is paid after they were denied in both instances.
every calendar quarter in which it is earned. On the other hand, the GRT is
neither deducted nor withheld, but is paid only after every taxable quarter in This prompted the petitioners filed their respective petitions for certiorari in
which it is earned. the Regional Trial Court (RTC) in Manila.

Third, these two taxes are of different kinds or characters. The FWT is an ISSUE:
income tax subject to withholding, while the GRT is a percentage tax not
subject to withholding.
The main issues for resolution are, therefore, (1) whether or not the CA
properly denied due course to the appeal for raising pure questions of law;
In short, there is no double taxation, because there is no taxing twice, by the and (2) whether or not the petitioners were entitled to the tax credit or tax
same taxing authority, within the same jurisdiction, for the same purpose, in refund for the taxes paid under Section 21, supra.
different taxing periods, some of the property in the territory.125 Subjecting
interest income to a 20% FWT and including it in the computation of the 5%
GRT is clearly not double taxation. Ruling

WHEREFORE, the Petition is GRANTED. The assailed Decision and The appeal is meritorious.
Resolution of the Court of Appeals are hereby REVERSED and SET ASIDE.
No costs. Double taxation means taxing the same property twice when it should be
taxed only once; that is, "taxing the same person twice by the same
G.R. No. 180651               July 30, 2014 jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described as "direct duplicate
taxation," the two taxes must be imposed on the same subject matter, for the
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE same purpose, by the same taxing authority, within the same jurisdiction,
CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.; and HARDWARE during the same taxing period; and the taxes must be of the same kind or
WORKSHOP, INC., Petitioners, character.
vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA;
and THE CITY OF MANILA, Respondents. Using the aforementioned test, the Court finds that there is indeed double
taxation if respondent is subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
FACTS: same subject matter – the privilege of doing business in the City of Manila;
(2) for the same purpose – to make persons conducting business within the
The City of Manila assessed and collected taxes from the individual City of Manila contribute to city revenues; (3) by the same taxing authority –
petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors, or petitioner City of Manila; (4) within the same taxing jurisdiction – within the
Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila. territorial jurisdiction of the City of Manila; (5) for the same taxing periods –
At the same time, the City of Manila imposed additional taxes upon the per calendar year; and (6) of the same kind or character – a local business
petitioners pursuant to Section 21 of the Revenue Code of Manila, as tax imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under Sections person who sold goods and services in the course of trade or business but
14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section only identified such person with particularity, namely, the wholesaler,
143 of the LGC, the very source of the power of municipalities and cities to distributor or dealer (Section 15), and the retailer (Section 17), all the taxes –
impose a local business tax, and to which any local business tax imposed by being imposed on the privilege of doing business in the City of Manila in
petitioner City of Manila must conform. It is apparent from a perusal thereof order to make the taxpayers contribute to the city’s revenues – were imposed
that when a municipality or city has already imposed a business tax on on the same subject matter and for the same purpose.
manufacturers, etc. of liquors, distilled spirits, wines, and any other article of
commerce, pursuant to Section 143(a) of the LGC, said municipality or city Secondly, the taxes were imposed by the same taxing authority (the City of
may no longer subject the same manufacturers, etc.to a business tax under Manila) and within the same jurisdiction in the same taxing period (i.e., per
Section 143(h) of the same Code. Section 143(h) may be imposed only on calendar year).
businesses that are subject to excise tax, VAT, or percentage tax under the
NIRC, and that are "not otherwise specified in preceding paragraphs." In the Thirdly, the taxes were all in the nature of local business taxes.
same way, businesses such as respondent’s, already subject to a local
business tax under Section 14 of Tax Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be made liable for local business In fine, the imposition of the tax under Section 21 of the Revenue Code of
tax under Section 21 of the same Tax Ordinance [which is based on Section Manila constituted double taxation, and the taxes collected pursuant thereto
143(h) of the LGC]. must be refunded.

Based on the foregoing reasons, petitioner should not have been subjected
to taxes under Section 21 of the Manila Revenue Code for the fourth quarter
of 2001, considering that it had already been paying local business tax under
Section 14 of the same ordinance.
G.R. No. 127105 June 25, 1999
Accordingly, respondent’s assessment under both Sections 14 and 21 had
no basis. Petitioner is indeed liable to pay business taxes to the City of COMMISSIONER OF INTERNAL REVENUE, petitioner,
Manila; nevertheless, considering that the former has already paid these vs.
taxes under Section 14 of the Manila Revenue Code, it is exempt from the S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents. 
same payments under Section 21 of the same code. Hence, payments made
under Section 21 must be refunded in favor of petitioner. FACTS:

It is undisputed that petitioner paid business taxes based on Sections 14 and [Respondent], a domestic corporation organized and operating under the
21 for the fourth quarter of 2001 in the total amount of ₱470,932.21. Philippine laws, entered into a license agreement with SC Johnson and Son,
Therefore, it is entitled to a refund of ₱164,552.04 corresponding to the United States of America (USA), a non-resident foreign corporation based in
payment under Section 21 of the Manila Revenue Code. the U.S.A. pursuant to which the [respondent] was granted the right to use
the trademark, patents and technology owned by the latter including the right
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and to manufacture, package and distribute the products covered by the
Swedish Match Philippines, Inc., the Court now holds that all the elements of Agreement and secure assistance in management, marketing and production
double taxation concurred upon the City of Manila’s assessment on and from SC Johnson and Son, U. S. A.
collection from the petitioners of taxes for the first quarter of 1999 pursuant to
Section 21 of the Revenue Code of Manila. The said License Agreement was duly registered with the Technology
Transfer Board of the Bureau of Patents, Trade Marks and Technology
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax Transfer.
on a person who sold goods and services in the course of trade or business
based on a certain percentage of his gross sales or receipts in the preceding For the use of the trademark or technology, [respondent] was obliged to pay
calendar year, while Section 15 and Section 17 likewise imposed the tax on a SC Johnson and Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments which and (2) that the "most favored nation" clause under the RP-US Tax Treaty
[respondent] paid for the period covering July 1992 to May 1993. refers to royalties paid under similar circumstances as those royalties subject
to tax in other treaties; that the phrase "paid under similar circumstances"
On October 29, 1993, [respondent] filed with the International Tax Affairs does not refer to payment of the tax but to the subject matter of the tax, that
Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on is, royalties, because the "most favored nation" clause is intended to allow
royalties arguing that, "the antecedent facts attending [respondent's] case fall the taxpayer in one state to avail of more liberal provisions contained in
squarely within the same circumstances under which said MacGeorge and another tax treaty wherein the country of residence of such taxpayer is also a
Gillete rulings were issued. Since the agreement was approved by the party thereto, subject to the basic condition that the subject matter of taxation
Technology Transfer Board, the preferential tax rate of 10% should apply to in that other tax treaty is the same as that in the original tax treaty under
the [respondent]. which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties
of the same kind paid under similar circumstances". S.C. Johnson also
contends that the Commissioner is estopped from insisting on her
The Commissioner did not act on said claim for refund. Private respondent
interpretation that the phrase "paid under similar circumstances" refers to the
S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review
manner in which the tax is paid, for the reason that said interpretation is
before the Court of Tax Appeals (CTA) to claim a refund of the overpaid
embodied in Revenue Memorandum Circular ("RMC") 39-92 which was
withholding tax on royalty payments from July 1992 to May 1993.
already abandoned by the Commissioner's predecessor in 1993; and was
expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid
The CTA rendered its decision in favor of S.C. Johnson and ordered the to an American licensor are subject only to 10% withholding tax pursuant to
Commissioner of Internal Revenue to issue a tax credit certificate in the Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany
amount of P963,266.00 representing overpaid withholding tax on royalty Tax Treaty. Said ruling should be given retroactive effect except if such is
payments, beginning July, 1992 to May, 1993. prejudicial to the taxpayer pursuant to Section 246 of the National Internal
Revenue Code.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty,
which is known as the "most favored nation" clause, the lowest rate of the The petition is meritorious.
Philippine tax at 10% may be imposed on royalties derived by a resident of
the United States from sources within the Philippines only if the
We are unable to sustain the position of the Court of Tax Appeals, which was
circumstances of the resident of the United States are similar to those of the
upheld by the Court of Appeals, that the phrase "paid under similar
resident of West Germany. Since the RP-US Tax Treaty contains no
circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be
"matching credit" provision as that provided under Article 24 of the RP-West
interpreted to refer to payment of royalty, and not to the payment of the tax,
Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not
for the reason that the phrase "paid under similar circumstances" is followed
paid under similar circumstances as those obtaining in the RP-West
by the phrase "to a resident of a third state". The respondent court held that
Germany Tax Treaty. Even assuming that the phrase "paid under similar
"Words are to be understood in the context in which they are used", and
circumstances" refers to the payment of royalties, and not taxes, as held by
since what is paid to a resident of a third state is not a tax but a royalty "logic
the Court of Appeals, still, the "most favored nation" clause cannot be
instructs" that the treaty provision in question should refer to royalties of the
invoked for the reason that when a tax treaty contemplates circumstances
same kind paid under similar circumstances.
attendant to the payment of a tax, or royalty remittances for that matter, these
must necessarily refer to circumstances that are tax-related. Finally,
petitioner argues that since S.C. Johnson's invocation of the "most favored The above construction is based principally on syntax or sentence structure
nation" clause is in the nature of a claim for exemption from the application of but fails to take into account the purpose animating the treaty provisions in
the regular tax rate of 25% for royalties, the provisions of the treaty must be point. To begin with, we are not aware of any law or rule pertinent to the
construed strictly against it. payment of royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar circumstances. The tax
rates on royalties and the circumstances of payment thereof are the same for
In its Comment, private respondent S.C. Johnson avers that the instant
all the recipients of such royalties and there is no disparity based on
petition should be denied (1) because it contains a defective certification
nationality in the circumstances of such payment.6 On the other hand, a
against forum shopping as required under SC Circular No. 28-91, that is, the
cursory reading of the various tax treaties will show that there is no similarity
certification was not executed by the petitioner herself but by her counsel;
in the provisions on relief from or avoidance of double taxation7 as this is a
matter of negotiation between the contracting parties.8 As will be shown later, In negotiating tax treaties, the underlying rationale for reducing the tax rate is
this dissimilarity is true particularly in the treaties between the Philippines and that the Philippines will give up a part of the tax in the expectation that the tax
the United States and between the Philippines and West Germany. given up for this particular investment is not taxed by the other
country. Thus the petitioner correctly opined that the phrase "royalties paid
The RP-US Tax Treaty is just one of a number of bilateral treaties which the under similar circumstances" in the most favored nation clause of the US-RP
Philippines has entered into for the avoidance of double taxation. The Tax Treaty necessarily contemplated "circumstances that are tax-related".
purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid In the case at bar, the state of source is the Philippines because the royalties
simultaneous taxation in two different jurisdictions. More precisely, the tax are paid for the right to use property or rights, i.e. trademarks, patents and
conventions are drafted with a view towards the elimination of international technology, located within the Philippines. The United States is the state of
juridical double taxation, which is defined as the imposition of comparable residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
taxes in two or more states on the same taxpayer in respect of the same there. Under the RP-US Tax Treaty, the state of residence and the state of
subject matter and for identical periods. 11 The apparent rationale for doing source are both permitted to tax the royalties, with a restraint on the tax that
away with double taxation is of encourage the free flow of goods and may be collected by the state of source. Furthermore, the method employed
services and the movement of capital, technology and persons between to give relief from double taxation is the allowance of a tax credit to citizens
countries, conditions deemed vital in creating robust and dynamic or residents of the United States (in an appropriate amount based upon the
economies. 12 Foreign investments will only thrive in a fairly predictable and taxes paid or accrued to the Philippines) against the United States tax, but
reasonable international investment climate and the protection against such amount shall not exceed the limitations provided by United States law
double taxation is crucial in creating such a climate. 13 for the taxable year. Under Article 13 thereof, the Philippines may impose
one of three rates — 25 percent of the gross amount of the royalties; 15
Double taxation usually takes place when a person is resident of a percent when the royalties are paid by a corporation registered with the
contracting state and derives income from, or owns capital in, the other Philippine Board of Investments and engaged in preferred areas of activities;
contracting state and both states impose tax on that income or capital. In or the lowest rate of Philippine tax that may be imposed on royalties of the
order to eliminate double taxation, a tax treaty resorts to several methods. same kind paid under similar circumstances to a resident of a third state.
First, it sets out the respective rights to tax of the state of source or situs and
of the state of residence with regard to certain classes of income or capital. In Given the purpose underlying tax treaties and the rationale for the most
some cases, an exclusive right to tax is conferred on one of the contracting favored nation clause, the concessional tax rate of 10 percent provided for in
states; however, for other items of income or capital, both states are given the RP-Germany Tax Treaty should apply only if the taxes imposed upon
the right to tax, although the amount of tax that may be imposed by the state royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are
of source is limited. 14 paid under similar circumstances. This would mean that private respondent
must prove that the RP-US Tax Treaty grants similar tax reliefs to residents
The second method for the elimination of double taxation applies whenever of the United States in respect of the taxes imposable upon royalties earned
the state of source is given a full or limited right to tax together with the state from sources within the Philippines as those allowed to their German
of residence. In this case, the treaties make it incumbent upon the state of counterparts under the RP-Germany Tax Treaty.
residence to allow relief in order to avoid double taxation. There are two
methods of relief — the exemption method and the credit method. In the The RP-US and the RP-West Germany Tax Treaties do not contain similar
exemption method, the income or capital which is taxable in the state of provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
source or situs is exempted in the state of residence, although in some expressly allows crediting against German income and corporation tax of
instances it may be taken into account in determining the rate of tax 20% of the gross amount of royalties paid under the law of the Philippines.
applicable to the taxpayer's remaining income or capital. On the other hand, On the other hand, Article 23 of the RP-US Tax Treaty, which is the
in the credit method, although the income or capital which is taxed in the counterpart provision with respect to relief for double taxation, does not
state of source is still taxable in the state of residence, the tax paid in the provide for similar crediting of 20% of the gross amount of royalties paid.
former is credited against the tax levied in the latter. The basic difference Said Article 23 reads:
between the two methods is that in the exemption method, the focus is on the
income or capital itself, whereas the credit method focuses upon the tax. Article 23
 Relief from double taxation effectuate its purpose. 21 The Vienna Convention on the Law of Treaties
states that a treaty shall be interpreted in good faith in accordance with the
Double taxation of income shall be avoided in the following ordinary meaning to be given to the terms of the treaty in their context and in
manner: the light of its object and
purpose. 22
1) In accordance with the provisions and
subject to the limitations of the law of the As stated earlier, the ultimate reason for avoiding double taxation is to
United States (as it may be amended from encourage foreign investors to invest in the Philippines — a crucial economic
time to time without changing the general goal for developing countries. 23 The goal of double taxation conventions
principle thereof), the United States shall would be thwarted if such treaties did not provide for effective measures to
allow to a citizen or resident of the United minimize, if not completely eliminate, the tax burden laid upon the income or
States as a credit against the United States capital of the investor. Thus, if the rates of tax are lowered by the state of
tax the appropriate amount of taxes paid or source, in this case, by the Philippines, there should be a concomitant
accrued to the Philippines and, in the case commitment on the part of the state of residence to grant some form of tax
of a United States corporation owning at relief, whether this be in the form of a tax credit or exemption. Otherwise, the
least 10 percent of the voting stock of a tax which could have been collected by the Philippine government will simply
Philippine corporation from which it receives be collected by another state, defeating the object of the tax treaty since the
dividends in any taxable year, shall allow tax burden imposed upon the investor would remain unrelieved. If the state of
credit for the appropriate amount of taxes residence does not grant some form of tax relief to the investor, no benefit
paid or accrued to the Philippines by the would redound to the Philippines, i.e., increased investment resulting from a
Philippine corporation paying such dividends favorable tax regime, should it impose a lower tax rate on the royalty
with respect to the profits out of which such earnings of the investor, and it would be better to impose the regular rate
dividends are paid. Such appropriate rather than lose much-needed revenues to another country.
amount shall be based upon the amount of
tax paid or accrued to the Philippines, but At the same time, the intention behind the adoption of the provision on "relief
the credit shall not exceed the limitations (for from double taxation" in the two tax treaties in question should be considered
the purpose of limiting the credit to the in light of the purpose behind the most favored nation clause.
United States tax on income from sources
within the Philippines or on income from The purpose of a most favored nation clause is to grant to the contracting
sources outside the United States) provided party treatment not less favorable than that which has been or may be
by United States law for the taxable granted to the "most favored" among other countries. The most favored
year. . . . nation clause is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations
The reason for construing the phrase "paid under similar circumstances" as may enjoy the privileges accorded by either party to those of the most
used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is favored nation. The essence of the principle is to allow the taxpayer in one
anchored upon a logical reading of the text in the light of the fundamental state to avail of more liberal provisions granted in another tax treaty to which
purpose of such treaty which is to grant an incentive to the foreign investor by the country of residence of such taxpayer is also a party provided that the
lowering the tax and at the same time crediting against the domestic tax subject matter of taxation, in this case royalty income, is the same as that in
abroad a figure higher than what was collected in the Philippines. the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US
Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty,
In one case, the Supreme Court pointed out that laws are not just mere above-quoted, speaks of tax on royalties for the use of trademark, patent,
compositions, but have ends to be achieved and that the general purpose is and technology. The entitlement of the 10% rate by U.S. firms despite the
a more important aid to the meaning of a law than any rule which grammar absence of a matching credit (20% for royalties) would derogate from the
may lay down. 20 It is the duty of the courts to look to the object to be design behind the most grant equality of international treatment since the tax
accomplished, the evils to be remedied, or the purpose to be subserved, and burden laid upon the income of the investor is not the same in the two
should give the law a reasonable or liberal construction which will best countries. The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment precisely to Believing that it made an overpayment of the BPRT, petitioner filed with the
underscore the need for equality of treatment. BIR Large Taxpayers Assessment and Investigation Division on 4 October
2005 an administrative claim for refund or issuance of its tax credit certificate
We accordingly agree with petitioner that since the RP-US Tax Treaty does in the total amount of PHP 22,562,851.17. On the same date, petitioner
not give a matching tax credit of 20 percent for the taxes paid to the requested from the International Tax Affairs Division (ITAD) a confirmation of
Philippines on royalties as allowed under the RP-West Germany Tax Treaty, its entitlement to the preferential tax rate of 10% under the RP-Germany Tax
private respondent cannot be deemed entitled to the 10 percent rate granted Treaty.
under the latter treaty for the reason that there is no payment of taxes on
royalties under similar circumstances. ISSUE

It bears stress that tax refunds are in the nature of tax exemptions. As such This Court is now confronted with the issue of whether the failure to strictly
they are regarded as in derogation of sovereign authority and to be comply with RMO No. 1-2000 will deprive persons or corporations of the
construed strictissimi juris against the person or entity claiming the benefit of a tax treaty.
exemption. 27 The burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant of RULING
organic or statute law. 28 Private respondent is claiming for a refund of the
alleged overpayment of tax on royalties; however, there is nothing on record The Petition is meritorious.
to support a claim that the tax on royalties under the RP-US Tax Treaty is
paid under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty. Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall
be subject to a tax of 15% based on the total profits applied for or earmarked
for remittance without any deduction of the tax component. However,
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty,
decision dated May 7, 1996 of the Court of Tax Appeals and the decision which provides that where a resident of the Federal Republic of Germany has
dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE. a branch in the Republic of the Philippines, this branch may be subjected to
the branch profits remittance tax withheld at source in accordance with
SO ORDERED. Philippine law but shall not exceed 10% of the gross amount of the profits
remitted by that branch to the head office.
G.R. No. 188550               August 19, 2013
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER, in the Philippines, remitting to its head office in Germany, the benefit of a
vs. preferential rate equivalent to 10% BPRT.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any
DECISION availment of the tax treaty relief must be preceded by an application with
ITAD at least 15 days before the transaction. The Order was issued to
FACTS: streamline the processing of the application of tax treaty relief in order to
improve efficiency and service to the taxpayers. Further, it also aims to
prevent the consequences of an erroneous interpretation and/or application
Petitioner withheld and remitted to respondent on 21 October 2003 the
of the treaty provisions (i.e., filing a claim for a tax refund/credit for the
amount of PHP 67,688,553.51, which represented the fifteen percent (15%)
overpayment of taxes or for deficiency tax liabilities for underpayment).
branch profit remittance tax (BPRT) on its regular banking unit (RBU) net
income remitted to Deutsche Bank Germany (DB Germany) for 2002 and
prior taxable years. The crux of the controversy lies in the implementation of RMO No. 1-2000.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of operate to divest entitlement to the relief as it would constitute a violation of
international law as part of the law of the land. The time-honored international the duty required by good faith in complying with a tax treaty. The denial of
principle of pacta sunt servanda demands the performance in good faith of the availment of tax relief for the failure of a taxpayer to apply within the
treaty obligations on the part of the states that enter into the agreement. prescribed period under the administrative issuance would impair the value
Every treaty in force is binding upon the parties, and obligations under the of the tax treaty. At most, the application for a tax treaty relief from the BIR
treaty must be performed by them in good faith. More importantly, treaties should merely operate to confirm the entitlement of the taxpayer to the relief.
have the force and effect of law in this jurisdiction.
The obligation to comply with a tax treaty must take precedence over the
Tax treaties are entered into "to reconcile the national fiscal legislations of objective of RMO No. 1-2000.1âwphi1 Logically, noncompliance with tax
the contracting parties and, in turn, help the taxpayer avoid simultaneous treaties has negative implications on international relations, and unduly
taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. discourages foreign investors. While the consequences sought to be
further clarifies that "tax conventions are drafted with a view towards the prevented by RMO No. 1-2000 involve an administrative procedure, these
elimination of international juridical double taxation, which is defined as the may be remedied through other system management processes, e.g., the
imposition of comparable taxes in two or more states on the same taxpayer imposition of a fine or penalty. But we cannot totally deprive those who are
in respect of the same subject matter and for identical periods. The apparent entitled to the benefit of a treaty for failure to strictly comply with an
rationale for doing away with double taxation is to encourage the free flow of administrative issuance requiring prior application for tax treaty relief.
goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic Prior Application vs. Claim for Refund
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against Again, RMO No. 1-2000 was implemented to obviate any erroneous
double taxation is crucial in creating such a climate." interpretation and/or application of the treaty provisions. The objective of the
BIR is to forestall assessments against corporations who erroneously availed
Simply put, tax treaties are entered into to minimize, if not eliminate the themselves of the benefits of the tax treaty but are not legally entitled thereto,
harshness of international juridical double taxation, which is why they are as well as to save such investors from the tedious process of claims for a
also known as double tax treaty or double tax agreements. refund due to an inaccurate application of the tax treaty provisions. However,
as earlier discussed, noncompliance with the 15-day period for prior
"A state that has contracted valid international obligations is bound to make application should not operate to automatically divest entitlement to the tax
in its legislations those modifications that may be necessary to ensure the treaty relief especially in claims for refund.
fulfillment of the obligations undertaken." Thus, laws and issuances must
ensure that the reliefs granted under tax treaties are accorded to the parties The underlying principle of prior application with the BIR becomes moot in
entitled thereto. The BIR must not impose additional requirements that would refund cases, such as the present case, where the very basis of the claim is
negate the availment of the reliefs provided for under international erroneous or there is excessive payment arising from non-availment of a tax
agreements. More so, when the RP-Germany Tax Treaty does not provide treaty relief at the first instance. In this case, petitioner should not be faulted
for any pre-requisite for the availment of the benefits under said agreement. for not complying with RMO No. 1-2000 prior to the transaction. It could not
have applied for a tax treaty relief within the period prescribed, or 15 days
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which prior to the payment of its BPRT, precisely because it erroneously paid the
would indicate a deprivation of entitlement to a tax treaty relief for failure to BPRT not on the basis of the preferential tax rate under
comply with the 15-day period. We recognize the clear intention of the BIR in
implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty the RP-Germany Tax Treaty, but on the regular rate as prescribed by the
relief for failure to strictly comply with the prescribed period is not in harmony NIRC. Hence, the prior application requirement becomes illogical. Therefore,
with the objectives of the contracting state to ensure that the benefits granted the fact that petitioner invoked the provisions of the RP-Germany Tax Treaty
under tax treaties are enjoyed by duly entitled persons or corporations. when it requested for a confirmation from the ITAD before filing an
administrative claim for a refund should be deemed substantial compliance
Bearing in mind the rationale of tax treaties, the period of application for the with RMO No. 1-2000.
availment of tax treaty relief as required by RMO No. 1-2000 should not
Corollary thereto, Section 229of the NIRC provides the taxpayer a remedy for Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU
tax recovery when there has been an erroneous payment of tax.1âwphi1 The net income amounting to PHP 451,257,023.29 for 2002 and prior taxable
outright denial of petitioner’s claim for a refund, on the sole ground of failure years, applying the 10% BPRT. Thus, it is proper to grant petitioner a refund
to apply for a tax treaty relief prior to the payment of the BPRT, would defeat of the difference between the PHP 67,688,553.51 (15% BPRT) and PHP
the purpose of Section 229. 45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.

Petitioner is entitled to a refund WHEREFORE, premises considered, the instant Petition is GRANTED.
Accordingly, the Court of Tax Appeals En Banc Decision dated 29 May 2009
It is significant to emphasize that petitioner applied – though belatedly – for a and Resolution dated 1 July 2009 are REVERSED and SET ASIDE. A new
tax treaty relief, in substantial compliance with RMO No. 1-2000. A ruling by one is hereby entered ordering respondent Commissioner of Internal
the BIR would have confirmed whether petitioner was entitled to the lower Revenue to refund or issue a tax credit certificate in favor of petitioner
rate of 10% BPRT pursuant to the RP-Germany Tax Treaty. Deutsche Bank AG Manila Branch the amount of TWENTY TWO MILLION
FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE
PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine
Nevertheless, even without the BIR ruling, the CTA Second Division found as
currency, representing the erroneously paid BPRT for 2002 and prior taxable
follows:
years.
Based on the evidence presented, both documentary and testimonial,
G.R. Nos. 193383-84, January 14, 2015
petitioner was able to establish the following facts:

CBK POWER COMPANY LIMITED, Petitioner, v. COMMISSIONER OF

a. That petitioner is a branch office in the Philippines of Deutsche
INTERNAL REVENUE, Respondent.
Bank AG, a corporation organized and existing under the laws of the
Federal Republic of Germany;
[G.R. NOS. 193407-08]
b. That on October 21, 2003, it filed its Monthly Remittance Return of COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CBK POWER
Final Income Taxes Withheld under BIR Form No. 1601-F and COMPANY LIMITED, Respondent.
remitted the amount of ₱67,688,553.51 as branch profits remittance
tax with the BIR; and
DECISION
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having
PERLAS-BERNABE, J.:
issued a clearance, petitioner remitted to Frankfurt Head Office the
amount of EUR5,174,847.38 (or ₱330,175,961.88 at 63.804
Peso/Euro) representing its 2002 profits remittance. The Facts

CBK Power is a limited partnership duly organized and existing under the
The amount of PHP 67,688,553.51 paid by petitioner represented the 15%
laws of the Philippines, and primarily engaged in the development and
BPRT on its RBU net income, due for remittance to DB Germany amounting
operation of the Caliraya, Botocan, and Kalayaan hydroelectric power
to PHP 451,257,023.29 for 2002 and prior taxable years.
generating plants in Laguna (CBK Project). It is registered with the Board of
Investments (BOI) as engaged in a preferred pioneer area of investment
Likewise, both the administrative and the judicial actions were filed within the under the Omnibus Investment Code of 1987.7chanRoblesvirtualLawlibrary
two-year prescriptive period pursuant to Section 229 of the NIRC.
To finance the CBK Project, CBK Power obtained in August 2000 a
Clearly, there is no reason to deprive petitioner of the benefit of a preferential syndicated loan from several foreign banks, acting through an Inter-Creditor
tax rate of 10% BPRT in accordance with the RP-Germany Tax Treaty. Agent, Dai-ichi Kangyo Bank, a Japanese bank that subsequently merged
with the Industrial Bank of Japan, Limited and Fuji Bank, with the merged
entity being named as Mizuho Corporate Bank. One of the merged banks,
Fuji Bank, had a branch in the Philippines, which became a branch of Mizuho of international law as part of the law of the land. The time-honored
Bank as a result of the merger. The Industrial Bank of Japan and Mizuho international principle of pacta sunt servanda demands the performance in
Bank are residents of Japan for purposes of income taxation. good faith of treaty obligations on the part of the states that enter into the
agreement. In this jurisdiction, treaties have the force and effect of
Certain portions of the loan were subsequently assigned by the original law.42chanRoblesvirtualLawlibrary
lenders to various other banks who are residents of Netherlands and Austria.
The issue of whether the failure to strictly comply with RMO No. 1-2000 will
In February 2001, CBK Power borrowed money from Industrial Bank of deprive persons or corporations of the benefit of a tax treaty was squarely
Japan, Fortis-Netherlands, Raiffesen Bank, Fortis-Belgium, and Mizuho Bank addressed in the recent case of Deutsche Bank AG Manila Branch v.
for which it remitted interest payments from May 2001 to May 2003. It Commissioner of Internal Revenue43 (Deutsche Bank), where the Court
allegedly withheld final taxes from said payments based on the following emphasized that the obligation to comply with a tax treaty must take
rates, and paid the same to the Revenue District Office No. 55 of the Bureau precedence over the objective of RMO No. 1-2000.
of Internal Revenue (BIR): (a) fifteen percent (15%) for Fortis-Belgium, Fortis-
Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for Industrial
Bank of Japan and Mizuho Bank.12chanRoblesvirtualLawlibrary The obligation to comply with a tax treaty must take precedence over
the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties
However, according to CBK Power, under the relevant tax has negative implications on international relations, and unduly discourages
treaties between the Philippines and the respective countries in which each foreign investors. While the consequences sought to be prevented by RMO
of the banks is a resident, the interest income derived by the aforementioned No. 1-2000 involve an administrative procedure, these may be remedied
banks are subject only to a preferential tax rate of 10%. through other system management processes, e.g., the imposition of a fine
or penalty. But we cannot totally deprive those who are entitled to the
CBK Power filed a claim for refund of its excess final withholding taxes benefit of a treaty for failure to strictly comply with an administrative
allegedly erroneously withheld and collected for the years 2001 and 2002.  issuance requiring prior application for tax treaty relief.
The claim for refund of excess final withholding taxes in 2003 was
subsequently filed on March 4, 2005.nRoblesvirtualLawlibrary The objective of RMO No. 1-2000 in requiring the application for treaty relief
with the ITAD before a party’s availment of the preferential rate under a tax
The Commissioner of Internal Revenue’s (Commissioner) inaction on said treaty is to avert the consequences of any erroneous interpretation and/or
claims prompted CBK Power to file petitions for review before the CTA. application of treaty provisions, such as claims for refund/credit for
overpayment of taxes, or deficiency tax liabilities for
The Issues Before the Court underpayment.45 However, as pointed out in Deutsche Bank, the underlying
principle of prior application with the BIR becomes moot in refund cases –
Whether the BIR may add a requirement – prior application for an ITAD ruling as in the present case – where the very basis of the claim is erroneous or
– that is not found in the income tax treaties signed by the Philippines before there is excessive payment arising from the non-availment of a tax treaty
a taxpayer can avail of preferential tax rates under said treaties. relief at the first instance. Just as Deutsche Bank was not faulted by the
Court for not complying with RMO No. 1-2000 prior to the transaction,46 so
Whether CBK Power is not entitled to a refund for the period covering taxable should CBK Power. In parallel, CBK Power could not have applied for a tax
year 2003 as it allegedly failed to exhaust administrative remedies before treaty relief 15 days prior to its payment of the final withholding tax on the
seeking judicial redress. interest paid to its lenders precisely because it erroneously paid said
tax on the basis of the regular rate as prescribed by the NIRC, and not on the
The Court’s Ruling preferential tax rate provided under the different treaties. As stressed by the
Court, the prior application requirement under RMO No. 1-2000 then
The Court resolves the foregoing in seriatim. becomes illogical.
A. G.R. Nos. 193383-84 Not only is the requirement illogical, but it is also an imposition that is not
found at all in the applicable tax treaties. In  Deutsche Bank, the Court
The Philippine Constitution provides for adherence to the general principles categorically held that the BIR should not impose additional requirements
that would negate the availment of the reliefs provided for under international
agreements, especially since said tax treaties do not provide for any xxxx
prerequisite at all for the availment of the benefits under said
agreements.48chanRoblesvirtualLawlibrary SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or
proceeding shall be maintained in any court for the recovery of any national
It bears reiterating that the application for a tax treaty relief from the BIR internal revenue tax hereafter alleged to have been erroneously or illegally
should merely operate to confirm the entitlement of the taxpayer to the assessed or collected, or of any penalty claimed to have been collected
relief. Since CBK Power had requested for confirmation from the ITAD on without authority, of any sum alleged to have been excessively or in any
June 8, 2001 and October 28, 200250 before it filed on April 14, 2003 its manner wrongfully collected without authority, or of any sum alleged to have
administrative claim for refund of its excess final withholding taxes, the same been excessively or in any manner wrongfully collected, until a claim for
should be deemed substantial compliance with RMO No. 1-2000, as refund or credit has been duly filed with the Commissioner; but such suit or
in Deutsche Bank. To rule otherwise would defeat the purpose of Section proceeding may be maintained, whether or not such tax, penalty, or sum has
229 of the NIRC in providing the taxpayer a remedy for erroneously paid tax been paid under protest or duress.
solely on the ground of failure to make prior application for tax treaty
relief.51 As the Court exhorted in Republic v. GST Philippines, Inc.,52 while the In any case, no such suit or proceeding shall be filed after the expiration of
taxpayer has an obligation to honestly pay the right taxes, the government two (2) years from the date of payment of the tax or penalty regardless of any
has a corollary duty to implement tax laws in good faith; to discharge its duty supervening cause that may arise after payment: x x x. (Emphases and
to collect what is due to it; and to justly return what has been erroneously underscoring supplied)
and excessively given to it.
Indubitably, CBK Power’s administrative and judicial claims for refund of its
excess final withholding taxes covering taxable year 2003 were filed within
B. G.R. Nos. 193407-08 the two-year prescriptive period.
Sections 204 and 229 of the NIRC pertain to the refund of erroneously or
illegally collected taxes. Section 204 applies to administrative claims for
With respect to the remittance filed on March 10, 2003, the Court agrees with
refund, while Section 229 to judicial claims for refund. In both instances, the
the ratiocination of the CTA En Banc in debunking the alleged failure to
taxpayer’s claim must be filed within two (2) years from the date of payment
exhaust administrative remedies. Had CBK Power awaited the action of the
of the tax or penalty. However, Section 229 of the NIRC further states the
Commissioner on its claim for refund prior to taking court action knowing fully
condition that a judicial claim for refund may not be maintained until a claim
well that the prescriptive period was about to end, it would have lost not only
for refund or credit has been duly filed with the Commissioner. These
its right to seek judicial recourse but its right to recover the final withholding
provisions respectively read:chanroblesvirtuallawlibrary
taxes it erroneously paid to the government thereby suffering irreparable
damage.59chanRoblesvirtualLawlibrary
SEC. 204. Authority of the Commissioner to Compromise, Abate and
Refund or Credit Taxes. – The Commissioner may - Also, while it may be argued that, for the remittance filed on June 10, 2003
that was to prescribe on June 10, 2005, CBK Power could have waited for, at
xxxx the most, three (3) months from the filing of the administrative claim on
March 4, 2005 until the last day of the two-year prescriptive period ending
(C) Credit or refund taxes erroneously or illegally received or penalties June 10, 2005, that is, if only to give the BIR at the administrative level an
imposed without authority, refund the value of internal revenue stamps when opportunity to act on said claim, the Court cannot, on that basis alone, deny a
they are returned in good condition by the purchaser, and, in his discretion, legitimate claim that was, for all intents and purposes, timely filed in
redeem or change unused stamps that have been rendered unfit for use and accordance with Section 229 of the NIRC. There was no violation of Section
refund their value upon proof of destruction. No credit or refund of taxes or 229 since the law, as worded, only requires that an administrative claim be
penalties shall be allowed unless the taxpayer files in writing with the priorly filed.
Commissioner a claim for credit or refund within two (2) years after the
payment of the tax or penalty: Provided, however, That a return filed showing To this end, and bearing in mind that the Legislature is presumed to have
an overpayment shall be considered as a written claim for credit or refund. understood the language it used and to have acted with full idea of what it
wanted to accomplish, it is fair and reasonable to say without doing violence MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N.
to the context or either of the two provisions, that by the first is meant simply FAUSTO, Petitioners,
that the Collector of Internal Revenue shall be given an opportunity to vs.
consider his mistake, if mistake has been committed, before he is sued, but EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN,
not, as the appellant contends that pending consideration of the claim, the ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P.
period of two years provided in the last clause shall be deemed FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA
interrupted. Nowhere and in no wise does the law imply that the MAEVE T. LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS
Collector of Internal Revenue must act upon the claim, or that the CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN
taxpayer shall not go to court before he is notified of the Collector’s INSURANCE CO., and LAND BANK OF THE PHILIPPINES, Respondents.
action. x x x. We understand the filing of the claim with the Collector of
Internal Revenue to be intended primarily as a notice of warning that FACTS:
unless the tax or penalty alleged to have been collected erroneously or
illegally is refunded, court action will follow. The Sangguniang Panlalawigan of Cagayan passed a resolution authorizing
Governor Lara to engage the services of and appoint Preferred Ventures
Corporation as financial advisor or consultant for the issuance and flotation of
That being said, the foregoing refund claims of CBK Power should all be bonds to fund the priority projects of the governor without cost and
granted, and, the petition of the Commissioner in G.R. Nos. 193407-08 be commitment.
denied for lack of merit.
Through another Resolution, the Sanggunian ratified the Memorandum of
Agreement (MOA) entered into by Gov. Lara and Preferred Ventures
Corporation. The MOA provided that the provincial government of Cagayan
shall pay Preferred Ventures Corporation a one-time fee of 3% of the amount
of bonds floated.

Later on, the Sangguniang Panlalawigan approved multiple resolutions

authorizing to negotiate, sign and execute contracts or agreements pertinent
to the flotation of the bonds, as well as the bond flotation and ratifying the
Cagayan Provincial Board Agreements

On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders
Corporation, giving to the latter the planning, design, construction and site
development of the town center project for a fee of ₱213,795,732.39. 

Proceedings before the Regional Trial Court

On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman

and Leonides N. Fausto filed a Petition for Annulment of Contracts and
Injunction with prayer for a Temporary Restraining Order/Writ of Preliminary
Injunction 13 against Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O.
Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P.
Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia Maeve T. Layos,
TAXPAYER’S SUIT
Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO
and LBP.1avvphi1
G.R. No. 165109               December 14, 2009
At the time of the filing of the petition, Manuel N. Mamba was the Petitioners have legal standing to sue as taxpayers
Representative of the 3rd Congressional District of the province of
Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were A taxpayer is allowed to sue where there is a claim that public funds are
members of the Sangguniang Panlalawigan of Cagayan. illegally disbursed, or that the public money is being deflected to any
improper purpose, or that there is wastage of public funds through the
Edgar R. Lara was sued in his capacity as governor of Cagayan, while enforcement of an invalid or unconstitutional law. A person suing as a
Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., taxpayer, however, must show that the act complained of directly involves the
Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. illegal disbursement of public funds derived from taxation. He must also
Calagui and Cecilia Maeve T. Layos were sued as members of prove that he has sufficient interest in preventing the illegal expenditure of
the Sangguniang Panlalawigan of Cagayan. Respondents Preferred money raised by taxation and that he will sustain a direct injury because of
Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP the enforcement of the questioned statute or contract. In other words, for a
were all impleaded as indispensable or necessary parties. taxpayer’s suit to prosper, two requisites must be met: (1) public funds
derived from taxation are disbursed by a political subdivision or
Respondent Preferred Ventures Corporation is the financial advisor of the instrumentality and in doing so, a law is violated or some irregularity is
province of Cagayan regarding the bond flotation undertaken by the province. committed and (2) the petitioner is directly affected by the alleged act. 
Respondent Asset Builders Corporation was awarded the right to plan,
design, construct and develop the proposed town center. Respondent RCBC, In light of the foregoing, it is apparent that contrary to the view of the RTC,
through its Trust and Investment Division, is the trustee of the seven-year
bond flotation undertaken by the province for the construction of the town a taxpayer need not be a party to the contract to challenge its validity.  As
center, while respondent MICO is the guarantor. Lastly, respondent LBP is long as taxes are involved, people have a right to question contracts entered
the official depositary bank of the province. into by the government.

In response to the petition, public respondents filed an Answer with Motion to In this case, although the construction of the town center would be primarily
Dismiss,  raising the following defenses: a) petitioners are not the proper sourced from the proceeds of the bonds, which respondents insist are not
parties or they lack locus standi in court; b) the action is barred by the rule on taxpayer’s money, a government support in the amount of ₱187 million would
state immunity from suit and c) the issues raised are not justiciable questions still be spent for paying the interest of the bonds. In fact, a Deed of
but purely political. Assignment was executed by the governor in favor of respondent RCBC over
the Internal Revenue Allotment (IRA) and other revenues of the provincial
On the assumption that the controversy presents justiciable issues which this government as payment and/or security for the obligations of the provincial
Court may take cognizance of, petitioners in the present case who government under the Trust Indenture Agreement dated September 17,
presumably presented legitimate interests in the controversy are not parties 2003. Records also show that on March 4, 2004, the governor requested
to the questioned contract. Contracts produce effect as between the parties the Sangguniang Panlalawigan to appropriate an amount of ₱25 million for
who execute them. Only a party to the contract can maintain an action to the interest of the bond.  Clearly, the first requisite has been met.
enforce the obligations arising under said contract (Young vs. CA, 169 SCRA
213). Since a contract is binding only upon the parties thereto, a third person As to the second requisite, the court, in recent cases, has relaxed the
cannot ask for its rescission if it is in fraud of his rights. stringent "direct injury test" bearing in mind that locus standi is a procedural
technicality. By invoking "transcendental importance", "paramount public
ISSUE: interest", or "far-reaching implications", ordinary citizens and taxpayers were
allowed to sue even if they failed to show direct injury. In cases where
Whether the petitioner has legal standing to sue serious legal issues were raised or where public expenditures of millions of
pesos were involved, the court did not hesitate to give standing to taxpayers.
RULING:
We find no reason to deviate from the jurisprudential trend.
The petition is partially meritorious.
To begin with, the amount involved in this case is substantial. Under the additional security, it further authorized the assignment of a portion of its
various agreements entered into by the governor, which were ratified by internal revenue allotment (IRA) and the monthly income from the proposed
the Sangguniang Panlalawigan, the provincial government of Cagayan would project in favor of Land Bank. Consequently, Land Bank extended a loan in
incur a total cost of ₱231,908,232.39 favor of the Municipality (First Loan), the proceeds of which were used to
construct ten (10) kiosks at the northern and southern portions of the Imelda
Garden. After completion, these kiosks were rented out.
What is more, the provincial government would be shelling out a total amount
of ₱187 million for the period of seven years by way of subsidy for the
interest of the bonds. Without a doubt, the resolution of the present petition is On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving the
of paramount importance to the people of Cagayan who at the end of the day construction of a commercial center on the Plaza Lot as part of phase II of
would bear the brunt of these agreements. the Redevelopment Plan. To finance the project, Mayor Eriguel was again
authorized to obtain a loan from Land Bank, posting as well the same
securities as that of the First Loan. All previous representations and
Another point to consider is that local government units now possess more
warranties of Mayor Eriguel related to the negotiation and obtention of the
powers, authority and resources at their disposal, which in the hands of
new loan10 were ratified on September 5, 2006 through Resolution No. 128-
unscrupulous officials may be abused and misused to the detriment of the
2006.11 In consequence, Land Bank granted a second loan in favor of the
public. To protect the interest of the people and to prevent taxes from being
Municipality on October 20, 2006 in the principal amount of ₱28,000,000.00
squandered or wasted under the guise of government projects, a liberal
(Second Loan).12
approach must therefore be adopted in determining locus standi in public
suits.
Unlike phase 1 of the Redevelopment Plan, the construction of the
commercial center at the Agoo Plaza was vehemently objected to by some
In view of the foregoing, we are convinced that petitioners have sufficient
residents of the Municipality. Led by respondent Eduardo Cacayuran
standing to file the present suit. Accordingly, they should be given the
(Cacayuran), these residents claimed that the conversion of the Agoo Plaza
opportunity to present their case before the RTC.
into a commercial center, as funded by the proceeds from the First and
Second Loans (Subject Loans), were "highly irregular, violative of the law,
and detrimental to public interests, and will result to wanton desecration of
the said historical and public park." The foregoing was embodied in a
Manifesto, launched through a signature campaign conducted by the
residents and Cacayuran.
G.R. No. 191667               April 17, 2013
In addition, Cacayuran wrote a letter expressing the growing public clamor
LAND BANK OF THE PHILIPPINES, Petitioner, against the conversion of the Agoo Plaza into a commercial center. He then
vs. requested the foregoing officers to furnish him certified copies of various
EDUARDO M. CACAYURAN, Respondent. documents related to the aforementioned conversion including, among
others, the resolutions approving the Redevelopment Plan as well as the loan
FACTS agreements for the sake of public information and transparency.

From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed Unable to get any response, Cacayuran, invoking his right as a taxpayer,
certain resolutions to implement a multi-phased to redevelop the Agoo Public filed a Complaint against the Implicated Officers and Land Bank, assailing,
Plaza (Agoo Plaza) where the Imelda Garden and Jose Rizal Monument among others, the validity of the Subject Loans on the ground that the Plaza
were situated. Lot used as collateral thereof is property of public dominion and therefore,
beyond the commerce of man.
To finance phase 1 of the said plan, the SB initially passed a resolution
authorizing then Mayor Eufranio Eriguel to obtain a loan from Land Bank and For its part, Land Bank claimed that it is not privy to the Implicated Officers’
incidental thereto, mortgage a 2,323.75 square meter lot situated at the acts of destroying the Agoo Plaza. It further asserted that Cacayuran did not
southeastern portion of the Agoo Plaza (Plaza Lot) as collateral. To serve as
have a cause of action against it since he was not privy to any of the Subject taxpayer’s money, there is no denying that public funds derived from taxation
Loans.19 are bound to be expended as the Municipality assigned a portion of its IRA
as a security for the foregoing loans. Needless to state, the Municipality’s
During the pendency of the proceedings, the construction of the commercial IRA, which serves as the local government unit’s just share in the national
center was completed and the said structure later became known as the taxes, is in the nature of public funds derived from taxation. The Court
Agoo’s People Center (APC). believes, however, that although these funds may be posted as a security, its
collateralization should only be deemed effective during the incumbency of
the public officers who approved the same, else those who succeed them be
On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007, declaring
effectively deprived of its use.
the area where the APC stood as patrimonial property of the Municipality.

In any event, it is observed that the proceeds from the Subject Loans had
ISSUE
already been converted into public funds by the Municipality’s receipt thereof.
Funds coming from private sources become impressed with the
Whether Cacayuran has standing to sue characteristics of public funds when they are under official custody.

RULING Accordingly, the first requisite has been clearly met.

The petition lacks merit. Second, as a resident-taxpayer of the Municipality, Cacayuran is directly
affected by the conversion of the Agoo Plaza which was funded by the
A. Cacayuran’s standing to sue proceeds of the Subject Loans. It is well-settled that public plazas are
properties for public useand therefore, belongs to the public dominion. As
Land Bank claims that Cacayuran did not have any standing to contest the such, it can be used by anybody and no one can exercise over it the rights of
construction of the APC as it was funded through the proceeds coming from a private owner. In this light, Cacayuran had a direct interest in ensuring that
the Subject Loans and not from public funds. Besides, Cacayuran was not the Agoo Plaza would not be exploited for commercial purposes through the
even a party to any of the Subject Loans and is thus, precluded from APC’s construction. Moreover, Cacayuran need not be privy to the Subject
questioning the same. Loans in order to proffer his objections thereto. In Mamba v. Lara, it has been
held that a taxpayer need not be a party to the contract to challenge its
The argument is untenable. validity; as long as taxes are involved, people have a right to question
contracts entered into by the government.
It is hornbook principle that a taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed, or that public money is being Therefore, as the above-stated requisites obtain in this case, Cacayuran has
deflected to any improper purpose, or that there is wastage of public funds standing to file the instant suit.
through the enforcement of an invalid or unconstitutional law. A person suing
as a taxpayer, however, must show that the act complained of directly
involves the illegal disbursement of public funds derived from taxation. In
other words, for a taxpayer’s suit to prosper, two requisites must be met
namely, (1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed; and (2) the petitioner is directly affected by the
alleged act.

Records reveal that the foregoing requisites are present in the instant case.

First, although the construction of the APC would be primarily sourced from
the proceeds of the Subject Loans, which Land Bank insists are not
LAW v REGULATION
Whether or not the RTC erred in nullifying Section 11 of RR 17-2012 and
[ G.R. No. 210251, April 17, 2017 ] Annex "D-1" of RMC 90-2012 in imposing excise tax to packaging
combinations of 5's, 10's, etc. not exceeding 20 cigarette sticks packed by
SECRETARY OF FINANCE CESAR V. PURISIMA AND COMMISSIONER machine.
OF INTERNAL REVENUE KIM S. JACINTO-HENARES, PETITIONERS,
VS. PHILIPPINE TOBACCO INSTITUTE, INC., RESPONDENT. THE COURT'S RULING

FACTS The petition lacks merit.

On 20 December 2012, President Benigno S. Aquino III signed Republic Act
No. 10351[5] (RA 10351), otherwise known as the Sin Tax Reform Law. RA Section 145(C) of the NIRC is clear that the excise tax on cigarettes packed
10351 restructured the excise tax on alcohol and tobacco products by by machine is imposed per pack. "Per pack" was not given a clear definition
amending pertinent provisions of Republic Act No. 8424,[6] known as the Tax by the NIRC. However, a "pack" would normally refer to a number of
Reform Act of 1997 or the National Internal Revenue Code of 1997 (NIRC). individual components packaged as a unit.[10] Under the same provision,
cigarette manufacturers are permitted to bundle cigarettes packed by
Section 5 of RA 10351, which amended Section 145(C) of the NIRC, machine in the maximum number of 20 sticks and aside from 20's, the law
increased the excise tax rate of cigars and cigarettes and allowed cigarettes also allows packaging combinations of not more than 20's - it can be 4
packed by machine to be packed in other packaging combinations of not pouches of 5 cigarette sticks in a pack (4 x 5's), 2 pouches of 10 cigarette
more than 20. The relevant portions state: sticks in a pack (2 x 10's), etc.
SEC. 5. Section 145 of the National Internal Revenue Code of 1997, as
amended by Republic Act No. 9334 Based on this maximum packaging and allowable combinations, the BIR,
with RA 10351 as basis, issued RR 17-2012. Section 11 of RR 17-2012,
On 21 December 2012, the Secretary of Finance, upon the recommendation which provides for the manner of packaging cigarettes, states:
of the Commissioner of Internal Revenue (CIR), issued RR 17-2012. Section SEC. 11. Revised Provisions for the Manner of Packaging of Cigarettes. - All
11 of RR 17-2012 imposes an excise tax on individual cigarette pouches of Cigarettes whether packed by hand or packed by machine shall only be
5's and 10's even if they are bundled or packed in packaging combinations packed in twenties (20s), and through other packaging combinations which
not exceeding 20 cigarettes. shall result to not more than twenty sticks of cigarettes: Provided, That, in
case of cigarettes packed in not more than twenty sticks, whether in 5
PMFTC, Inc., a member of respondent Philippine Tobacco Institute, Inc. sticks, 10 sticks and other packaging combinations below 20 slicks, the
(PTI), paid the excise taxes required under RA 10351, RR 17-2012, and net retail price of each individual package of 5s, 10s, etc. shall be the
RMC 90-2012 in order to withdraw cigarettes from its manufacturing facilities. basis of imposing the tax rate prescribed under the Act. (Emphasis
However, on 16 January 2012, PMFTC wrote the CIR prior to the payment of supplied)
the excise taxes stating that payment was being made under protest and The BIR also released RMC 90-2012, specifically Annex "D-1" on Cigarettes
without prejudice to its right to question said issuances through remedies Packed by Machine, in accordance with RA 10351 and RR 17-2012, showing
available under the law. in tabular form the different brands of locally-manufactured cigarettes packed
by machine with the brand names, content/unit (pack), net retail price, and
As a consequence, on 26 February 2013, PTI filed a petition[7] for declaratory the applicable excise tax rates effective 1 January 2013. The net retail price
relief with an application for writ of preliminary injunction with the RTC. PTI of some brand names was converted into individual packages of 5's or 10's
sought to have RR 17-2012 and RMC 90-2012 declared null and void for pursuant to Section 11 of RR 17-2012.
allegedly violating the Constitution and imposing tax rates not authorized by
RA 10351. PTI stated that the excise tax rate of either P12 or P25 under RA In the laws preceding RA 10351 - RA 8240[11] and RA 9334,[12] both
10351 should be imposed only on cigarettes packed by machine in packs of amendments to the excise tax rates provisions of the NIRC dealing with
20's or packaging combinations of 20's and should not be imposed on cigarettes packed by machine, which took effect in 1997 and 2005,
cigarette pouches of 5's and 10's. respectively, provided that all "duly registered or existing brands of cigarettes
or new brands thereof packed by machine shall only be packed in twenties."
ISSUE
The confusion set in when RA 10351 amended the NIRC once again in 2012 In this case, Section 11 of RR 17-2012 and Annex "D-1" on Cigarettes
and introduced packaging combinations to cigarettes packed by machine, Packed by Machine of RMC 90-2012 clearly contravened the provisions of
providing that "duly registered cigarettes packed by machine shall only be RA 10351. It is a well-settled principle that a revenue regulation cannot
packed in twenties and other packaging combinations of not more than amend the law it seeks to implement.
twenty."
In the present case, a reading of Section 11 of RR 17-2012 and Annex "D-1"
Thereafter, RR 17-2012 followed, where the BIR, in Section 11, reiterated the on Cigarettes Packed by Machine of RMC 90-2012 reveals that they are not
provision in the NIRC that cigarettes shall only be packed in 20's and in other simply regulations to implement RA 10351. They are amendatory provisions
packaging combinations which shall not exceed 20 sticks. However, the BIR which require cigarette manufacturers to be liable to pay for more tax than
added "x x x That, in case of cigarettes packed in not more than twenty the law, RA 10351, allows. The BIR, in issuing these revenue regulations,
sticks, whether in 5 sticks, 10 sticks and other packaging combinations created an additional tax liability for packaging combinations smaller than 20
below 20 sticks, the net retail price of each individual package of 5s, cigarette sticks. In so doing, the BIR amended the law, an act beyond the
10s, etc. shall be the basis of imposing the tax rate x x x." power of the BIR to do.

The basis of RR 17-2012 is RA 10351. RA 10351, in amending Section In sum, we agree with the ruling of the RTC that Section 11 of RR 17-2012
145(C) of the NIRC provided that "duly registered cigarettes packed by and Annex "D-1" on Cigarettes Packed by Machine of RMC 90-2012 are null
machine shall only be packed in twenties and other packaging combinations and void. Excise tax on cigarettes packed by machine shall be imposed on
of not more than twenty." However, nowhere is it mentioned that the other the packaging combination of 20 cigarette sticks as a whole and not to
packaging combinations of not more than 20 will be imposed individual tax individual packaging combinations or pouches of 5's, 10's, etc.
rates based on its different packages of 5's, 10's, etc. In such a case, a
cigarette pack of 20's will only be subjected to an excise tax rate of P12.00
per pack as opposed to packaging combinations of 5's or 10's which will be
subjected to a higher excise tax rate of P24.00 for 10's and P48.00 for 5's.

During the Bicameral Conference Committee on the Disagreeing Provisions

of Senate Bill No. 3299 and House Bill No. 5727 dealing with the Sin Tax bills
of the 15th Congress, before these bills were enacted into RA 10351, our
lawmakers and Kim S. Jacinto-Henares, the CIR at the time, deliberated on
the packaging of cigarettes.

It can be gleaned that the lawmakers intended to impose the excise tax on
every pack of cigarettes that come in 20 sticks. Individual pouches or
packaging combinations of 5's and 10's for retail purposes are allowed and
will be subjected to the same excise tax rate as long as they are bundled
together by not more than 20 sticks. Thus, by issuing Section 11 of RR 17-
2012 and Annex "D-1" on Cigarettes Packed by Machine of RMC 90-2012,
the BIR went beyond the express provisions of RA 10351.

It is an elementary rule in administrative law that administrative rules and

regulations enacted by administrative bodies to implement the law which they
are entrusted to enforce have the force of law and are entitled to great weight
and respect. However, these implementations of the law must not override,
supplant, or modify the law but must remain consistent with the law they
intend to implement. It is only Congress which has the power to repeal or
amend the law.
INHERENT LIMITATIONS 2. — Do Ordinances Nos. 23 and 27 constitute double
taxation and impose percentage or specific taxes?
Delegation to LGUs
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
G.R. No. L-31156 February 27, 1976
1. The power of taxation is an essential and inherent attribute of sovereignty,
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff- belonging as a matter of right to every independent government, without
appellant, being expressly conferred by the people. It is a power that is purely
vs. legislative and which the central legislative body cannot delegate either to the
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET executive or judicial department of the government without infringing upon
AL., defendant appellees. the theory of separation of powers. The exception, however, lies in the case
of municipal corporations, to which, said theory does not apply. Legislative
FACTS: powers may be delegated to local governments in respect of matters of local
concern. This is sanctioned by immemorial practice. By necessary
implication, the legislative power to create political corporations for purposes
Plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
of local self-government carries with it the power to confer on such local
commenced a complaint with preliminary injunction for that court to declare
governmental agencies the power to tax. Under the New Constitution, local
Section 2 of Republic Act No. 2264 otherwise known as the Local Autonomy
governments are granted the autonomous authority to create their own
Act, unconstitutional as an undue delegation of taxing authority as well as to
sources of revenue and to levy taxes. Section 5, Article XI provides: "Each
declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of
local government unit shall have the power to create its sources of revenue
Tanauan, Leyte, null and void.
and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on from beyond the sphere of the legislative power to enact and vest in local
September 25, 1962, levies and collects "from soft drinks producers and governments the power of local taxation.
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of
soft drink corked." For the purpose of computing the taxes due, the person,
The plenary nature of the taxing power thus delegated, contrary to plaintiff-
firm, company or corporation producing soft drinks shall submit to the
appellant's pretense, would not suffice to invalidate the said law as
Municipal Treasurer a monthly report, of the total number of bottles produced
confiscatory and oppressive. In delegating the authority, the State is not
and corked during the month.
limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it
On the other hand, Municipal Ordinance No. 27, which was approved on is meant that there may be delegated such measure of power to impose and
October 28, 1962, levies and collects "on soft drinks produced or collect taxes as the legislature may deem expedient. Thus, municipalities
manufactured within the territorial jurisdiction of this municipality a tax of ONE may be permitted to tax subjects which for reasons of public policy the State
CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume has not deemed wise to tax for more general purposes. This is not to say
capacity." 4 For the purpose of computing the taxes due, the person, fun though that the constitutional injunction against deprivation of property
company, partnership, corporation or plant producing soft drinks shall submit without due process of law may be passed over under the guise of the taxing
to the Municipal Treasurer a monthly report of the total number of gallons power, except when the taking of the property is in the lawful exercise of the
produced or manufactured during the month. 5 taxing power, as when (1) the tax is for a public purpose; (2) the rule on
uniformity of taxation is observed; (3) either the person or property taxed is
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as within the jurisdiction of the government levying the tax; and (4) in the
"municipal production tax.' assessment and collection of certain kinds of taxes notice and opportunity for
hearing are provided. Due process is usually violated where the tax imposed
There are three capital questions raised in this appeal: is for a private as distinguished from a public purpose; a tax is imposed on
property outside the State, i.e., extraterritorial taxation; and arbitrary or
1. — Is Section 2, Republic Act No. 2264 an undue oppressive methods are used in assessing and collecting taxes. But, a tax
delegation of power, confiscatory and oppressive? does not violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a benefit to
such taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial inquiry,
and a notice and hearing as to the amount of the tax and the manner in
which it shall be apportioned are generally not necessary to due process of
law.

There is no validity to the assertion that the delegated authority can be

declared unconstitutional on the theory of double taxation. It must be
observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. The
reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction
against double taxation found in the Constitution of the United States and
some states of the Union. Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same governmental entity or
by the same jurisdiction for the same purpose, but not in a case where one
tax is imposed by the State and the other by the city or municipality.
INHERENT LIMITATIONS (ii) national government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 ½%).
Delegation to the president
SEC. 5. Section 107 of the same Code, as amended, is hereby further
G.R. No. 168056 September 1, 2005 amended to read as follows:

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON SEC. 107. Value-Added Tax on Importation of Goods. –
S. ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs. (A) In General. – There shall be levied, assessed and collected on every
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; importation of goods a value-added tax equivalent to ten percent (10%)
HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR based on the total value used by the Bureau of Customs in determining tariff
PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL and customs duties, plus customs duties, excise taxes, if any, and other
REVENUE GUILLERMO PARAYNO, JR., Respondent. charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are
A. No Undue Delegation of Legislative Power determined on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, if
any: provided, further, that the President, upon the recommendation of
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and
the Secretary of Finance, shall, effective January 1, 2006, raise the rate
Escudero,  et al. contend in common that Sections 4, 5 and 6 of R.A. No.
of value-added tax to twelve percent (12%) after any of the following
9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving
conditions has been satisfied.
the President the stand-by authority to raise the VAT rate from 10% to 12%
when a certain condition is met, constitutes undue delegation of the
legislative power to tax. (i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%) or
The assailed provisions read as follows:

(ii) national government deficit as a percentage of GDP of the previous

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended
year exceeds one and one-half percent (1 ½%).
to read as follows:

SEC. 6. Section 108 of the same Code, as amended, is hereby further

SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
amended to read as follows:
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
every sale, barter or exchange of goods or properties, a value-added tax
Properties –
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: provided, that the President, upon the (A) Rate and Base of Tax. – There shall be levied, assessed and collected, a
recommendation of the Secretary of Finance, shall, effective January 1, value-added tax equivalent to ten percent (10%) of gross receipts derived
2006, raise the rate of value-added tax to twelve percent (12%), after any from the sale or exchange of services: provided, that the President, upon
of the following conditions has been satisfied. the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%) or (i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous A brief discourse on the principle of non-delegation of powers is instructive.
year exceeds one and one-half percent (1 ½%). (Emphasis supplied)
The principle of separation of powers ordains that each of the three great
Petitioners allege that the grant of the stand-by authority to the President to branches of government has exclusive cognizance of and is supreme in
increase the VAT rate is a virtual abdication by Congress of its exclusive matters falling within its own constitutionally allocated sphere.37 A logical
power to tax because such delegation is not within the purview of Section 28
(2), Article VI of the Constitution, which provides: corollary to the doctrine of separation of powers is the principle of non-
delegation of powers, as expressed in the Latin maxim: potestas delegata
The Congress may, by law, authorize the President to fix within specified non delegari potest which means "what has been delegated, cannot be
limits, and may impose, tariff rates, import and export quotas, tonnage and delegated."38 This doctrine is based on the ethical principle that such as
wharfage dues, and other duties or imposts within the framework of the delegated power constitutes not only a right but a duty to be performed by
national development program of the government. the delegate through the instrumentality of his own judgment and not through
the intervening mind of another.39
They argue that the VAT is a tax levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of services, which With respect to the Legislature, Section 1 of Article VI of the Constitution
cannot be included within the purview of tariffs under the exempted provides that "the Legislative power shall be vested in the Congress of the
delegation as the latter refers to customs duties, tolls or tribute payable upon Philippines which shall consist of a Senate and a House of Representatives."
merchandise to the government and usually imposed on goods or The powers which Congress is prohibited from delegating are those which
merchandise imported or exported. are strictly, or inherently and exclusively, legislative. Purely legislative power,
which can never be delegated, has been described as the authority to make
Petitioners ABAKADA GURO Party List, et al., further contend that a complete law – complete as to the time when it shall take effect and
delegating to the President the legislative power to tax is contrary to as to whom it shall be applicable – and to determine the expediency of
republicanism. They insist that accountability, responsibility and transparency its enactment.40 Thus, the rule is that in order that a court may be justified in
should dictate the actions of Congress and they should not pass to the holding a statute unconstitutional as a delegation of legislative power, it must
President the decision to impose taxes. They also argue that the law also appear that the power involved is purely legislative in nature – that is, one
effectively nullified the President’s power of control, which includes the appertaining exclusively to the legislative department. It is the nature of the
authority to set aside and nullify the acts of her subordinates like the power, and not the liability of its use or the manner of its exercise, which
Secretary of Finance, by mandating the fixing of the tax rate by the President determines the validity of its delegation.
upon the recommendation of the Secretary of Finance.
Nonetheless, the general rule barring delegation of legislative powers is
Petitioners Pimentel,  et al. aver that the President has ample powers to subject to the following recognized limitations or exceptions:
cause, influence or create the conditions provided by the law to bring about
either or both the conditions precedent. (1) Delegation of tariff powers to the President under Section 28 (2) of Article
VI of the Constitution;
On the other hand, petitioners Escudero, et al. find bizarre and revolting the
situation that the imposition of the 12% rate would be subject to the whim of (2) Delegation of emergency powers to the President under Section 23 (2) of
the Secretary of Finance, an unelected bureaucrat, contrary to the principle Article VI of the Constitution;
of no taxation without representation. They submit that the Secretary of
Finance is not mandated to give a favorable recommendation and he may (3) Delegation to the people at large;
not even give his recommendation. Moreover, they allege that no guiding
standards are provided in the law on what basis and as to how he will make (4) Delegation to local governments; and
his recommendation. They claim, nonetheless, that any recommendation of
the Secretary of Finance can easily be brushed aside by the President since
the former is a mere alter ego of the latter, such that, ultimately, it is the (5) Delegation to administrative bodies.
President who decides whether to impose the increased tax rate or not.
In every case of permissible delegation, there must be a showing that the Constitutional Limitations finds restatement in Prof. Willoughby's treatise on
delegation itself is valid. It is valid only if the law (a) is complete in itself, the Constitution of the United States in the following language — speaking of
setting forth therein the policy to be executed, carried out, or implemented by declaration of legislative power to administrative agencies: The principle
the delegate;41 and (b) fixes a standard — the limits of which are sufficiently which permits the legislature to provide that the administrative agent
determinate and determinable — to which the delegate must conform in the may determine when the circumstances are such as require the
performance of his functions.42 A sufficient standard is one which defines application of a law is defended upon the ground that at the time this
legislative policy, marks its limits, maps out its boundaries and specifies the authority is granted, the rule of public policy, which is the essence of
public agency to apply it. It indicates the circumstances under which the the legislative act, is determined by the legislature. In other words, the
legislative command is to be effected.43 Both tests are intended to prevent a legislature, as it is its duty to do, determines that, under given
total transference of legislative authority to the delegate, who is not allowed circumstances, certain executive or administrative action is to be taken,
to step into the shoes of the legislature and exercise a power essentially and that, under other circumstances, different or no action at all is to be
legislative.44 taken. What is thus left to the administrative official is not the
legislative determination of what public policy demands, but simply the
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, ascertainment of what the facts of the case require to be done
expounded on the concept and extent of delegation of power in this wise: according to the terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative will must, of course,
come from Congress, but the ascertainment of the contingency upon
In testing whether a statute constitutes an undue delegation of legislative
which the Act shall take effect may be left to such agencies as it may
power or not, it is usual to inquire whether the statute was complete in all its
designate. The legislature, then, may provide that a law shall take effect
terms and provisions when it left the hands of the legislature so that nothing
upon the happening of future specified contingencies leaving to some
was left to the judgment of any other appointee or delegate of the legislature.
other person or body the power to determine when the specified
contingency has arisen.
...
In Edu vs. Ericta,47 the Court reiterated:
‘The true distinction’, says Judge Ranney, ‘is between the delegation of
power to make the law, which necessarily involves a discretion as to
What cannot be delegated is the authority under the Constitution to make
what it shall be, and conferring an authority or discretion as to its
laws and to alter and repeal them; the test is the completeness of the statute
execution, to be exercised under and in pursuance of the law. The first
in all its terms and provisions when it leaves the hands of the legislature. To
cannot be done; to the latter no valid objection can be made.’
determine whether or not there is an undue delegation of legislative power,
the inquiry must be directed to the scope and definiteness of the measure
... enacted. The legislative does not abdicate its functions when it
describes what job must be done, who is to do it, and what is the scope
It is contended, however, that a legislative act may be made to the effect as of his authority. For a complex economy, that may be the only way in which
law after it leaves the hands of the legislature. It is true that laws may be the legislative process can go forward. A distinction has rightfully been
made effective on certain contingencies, as by proclamation of the executive made between delegation of power to make the laws which necessarily
or the adoption by the people of a particular community. In Wayman vs. involves a discretion as to what it shall be, which constitutionally may
Southard, the Supreme Court of the United States ruled that the legislature not be done, and delegation of authority or discretion as to its
may delegate a power not legislative which it may itself rightfully execution to be exercised under and in pursuance of the law, to which
exercise. The power to ascertain facts is such a power which may be no valid objection can be made. The Constitution is thus not to be
delegated. There is nothing essentially legislative in ascertaining the regarded as denying the legislature the necessary resources of flexibility and
existence of facts or conditions as the basis of the taking into effect of practicability. (Emphasis supplied).48
a law. That is a mental process common to all branches of the
government. Notwithstanding the apparent tendency, however, to relax the Clearly, the legislature may delegate to executive officers or bodies the
rule prohibiting delegation of legislative authority on account of the power to determine certain facts or conditions, or the happening of
complexity arising from social and economic forces at work in this modern contingencies, on which the operation of a statute is, by its terms, made to
industrial age, the orthodox pronouncement of Judge Cooley in his work on depend, but the legislature must prescribe sufficient standards, policies or
limitations on their authority.49 While the power to tax cannot be delegated to denotes an imperative obligation and is inconsistent with the idea of
executive agencies, details as to the enforcement and administration of an discretion.53 Where the law is clear and unambiguous, it must be taken to
exercise of such power may be left to them, including the power to determine mean exactly what it says, and courts have no choice but to see to it that the
the existence of facts on which its operation depends.50 mandate is obeyed.54

The rationale for this is that the preliminary ascertainment of facts as basis Thus, it is the ministerial duty of the President to immediately impose the
for the enactment of legislation is not of itself a legislative function, but is 12% rate upon the existence of any of the conditions specified by Congress.
simply ancillary to legislation. Thus, the duty of correlating information and This is a duty which cannot be evaded by the President. Inasmuch as the law
making recommendations is the kind of subsidiary activity which the specifically uses the word shall, the exercise of discretion by the President
legislature may perform through its members, or which it may delegate to does not come into play. It is a clear directive to impose the 12% VAT rate
others to perform. Intelligent legislation on the complicated problems of when the specified conditions are present. The time of taking into effect of
modern society is impossible in the absence of accurate information on the the 12% VAT rate is based on the happening of a certain specified
part of the legislators, and any reasonable method of securing such contingency, or upon the ascertainment of certain facts or conditions by a
information is proper.51 The Constitution as a continuously operative charter person or body other than the legislature itself.
of government does not require that Congress find for itself
The Court finds no merit to the contention of petitioners ABAKADA
every fact upon which it desires to base legislative action or that it make for GURO  Party List, et al. that the law effectively nullified the President’s power
itself detailed determinations which it has declared to be prerequisite to of control over the Secretary of Finance by mandating the fixing of the tax
application of legislative policy to particular facts and circumstances rate by the President upon the recommendation of the Secretary of Finance.
impossible for Congress itself properly to investigate.52 The Court cannot also subscribe to the position of petitioners

In the present case, the challenged section of R.A. No. 9337 is the Pimentel,  et al. that the word shall should be interpreted to mean may in view
common proviso in Sections 4, 5 and 6 which reads as follows: of the phrase "upon the recommendation of the Secretary of Finance."
Neither does the Court find persuasive the submission of petitioners
That the President, upon the recommendation of the Secretary of Finance, Escudero,  et al. that any recommendation by the Secretary of Finance can
shall, effective January 1, 2006, raise the rate of value-added tax to twelve easily be brushed aside by the President since the former is a mere alter ego
percent (12%), after any of the following conditions has been satisfied: of the latter.

(i) Value-added tax collection as a percentage of Gross Domestic Product When one speaks of the Secretary of Finance as the alter ego of the
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or President, it simply means that as head of the Department of Finance he is
the assistant and agent of the Chief Executive. The multifarious executive
and administrative functions of the Chief Executive are performed by and
(ii) National government deficit as a percentage of GDP of the previous year
through the executive departments, and the acts of the secretaries of such
exceeds one and one-half percent (1 ½%).
departments, such as the Department of Finance, performed and
promulgated in the regular course of business, are, unless disapproved or
The case before the Court is not a delegation of legislative power. It is simply reprobated by the Chief Executive, presumptively the acts of the Chief
a delegation of ascertainment of facts upon which enforcement and Executive. The Secretary of Finance, as such, occupies a political position
administration of the increase rate under the law is contingent. The and holds office in an advisory capacity, and, in the language of Thomas
legislature has made the operation of the 12% rate effective January 1, 2006, Jefferson, "should be of the President's bosom confidence" and, in the
contingent upon a specified fact or condition. It leaves the entire operation or language of Attorney-General Cushing, is "subject to the direction of the
non-operation of the 12% rate upon factual matters outside of the control of President."55
the executive.
In the present case, in making his recommendation to the President on the
No discretion would be exercised by the President. Highlighting the absence existence of either of the two conditions, the Secretary of Finance is not
of discretion is the fact that the word shall is used in the common proviso. acting as the alter ego of the President or even her subordinate. In such
The use of the word shall connotes a mandatory order. Its use in a statute
instance, he is not subject to the power of control and direction of the
President. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take
effect.56 The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and
collate statistical data and other pertinent information and verify if any of the
two conditions laid out by Congress is present. His personality in such
instance is in reality but a projection of that of Congress. Thus, being the
agent of Congress and not of the President, the President cannot alter or
modify or nullify, or set aside the findings of the Secretary of Finance and to
substitute the judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain

the existence of a fact, namely, whether by December 31, 2005, the value-
added tax collection as a percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1½%). If either of these two instances has occurred,
the Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no undue delegation of
legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible.57 Congress does not abdicate its
functions or unduly delegate power when it describes what job must be done,
who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can
go forward.58

As to the argument of petitioners ABAKADA GURO Party List, et al. that

delegating to the President the legislative power to tax is contrary to the
principle of republicanism, the same deserves scant consideration. Congress
did not delegate the power to tax but the mere implementation of the law.
The intent and will to increase the VAT rate to 12% came from Congress and
the task of the President is to simply execute the legislative policy. That
Congress chose to do so in such a manner is not within the province of the
Court to inquire into, its task being to interpret the law.59

The insinuation by petitioners Pimentel,  et al. that the President has ample

powers to cause, influence or create the conditions to bring about either or
both the conditions precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations which are
manifestly conjectural, as these may not exist at all. The Court deals with
facts, not fancies; on realities, not appearances. When the Court acts on
appearances instead of realities, justice and law will be short-lived.
CONSTITUTIONAL LIMITATIONS Different groups came to this Court via petitions for certiorari and
prohibition assailing the validity and constitutionality of R.A. No. 9337
Due Process and Equal Protection
On September 1, 2005, the Court dismissed all the petitions and upheld the
G.R. No. 172087               March 15, 2011 constitutionality of R.A. No. 9337.

PHILIPPINE AMUSEMENT AND GAMING CORPORATION On the same date, respondent BIR issued Revenue Regulations (RR) No.
(PAGCOR), Petitioner, 16-200, specifically identifying PAGCOR as one of the franchisees subject to
vs. 10% VAT imposed under Section 108 of the National Internal Revenue Code
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by of 1997, as amended by R.A. No. 9337.
HON. JOSE MARIO BUÑAG, in his official capacity as COMMISSIONER
OF INTERNAL REVENUE, Public Respondent, ISSUE:
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or
under the authority of Respondent. Public and Private Respondents. Whether or not ra 9337, section 1 (c) is null and void ab initio for being
repugnant to the equal protection [clause] embodied in section 1, article iii of
DECISION the 1987 constitution.

FACTS: RULING:

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-Aon Equal protection requires that all persons or things similarly situated should
January 1, 1977. Several more PD’s were created which defined PAGCOR’s be treated alike, both as to rights conferred and responsibilities imposed.
powers, functions, and the scope of exemption. To consolidate these laws, Similar subjects, in other words, should not be treated differently, so as to
P.D. No. 1869 was issued. Section 13 enumerated the list wherein PAGCOR give undue favor to some and unjustly discriminate against others. The
will be exempted from paying taxes. guarantee means that no person or class of persons shall be denied the
same protection of laws which is enjoyed by other persons or other classes in
PAGCOR's tax exemption was removed in June 1984 through P.D. No. like circumstances. The "equal protection of the laws is a pledge of the
1931, but it was later restored by Letter of Instruction No. 1430, which was protection of equal laws." It limits governmental discrimination. The equal
issued in September 1984. protection clause extends to artificial persons but only insofar as their
property is concerned.
On January 1, 1998, R.A. No. 8424, otherwise known as the National
Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 xxxx
provides that government-owned and controlled corporations (GOCCs) shall
pay corporate income tax, except petitioner PAGCOR, the Government Legislative bodies are allowed to classify the subjects of legislation. If the
Service and Insurance Corporation, the Social Security System, the classification is reasonable, the law may operate only on some and not all of
Philippine Health Insurance Corporation, and the Philippine Charity the people without violating the equal protection clause. The classification
Sweepstakes Office. must, as an indispensable requisite, not be arbitrary. To be valid, it must
conform to the following requirements:
With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of
the National Internal Revenue Code of 1997 were amended. The particular 1) It must be based on substantial distinctions.
amendment that is at issue in this case is Section 1 of R.A. No. 9337, which
amended Section 27 (c) of the National Internal Revenue Code of 1997 by 2) It must be germane to the purposes of the law.
excluding PAGCOR from the enumeration of GOCCs that are exempt from
payment of corporate income tax. 3) It must not be limited to existing conditions only.
 4) It must apply equally to all members of the class. tax, expressed in the maxim: exceptio firmat regulam in casibus non
exceptis.
It is not contested that before the enactment of R.A. No. 9337, petitioner was
one of the five GOCCs exempted from payment of corporate income tax as PAGCOR cannot find support in the equal protection clause of the
shown in R.A. No. 8424, Section 27 (c) Constitution, as the legislative records of the Bicameral Conference Meeting
dated October 27, 1997, of the Committee on Ways and Means, show that
A perusal of the legislative records of the Bicameral Conference Meeting of PAGCOR’s exemption from payment of corporate income tax, as provided in
the Committee on Ways on Means dated October 27, 1997 would show that Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of
the exemption of PAGCOR from the payment of corporate income tax was 1997, was not made pursuant to a valid classification based on substantial
due to the acquiescence of the Committee on Ways on Means to the request distinctions and the other requirements of a reasonable classification by
of PAGCOR that it be exempt from such tax. legislative bodies, so that the law may operate only on some, and not all,
without violating the equal protection clause. The legislative records show
that the basis of the grant of exemption to PAGCOR from corporate income
The discussion above bears out that under R.A. No. 8424, the exemption of
tax was PAGCOR’s own request to be exempted.
PAGCOR from paying corporate income tax was not based on a
classification showing substantial distinctions which make for real
differences, but to reiterate, the exemption was granted upon the request of
PAGCOR that it be exempt from the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424,
PAGCOR has been excluded from the enumeration of GOCCs that are
exempt from paying corporate income tax. The records of the Bicameral
Conference Meeting dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555,
show that it is the legislative intent that PAGCOR be subject to the payment
of corporate income tax.

Taxation is the rule and exemption is the exception. The burden of proof
rests upon the party claiming exemption to prove that it is, in fact, covered by
the exemption so claimed. As a rule, tax exemptions are construed strongly
against the claimant. Exemptions must be shown to exist clearly and
categorically, and supported by clear legal provision.

In this case, PAGCOR failed to prove that it is still exempt from the payment
of corporate income tax, considering that Section 1 of R.A. No. 9337
amended Section 27 (c) of the National Internal Revenue Code of 1997 by
omitting PAGCOR from the exemption. The legislative intent, as shown by
the discussions in the Bicameral Conference Meeting, is to require PAGCOR
to pay corporate income tax; hence, the omission or removal of PAGCOR
from exemption from the payment of corporate income tax. It is a basic
precept of statutory construction that the express mention of one person,
thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius. Thus, the express mention of
the GOCCs exempted from payment of corporate income tax excludes all
others. Not being excepted, petitioner PAGCOR must be regarded as coming
within the purview of the general rule that GOCCs shall pay corporate income
CONSTITUTIONAL LIMITATIONS likewise made additional payments under protest on various dates totaling
P27,669,566.91.
Non-impairment of obligation of contracts / Grant of Franchise
ISSUE:
G.R. No. 131359 May 5, 1999
Whether the imposition of a franchise tax under Section 2.09 of Laguna
MANILA ELECTRIC COMPANY, petitioner, Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is
vs. violative of the non-impairment clause of the Constitution and Section 1 of
PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Presidential Decree No. 551.
Provincial Treasurer of Laguna, respondents.
RULING:
FACTS:
The petition lacks merit.
On various dates, certain municipalities of the Province of Laguna, issued
resolutions through their respective municipal councils granting franchise in Prefatorily, it might be well to recall that local governments do not have the
favor of petitioner Manila Electric Company ("MERALCO") for the supply of inherent power to tax except to the extent that such power might be
electric light, heat and power within their concerned areas. On 19 January delegated to them either by the basic law or by statute. Presently, under
1983, MERALCO was likewise granted a franchise by the National Article X of the 1987 Constitution, a general delegation of that power has
Electrification Administration to operate an electric light and power service in been given in favor of local government units.
the Municipality of Calamba, Laguna.
Under the now prevailing Constitution, where there is neither a grant nor a
Republic Act No. 7160, otherwise known as the "Local Government Code of prohibition by statute, the tax power must be deemed to exist although
1991," was enacted to take effect on 01 January 1992 enjoining local Congress may provide statutory limitations and guidelines. The basic
government units to create their own sources of revenue and to levy taxes, rationale for the current rule is to safeguard the viability and self-sufficiency of
fees and charges, subject to the limitations expressed therein, consistent with local government units by directly granting them general and broad tax
the basic policy of local autonomy. powers. Nevertheless, the fundamental law did not intend the delegation to
be absolute and unconditional; the constitutional objective obviously is to
On the basis of the above ordinance, respondent Provincial Treasurer sent a ensure that, while the local government units are being strengthened and
demand letter to MERALCO for the corresponding tax payment. Petitioner made more autonomous, the legislature must still see to it that (a) the
MERALCO paid the tax under protest. A formal claim for refund was taxpayer will not be over-burdened or saddled with multiple and
thereafter sent by MERALCO to the Provincial Treasurer of Laguna claiming unreasonable impositions; (b) each local government unit will have its fair
that the franchise tax it had paid and continued to pay to the National share of available resources; (c) the resources of the national government
Government pursuant to P.D. 551 already included the franchise tax imposed will not be unduly disturbed; and (d) local taxation will be fair, uniform, and
by the Provincial Tax Ordinance. just.

The claim for refund of petitioner was denied in a letter signed by Governor The Local Government Code of 1991 has incorporated and adopted, by and
Jose D. Lina relied on a more recent law, i.e. Republic Act No. 7160 or the large, the provisions of the now repealed Local Tax Code, which had been in
Local Government Code of 1991, than the old decree invoked by petitioner. effect since 01 July 1973, promulgated into law by Presidential Decree No.
231 pursuant to the then provisions of Section 2, Article XI, of the 1973
Constitution. The 1991 Code explicitly authorizes provincial governments,
MERALCO filed with the Regional Trial Court of Sta. Cruz, Laguna, a
notwithstanding "any exemption granted by any law or other special law, . . .
complaint for refund, with a prayer for the issuance of a writ of preliminary
(to) impose a tax on businesses enjoying a franchise."
injunction and/or temporary restraining order, against the Province of Laguna
and also Benito R. Balazo in his capacity as the Provincial Treasurer of
Laguna. Aside from the amount of P19,520,628.42 for which petitioner Indicative of the legislative intent to carry out the Constitutional mandate of
MERALCO had priorly made a formal request for refund, petitioner thereafter vesting broad tax powers to local government units, the Local Government
Code has effectively withdrawn under Section 193 thereof, tax exemptions or government, acting in its private capacity, sheds its cloak of authority and
incentives theretofore enjoyed by certain entities. This law states: waives its governmental immunity. Truly, tax exemptions of this kind may not
be revoked without impairing the obligations of contracts. These contractual
Sec. 193. Withdrawal of Tax Exemption Privileges — Unless tax exemptions, however, are not to be confused with tax exemptions
otherwise provided in this Code, tax exemptions or granted under franchises. A franchise partakes the nature of a grant which is
incentives granted to, or presently enjoyed by all persons, beyond the purview of the non-impairment clause of the Constitution. Indeed,
whether natural or juridical, including government-owned or Article XII, Section 11, of the 1987 Constitution, like its precursor provisions
controlled corporations, except local water districts, in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
cooperatives duly registered under R.A. No. 6938, non-stock operation of a public utility shall be granted except under the condition that
and non-profit hospitals and educational institutions, are such privilege shall be subject to amendment, alteration or repeal by
hereby withdrawn upon the effectivity of this Code. Congress as and when the common good so requires.
(Underscoring supplied for emphasis)
[G.R. NO. 155491, September 16, 2008]
The Code, in addition, contains a general repealing clause in its Section 534;
thus: SMART COMMUNICATIONS, INC., Petitioner, v. THE CITY OF DAVAO,
REPRESENTED HEREIN BY ITS MAYOR HON. RODRIGO R. DUTERTE,
Sec. 534. Repealing Clause. — . . . AND THE SANGGUNIANG PANLUNGSOD OF DAVAO
CITY, Respondents.
(f) All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative FACTS
regulations, or part or parts thereof which are inconsistent
with any of the provisions of this Code are hereby repealed Smart filed a special civil action for declaratory relief under Rule 63 of the
or modified accordingly. (Underscoring supplied for Rules of Court, for the ascertainment of its rights and obligations under the
emphasis) 8 Tax Code of the City of Davao.

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Smart contends that its telecenter in Davao City is exempt from payment of
Bienvenido V. Reyes, et al., 13 the Court has held that the phrase in lieu of all franchise tax to the City, on the following grounds: (a) the issuance of its
taxes "have to give way to the peremptory language of the Local Government franchise under Republic Act (R.A.) No. 7294 subsequent to R.A. No. 7160
Code specifically providing for the withdrawal of such exemptions, shows the clear legislative intent to exempt it from the provisions of R.A.
privileges," and that "upon the effectivity of the Local Government Code all 7160; (b) Section 137 of R.A. No. 7160 can only apply to exemptions already
exemptions except only as provided therein can no longer be invoked by existing at the time of its effectivity and not to future exemptions; (c) the
MERALCO to disclaim liability for the local tax." In fine, the Court has viewed power of the City of Davao to impose a franchise tax is subject to statutory
its previous rulings as laying stress more on the legislative intent of the limitations such as the "in lieu of all taxes" clause found in Section 9 of R.A.
amendatory law — whether the tax exemption privilege is to be withdrawn or No. 7294; and (d) the imposition of franchise tax by the City of Davao would
not — rather than on whether the law can withdraw, without violating the amount to a violation of the constitutional provision against impairment of
Constitution, the tax exemption or not. contracts.

While the Court has, not too infrequently, referred to tax exemptions Respondents filed their Answer in which they invoked the power granted by
contained in special franchises as being in the nature of contracts and a part the Constitution to local government units to create their own sources of
of the inducement for carrying on the franchise, these exemptions, revenue.
nevertheless, are far from being strictly contractual in nature. Contractual tax
exemptions, in the real sense of the term and where the non-impairment The RTC rendered its Decision1 denying the petition. The trial court noted
clause of the Constitution can rightly be invoked, are those agreed to by the that the ambiguity of the "in lieu of all taxes" provision in R.A. No. 7294, on
taxing authority in contracts, such as those contained in government bonds whether it covers both national and local taxes, must be resolved against the
or debentures, lawfully entered into by them under enabling laws in which the taxpayer.  Smart filed a motion for reconsideration which was denied. Thus,
the instant case.

ISSUE

In sum, the pivotal issue in this case is whether Smart is liable to pay the
franchise tax imposed by the City of Davao.

RULING

We rule in the affirmative.

Another argument of Smart is that the imposition of the local franchise tax by
the City of Davao would violate the constitutional prohibition against
impairment of contracts. The franchise, according to petitioner, is in the
nature of a contract between the government and Smart.

However, we find that there is no violation of Article III, Section 10 of the

1987 Philippine Constitution. As previously discussed, the franchise of Smart
does not expressly provide for exemption from local taxes. Absent the
express provision on such exemption under the franchise, we are
constrained to rule against it. The "in lieu of all taxes" clause in Section 9 of
R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in
the law, the doubt must be resolved against the grant of tax exemption.

Moreover, Smart's franchise was granted with the express condition that it is
subject to amendment, alteration, or repeal. As held in Tolentino v. Secretary
of Finance:
It is enough to say that the parties to a contract cannot, through the exercise
of prophetic discernment, fetter the exercise of the taxing power of the State.
For not only are existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of sovereign
power is also read into contracts as a basic postulate of the legal order. The
policy of protecting contracts against impairment presupposes the
maintenance of a government which retains adequate authority to secure the
peace and good order of society.

In truth, the Contract Clause has never been thought as a limitation on the
exercise of the State's power of taxation save only where a tax exemption
has been granted for a valid consideration. x x x.
CONSTITUTIONAL LIMITATIONS Whether or not the ordinances of the City of Manila, Nos. 3000, as amended,
and 2529, 3028 and 3364, are constitutional and valid
Infringement of religious freedom
Whether the provisions of said ordinances are applicable or not to the case at
G.R. No. L-9637             April 30, 1957 bar.

AMERICAN BIBLE SOCIETY, plaintiff-appellant, RULING:

vs.
CITY OF MANILA, defendant-appellee. Section 1, subsection (7) of Article III of the Constitution of the Republic of
the Philippines, provides that:
FACTS:
(7) No law shall be made respecting an establishment of religion, or
Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary prohibiting the free exercise thereof, and the free exercise and
corporation duly registered and doing business in the Philippines through its enjoyment of religious profession and worship, without discrimination
Philippine agency established in Manila in November, 1898, with its principal or preference, shall forever be allowed. No religion test shall be
office at 636 Isaac Peral in said City. The defendant appellee is a municipal required for the exercise of civil or political rights.
corporation with powers that are to be exercised in conformity with the
provisions of Republic Act No. 409, known as the Revised Charter of the City The City Treasurer required plaintiff to secure a Mayor's permit in connection
of Manila. with the society's alleged business of distributing and selling bibles, etc. and
to pay permit dues for the period covered in this litigation, plus the sum for
Plaintiff's Philippine agency has been distributing and selling bibles and/or compromise on account of plaintiff's failure to secure the permit required by
gospel portions thereof throughout the Philippines and translating the same Ordinance No. 3000 of the City of Manila, as amended. This Ordinance is of
into several Philippine dialects. The acting City Treasurer of the City of general application and not particularly directed against institutions like the
Manila informed plaintiff that it was conducting the business of general plaintiff, and it does not contain any provisions whatever prescribing religious
merchandise without providing itself with the necessary Mayor's permit and censorship nor restraining the free exercise and enjoyment of any religious
municipal license, in violation multiple ordinances and required plaintiff to profession.
secure, within three days, the corresponding permit and license fees,
together with compromise covering the period from the 4th quarter of 1945 to The business, trade or occupation of the plaintiff involved in this case is not
the 2nd quarter of 1953. particularly mentioned in Section 3 of the Ordinance, and the record does not
show that a permit is required therefor under existing laws and ordinances for
Plaintiff protested against this requirement, but the City Treasurer demanded the proper supervision and enforcement of their provisions governing the
that plaintiff deposit and pay under protest the said amount. To avoid the sanitation, security and welfare of the public and the health of the employees
closing of its business as well as further fines and penalties in the premises, engaged in the business of the plaintiff. However, sections 3 of Ordinance
plaintiff paid to the defendant under protest the said permit and license fees, 3000 contains item No. 79, which reads as follows:
giving at the same time notice to the City Treasurer that suit would be taken
in court to question the legality of the ordinances under which, the said fees 79. All other businesses, trades or occupations not
were being collected, which was done on the same date by filing the mentioned in this Ordinance, except those upon which the
complaint that gave rise to this action. In its complaint, plaintiff prays that City is not empowered to license or to tax P5.00
judgment be rendered declaring the ordinances as illegal and
unconstitutional, and that the defendant be ordered to refund what it had paid Therefore, the necessity of the permit is made to depend upon the power of
under protest, together with legal interest thereon, and the costs, plaintiff the City to license or tax said business, trade or occupation.
further praying for such other relief and remedy as the court may deem just
equitable. The license fees required to be paid quarterly in Section 1 of said Ordinance
No. 2529, as amended, are not imposed directly upon any religious institution
ISSUE: but upon those engaged in any of the business or occupations therein
enumerated, such as retail "dealers in general merchandise" which, it is Plaintiff, however, argues that the questioned ordinances, to be valid, must
alleged, cover the business or occupation of selling bibles, books, etc. first be approved by the President of the Philippines as per section 18,
subsection (ii) of Republic Act No. 409, which reads as follows:
Appellant's counsel states that section 18 (o) of Republic Act No, 409
introduces a new and wider concept of taxation and is different from the (ii) To tax, license and regulate any business, trade or occupation
provisions of Section 2444(m-2) that the former cannot be considered as a being conducted within the City of Manila, not otherwise enumerated
substantial re-enactment of the provisions of the latter. We have quoted in the preceding subsections, including percentage taxes based on
above the provisions of section 2444(m-2) of the Revised Administrative gross sales or receipts, subject to the approval of the PRESIDENT,
Code and We shall now copy hereunder the provisions of Section 18, except amusement taxes.
subdivision (o) of Republic Act No. 409, which reads as follows:
but this requirement of the President's approval was not contained in section
(o) To tax and fix the license fee on dealers in general merchandise, 2444 of the former Charter of the City of Manila under which Ordinance No.
including importers and indentors, except those dealers who may be 2529 was promulgated. Anyway, as stated by appellee's counsel, the
expressly subject to the payment of some other municipal tax under business of "retail dealers in general merchandise" is expressly enumerated
the provisions of this section. in subsection (o), section 18 of Republic Act No. 409; hence, an ordinance
prescribing a municipal tax on said business does not have to be approved
Dealers in general merchandise shall be classified as (a) wholesale by the President to be effective, as it is not among those referred to in said
dealers and (b) retail dealers. For purposes of the tax on retail subsection (ii). Moreover, the questioned ordinances are still in force, having
dealers, general merchandise shall be classified into four main been promulgated by the Municipal Board of the City of Manila under the
classes: namely (1) luxury articles, (2) semi-luxury articles, (3) authority granted to it by law.
essential commodities, and (4) miscellaneous articles. A separate
license shall be prescribed for each class but where commodities of The question that now remains to be determined is whether said ordinances
different classes are sold in the same establishment, it shall not be are inapplicable, invalid or unconstitutional if applied to the alleged business
compulsory for the owner to secure more than one license if he pays of distribution and sale of bibles to the people of the Philippines by a religious
the higher or highest rate of tax prescribed by ordinance. Wholesale corporation like the American Bible Society, plaintiff herein.
dealers shall pay the license tax as such, as may be provided by
ordinance. With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779,
2821 and 3028, appellant contends that it is unconstitutional and illegal
For purposes of this section, the term "General merchandise" shall because it restrains the free exercise and enjoyment of the religious
include poultry and livestock, agricultural products, fish and other profession and worship of appellant.
allied products.
Article III, section 1, clause (7) of the Constitution of the Philippines
The only essential difference that We find between these two provisions that aforequoted, guarantees the freedom of religious profession and worship.
may have any bearing on the case at bar, is that, while subsection (m-2) "Religion has been spoken of as a profession of faith to an active power that
prescribes that the combined total tax of any dealer or manufacturer, or both, binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has
enumerated under subsections (m-1) and (m-2), whether dealing in one or all reference to one's views of his relations to His Creator and to the obligations
of the articles mentioned therein, shall not be in excess of P500 per annum, they impose of reverence to His being and character, and obedience to His
the corresponding section 18, subsection (o) of Republic Act No. 409, does Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of the
not contain any limitation as to the amount of tax or license fee that the retail free exercise and enjoyment of religious profession and worship carries with
dealer has to pay per annum. Hence, and in accordance with the weight of it the right to disseminate religious information. Any restraints of such right
the authorities above referred to that maintain that "all rights and liabilities can only be justified like other restraints of freedom of expression on the
which have accrued under the original statute are preserved and may be grounds that there is a clear and present danger of any substantive evil
enforced, since the reenactment neutralizes the repeal, therefore continuing which the State has the right to prevent". (Tañada and Fernando on the
the law in force without interruption", We hold that the questioned ordinances Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the
of the City of Manila are still in force and effect.
license fee herein involved is imposed upon appellant for its distribution and
sale of bibles and other religious literature.

It may be true that in the case at bar the price asked for the bibles and other
religious pamphlets was in some instances a little bit higher than the actual
cost of the same but this cannot mean that appellant was engaged in the
business or occupation of selling said "merchandise" for profit. For this
reason We believe that the provisions of City of Manila Ordinance No. 2529,
as amended, cannot be applied to appellant, for in doing so it would impair its
free exercise and enjoyment of its religious profession and worship as well as
its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the

obtention the Mayor's permit before any person can engage in any of the
businesses, trades or occupations enumerated therein, We do not find that it
imposes any charge upon the enjoyment of a right granted by the
Constitution, nor tax the exercise of religious practices.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered

unconstitutional, even if applied to plaintiff Society. But as Ordinance No.
2529 of the City of Manila, as amended, is not applicable to plaintiff-appellant
and defendant-appellee is powerless to license or tax the business of plaintiff
Society involved herein for, as stated before, it would impair plaintiff's right to
the free exercise and enjoyment of its religious profession and worship, as
well as its rights of dissemination of religious beliefs, We find that Ordinance
No. 3000, as amended is also inapplicable to said business, trade or
occupation of the plaintiff.
CONSTITUTIONAL LIMITATIONS The PPI questions the law insofar as it has withdrawn the exemption
previously granted to the press under § 103 (f) of the NIRC. Although the
Infringement of Religious/Press Freedom exemption was subsequently restored by administrative regulation with
respect to the circulation income of newspapers, the PPI presses its claim
because of the possibility that the exemption may still be removed by mere
G.R. No. 115455 August 25, 1994
revocation of the regulation of the Secretary of Finance. On the other hand,
the PBS goes so far as to question the Secretary's power to grant exemption
ARTURO M. TOLENTINO, petitioner, for two reasons: (1) The Secretary of Finance has no power to grant tax
vs. exemption because this is vested in Congress and requires for its exercise
THE SECRETARY OF FINANCE and THE COMMISSIONER OF the vote of a majority of all its members and (2) the Secretary's duty is to
INTERNAL REVENUE, respondents. execute the law.

FACTS: What PPI contends is that by withdrawing the exemption previously granted
to print media transactions involving printing, publication, importation or sale
The value-added tax (VAT) is levied on the sale, barter or exchange of goods of newspapers, Republic Act No. 7716 has singled out the press for
and properties as well as on the sale or exchange of services. It is equivalent discriminatory treatment and that within the class of mass media the law
to 10% of the gross selling price or gross value in money of goods or discriminates against print media by giving broadcast media favored
properties sold, bartered or exchanged or of the gross receipts from the sale treatment. We have carefully examined this argument, but we are unable to
or exchange of services. Republic Act No. 7716 seeks to widen the tax base find a differential treatment of the press by the law, much less any censorial
of the existing VAT system and enhance its administration by amending the motivation for its enactment. If the press is now required to pay a value-
National Internal Revenue Code. added tax on its transactions, it is not because it is being singled out, much
less targeted, for special treatment but only because of the removal of the
ISSUE: exemption previously granted to it by law. The withdrawal of exemption is all
that is involved in these cases. Other transactions, likewise previously
A. Does the law violate the following provisions in the Bill of Rights (Art. III)? granted exemption, have been delisted as part of the scheme to expand the
base and the scope of the VAT system. The law would perhaps be open to
the charge of discriminatory treatment if the only privilege withdrawn had
1. §1
been that granted to the press. But that is not the case.

2. § 4
The situation in the case at bar is indeed a far cry from those cited by the PPI
in support of its claim that Republic Act No. 7716 subjects the press to
3. § 5 discriminatory taxation. In the cases cited, the discriminatory purpose was
clear either from the background of the law or from its operation.
4. § 10
Unless justified, the differential treatment of the press creates risks of
B. Does the law violate the following other provisions of the Constitution? suppression of expression. In contrast, in the cases at bar, the statute applies
to a wide range of goods and services. The argument that, by imposing the
1. Art. VI, § 28(1) VAT only on print media whose gross sales exceeds P480,000 but not more
than P750,000, the law discriminates is without merit since it has not been
2. Art. VI, § 28(3) shown that as a result the class subject to tax has been unreasonably
narrowed. The fact is that this limitation does not apply to the press along but
to all sales. Nor is impermissible motive shown by the fact that print media
II. SUBSTANTIVE ISSUES and broadcast media are treated differently. The press is taxed on its
transactions involving printing and publication, which are different from the
RULING: transactions of broadcast media. There is thus a reasonable basis for the
classification.
What has been said above also disposes of the allegations of the PBS that
the removal of the exemption of printing, publication or importation of books
and religious articles, as well as their printing and publication, likewise
violates freedom of thought and of conscience. For as the U.S. Supreme
Court unanimously held in Jimmy Swaggart Ministries v. Board of
Equalization, the Free Exercise of Religion Clause does not prohibit imposing
a generally applicable sales and use tax on the sale of religious materials by
a religious organization.

This brings us to the question whether the registration provision of the

law, although of general applicability, nonetheless is invalid when applied to
the press because it lays a prior restraint on its essential freedom.

In this case, the fee in § 107, although a fixed amount (P1,000), is not
imposed for the exercise of a privilege but only for the purpose of defraying
part of the cost of registration. The registration requirement is a central
feature of the VAT system. It is designed to provide a record of tax credits
because any person who is subject to the payment of the VAT pays an input
tax, even as he collects an output tax on sales made or services rendered.
The registration fee is thus a mere administrative fee, one not imposed on
the exercise of a privilege, much less a constitutional right.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on
the ground that it offends the free speech, press and freedom of religion
guarantees of the Constitution to be without merit. For the same reasons, we
find the claim of the Philippine Educational Publishers Association (PEPA) in
G.R. No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the constitutional
mandate to the government to give priority to education, science and
technology (Art. II, § 17) to be untenable.
POWER OF THE CIR TO INTERPRET/REVIEW/APPEALTO SEC. OF
FINANCE (SEC. 4 OF THE NIRC) The Voluntary Arbitrator has no jurisdiction to settle tax matters

G.R. No. 204142, November 19, 2014 The Labor Code vests the Voluntary Arbitrator original and exclusive
jurisdiction to hear and decide all unresolved grievances arising from the
interpretation or implementation of the Collective Bargaining
HONDA CARS PHILIPPINES, INC., Petitioner, v. HONDA CARS
Agreement and those arising from the interpretation or enforcement of
TECHNICAL SPECIALIST AND SUPERVISORS UNION, Respondent.
company personnel policies. Upon agreement of the parties, the Voluntary
Arbitrator shall also hear and decide all other labor disputes, including unfair
FACTS: labor practices and bargaining deadlocks.15chanRoblesvirtualLawlibrary
Petitioner Honda Cars Philippines, Inc., (company) and respondent Honda In short, the Voluntary Arbitrator’s jurisdiction is limited to labor
Cars Technical Specialists and Supervisory Union (union), the exclusive disputes. Labor dispute means “any controversy or matter concerning terms
collective bargaining representative of the company’s supervisors and and conditions of employment or the association or representation of persons
technical specialists, entered into a CBA effective April 1, 2006 to March 31, in negotiating, fixing, maintaining, changing, or arranging the terms and
2011.4chanRoblesvirtualLawlibrary conditions of employment, regardless of whether the disputants stand in the
proximate relation of employer and employee.”16chanRoblesvirtualLawlibrary
Prior to April 1, 2005, the union members were receiving transportation
allowance every month. On September 3, 2005, the company and the union The issues raised before the Panel of Voluntary Arbitrators are: (1) whether
entered into a Memorandum of Agreement5(MOA) converting the the cash conversion of the gasoline allowance shall be subject to fringe
transportation allowance into a monthly gasoline allowance starting at 125 benefit tax or the graduated income tax rate on compensation; and (2)
liters effective April 1, 2005.  The allowance answers for the gasoline whether the company wrongfully withheld income tax on the converted gas
consumed by the union members for official business purposes and for home allowance.
to office travel and vice-versa.
The Voluntary Arbitrator has no competence to rule on the taxability of the
The company claimed that the grant of the gasoline allowance is tied up to a gas allowance and on the propriety of the withholding of tax. These issues
similar company policy for managers and assistant vice-presidents (AVPs), are clearly tax matters, and do not involve labor disputes.  To be exact,
which provides that  in the event the amount of gasoline is not fully they involve tax issues within a labor relations setting as they pertain to
consumed, the gasoline not used may be converted into cash, subject to questions of law on the application of Section 33 (A) of the NIRC. They do
whatever tax may be applicable.  Since the cash conversion is paid in the not require the application of the Labor Code or the interpretation of the MOA
monthly payroll as an excess gas allowance, the company considers the and/or company personnel policies. Furthermore, the company and the union
amount as part of the managers’ and AVPs’ compensation that is subject to cannot agree or compromise on the taxability of the gas allowance. Taxation
income tax on compensation. is the State’s inherent power; its imposition cannot be subject to the will of
the parties.
Accordingly, the company deducted from the union members’ salaries the
withholding tax corresponding to the conversion to cash of their unused Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive
gasoline allowance. and original jurisdiction to interpret the provisions of the NIRC and other
tax laws, subject to review by the Secretary of Finance. Consequently, if the
The union, on the other hand, argued that the gasoline allowance for its company and/or the union desire/s to seek clarification of these issues,
members is a “negotiated item” under Article XV, Section 15 of the new CBA it/they should have requested for a tax ruling17 from the Bureau of Internal
on fringe benefits.  It thus opposed the company’s practice of treating the Revenue (BIR). Any revocation, modification or reversal of the CIR’s ruling
gasoline allowance that, when converted into cash, is considered as shall not be given retroactive application if the revocation, modification or
compensation income that is subject to withholding tax. reversal will be prejudicial to the taxpayers, except in the following
cases:chanroblesvirtuallawlibrary

RULING (a) Where the taxpayer deliberately misstates or omits material facts from
 his return or any document required of him by the BIR; organizations (NGOs) throughout the country.”chanRoblesvirtualLawlibrary
(b) Where the facts subsequently gathered by the BIR are materially Prior to and around the time of the proposal of CODE-NGO, other proposals
different from the facts on which the ruling is based; or for the issuance of zero-coupon bonds were also presented by banks and
(c) Where the taxpayer acted in bad faith.18 financial institutions, such as First Metro Investment
Corporation, International Exchange Bank, Security Bank Corporation and
SB Capital Investment Corporation , and ATR-Kim Eng Fixed Income, Inc.
“[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng
On the other hand, if the union disputes the withholding of tax and desires a Fixed Income indicate that the interest income or discount earned on the
refund of the withheld tax, it should have filed an administrative claim for proposed zero-coupon bonds would be subject to the prevailing withholding
refund with the CIR. Paragraph 2, Section 4 of the NIRC expressly vests the tax.”cha
CIR original jurisdiction over refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other tax matters. A zero-coupon bond is a bond bought at a price substantially lower than its
face value (or at a deep discount), with the face value repaid at the time of
maturity.14  It does not make periodic interest payments, or have so-called
“coupons,” hence the term zero-coupon bond.15  However, the discount to
G.R. No. 198756, January 13, 2015 face value constitutes the return to the bondholder.

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGO’s
CORPORATION, METROPOLITAN BANK & TRUST COMPANY, letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-2001 on
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL the tax treatment of the proposed PEACe Bonds.  BIR Ruling No. 020-2001,
BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT signed by then Commissioner of Internal Revenue René G. Bañez confirmed
BANK, Petitioners, that the PEACe Bonds would not be classified as deposit substitutes and
would not be subject to the corresponding withholding tax
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners, The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001
was subsequently reiterated in BIR Ruling No. 035-200119 dated August 16,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001
v. REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF (collectively, the 2001 Rulings).  In sum, these rulings pronounced that to be
INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY able to determine whether the financial assets, i.e., debt instruments and
OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL securities are deposit substitutes, the “20 or more individual or corporate
TREASURER AND BUREAU OF TREASURY, Respondents. lenders” rule must apply.  Moreover, the determination of the phrase “at any
one time” for purposes of determining the “20 or more lenders” is to be
determined at the time of the original issuance.  Such being the case, the
FACTS PEACe Bonds were not to be treated as deposit substitutes.

The Caucus of Development NGO Networks (CODE-NGO) “with the Meanwhile, in the memorandum dated July 4, 2001, Former Treasurer
assistance of its financial advisors, Rizal Commercial Banking Corp. Eduardo Sergio G. Edeza (Former Treasurer Edeza) questioned the
(“RCBC”), RCBC Capital Corp. (“RCBC Capital”), CAPEX Finance and propriety of issuing the bonds directly to a special purpose vehicle
Investment Corp. (“CAPEX”) and SEED Capital Ventures, Inc. considering that the latter was not a Government Securities Eligible Dealer
(SEED),” requested an approval from the Department of Finance for the (GSED). Former Treasurer Edeza recommended that the issuance of the
issuance by the Bureau of Treasury of 10-year zero-coupon Treasury Bonds “be done through the ADAPS” and that CODE-NGO “should get a
Certificates (T-notes).  The T-notes would initially be purchased by a special GSED to bid in [sic] its behalf.”
purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium
to investors as the PEACe Bonds. The net proceeds from the sale of the Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury
Bonds “will be used to endow a permanent fund (Hanapbuhay® Fund) to Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
finance meritorious activities and projects of accredited non-government announced that “P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]”26  The notice stated that the Bonds “shall RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution
be issued to not more than 19 buyers/lenders hence, the necessity of a and sale of the P35 billion Bonds at the price of P11,995,513,716.51.47  In
manual auction for this maiden issue.”27  It also required the GSEDs to Section 7(r) of the underwriting agreement, CODE-NGO represented that
submit their bids not later than 12 noon on auction date and to disclose in “[a]ll income derived from the Bonds, inclusive of premium on redemption
their bid submissions the names of the institutions bidding through them to and gains on the trading of the same, are exempt from all forms of taxation
ensure strict compliance with the 19 lender limit.28  Lastly, it stated that “the as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May
issue being limited to 19 lenders and while taxable shall not be subject to the 2001 and 16 August 2001, respectively.”48chanRoblesvirtualLawlibrary
20% final withholding [tax].”29chanRoblesvirtualLawlibrary
RCBC Capital sold the Government Bonds in the secondary market for an
On October 12, 2001, the Bureau of Treasury released a memo30 on the issue price of P11,995,513,716.51.  Petitioners purchased the PEACe Bonds
“Formula for the Zero-Coupon Bond.”  The memo stated in part that the on different dates.49chanRoblesvirtualLawlibrary
formula (in determining the purchase price and settlement amount) “is only
applicable to the zeroes that are not subject to the 20% final withholding due BIR rulings
to the 19 buyer/lender limit.”31chanRoblesvirtualLawlibrary
On October 7, 2011, “the BIR issued the assailed 2011 BIR Ruling imposing
A day before the auction date or on October 15, 2001, the Bureau of a 20% FWT on the Government Bonds and directing the BIR to withhold said
Treasury issued the “Auction Guidelines for the 10-year Zero-Coupon final tax at the maturity thereof, [allegedly without] consultation with
Treasury Bond to be Issued on October 16, 2001” (Auction Guidelines).32  Petitioners as bondholders, and without conducting any
The Auction Guidelines reiterated that the Bonds to be auctioned are “[n]ot hearing.”50chanRoblesvirtualLawlibrary
subject to 20% withholding tax as the issue will be limited to a maximum of
19 lenders in the primary market (pursuant to BIR Revenue Regulation No. “It appears that the assailed 2011 BIR Ruling was issued in response to a
020 2001).”33  The Auction Guidelines, for the first time, also stated that the query of the Secretary of Finance on the proper tax treatment of the discount
Bonds are “[e]ligible as liquidity reserves (pursuant to MB Resolution No. or interest income derived from the Government Bonds.”51  The Bureau of
1545 dated 27 September 2001)[.]”34chanRoblesvirtualLawlibrary Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005,
namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year 491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July
zero-coupon bonds.35  Also on the same date, the Bureau of Treasury issued 28, 2005, declared the following:chanroblesvirtuallawlibrary
another memorandum36 quoting excerpts of the ruling issued by the Bureau
of Internal Revenue concerning the Bonds’ exemption from 20% final The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
withholding tax and the opinion of the Monetary Board on reserve subject to 20% Final Tax on interest income from deposit substitutes.  It is
eligibility.37chanRoblesvirtualLawlibrary now settled that all treasury bonds (including PEACe Bonds), regardless of
the number of purchasers/lenders at the time of origination/issuance are
During the auction, there were 45 bids from 15 GSEDs.38  The bidding range considered deposit substitutes.  In the case of zero-coupon bonds, the
was very wide, from as low as 12.248% to as high as 18.000%.39  discount (i.e. difference between face value and purchase price/discounted
Nonetheless, the Bureau of Treasury accepted the auction results.40  The cut- value of the bond) is treated as interest income of the purchaser/holder. 
off was at 12.75%.41chanRoblesvirtualLawlibrary Thus, the Php 24.3 interest income should have been properly subject to the
20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .
After the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder having tendered the lowest bids.42  ....
Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion
worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately However, at the time of the issuance of the PEACe Bonds in 2001, the BTr
P10.17 billion,43 resulting in a discount of approximately P24.83 billion. was not able to collect the final tax on the discount/interest income realized
by RCBC as a result of the 2001 Rulings.  Subsequently, the issuance of BIR
Also on October 16, 2001, RCBC Capital entered into an underwriting Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes
agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the the 2001 Rulings by stating that the [1997] Tax Code is clear that the “term
Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.45  public means borrowing from twenty (20) or more individual or corporate
lenders at any one time.”  The word “any” plainly indicates that the period I. Whether the PEACe Bonds are “deposit substitutes” and
contemplated is the entire term of the bond, and not merely the point of thus subject to 20% final withholding tax under the 1997
origination or issuance. . . . Thus, by taking the PEACe bonds out of the National Internal Revenue Code.  Related to this question is
ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax, the interpretation of the phrase “borrowing from twenty (20)
an exemption in favour of the PEACe Bonds was created when no such or more individual or corporate lenders at any one time”
exemption is found in the law. under Section 22(Y) of the 1997 National Internal Revenue
Code, particularly on whether the reckoning of the 20 lenders
includes trading of the bonds in the secondary market; and
On October 11, 2011, a “Memo for Trading Participants No. 58-2011 was
issued by the Philippine Dealing System Holdings Corporation and
Subsidiaries (“PDS Group”).  The Memo provides that in view of the II. If the PEACe Bonds are considered “deposit substitutes,”
pronouncement of the DOF and the BIR on the applicability of the 20% FWT whether the government or the Bureau of Internal Revenue
on the Government Bonds, no transfer of the same shall be allowed to be is estopped from imposing and/or collecting the 20% final
recorded in the Registry of Scripless Securities (“ROSS”) from 12 October withholding tax from the face value of these Bonds
2011 until the redemption payment date on 18 October 2011.  Thus, the
bondholders of record appearing on the ROSS as of 18 October 2011, which a. Will the imposition of the 20% final withholding tax
include the Petitioners, shall be treated by the BTr as the beneficial owners of violate the non-impairment clause of the
such securities for the relevant [tax] payments to be imposed thereon.” Constitution?

On October 17, 2011, replying to an urgent query from the Bureau of b. Will it constitute a deprivation of property without due
Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378- process of law?
201157 clarifying that the final withholding tax due on the discount or interest
earned on the PEACe Bonds should “be imposed and withheld not only on c. Will it violate Section 245 of the 1997 National
RCBC/CODE NGO but also [on] ‘all subsequent holders of the Bonds.’ Internal Revenue Code on non-retroactivity of
rulings?
On October 17, 2011, petitioners filed a petition for certiorari, prohibition,
and/or mandamus (with urgent application for a temporary restraining order
and/or writ of preliminary injunction)59 before this court. RULING:

On December 1, 2011, public respondents filed their compliance.69  They Non-exhaustion of administrative remedies proper
explained that: 1) “the implementation of [BIR Ruling No. 370-2011], which
has already been performed on October 18, 2011 with the withholding of the Under Section 4 of the 1997 National Internal Revenue Code, interpretative
20% final withholding tax on the face value of the PEACe bonds, is rulings are reviewable by the Secretary of Finance.
already fait accompli . . . when the Resolution and TRO were served to and
received by respondents BTr and National Treasurer [on October 19, 2011]”; SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide
and 2) the withheld amount has ipso facto become public funds and cannot Tax Cases. - The power to interpret the provisions of this Code and other tax
be disbursed or released to petitioners without congressional appropriation.71  laws shall be under the exclusive and original jurisdiction of the
Respondents further aver that “[i]nasmuch as the . . . TRO has already Commissioner, subject to review by the Secretary of Finance.  (Emphasis
become moot . . . the condition attached to it, i.e., ‘that the 20% final supplied)
withholding tax on interest income therefrom shall be withheld by the banks
and placed in escrow . . .’ has also been rendered Thus, it was held that “[i]f superior administrative officers [can] grant the relief
moot[.]”72chanRoblesvirtualLawlibrary prayed for, [then] special civil actions are generally not entertained.”153  The
remedy within the administrative machinery must be resorted to first and
pursued to its appropriate conclusion before the court’s judicial power can be
ISSUE: sought.154chanRoblesvirtualLawlibrary

The main issues to be resolved are:ChanRoblesVirtualawlibrary

Nonetheless, jurisprudence allows certain exceptions to the rule on questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in
exhaustion of administrative remedies: connection with the implementation of the 1997 National Internal Revenue
Code on the taxability of the interest income from zero-coupon bonds issued
[The doctrine of exhaustion of administrative remedies] is a relative one and by the government.
its flexibility is called upon by the peculiarity and uniqueness of the factual
and circumstantial settings of a case. Hence, it is disregarded (1) when there Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
is a violation of due process, (2) when the issue involved is purely a legal amended by Republic Act No. 9282,160 such rulings of the Commissioner of
question,155 (3) when the administrative action is patently illegal amounting to Internal Revenue are appealable to that court, thus:
lack or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) SEC. 7. Jurisdiction. - The CTA shall exercise:
when the respondent is a department secretary whose acts as an alter ego of
the President bears the implied and assumed approval of the latter, (7) when a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
to require exhaustion of administrative remedies would be unreasonable, (8)
when it would amount to a nullification of a claim, (9) when the subject matter 1. Decisions of the Commissioner of Internal Revenue in cases
is a private land in land case proceedings, (10) when the rule does not involving disputed assessments, refunds of internal revenue
provide a plain, speedy and adequate remedy, (11) when there are taxes, fees or other charges, penalties in relation thereto, or
circumstances indicating the urgency of judicial intervention. 156 (Emphasis other matters arising under the National Internal Revenue or
supplied, citations omitted) other laws administered by the Bureau of Internal Revenue;

The exceptions under (2) and (11) are present in this case.  The question ....
involved is purely legal, namely: (a) the interpretation of the 20-lender rule in
the definition of the terms public  and deposit substitutes under the 1997 SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party
National Internal Revenue Code; and (b) whether the imposition of the 20% adversely affected by a decision, ruling or inaction of the Commissioner of
final withholding tax on the PEACe Bonds upon maturity violates the Internal Revenue, the Commissioner of Customs, the Secretary of Finance,
constitutional provisions on non-impairment of contracts and due process.  the Secretary of Trade and Industry or the Secretary of Agriculture or the
Judicial intervention is likewise urgent with the impending maturity of the Central Board of Assessment Appeals or the Regional Trial Courts may file
PEACe Bonds on October 18, 2011. an appeal with the CTA within thirty (30) days after the receipt of such
decision or ruling or after the expiration of the period fixed by law for action
The rule on exhaustion of administrative remedies also finds no application as referred to in Section 7(a)(2) herein.
when the exhaustion will result in an exercise in
futility.157chanRoblesvirtualLawlibrary ....

In this case, an appeal to the Secretary of Finance from the questioned 2011 SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding
BIR Ruling would be a futile exercise because it was upon the request of the involving matters arising under the National Internal Revenue Code, the
Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of Tariff and Customs Code or the Local Government Code shall be
Internal Revenue.  It appears that the Secretary of Finance adopted the maintained, except as herein provided, until and unless an appeal has been
Commissioner of Internal Revenue’s opinions as his own.158  This position previously filed with the CTA and disposed of in accordance with the
was in fact confirmed in the letter159 dated October 10, 2011 where he provisions of this Act.
ordered the Bureau of Treasury to withhold the amount corresponding to the
20% final withholding tax on the interest or discounts allegedly due from the In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v.
bondholders on the strength of the 2011 BIR Ruling. Blaquera,162 this court emphasized the jurisdiction of the Court of Tax
Appeals over rulings of the Bureau of Internal Revenue, thus:
Doctrine on hierarchy of courts
While the Court of Appeals correctly took cognizance of the petition
We agree with respondents that the jurisdiction to review the rulings of the
for certiorari, however, let it be stressed that the jurisdiction to review the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals.  The
rulings of the Commissioner of Internal Revenue pertains to the Court of Tax
Appeals, not to the RTC. Internal Revenue Code or other law or part of the law administered by the
Bureau of Internal Revenue.’”163
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of In exceptional cases, however, this court entertained direct recourse to it
pawnshops. . . . when “dictated by public welfare and the advancement of public policy, or
demanded by the broader interest of justice, or the orders complained of
.... were found to be patent nullities, or the appeal was considered as clearly an
inappropriate remedy.”164chanRoblesvirtualLawlibrary
Such revenue orders were issued pursuant to petitioner's powers under
Section 245 of the Tax Code, which states: In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v.
The Secretary, Department of Interior and Local Government, 165 this court
“SEC. 245. Authority of the Secretary of Finance to promulgate rules and noted that the petition for prohibition was filed directly before it “in disregard
regulations. — The Secretary of Finance, upon recommendation of the of the rule on hierarchy of courts.  However, [this court] opt[ed] to take
Commissioner, shall promulgate all needful rules and regulations for the primary jurisdiction over the . . . petition and decide the same on its merits in
effective enforcement of the provisions of this Code. view of the significant constitutional issues raised by the parties dealing with
the tax treatment of cooperatives under existing laws and in the interest of
The authority of the Secretary of Finance to determine articles similar or speedy justice and prompt disposition of the
analogous to those subject to a rate of sales tax under certain category matter.”166chanRoblesvirtualLawlibrary
enumerated in Section 163 and 165 of this Code shall be without prejudice
to the power of the Commissioner of Internal Revenue to make rulings or Here, the nature and importance of the issues raised167 to the investment and
opinions in connection with the implementation of the provisions of internal banking industry with regard to a definitive declaration of whether
revenue laws, including ruling on the classification of articles of sales and government debt instruments are deposit substitutes under existing laws, and
similar purposes.” (Emphasis in the original) the novelty thereof, constitute exceptional and compelling circumstances to
justify resort to this court in the first instance.
....
The tax provision on deposit substitutes affects not only the PEACe Bonds
The Court, in Rodriguez, etc. vs. Blaquera, etc.,  ruled: but also any other financial instrument or product that may be issued and
traded in the market.  Due to the changing positions of the Bureau of Internal
“Plaintiff maintains that this is not an appeal from a ruling of the Collector of Revenue on this issue, there is a need for a final ruling from this court to
Internal Revenue, but merely an attempt to nullify General Circular No. V- stabilize the expectations in the financial market.
148, which does not adjudicate or settle any controversy, and that,
accordingly, this case is not within the jurisdiction of the Court of Tax Finally, non-compliance with the rules on exhaustion of administrative
Appeals. remedies and hierarchy of courts had been rendered moot by this court’s
issuance of the temporary restraining order enjoining the implementation of
We find no merit in this pretense. General Circular No. V-148 directs the the 2011 BIR Ruling.  The temporary restraining order effectively recognized
officers charged with the collection of taxes and license fees to adhere strictly the urgency and necessity of direct resort to this court.
to the interpretation given by the defendant to the statutory provisions
abovementioned, as set forth in the Circular. The same incorporates, corresponding to the 20% final withholding tax despite this court’s directive in
therefore, a decision of the Collector of Internal Revenue (now Commissioner the temporary restraining order and in the resolution dated November 15,
of Internal Revenue) on the manner of enforcement of the said statute, the 2011 to deliver the amounts to the banks to be placed in escrow pending
administration of which is entrusted by law to the Bureau of Internal resolution of this case.
Revenue. As such, it comes within the purview of Republic Act No. 1125,
Section 7 of which provides that the Court of Tax Appeals ‘shall exercise
exclusive appellate jurisdiction to review by appeal . . . decisions of the
Collector of Internal Revenue in . . . matters arising under the National
 CONFEDERATION FOR UNITY, RECOGNITION AND penalty therefor, particularly upon local government officials; and (2)
ADVANCEMENT OF GOVERNMENT EMPLOYEES VS. violates the equal protection clause of the Constitution as it discriminates
COMMISSIONER - BIR, GR NO. 213446 DATED JULY 3, 2018 against government officials and employees by imposing fringe benefit
tax upon their allowances and benefits, as opposed to the allowances
and benefits of employees of the private sector, the fringe benefit tax of
which is borne and paid by their employers.
FACTS:
Further, the petition also prays for the issuance of a writ of mandamus
On June 20, 2014, respondent CIR issued the assailed RMO No. 23-
ordering respondent CIR to perform its duty under Section 32(B)(7)(e)(iv)
2014, in furtherance of Revenue Memorandum Circular (RMC) No. 23-
of the NIRC of 1997, as amended, to upgrade the ceiling of the 13th
2012 dated February 14, 2012 on the "Reiteration of the Responsibilities
month pay and other benefits for the concerned officials and employees
of the Officials and Employees of Government Offices for the Withholding
of the government, including petitioners.
of Applicable Taxes on Certain Income Payments and the Imposition of
Penalties for Non-Compliance Thereof," in order to clarify and
consolidate the responsibilities of the public sector to withhold taxes on G.R. No. 213658
its transactions as a customer (on its purchases of goods and services)
and as an employer (on compensation paid to its officials and employees) On August 19, 2014, petitioners Armando A. Yanga, President of the
under the National Internal Revenue Code (NIRC or Tax Code) of 1997, Regional Trial Court (RTC) Judges Association of Manila, and Ma.
as amended, and other special laws. Cristina Carmela I. Japzon, President of the Philippine Association of
Court Employees – Manila Chapter, filed a Petition for Certiorari and
G.R. No. 213446 Prohibition as duly authorized representatives of said associations,
seeking to nullify RMO No. 23-2014 on the following grounds: (1)
respondent CIR is bereft of any authority to issue the assailed RMO. The
Petitioners Confederation for Unity, Recognition and Advancement of
NIRC of 1997, as amended, expressly vests to the Secretary of Finance
Government Employees (COURAGE), et al., filed a Petition for
the authority to promulgate all needful rules and regulations for the
Prohibition and Mandamus, imputing grave abuse of discretion on the
effective enforcement of tax provisions; and (2) respondent CIR
part of respondent CIR in issuing RMO No. 23-2014. According to
committed grave abuse of discretion amounting to lack or excess of
petitioners, RMO No. 23-2014 classified as taxable compensation, the
jurisdiction in the issuance of RMO No. 23-2014 when it subjected to
following allowances, bonuses, compensation for services granted to
withholding tax benefits and allowances of court employees which are
government employees, which they alleged to be considered by law as
tax-exempt such as: (a) Special Allowance for Judiciary (SAJ) under
non-taxable fringe and de minimis benefits.
Republic Act (RA) No. 9227 and additional cost of living allowance
(AdCOLA) granted under Presidential Decree (PD) No. 1949 which are
a. considered as non-taxable fringe benefits under Section 33(A) of the
NIRC of 1997, as amended; (b) cash gift, loyalty awards, uniform and
Petitioners further assert that the imposition of withholding tax on these clothing allowance and additional compensation (ADCOM) granted to
allowances, bonuses and benefits, which have been allotted by the court employees which are considered de minimis under Section 33(C)
Government to its employees free of tax for a long time, violates the (4) of the same Code; (c) allowances and benefits granted by the
prohibition on non-diminution of benefits under Article 100 of the Labor Judiciary which are not taxable pursuant to Section 32(7)(E) of the NIRC
Code; and infringes upon the fiscal autonomy of the Legislature, of 1997, as amended; and (d) expenses for the Judiciary provided under
Judiciary, Constitutional Commissions and Office of the Ombudsman Commission on Audit (COA) Circular 2012-001.
granted by the Constitution.4
Petitioners further assert that RMO No. 23-2014 violates their right to due
Petitioners also claim that RMO No. 23-2014 (1) constitutes a usurpation process of law because while it is ostensibly denominated as a mere
of legislative power and diminishes the delegated power of local revenue issuance, it is an illegal and unwarranted legislative action which
government units inasmuch as it defines new offenses and prescribes
sharply increased the tax burden of officials and employees of the The power to decide disputed assessments, refunds of internal revenue
Judiciary without the benefit of being heard. taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under this Code or other laws or portions thereof
On October 21, 2014, the Court resolved to consolidate the foregoing administered by the Bureau of Internal Revenue is vested in the
cases. Commissioner, subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals.
The Petitions-in-Intervention
The CIR's exercise of its power to interpret tax laws comes in the form of
Meanwhile, on September 11, 2014, the National Federation of revenue issuances, which include RMOs that provide "directives or
Employees Associations of the Department of Agriculture (NAFEDA) et instructions; prescribe guidelines; and outline processes, operations,
al., duly registered union/association of employees of the Department of activities, workflows, methods and procedures necessary in the
Agriculture, National Agricultural and Fisheries Council, Commission on implementation of stated policies, goals, objectives, plans and programs
Elections, Mines and Geosciences Bureau, and Philippine Fisheries of the Bureau in all areas of operations, except auditing." These revenue
Development Authority, claiming similar interest as petitioners in G.R. No. issuances are subject to the review of the Secretary of Finance. In
213446, filed a Petition-in-Intervention seeking the nullification of items relation thereto, Department of Finance Department Order No. 007-
III, VI and VII of RMO No. 23-2014 based on the following grounds: (1) 0244 issued by the Secretary of Finance laid down the procedure and
that respondent CIR acted with grave abuse of discretion and usurped requirements for filing an appeal from the adverse ruling of the CIR to the
the power of the Legislature in issuing RMO No. 23-2014 which imposes said office. A taxpayer is granted a period of thirty (30) days from receipt
additional taxes on government employees and prescribes penalties for of the adverse ruling of the CIR to file with the Office of the Secretary of
government official's failure to withhold and remit the same; (2) that RMO Finance a request for review in writing and under oath.
No. 23-2014 violates the equal protection clause because the
Commission on Human Rights (CHR) was not included among the We revert to the earlier rulings in Rodriguez, Leal, and Asia International
constitutional commissions covered by the issuance and the ADCOM of Auctioneers, Inc. The Court of Tax Appeals has exclusive jurisdiction to
employees of the Judiciary was subjected to withholding tax but those determine the constitutionality or validity of tax laws, rules and
received by employees of the Legislative and Executive branches are regulations, and other administrative issuances of the Commissioner of
not; and (3) that respondent CIR failed to upgrade the tax exemption Internal Revenue.
ceiling for benefits under Section 32(B)(7) of the NIRC of 1997, as
amended. Article VIII, Section 1 of the 1987 Constitution provides the general
definition of judicial power:
RULING
ARTICLE [VIII]
It is an unquestioned rule in this jurisdiction that certiorari under Rule 65 JUDICIAL DEPARTMENT
will only lie if there is no appeal, or any other plain, speedy and adequate
remedy in the ordinary course of law against the assailed issuance of the Section 1. The judicial power shall be vested in one Supreme Court and
CIR. The plain, speedy and adequate remedy expressly provided by law in such lower courts as may be established by law.
is an appeal of the assailed RMO with the Secretary of Finance under
Section 4 of the NIRC of 1997, as amended, to wit: Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide enforceable, and to determine whether or not there has been a grave
Tax Cases. – The power to interpret the provisions of this Code and abuse of discretion amounting to lack or excess of jurisdiction on the part
other tax laws shall be under the exclusive and original jurisdiction of any branch or instrumentality of the Government. (Emphasis supplied)
of the Commissioner, subject to review by the Secretary of Finance .
Based on this constitutional provision, this Court recognized, for the first must possess them in order to enforce its rules of practice and to
time, in The City of Manila v. Hon. Grecia-Cuerdo, the Court of Tax suppress any abuses of its process and to defeat any attempted
Appeals' jurisdiction over petitions for certiorari assailing interlocutory thwarting of such process.
orders issued by the Regional Trial Court in a local tax case. Thus:
In this regard, Section 1 of RA 9282 states that the CTA shall be of the
[W]hile there is no express grant of such power, with respect to the CTA, same level as the CA and shall possess all the inherent powers of a court
Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that of justice.
judicial power shall be vested in one Supreme Court and in such lower
courts as may be established by law and that judicial power includes the Indeed, courts possess certain inherent powers which may be said to be
duty of the courts of justice to settle actual controversies involving rights implied from a general grant of jurisdiction, in addition to those expressly
which are legally demandable and enforceable, and to determine conferred on them. These inherent powers are such powers as are
whether or not there has been a grave abuse of discretion necessary for the ordinary and efficient exercise of jurisdiction; or are
amounting to lack or excess of jurisdiction on the part of any essential to the existence, dignity and functions of the courts, as well as
branch or instrumentality of the Government. to the due administration of justice; or are directly appropriate, convenient
and suitable to the execution of their granted powers; and include the
On the strength of the above constitutional provisions, it can be fairly power to maintain the court's jurisdiction and render it effective in behalf
interpreted that the power of the CTA includes that of determining of the litigants.
whether or not there has been grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the RTC in issuing an Thus, this Court has held that "while a court may be expressly granted
interlocutory order in cases falling within the exclusive appellate the incidental powers necessary to effectuate its jurisdiction, a grant of
jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional jurisdiction, in the absence of prohibitive legislation, implies the
mandate, is vested with jurisdiction to issue writs of certiorari in these necessary and usual incidental powers essential to effectuate it, and,
cases. (Emphasis in the original) subject to existing laws and constitutional provisions, every regularly
constituted court has power to do all things that are reasonably
This Court further explained that the Court of Tax Appeals' authority to necessary for the administration of justice within the scope of its
issue writs of certiorari is inherent in the exercise of its appellate jurisdiction and for the enforcement of its judgments and mandates."
jurisdiction: Hence, demands, matters or questions ancillary or incidental to, or
growing out of, the main action, and coming within the above principles,
A grant of appellate jurisdiction implies that there is included in it the may be taken cognizance of by the court and determined, since such
power necessary to exercise it effectively, to make all orders that will jurisdiction is in aid of its authority over the principal matter, even though
preserve the subject of the action, and to give effect to the final the court may thus be called on to consider and decide matters which, as
determination of the appeal. It carries with it the power to protect that original causes of action, would not be within its cognizance. (Citations
jurisdiction and to make the decisions of the court thereunder effective. omitted)
The court, in aid of its appellate jurisdiction, has authority to control all
auxiliary and incidental matters necessary to the efficient and proper Judicial power likewise authorizes lower courts to determine the
exercise of that jurisdiction. For this purpose, it may, when necessary, constitutionality or validity of a law or regulation in the first instance. This
prohibit or restrain the performance of any act which might interfere with is contemplated in the Constitution when it speaks of appellate review of
the proper exercise of its rightful jurisdiction in cases pending before it. final judgments of inferior courts in cases where such constitutionality is
in issue.
Lastly, it would not be amiss to point out that a court which is endowed
with a particular jurisdiction should have powers which are necessary to On June 16, 1954, Republic Act No. 1125 created the Court of Tax
enable it to act effectively within such jurisdiction. These should be Appeals not as another superior administrative agency as was its
regarded as powers which are inherent in its jurisdiction and the court
predecessor — the former Board of Tax Appeals — but as a part of the administrative issuance (revenue orders, revenue memorandum
judicial system with exclusive jurisdiction to act on appeals from: circulars, rulings).

(1) Decisions of the Collector of Internal Revenue in cases involving Section 7 of Republic Act No. 1125, as amended, is explicit that, except
disputed assessments, refunds of internal revenue taxes, fees or for local taxes, appeals from the decisions of quasi-judicial agencies
other charges, penalties imposed in relation thereto, or other matters (Commissioner of Internal Revenue, Commissioner of Customs,
arising under the National Internal Revenue Code or other law or part Secretary of Finance, Central Board of Assessment Appeals, Secretary
of law administered by the Bureau of Internal Revenue; of Trade and Industry) on tax-related problems must be
brought exclusively to the Court of Tax Appeals.
   

(2) Decisions of the Commissioner of Customs in cases involving liability In other words, within the judicial system, the law intends the Court of Tax
for customs duties, fees or other money charges; seizure, detention Appeals to have exclusive jurisdiction to resolve all tax problems.
or release of property affected fines, forfeitures or other penalties Petitions for writs of certiorari against the acts and omissions of the said
imposed in relation thereto; or other matters arising under the quasi-judicial agencies should, thus, be filed before the Court of Tax
Customs Law or other law or part of law administered by the Bureau Appeals.
of Customs; and
Republic Act No. 9282, a special and later law than Batas Pambansa Blg.
   
129 provides an exception to the original jurisdiction of the Regional Trial
(3) Decisions of provincial or city Boards of Assessment Appeals in Courts over actions questioning the constitutionality or validity of tax laws
cases involving the assessment and taxation of real property or other or regulations. Except for local tax cases, actions directly challenging the
matters arising under the Assessment Law, including rules and constitutionality or validity of a tax law or regulation or administrative
regulations relative thereto. issuance may be filed directly before the Court of Tax Appeals.

Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction Furthermore, with respect to administrative issuances (revenue
over all matters involving assessments that were previously cognizable orders, revenue memorandum circulars, or rulings), these are
by the Regional Trial Courts (then courts of first instance). issued by the Commissioner under its power to make rulings or
opinions in connection with the implementation of the provisions of
internal revenue laws. Tax rulings, on the other hand, are official
In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction
positions of the Bureau on inquiries of taxpayers who request
of the Court of Tax Appeals and elevated its rank to the level of a
clarification on certain provisions of the National Internal Revenue
collegiate court with special jurisdiction. Section 1 specifically provides
Code, other tax laws, or their implementing regulations. Hence, the
that the Court of Tax Appeals is of the same level as the Court of Appeals
determination of the validity of these issuances clearly falls within
and possesses "all the inherent powers of a Court of Justice."
the exclusive appellate jurisdiction of the Court of Tax Appeals
under Section 7(1) of Republic Act No. 1125, as amended, subject to
The Court of Tax Appeals has undoubted jurisdiction to pass upon prior review by the Secretary of Finance, as required under Republic
the constitutionality or validity of a tax law or regulation when Act No. 8424.
raised by the taxpayer as a defense in disputing or contesting an
assessment or claiming a refund. It is only in the lawful exercise of
A direct invocation of this Court's jurisdiction should only be allowed
its power to pass upon all matters brought before it, as sanctioned
when there are special, important and compelling reasons clearly and
by Section 7 of Republic Act No. 1125, as amended.
specifically spelled out in the petition.
This Court, however, declares that the Court of Tax Appeals may
Nevertheless, despite the procedural infirmities of the petitions that
likewise take cognizance of cases directly challenging the
warrant their outright dismissal, the Court deems it prudent, if not crucial,
constitutionality or validity of a tax law or regulation or
to take cognizance of, and accordingly act on, the petitions as they assail taxable years 1996 and 1997 which prompted respondent to file a protest
the validity of the actions of the CIR that affect thousands of employees in with the BIR.
the different government agencies and instrumentalities. The Court,
following recent jurisprudence, avails itself of its judicial prerogative in Petitioner CIR sent respondent a letter demanding payment of "deficiency
order not to delay the disposition of the case at hand and to promote the VAT" DST for taxable years 1996 and 1997. Attached to the demand
vital interest of justice. letter were four (4) assessment notices.

G.R. No. 168129             April 24, 2007 Respondent filed another protest questioning the assessment notices.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, Petitioner CIR did not take any action on respondent's protests. Hence,
vs. on September 21, 2000, respondent filed with the Court of Tax Appeals
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent. (CTA) a petition for review which the CTA partially granted and ordered
respondent to pay the assessed fees.
FACTS:
Respondent filed a motion for partial reconsideration of the above
The Philippine Health Care Providers, Inc., herein respondent, is a judgment concerning its liability to pay the deficiency VAT to which the
corporation organized and existing under the laws of the Republic of the CTA ruled the withdrawal of the assessment issued against the petitioner.
Philippines. On July 25, 1987, President Corazon C. Aquino issued
Executive Order (E.O.) No. 273, amending the National Internal Revenue However, after a careful review of the facts of the case as well as the Law
Code of 1977 (Presidential Decree No. 1158) by imposing Value-Added and jurisprudence applicable, this court resolves to grant petitioner's
Tax (VAT) on the sale of goods and services. This E.O. took effect on "Motion for Partial Reconsideration." We are in accord with the view of
January 1, 1988. petitioner that it is entitled to the benefit of non-retroactivity of rulings
guaranteed under Section 246 of the Tax Code, in the absence of
Before the effectivity of E.O. No. 273, or on December 10, 1987, showing of bad faith on its part. Section 246 of the Tax Code provides:
respondent wrote the Commissioner of Internal Revenue (CIR),
petitioner, inquiring whether the services it provides to the participants in Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification
its health care program are exempt from the payment of the VAT. or reversal of any of the rules and regulations promulgated in accordance
with the preceding Sections or any of the rulings or circulars promulgated
Petitioner CIR, through the VAT Review Committee of the Bureau of by the Commissioner shall not be given retroactive application if the
Internal Revenue (BIR), issued VAT Ruling No. 231-88 stating that revocation, modification or reversal will be prejudicial to the taxpayers, x x
respondent, as a provider of medical services, is exempt from the VAT x.
coverage.
Clearly, undue prejudice will be caused to petitioner if the revocation of
Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT Ruling No. 231-88 will be retroactively applied to its case. VAT
VAT or E-VAT Law) took effect, amending further the National Internal Ruling No. 231-88 issued by no less than the respondent itself has
Revenue Code of 1977. Then on January 1, 1998, R.A. No. 8424 confirmed petitioner's entitlement to VAT exemption under Section 103 of
(National Internal Revenue Code of 1997) became effective. This new the Tax Code. In saying so, respondent has actually broadened the
Tax Code substantially adopted and reproduced the provisions of E.O. scope of "medical services" to include the case of the petitioner. This
No. 273 on VAT and R.A. No. 7716 on E-VAT. VAT ruling was even confirmed subsequently by Regional Director
Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit M). Exhibit P,
The BIR sent respondent a Preliminary Assessment Notice for deficiency which served as basis for the issuance of the said VAT ruling in favor of
in its payment of the VAT and documentary stamp taxes (DST) for the petitioner sufficiently described the business of petitioner and there is
no way BIR could be misled by the said representation as to the real
nature of petitioner's business. Such being the case, this court is representations." As "the term health maintenance organization did not
convinced that petitioner's reliance on the said ruling is premised on good as yet have any particular significance for tax purposes," respondent's
faith. The facts of the case do not show that petitioner deliberately failure "to include a term that has yet to acquire its present definition and
committed mistakes or omitted material facts when it obtained the said significance cannot be equated with bad faith."
ruling from the Bureau of Internal Revenue. Thus, in the absence of such
proof, this court upholds the application of Section 246 of the Tax Code. We agree with both the Tax Court and the Court of Appeals that
Consequently, the pronouncement made by the BIR in VAT Ruling No. respondent acted in good faith. In Civil Service Commission v. Maala, we
231-88 as to the VAT exemption of petitioner should be upheld. described good faith as "that state of mind denoting honesty of intention
and freedom from knowledge of circumstances which ought to put the
In its Decision, the Court of Appeals affirmed the CTA Resolution. holder upon inquiry; an honest intention to abstain from taking any
unconscientious advantage of another, even through technicalities of law,
ISSUE: together with absence of all information, notice, or benefit or belief of
facts which render transaction unconscientious."
Whether VAT Ruling No. 231-88 exempting respondent from payment of
VAT has retroactive application. According to the Court of Appeals, respondent's failure to describe itself
as a "health maintenance organization," which is subject to VAT, is not
RULING: tantamount to bad faith. We note that the term "health maintenance
organization" was first recorded in the Philippine statute books only upon
the passage of "The National Health Insurance Act of 1995" (Republic
Relative to the second issue, Section 246 of the 1997 Tax Code, as
Act No. 7875). Section 4 (o) (3) thereof defines a health maintenance
amended, provides that rulings, circulars, rules and regulations
organization as "an entity that provides, offers, or arranges for coverage
promulgated by the Commissioner of Internal Revenue have no
of designated health services needed by plan members for a fixed
retroactive application if to apply them would prejudice the taxpayer. The
prepaid premium." Under this law, a health maintenance organization is
exceptions to this rule are: (1) where the taxpayer deliberately misstates
one of the classes of a "health care provider."
or omits material facts from his return or in any document required of him
by the Bureau of Internal Revenue; (2) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from It is thus apparent that when VAT Ruling No. 231-88 was issued in
the facts on which the ruling is based, or (3) where the taxpayer acted in respondent's favor, the term "health maintenance organization" was yet
bad faith. unknown or had no significance for taxation purposes. Respondent,
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.
We must now determine whether VAT Ruling No. 231-88 exempting
respondent from paying its VAT liabilities has retroactive application.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held
that under Section 246 of the 1997 Tax Code, the Commissioner of
In its Resolution dated March 23, 2003, the CTA found that there is no
Internal Revenue is precluded from adopting a position contrary to
showing that respondent "deliberately committed mistakes or omitted
one previously taken where injustice would result to the
material facts" when it obtained VAT Ruling No. 231-88 from the BIR. The
taxpayer. Hence, where an assessment for deficiency withholding
CTA held that respondent's letter which served as the basis for the VAT
income taxes was made, three years after a new BIR Circular reversed a
ruling "sufficiently described" its business and "there is no way the BIR
previous one upon which the taxpayer had relied upon, such an
could be misled by the said representation as to the real nature" of said
assessment was prejudicial to the taxpayer. To rule otherwise, opined the
business.
Court, would be contrary to the tenets of good faith, equity, and fair play.
In sustaining the CTA, the Court of Appeals found that "the failure of
G.R. No. 153205             January 22, 2007
respondent to refer to itself as a health maintenance organization is not
an indication of bad faith or a deliberate attempt to make false
COMMISSIONER OF INTERNAL REVENUE, Petitioner, For the year 1996, [respondent] seasonably filed its quarterly Value-
vs. Added Tax Returns reflecting, among others, a total zero-rated sales
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR of P147,317,189.62 with VAT input taxes of P3,361,174.14.
MINDANAO, INC., Respondent.
Respondent availed of the Voluntary Assessment Program (VAP) of the
FACTS: BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated
February 20, 1996 to be applicable to its case.
[Respondent] is a domestic corporation duly organized and existing under
and by virtue of the laws of the Philippines with principal address located In [conformity] with the aforecited Revenue Regulations, [respondent]
at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City. subjected its sale of services to the Consortium to the 10% VAT in the
total amount of P103,558,338.11 representing April to December 1996
It is represented that a foreign consortium composed of Burmeister and sales since said Revenue Regulations No. 5-96 became effective only on
Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering April 1996. The sum of P43,893,951.07, representing January to March
and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract 1996 sales was subjected to zero rate. Consequently, [respondent] filed
with NAPOCOR for the operation and maintenance of [NAPOCOR’s] two its 1996 amended VAT return consolidating therein the VAT output and
power barges. The Consortium appointed BWSC-Denmark as its input taxes for the four calendar quarters of 1996. It paid the amount
coordination manager. of P6,994,659.67 through BIR’s collecting agent, PCIBank, as its output
tax liability for the year 1996.
BWSC-Denmark established [respondent] which subcontracted the actual
operation and maintenance of NAPOCOR’s two power barges as well as Respondent was able to secure VAT Ruling No. 003-99 from the VAT
the performance of other duties and acts which necessarily have to be Review Committee which reconfirmed BIR Ruling No. 023-95 "insofar as
done in the Philippines. it held that the services being rendered by BWSCMI is subject to VAT at
zero percent (0%)."
NAPOCOR paid capacity and energy fees to the Consortium in a mixture
of currencies. The freely convertible non-Peso component is deposited On the strength of the aforementioned rulings, [respondent] on April
directly to the Consortium’s bank accounts in Denmark and Japan, while 22,1999, filed a claim for the issuance of a tax credit certificate with
the Peso-denominated component is deposited in a separate and special Revenue District No. 113 of the BIR. [Respondent] believed that it
designated bank account in the Philippines. On the other hand, the erroneously paid the output VAT for 1996 due to its availment of the
Consortium pays [respondent] in foreign currency inwardly remitted to the Voluntary Assessment Program (VAP) of the BIR.
Philippines through the banking system.
On 27 December 1999, respondent filed a petition for review with the
In order to ascertain the tax implications of the above transactions, CTA in order to toll the running of the two-year prescriptive period under
[respondent] sought a ruling from the BIR which responded with BIR the Tax Code.
Ruling No. 023-95 dated February 14, 1995, declaring therein that if
[respondent] chooses to register as a VAT person and the consideration The Issue
for its services is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng The lone issue for resolution is whether respondent is entitled to the
Pilipinas, the aforesaid services shall be subject to VAT at zero-rate. refund of P6,994,659.67 as erroneously paid output VAT for the year
1996.16
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the
Certificate of Registration bearing RDO Control No. 95-113-007556 was RULING:
issued in favor of [respondent] by the Revenue District Office No. 113 of
Davao City.
At the outset, the Court declares that the denial of the instant petition is accordance with BSP rules. Another essential condition for qualification
not on the ground that respondent’s services are subject to 0% VAT. to zero-rating under Section 102(b)(2) is that the recipient of such
Rather, it is based on the non-retroactivity of the prejudicial revocation of services is doing business outside the Philippines. While this requirement
BIR Ruling No. 023-95 and VAT Ruling No. 003-99, which held that is not expressly stated in the second paragraph of Section 102(b), this is
respondent’s services are subject to 0% VAT and which respondent clearly provided in the first paragraph of Section 102(b) where the listed
invoked in applying for refund of the output VAT. services must be "for other persons doing business outside the
Philippines." The phrase "for other persons doing business outside the
Section 102(b) of the Tax Code, the applicable provision in 1996 when Philippines" not only refers to the services enumerated in the first
respondent rendered the services and paid the VAT in question, paragraph of Section 102(b), but also pertains to the general term
enumerates which services are zero-rated, thus: "services" appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods
(b) Transactions subject to zero-rate. ― The following services performed must likewise be performed for persons doing business outside the
in the Philippines by VAT-registered persons shall be subject to 0%: Philippines.

(1) Processing, manufacturing or repacking goods for other This can only be the logical interpretation of Section 102(b)(2). If the
persons doing business outside the Philippines which goods provider and recipient of the "other services" are both doing business in
are subsequently exported, where the services are paid for in the Philippines, the payment of foreign currency is irrelevant. Otherwise,
acceptable foreign currency and accounted for in accordance with those subject to the regular VAT under Section 102(a) can avoid paying
the rules and regulations of the Bangko Sentral ng the VAT by simply stipulating payment in foreign currency inwardly
Pilipinas (BSP); remitted by the recipient of services. To interpret Section 102(b)(2) to
apply to a payer-recipient of services doing business in the Philippines is
to make the payment of the regular VAT under Section 102(a) dependent
(2) Services other than those mentioned in the preceding
on the generosity of the taxpayer. The provider of services can choose to
sub-paragraph, the consideration for which is paid for in
pay the regular VAT or avoid it by stipulating payment in foreign currency
acceptable foreign currency and accounted for in accordance with
inwardly remitted by the payer-recipient. Such interpretation removes
the rules and regulations of the Bangko Sentral ng
Section 102(a) as a tax measure in the Tax Code, an interpretation this
Pilipinas (BSP);
Court cannot sanction. A tax is a mandatory exaction, not a voluntary
contribution.
(3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
When Section 102(b)(2) stipulates payment in "acceptable foreign
Philippines is a signatory effectively subjects the supply of such
currency" under BSP rules, the law clearly envisions the payer-recipient
services to zero rate;
of services to be doing business outside the Philippines. Only those not
doing business in the Philippines can be required under BSP rules to pay
(4) Services rendered to vessels engaged exclusively in in acceptable foreign currency for their purchase of goods or services
international shipping; and from the Philippines. In a domestic transaction, where the provider and
recipient of services are both doing business in the Philippines, the BSP
(5) Services performed by subcontractors and/or contractors in cannot require any party to make payment in foreign currency.
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual Services covered by Section 102(b) (1) and (2) are in the nature of export
production. (Emphasis supplied) sales since the payer-recipient of services is doing business outside the
Philippines. Under BSP rules, the proceeds of export sales must be
The Tax Code not only requires that the services be other than reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to
"processing, manufacturing or repacking of goods" and that payment for require the provider of services under Section 102(b) (1) and (2) to
such services be in acceptable foreign currency accounted for in account for the foreign currency proceeds to the BSP. The same
rationale does not apply if the provider and recipient of the services are maintenance of two 100-Megawatt power barges ("Power Barges")
both doing business in the Philippines since their transaction is not in the acquired by NAPOCOR for a 15-year term. (Emphasis supplied)
nature of an export sale even if payment is denominated in foreign
currency. Considering this length of time, the Consortium’s operation and
maintenance of NAPOCOR’s power barges cannot be classified as a
Further, when the provider and recipient of services are both doing single or isolated transaction. The Consortium does not fall under Section
business in the Philippines, their transaction falls squarely under Section 102(b)(2) which requires that the recipient of the services must be a
102(a) governing domestic sale or exchange of services. Indeed, this is a person doing business outside the Philippines. Therefore, respondent’s
purely local sale or exchange of services subject to the regular VAT, services to the Consortium, not being supplied to a person doing
unless of course the transaction falls under the other provisions of business outside the Philippines, cannot legally qualify for 0% VAT.
Section 102(b).
Respondent, as subcontractor of the Consortium, operates and maintains
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those NAPOCOR’s power barges in the Philippines. NAPOCOR pays the
mentioned in the preceding subparagraph," the legislative intent is Consortium, through its non-resident partners, partly in foreign currency
that only the services are different between subparagraphs 1 and 2. The outwardly remitted. In turn, the Consortium pays respondent also in
requirements for zero-rating, including the essential condition that the foreign currency inwardly remitted and accounted for in accordance with
recipient of services is doing business outside the Philippines, remain the BSP rules. This payment scheme does not entitle respondent to 0% VAT.
same under both subparagraphs. As the Court held in Commissioner of Internal Revenue v. American
Express International, Inc. (Philippine Branch), the place of payment is
Significantly, the amended Section 108(b) [previously Section 102(b)] of immaterial, much less is the place where the output of the service is
the present Tax Code clarifies this legislative intent. Expressly included ultimately used. An essential condition for entitlement to 0% VAT under
among the transactions subject to 0% VAT are "[s]ervices other than Section 102(b)(1) and (2) is that the recipient of the services is a person
those mentioned in the [first] paragraph [of Section 108(b)] rendered to a doing business outside the Philippines. In this case, the recipient of the
person engaged in business conducted outside the Philippines or to a services is the Consortium, which is doing business not outside, but
nonresident person not engaged in business who is outside the within the Philippines because it has a 15-year contract to operate and
Philippines when the services are performed, the consideration for which maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.
is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP." The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are
In this case, the payer-recipient of respondent’s services is the taxed). However, as the Court stated in American Express, there is an
Consortium which is a joint-venture doing business in the Philippines. exception to this rule. This exception refers to the 0% VAT on services
While the Consortium’s principal members are non-resident foreign enumerated in Section 102 and performed in the Philippines. For services
corporations, the Consortium itself is doing business in the Philippines. covered by Section 102(b)(1) and (2), the recipient of the services must
This is shown clearly in BIR Ruling No. 023-95 which states that the be a person doing business outside the Philippines. Thus, to be exempt
contract between the Consortium and NAPOCOR is for a 15-year term, from the destination principle under Section 102(b)(1) and (2), the
thus: services must be (a) performed in the Philippines; (b) for a person doing
business outside the Philippines; and (c) paid in acceptable foreign
This refers to your letter dated January 14, 1994 requesting for a currency accounted for in accordance with BSP rules.
clarification of the tax implications of a contract between a consortium
composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Respondent’s reliance on the ruling in American Express is misplaced.
Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. That case involved a recipient of services, specifically American Express
("MITSUI"), all referred to hereinafter as the "Consortium", and the International, Inc. (Hongkong Branch), doing business outside the
National Power Corporation ("NAPOCOR") for the operation and Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is COMMISSIONER OF INTERNAL REVENUE, petitioner,
a VAT-registered person that facilitates the collection and payment of vs.
receivables belonging to its non-resident foreign client [American Express COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA
International, Inc. (Hongkong Branch)], for which it gets paid in INDUSTRIES, INC., respondents.
acceptable foreign currency inwardly remitted and accounted for in
accordance with BSP rules and regulations. x x x x (Emphasis supplied) FACTS:

In contrast, this case involves a recipient of services – the Consortium – ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in
which is doing business in the Philippines. Hence, American Express’ the manufacture and sale of cigar and cigarette products. On 7 May 1991
services were subject to 0% VAT, while respondent’s services should be private respondent received a letter dated 26 April 1991 from the
subject to 10% VAT. Commissioner of Internal Revenue assessing it deficiency Ad Valorem
Tax (AVT) inclusive of increments, on the removals of cigarette products
Nevertheless, in seeking a refund of its excess output tax, respondent from their place of production during the period 2 November 1990 to 22
relied on VAT Ruling No. 003-99, which reconfirmed BIR Ruling No. 023- January 1991.
95 "insofar as it held that the services being rendered by BWSCMI is
subject to VAT at zero percent (0%)." Respondent’s reliance on these Private respondent thru counsel filed a protest against the proposed
BIR rulings binds petitioner. assessment with a request that the same be withdrawn and cancelled but
was denied by petitioner. In a letter dated 10 June 1991 which petitioner
Petitioner’s filing of his Answer before the CTA challenging respondent’s received on the same day, private respondent requested for the
claim for refund effectively serves as a revocation of VAT Ruling No. 003- reconsideration of petitioner's denial of its protest. Without waiting for
99 and BIR Ruling No. 023-95. However, such revocation cannot be petitioner's reply to its request for reconsideration, private respondent
given retroactive effect since it will prejudice respondent. Changing filed on 19 June 1991 a petition for review with the Court of Tax Appeals.
respondent’s status will deprive respondent of a refund of a substantial On 25 June 1991 private respondent received from petitioner a letter
amount representing excess output tax. Section 246 of the Tax Code dated 21 June 1991 denying its request for reconsideration declaring
provides that any revocation of a ruling by the Commissioner of Internal again that its decision was final. On 8 July 1991 private respondent paid
Revenue shall not be given retroactive application if the revocation will under protest the disputed ad valorem.
prejudice the taxpayer. Further, there is no showing of the existence of
any of the exceptions enumerated in Section 246 of the Tax Code for the The Court of Tax Appeals ordered petitioner to refund to private
retroactive application of such revocation. respondent the amount of Five Hundred Twenty Thousand Eight Hundred
Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29) representing
However, upon the filing of petitioner’s Answer dated 2 March 2000 erroneously paid ad valorem tax for the period 2 November 1990 to 22
before the CTA contesting respondent’s claim for refund, respondent’s January 1991.
services shall be subject to the regular 10% VAT. Such filing is deemed a
revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to
Insular-Yebana Tobacco Corporation revoking BIR Ruling 473-88 for
being violative of Sec. 142 of the Tax Code. It included back the VAT to
the gross selling price in determining the tax base for computing the ad
valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of the
Tax Code, as amended by E.O. No. 273 —

Petitioner sought to apply the revocation retroactively to private

G.R. No. 117982 February 6, 1997 respondent's removals of cigarettes for the period starting 2 November
1990 to 22 January 1991 on the ground that private respondent allegedly
acted in bad faith which is an exception to the rule on non-retroactivity of any of the rulings or circulars promulgated by the
BIR Rulings.  Commissioner of Internal Revenue shall not be given
retroactive application if the revocation, modification, or
On appeal, the Court of Appeals affirmed the Court of Tax Appeals reversal will be prejudicial to the taxpayers except in the
holding that the retroactive application of BIR Ruling 017-91 cannot be following cases: a) where the taxpayer deliberately
allowed since private respondent did not act in bad faith. misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal
RULING: Revenue; b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or c) where
We cannot sustain petitioner. The deficiency tax assessment issued by
the taxpayer acted in bad faith.
petitioner against private respondent is without legal basis because of the
prohibition against the retroactive application of the revocation of BIR
rulings in the absence of bad faith on the part of private respondent. Without doubt, private respondent would be prejudiced by the retroactive
application of the revocation as it would be assessed deficiency excise
tax.
The present dispute arose from the discrepancy in the taxable base on
which the excise tax is to apply on account of two incongruous BIR
Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the Separate Opinions
VAT from the tax base in computing the fifteen percent (15%) excise tax
due; and, (2) BIR Ruling 017-91 dated 11 February 1991 which included
back the VAT in computing the tax base for purposes of the fifteen
percent (15%) ad valorem tax. VITUG, J., concurring:

The question as to the correct computation of the excise tax on cigarettes I concur in the ponencia written by my esteemed colleague, Mr. Justice
in the case at bar has been sufficiently addressed by BIR Ruling 017-91 Josue N. Bellosillo. I only would like to stress that the 1988 opinion of the
dated 11 February 1991 which revoked BIR Ruling 473-88 dated 4 Commissioner of Internal Revenue cannot be considered void,
October 1988 considering that it evinces what the former Commissioner must have felt
to be a real inconsistency between Section 127 and Section 142 of the
Private respondent did not question the correctness of the above BIR Tax Code. The non-retroactivity proscription under Section 246 of the Tax
ruling. In fact, upon knowledge of the effectivity of BIR Ruling No. 017-91, Code can thus aptly apply. I reserve my vote, however, in a situation
private respondent immediately implemented the method of computation where, as the Solicitor General so points out, the revoked ruling is
mandated therein by restoring the VAT in computing the tax base for patently null and void in which case it could possibly be disregarded as
purposes of the 15% ad valorem tax. being in existent from the very beginning.

However, well-entrenched is the rule that rulings and circulars, rules and G.R. No. 163653               July 19, 2011
regulations promulgated by the Commissioner of Internal Revenue would
have no retroactive application if to so apply them would be prejudicial to COMMISSIONER OF INTERNAL REVENUE, Petitioner,
the taxpayers. vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.
The applicable law is Sec. 246 of the Tax Code which provides —
x - - - - - - - - - - - - - - - - - - - - - - -x
Sec. 246. Non-retroactivity of rulings. — Any revocation,
modification, or reversal of any rules and regulations G.R. No. 167689
promulgated in accordance with the preceding section or
COMMISSIONER OF INTERNAL REVENUE, Petitioner, equity participation in FAC respectively pegged at 60% and 40% in the
vs. Shareholders’ Agreement, FDC subscribed to ₱500.7 million worth of
FILINVEST DEVELOPMENT CORPORATION, Respondent. shares in said joint venture company to RHPL’s subscription worth
₱433.8 million. Having paid its subscription by executing a Deed of
DECISION Assignment transferring to FAC a portion of its rights and interest in the
Project worth ₱500.7 million, FDC eventually reported a net loss of
FACTS: ₱190,695,061.00 in its Annual Income Tax Return for the taxable year
1996.11
The owner of 80% of the outstanding shares of respondent Filinvest
Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) On 3 January 2000, FDC received from the BIR a Formal Notice of
is a holding company which also owned 67.42% of the outstanding Demand to pay deficiency income and documentary stamp taxes, plus
shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI interests and compromise penalties,12 covered by the following
entered into a Deed of Exchange with FLI whereby the former both Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-
transferred in favor of the latter parcels of land appraised at 2000 for deficiency income taxes in the sum of ₱150,074,066.27 for
₱4,306,777,000.00. In exchange for said parcels which were intended to 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency
facilitate development of medium-rise residential and commercial documentary stamp taxes in the sum of ₱10,425,487.06 for 1996; (c)
buildings, 463,094,301 shares of stock of FLI were issued to FDC and Assessment Notice No. SP-INC-97-00019-2000 for deficiency income
FAI. As a result of the exchange, FLI’s ownership structure was changed. taxes in the sum of ₱5,716,927.03 for 1997; and (d) Assessment Notice
No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in
the sum of ₱5,796,699.40 for 1997.13 The foregoing deficiency taxes were
On 13 January 1997, FLI requested a ruling from the Bureau of Internal
assessed on the taxable gain supposedly realized by FDC from the Deed
Revenue (BIR) to the effect that no gain or loss should be recognized in
of Exchange it executed with FAI and FLI, on the dilution resulting from
the aforesaid transfer of real properties. Acting on the request, the BIR
the Shareholders’ Agreement FDC executed with RHPL as well as the
issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the
"arm’s-length" interest rate and documentary stamp taxes imposable on
exchange is among those contemplated under Section 34 (c) (2) of the
the advances FDC extended to its affiliates.14
old National Internal Revenue Code (NIRC)4 which provides that "(n)o
gain or loss shall be recognized if property is transferred to a corporation
by a person in exchange for a stock in such corporation of which as a On 3 January 2000, FAI similarly received from the BIR a Formal Letter
result of such exchange said person, alone or together with others, not of Demand for deficiency income taxes in the sum of ₱1,477,494,638.23
exceeding four (4) persons, gains control of said corporation."5 With the for the year 1997.15 Covered by Assessment Notice No. SP-INC-97-0027-
BIR’s reiteration of the foregoing ruling upon the 10 February 1997 2000,16 said deficiency tax was also assessed on the taxable gain
request for clarification filed by FLI,6 the latter, together with FDC and purportedly realized by FAI from the Deed of Exchange it executed with
FAI, complied with all the requirements imposed in the ruling.7 FDC and FLI.17 On 26 January 2000 or within the reglementary period of
thirty (30) days from notice of the assessment, both FDC and FAI filed
their respective requests for reconsideration/protest, on the ground that
On various dates during the years 1996 and 1997, in the meantime, FDC
the deficiency income and documentary stamp taxes assessed by the
also extended advances in favor of its affiliates, namely, FAI, FLI, Davao
BIR were bereft of factual and legal basis.18 Having submitted the relevant
Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).8 Duly
supporting documents pursuant to the 31 January 2000 directive from the
evidenced by instructional letters as well as cash and journal vouchers,
BIR Appellate Division, FDC and FAI filed on 11 September 2000 a letter
said cash advances amounted to ₱2,557,213,942.60 in 19969 and
requesting an early resolution of their request for reconsideration/protest
₱3,360,889,677.48 in 1997.10 On 15 November 1996, FDC also entered
on the ground that the 180 days prescribed for the resolution thereof
into a Shareholders’ Agreement with Reco Herrera PTE Ltd. (RHPL) for
under Section 228 of the NIRC was going to expire on 20 September
the formation of a Singapore-based joint venture company called Filinvest
2000.19
Asia Corporation (FAC), tasked to develop and manage FDC’s 50%
ownership of its PBCom Office Tower Project (the Project). With their
In view of the failure of petitioner Commissioner of Internal Revenue the conclusion of the testimony of Susana Macabelda anent the cash
(CIR) to resolve their request for reconsideration/protest within the advances FDC extended in favor of its affiliates,24 the CTA went on to
aforesaid period, FDC and FAI filed on 17 October 2000 a petition for render the Decision dated 10 September 2002 which, with the exception
review with the Court of Tax Appeals (CTA) pursuant to Section 228 of of the deficiency income tax on the interest income FDC supposedly
the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the realized from the advances it extended in favor of its affiliates, cancelled
petition alleged, among other matters, that as previously opined in BIR the rest of deficiency income and documentary stamp taxes assessed
Ruling No. S-34-046-97, no taxable gain should have been assessed against FDC and FAI for the years 1996 and 1997,25 thus:
from the subject Deed of Exchange since FDC and FAI collectively
gained further control of FLI as a consequence of the exchange; that WHEREFORE, in view of all the foregoing, the court finds the instant
correlative to the CIR's lack of authority to impute theoretical interests on petition partly meritorious. Accordingly, Assessment Notice No. SP-INC-
the cash advances FDC extended in favor of its affiliates, the rule is 96-00018-2000 imposing deficiency income tax on FDC for taxable year
settled that interests cannot be demanded in the absence of a stipulation 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-
to the effect; that not being promissory notes or certificates of obligations, 00021-2000 imposing deficiency documentary stamp tax on FDC for
the instructional letters as well as the cash and journal vouchers taxable years 1996 and 1997, respectively and Assessment Notice No.
evidencing said cash advances were not subject to documentary stamp SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the
taxes; and, that no income tax may be imposed on the prospective gain taxable year 1997 are hereby CANCELLED and SET ASIDE. However,
from the supposed appreciation of FDC's shareholdings in FAC. As a [FDC] is hereby ORDERED to PAY the amount of ₱5,691,972.03 as
consequence, FDC and FAC both prayed that the subject assessments deficiency income tax for taxable year 1997. In addition, petitioner is also
for deficiency income and documentary stamp taxes for the years 1996 ORDERED to PAY 20% delinquency interest computed from February
and 1997 be cancelled and annulled.20 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the
Tax Code.26
On 4 December 2000, the CIR filed its answer, claiming that the transfer
of property in question should not be considered tax free since, with the Finding that the collective increase of the equity participation of FDC and
resultant diminution of its shares in FLI, FDC did not gain further control FAI in FLI rendered the gain derived from the exchange tax-free, the CTA
of said corporation. Likewise calling attention to the fact that the cash also ruled that the increase in the value of FDC's shares in FAC did not
advances FDC extended to its affiliates were interest free despite the result in economic advantage in the absence of actual sale or conversion
interest bearing loans it obtained from banking institutions, the CIR thereof. While likewise finding that the documents evidencing the cash
invoked Section 43 of the old NIRC which, as implemented by Revenue advances FDC extended to its affiliates cannot be considered as loan
Regulations No. 2, Section 179 (b) and (c), gave him "the power to agreements that are subject to documentary stamp tax, the CTA
allocate, distribute or apportion income or deductions between or among enunciated, however, that the CIR was justified in assessing undeclared
such organizations, trades or business in order to prevent evasion of interests on the same cash advances pursuant to his authority under
taxes." The CIR justified the imposition of documentary stamp taxes on Section 43 of the NIRC in order to forestall tax evasion. For persuasive
the instructional letters as well as cash and journal vouchers for said cash effect, the CTA referred to the equivalent provision in the Internal
advances on the strength of Section 180 of the NIRC and Revenue Revenue Code of the United States (IRC-US), i.e., Sec. 482, as
Regulations No. 9-94 which provide that loan transactions are subject to implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of
said tax irrespective of whether or not they are evidenced by a formal Federal Income Taxation.27
agreement or by mere office memo. The CIR also argued that FDC
realized taxable gain arising from the dilution of its shares in FAC as a Dissatisfied with the foregoing decision, FDC filed on 5 November 2002
result of its Shareholders' Agreement with RHPL.21 the petition for review docketed before the CA as CA-G.R. No. 72992,
pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling
At the pre-trial conference, the parties filed a Stipulation of Facts, attention to the fact that the cash advances it extended to its affiliates
Documents and Issues22 which was admitted in the 16 February 2001 were interest-free in the absence of the express stipulation on interest
resolution issued by the CTA. With the further admission of the Formal required under Article 1956 of the Civil Code, FDC questioned the
Offer of Documentary Evidence subsequently filed by FDC and FAI23 and imposition of an arm's-length interest rate thereon on the ground, among
others, that the CIR's authority under Section 43 of the NIRC: (a) does are not subject to documentary stamp taxes pursuant to BIR
not include the power to impute imaginary interest on said transactions; Ruling No. 116-98, dated 30 July 1998, since they do not partake
(b) is directed only against controlled taxpayers and not against mother or the nature of loan agreements;
holding corporations; and, (c) can only be invoked in cases of
understatement of taxable net income or evident tax evasion.28 Upholding 3. Although BIR Ruling No. 116-98 had been subsequently
FDC's position, the CA's then Special Fifth Division rendered the herein modified by BIR Ruling No. 108-99, dated 15 July 1999, to the
assailed decision dated 16 December 2003,29 the decretal portion of effect that documentary stamp taxes are imposable on inter-office
which states: memos evidencing cash advances similar to those extended by
FDC, said latter ruling cannot be given retroactive application if to
WHEREFORE, premises considered, the instant petition is hereby do so would be prejudicial to the taxpayer;
GRANTED. The assailed Decision dated September 10, 2002 rendered
by the Court of Tax Appeals in CTA Case No. 6182 directing petitioner 4. FDC's alleged gain from the increase of its shareholdings in
Filinvest Development Corporation to pay the amount of ₱5,691,972.03 FAC as a consequence of the Shareholders' Agreement it
representing deficiency income tax on allegedly undeclared interest executed with RHPL cannot be considered taxable income since,
income for the taxable year 1997, plus 20% delinquency interest until actually converted thru sale or disposition of said shares,
computed from February 16, 2000 until full payment thereof is they merely represent unrealized increase in capital.34
REVERSED and SET ASIDE and, a new one entered annulling
Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency Respectively docketed before this Court as G.R. Nos. 163653 and
income tax on petitioner for taxable year 1997. No pronouncement as to 167689, the CIR's petitions for review on certiorari assailing the 16
costs.30 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005
decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1
With the denial of its partial motion for reconsideration of the same 11 March 2006 resolution issued by this Court’s Third Division.
December 2002 resolution issued by the CTA,31 the CIR also filed the
petition for review docketed before the CA as CA-G.R. No. 74510. In The Issues
essence, the CIR argued that the CTA reversibly erred in cancelling the
assessment notices: (a) for deficiency income taxes on the exchange of
In G.R. No. 163653, the CIR urges the grant of its petition on the
property between FDC, FAI and FLI; (b) for deficiency documentary
following ground:
stamp taxes on the documents evidencing FDC's cash advances to its
affiliates; and (c) for deficiency income tax on the gain FDC purportedly
realized from the increase of the value of its shareholdings in FAC.32 The THE COURT OF APPEALS ERRED IN REVERSING THE DECISION
foregoing petition was, however, denied due course and dismissed for OF THE COURT OF TAX APPEALS AND IN HOLDING THAT THE
lack of merit in the herein assailed decision dated 26 January ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE
200533 rendered by the CA's then Fourteenth Division, upon the following NOT SUBJECT TO INCOME TAX.35
findings and conclusions, to wit:
In G.R. No. 167689, on the other hand, petitioner proffers the following
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046- issues for resolution:
97, the 29 November 1996 Deed of Exchange resulted in the
combined control by FDC and FAI of more than 51% of the I
outstanding shares of FLI, hence, no taxable gain can be
recognized from the transaction under Section 34 (c) (2) of the THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
old NIRC; ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE
OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST
2. The instructional letters as well as the cash and journal DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
vouchers evidencing the advances FDC extended to its affiliates INCORPORATED (FAI) AND FILINVEST LAND
 INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR dedicated to the study and consideration of tax matters, can take judicial
THE NON-RECOGNITION OF TAXABLE GAIN UNDER notice of US income tax laws and regulations.37
SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL
REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any case of
NIRC. two or more organizations, trades or businesses (whether or not
incorporated and whether or not organized in the Philippines) owned or
II controlled directly or indirectly by the same interests, the Commissioner
of Internal Revenue is authorized to distribute, apportion or allocate gross
THE HONORABLE COURT OF APPEALS COMMITTED income or deductions between or among such organization, trade or
REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF business, if he determines that such distribution, apportionment or
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO allocation is necessary in order to prevent evasion of taxes or clearly to
ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS reflect the income of any such organization, trade or business." In
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER amplification of the equivalent provision39 under Commonwealth Act No.
SECTION 180 OF THE NIRC. 466,40 Sec. 179(b) of Revenue Regulation No. 2 states as follows:

III Determination of the taxable net income of controlled taxpayer. – (A)

DEFINITIONS. – When used in this section –
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE (1) The term "organization" includes any kind, whether it
INCREASE IN THE VALUE OF FDC’S SHAREHOLDINGS IN be a sole proprietorship, a partnership, a trust, an estate,
FAC IS NOT TAXABLE.36 or a corporation or association, irrespective of the place
where organized, where operated, or where its trade or
The Court’s Ruling business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or
whether affiliated or not.
While the petition in G.R. No. 163653 is bereft of merit, we find the CIR’s
petition in G.R. No. 167689 impressed with partial merit.
(2) The terms "trade" or "business" include any trade or
business activity of any kind, regardless of whether or
In G.R. No. 163653, the CIR argues that the CA erred in reversing the
where organized, whether owned individually or
CTA’s finding that theoretical interests can be imputed on the advances
otherwise, and regardless of the place where carried on.
FDC extended to its affiliates in 1996 and 1997 considering that, for said
purpose, FDC resorted to interest-bearing fund borrowings from
commercial banks. Since considerable interest expenses were deducted (3) The term "controlled" includes any kind of control,
by FDC when said funds were borrowed, the CIR theorizes that interest direct or indirect, whether legally enforceable, and
income should likewise be declared when the same funds were sourced however exercisable or exercised. It is the reality of the
for the advances FDC extended to its affiliates. Invoking Section 43 of the control which is decisive, not its form or mode of exercise.
1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the A presumption of control arises if income or deductions
CIR maintains that it is vested with the power to allocate, distribute or have been arbitrarily shifted.
apportion income or deductions between or among controlled
organizations, trades or businesses even in the absence of fraud, since (4) The term "controlled taxpayer" means any one of two
said power is intended "to prevent evasion of taxes or clearly to reflect or more organizations, trades, or businesses owned or
the income of any such organizations, trades or businesses." In addition, controlled directly or indirectly by the same interests.
the CIR asseverates that the CA should have accorded weight and
respect to the findings of the CTA which, as the specialized court
 (5) The term "group" and "group of controlled taxpayers" (C) APPLICATION – Transactions between controlled taxpayer
means the organizations, trades or businesses owned or and another will be subjected to special scrutiny to ascertain
controlled by the same interests. whether the common control is being used to reduce, avoid or
escape taxes. In determining the true net income of a controlled
(6) The term "true net income" means, in the case of a taxpayer, the Commissioner of Internal Revenue is not restricted
controlled taxpayer, the net income (or as the case may to the case of improper accounting, to the case of a fraudulent,
be, any item or element affecting net income) which would colorable, or sham transaction, or to the case of a device
have resulted to the controlled taxpayer, had it in the designed to reduce or avoid tax by shifting or distorting income or
conduct of its affairs (or, as the case may be, any item or deductions. The authority to determine true net income extends to
element affecting net income) which would have resulted any case in which either by inadvertence or design the taxable
to the controlled taxpayer, had it in the conduct of its net income in whole or in part, of a controlled taxpayer, is other
affairs (or, as the case may be, in the particular contract, than it would have been had the taxpayer in the conduct of his
transaction, arrangement or other act) dealt with the other affairs been an uncontrolled taxpayer dealing at arm’s length with
members or members of the group at arm’s length. It another uncontrolled taxpayer.41
does not mean the income, the deductions, or the item or
element of either, resulting to the controlled taxpayer by As may be gleaned from the definitions of the terms "controlled" and
reason of the particular contract, transaction, or "controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing
arrangement, the controlled taxpayer, or the interest provision, it would appear that FDC and its affiliates come within the
controlling it, chose to make (even though such contract, purview of Section 43 of the 1993 NIRC. Aside from owning significant
transaction, or arrangement be legally binding upon the portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that
parties thereto). FDC extended substantial sums of money as cash advances to its said
affiliates for the purpose of providing them financial assistance for their
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the operational and capital expenditures seemingly indicate that the situation
Tax Code is to place a controlled taxpayer on a tax parity with an sought to be addressed by the subject provision exists. From the tenor of
uncontrolled taxpayer, by determining, according to the standard paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be
of an uncontrolled taxpayer, the true net income from the property seen that the CIR's power to distribute, apportion or allocate gross
and business of a controlled taxpayer. The interests controlling a income or deductions between or among controlled taxpayers may be
group of controlled taxpayer are assumed to have complete likewise exercised whether or not fraud inheres in the transaction/s under
power to cause each controlled taxpayer so to conduct its affairs scrutiny. For as long as the controlled taxpayer's taxable income is not
that its transactions and accounting records truly reflect the net reflective of that which it would have realized had it been dealing at arm's
income from the property and business of each of the controlled length with an uncontrolled taxpayer, the CIR can make the necessary
taxpayers. If, however, this has not been done and the taxable rectifications in order to prevent evasion of taxes.
net income are thereby understated, the statute contemplates
that the Commissioner of Internal Revenue shall intervene, and, Despite the broad parameters provided, however, we find that the CIR's
by making such distributions, apportionments, or allocations as powers of distribution, apportionment or allocation of gross income and
he may deem necessary of gross income or deductions, or of any deductions under Section 43 of the 1993 NIRC and Section 179 of
item or element affecting net income, between or among the Revenue Regulation No. 2 does not include the power to impute
controlled taxpayers constituting the group, shall determine the "theoretical interests" to the controlled taxpayer's transactions. Pursuant
true net income of each controlled taxpayer. The standard to be to Section 28 of the 1993 NIRC,42 after all, the term "gross income" is
applied in every case is that of an uncontrolled taxpayer. Section understood to mean all income from whatever source derived, including,
44 grants no right to a controlled taxpayer to apply its provisions but not limited to the following items: compensation for services, including
at will, nor does it grant any right to compel the Commissioner of fees, commissions, and similar items; gross income derived from
Internal Revenue to apply its provisions. business; gains derived from dealings in property;" interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and
partner’s distributive share of the gross income of general professional should be in accordance with law as any arbitrariness will negate the very
partnership.43 While it has been held that the phrase "from whatever reason for government itself.51
source derived" indicates a legislative policy to include all income not
expressly exempted within the class of taxable income under our laws, In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence
the term "income" has been variously interpreted to mean "cash received on the imposition of deficiency income taxes on the transfer FDC and FAI
or its equivalent", "the amount of money coming to a person within a effected in exchange for the shares of stock of FLI. With respect to the
specific time" or "something distinct from principal or capital."44 Otherwise Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c)
stated, there must be proof of the actual or, at the very least, probable (2) of the 1993 NIRC pertinently provides as follows:
receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR. Sec. 34. Determination of amount of and recognition of gain or loss.-

Our circumspect perusal of the record yielded no evidence of actual or xxxx

possible showing that the advances FDC extended to its affiliates had
resulted to the interests subsequently assessed by the CIR. For all its
(c) Exception – x x x x
harping upon the supposed fact that FDC had resorted to borrowings
from commercial banks, the CIR had adduced no concrete proof that said
funds were, indeed, the source of the advances the former provided its No gain or loss shall also be recognized if property is transferred to a
affiliates. While admitting that FDC obtained interest-bearing loans from corporation by a person in exchange for shares of stock in such
commercial banks,45 Susan Macabelda - FDC's Funds Management corporation of which as a result of such exchange said person, alone or
Department Manager who was the sole witness presented before the together with others, not exceeding four persons, gains control of said
CTA - clarified that the subject advances were sourced from the corporation; Provided, That stocks issued for services shall not be
corporation's rights offering in 1995 as well as the sale of its investment considered as issued in return of property.
in Bonifacio Land in 1997.46 More significantly, said witness testified that
said advances: (a) were extended to give FLI, FAI, DSCC and FCI As even admitted in the 14 February 2001 Stipulation of Facts submitted
financial assistance for their operational and capital expenditures; and, by the parties,52 the requisites for the non-recognition of gain or loss
(b) were all temporarily in nature since they were repaid within the under the foregoing provision are as follows: (a) the transferee is a
duration of one week to three months and were evidenced by mere corporation; (b) the transferee exchanges its shares of stock for
journal entries, cash vouchers and instructional letters."47 property/ies of the transferor; (c) the transfer is made by a person, acting
alone or together with others, not exceeding four persons; and, (d) as a
Even if we were, therefore, to accord precipitate credulity to the CIR's result of the exchange the transferor, alone or together with others, not
bare assertion that FDC had deducted substantial interest expense from exceeding four, gains control of the transferee.53 Acting on the 13 January
its gross income, there would still be no factual basis for the imputation of 1997 request filed by FLI, the BIR had, in fact, acknowledged the
theoretical interests on the subject advances and assess deficiency concurrence of the foregoing requisites in the Deed of Exchange the
income taxes thereon. More so, when it is borne in mind that, pursuant to former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-
Article 1956 of the Civil Code of the Philippines, no interest shall be due 97.54 With the BIR's reiteration of said ruling upon the request for
unless it has been expressly stipulated in writing. Considering that taxes, clarification filed by FLI,55 there is also no dispute that said transferee and
being burdens, are not to be presumed beyond what the applicable transferors subsequently complied with the requirements provided for the
statute expressly and clearly declares,48 the rule is likewise settled that non-recognition of gain or loss from the exchange of property for tax, as
tax statutes must be construed strictly against the government and provided under Section 34 (c) (2) of the 1993 NIRC.56
liberally in favor of the taxpayer.49 Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with Then as now, the CIR argues that taxable gain should be recognized for
peculiar strictness to tax laws and the provisions of a taxing act are not to the exchange considering that FDC's controlling interest in FLI was
be extended by implication.50 While it is true that taxes are the lifeblood of actually decreased as a result thereof. For said purpose, the CIR calls
the government, it has been held that their assessment and collection attention to the fact that, prior to the exchange, FDC owned
2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital already has control of the corporation at the time of the exchange."60 This
stock. Upon the issuance of 443,094,000 additional FLI shares as a was confirmed when, apprised in FLI's request for clarification about the
consequence of the exchange and with only 42,217,000 thereof accruing change of percentage of ownership of its outstanding capital stock, the
in favor of FDC for a total of 2,579,575,000 shares, said corporation’s BIR opined as follows:
controlling interest was supposedly reduced to 61%.03 when reckoned
from the transferee's aggregate 4,226,629,000 outstanding shares. Please be informed that regardless of the foregoing, the transferors,
Without owning a share from FLI's initial 3,763,535,000 outstanding Filinvest Development Corp. and Filinvest Alabang, Inc. still gained
shares, on the other hand, FAI's acquisition of 420,877,000 FLI shares as control of Filinvest Land, Inc. The term 'control' shall mean ownership of
a result of the exchange purportedly resulted in its control of only 9.96% stocks in a corporation by possessing at least 51% of the total voting
of said transferee corporation's 4,226,629,000 outstanding shares. On power of all classes of stocks entitled to vote. Control is determined by
the principle that the transaction did not qualify as a tax-free exchange the amount of stocks received, i.e., total subscribed, whether for property
under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that or for services by the transferor or transferors. In determining the 51%
taxable gain in the sum of ₱263,386,921.00 should be recognized on the stock ownership, only those persons who transferred property for stocks
part of FDC and in the sum of ₱3,088,711,367.00 on the part of FAI.57 in the same transaction may be counted up to the maximum of five (BIR
Ruling No. 547-93 dated December 29, 1993.61
The paucity of merit in the CIR's position is, however, evident from the
categorical language of Section 34 (c) (2) of the 1993 NIRC which At any rate, it also appears that the supposed reduction of FDC's shares
provides that gain or loss will not be recognized in case the exchange of in FLI posited by the CIR is more apparent than real. As the uncontested
property for stocks results in the control of the transferee by the owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that
transferor, alone or with other transferors not exceeding four persons. FDC ideally controls the same percentage of the 420,877,000 shares
Rather than isolating the same as proposed by the CIR, FDC's issued to its said co-transferor which, by itself, represents 7.968% of the
2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares of FLI. Considered alongside FDC's 61.03% control
outstanding shares should, therefore, be appreciated in combination with of FLI as a consequence of the 29 November 1996 Deed of Transfer,
the 420,877,000 new shares issued to FAI which represents 9.96% said 7.968% add up to an aggregate of 68.998% of said transferee
control of said transferee corporation. Together FDC's 2,579,575,000 corporation's outstanding shares of stock which is evidently still greater
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to than the 67.42% FDC initially held prior to the exchange. This much was
3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since admitted by the parties in the 14 February 2001 Stipulation of Facts,
the term "control" is clearly defined as "ownership of stocks in a Documents and Issues they submitted to the CTA.62 Inasmuch as the
corporation possessing at least fifty-one percent of the total voting power combined ownership of FDC and FAI of FLI's outstanding capital stock
of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of adds up to a total of 70.99%, it stands to reason that neither of said
the 1993 NIRC, the exchange of property for stocks between FDC FAI transferors can be held liable for deficiency income taxes the CIR
and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) assessed on the supposed gain which resulted from the subject transfer.
(2) of the same provision.
On the other hand, insofar as documentary stamp taxes on loan
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR agreements and promissory notes are concerned, Section 180 of the
cites then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. NIRC provides follows:
Acosta who, in their book Tax Law and Jurisprudence, opined that said
provision could be inapplicable if control is already vested in the Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchangor prior to exchange.58 Aside from the fact that that the 10 exchange, drafts, instruments and securities issued by the government or
September 2002 Decision in CTA Case No. 6182 upholding the tax- any of its instrumentalities, certificates of deposit bearing interest and
exempt status of the exchange between FDC, FAI and FLI was penned others not payable on sight or demand. – On all loan agreements signed
by no less than Justice Acosta himself,59 FDC and FAI significantly point abroad wherein the object of the contract is located or used in the
out that said authors have acknowledged that the position taken by the Philippines; bill of exchange (between points within the Philippines),
BIR is to the effect that "the law would apply even when the exchangor drafts, instruments and securities issued by the Government or any of its
instrumentalities or certificates of deposits drawing interest, or orders for fractional part thereof, of the face value of any such agreements,
the payment of any sum of money otherwise than at sight or on demand, pursuant to Section 180 in relation to Section 173 of the Tax Code.
or on all promissory notes, whether negotiable or non-negotiable, except
bank notes issued for circulation, and on each renewal of any such note, In cases where no formal agreements or promissory notes have been
there shall be collected a documentary stamp tax of Thirty centavos executed to cover credit facilities, the documentary stamp tax shall be
(₱0.30) on each two hundred pesos, or fractional part thereof, of the face based on the amount of drawings or availment of the facilities, which may
value of any such agreement, bill of exchange, draft, certificate of deposit be evidenced by credit/debit memo, advice or drawings by any form of
or note: Provided, That only one documentary stamp tax shall be check or withdrawal slip, under Section 180 of the Tax Code.
imposed on either loan agreement, or promissory notes issued to secure
such loan, whichever will yield a higher tax: Provided however, That loan Applying the aforesaid provisions to the case at bench, we find that the
agreements or promissory notes the aggregate of which does not exceed instructional letters as well as the journal and cash vouchers evidencing
Two hundred fifty thousand pesos (₱250,000.00) executed by an the advances FDC extended to its affiliates in 1996 and 1997 qualified as
individual for his purchase on installment for his personal use or that of loan agreements upon which documentary stamp taxes may be imposed.
his family and not for business, resale, barter or hire of a house, lot, In keeping with the caveat attendant to every BIR Ruling to the effect that
motor vehicle, appliance or furniture shall be exempt from the payment of it is valid only if the facts claimed by the taxpayer are correct, we find that
documentary stamp tax provided under this Section. the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July
1998 which, strictly speaking, could be invoked only by ASB
When read in conjunction with Section 173 of the 1993 NIRC,63 the Development Corporation, the taxpayer who sought the same. In said
foregoing provision concededly applies to "(a)ll loan agreements, whether ruling, the CIR opined that documents like those evidencing the advances
made or signed in the Philippines, or abroad when the obligation or right FDC extended to its affiliates are not subject to documentary stamp tax,
arises from Philippine sources or the property or object of the contract is to wit:
located or used in the Philippines." Correlatively, Section 3 (b) and
Section 6 of Revenue Regulations No. 9-94 provide as follows: On the matter of whether or not the inter-office memo covering the
advances granted by an affiliate company is subject to documentary
Section 3. Definition of Terms. – For purposes of these Regulations, the stamp tax, it is informed that nothing in Regulations No. 26 (Documentary
following term shall mean: Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that
the same is subject to documentary stamp tax. Such being the case, said
(b) 'Loan agreement' – refers to a contract in writing where one of the inter-office memo evidencing the lendings or borrowings which is neither
parties delivers to another money or other consumable thing, upon the a form of promissory note nor a certificate of indebtedness issued by the
condition that the same amount of the same kind and quality shall be corporation-affiliate or a certificate of obligation, which are, more or less,
paid. The term shall include credit facilities, which may be evidenced by categorized as 'securities', is not subject to documentary stamp tax
credit memo, advice or drawings. imposed under Section 180, 174 and 175 of the Tax Code of 1997,
respectively. Rather, the inter-office memo is being prepared for
The terms 'Loan Agreement" under Section 180 and "Mortgage' under accounting purposes only in order to avoid the co-mingling of funds of the
Section 195, both of the Tax Code, as amended, generally refer to corporate affiliates.
1avvphi1

distinct and separate instruments. A loan agreement shall be taxed under

Section 180, while a deed of mortgage shall be taxed under Section 195." In its appeal before the CA, the CIR argued that the foregoing ruling was
later modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined
"Section 6. Stamp on all Loan Agreements. – All loan agreements that inter-office memos evidencing lendings or borrowings extended by a
whether made or signed in the Philippines, or abroad when the obligation corporation to its affiliates are akin to promissory notes, hence, subject to
or right arises from Philippine sources or the property or object of the documentary stamp taxes.64 In brushing aside the foregoing argument,
contract is located in the Philippines shall be subject to the documentary however, the CA applied Section 246 of the 1993 NIRC65 from which
stamp tax of thirty centavos (₱0.30) on each two hundred pesos, or proceeds the settled principle that rulings, circulars, rules and regulations
promulgated by the BIR have no retroactive application if to so apply
them would be prejudicial to the taxpayers.66 Admittedly, this rule does Corporation (‘FAC’) which is based in Singapore (pars. 1.01 and
not apply: (a) where the taxpayer deliberately misstates or omits material 6.11, Petition, pars. 1 and 7, Answer).
facts from his return or in any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered by the 1.12. FAC, the joint venture company formed by FDC and RHPL,
Bureau of Internal Revenue are materially different from the facts on is tasked to develop and manage the 50% ownership interest of
which the ruling is based; or (c) where the taxpayer acted in bad FDC in its PBCom Office Tower Project (‘Project’) with the
faith.67 Not being the taxpayer who, in the first instance, sought a ruling Philippine Bank of Communications (par. 6.12, Petition; par. 7,
from the CIR, however, FDC cannot invoke the foregoing principle on Answer).
non-retroactivity of BIR rulings.
1.13. Pursuant to the SA between FDC and RHPL, the equity
Viewed in the light of the foregoing considerations, we find that both the participation of FDC and RHPL in FAC was 60% and 40%
CTA and the CA erred in invalidating the assessments issued by the CIR respectively.
for the deficiency documentary stamp taxes due on the instructional
letters as well as the journal and cash vouchers evidencing the advances 1.14. In accordance with the terms of the SA, FDC subscribed to
FDC extended to its affiliates in 1996 and 1997. In Assessment Notice ₱500.7 million worth of shares of stock representing a 60% equity
No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of participation in FAC. In turn, RHPL subscribed to ₱433.8 million
₱6,400,693.62 for documentary stamp tax, ₱3,999,793.44 in interests worth of shares of stock of FAC representing a 40% equity
and ₱25,000.00 as compromise penalty, for a total of ₱10,425,487.06. participation in FAC.
Alongside the sum of ₱4,050,599.62 for documentary stamp tax, the CIR
similarly assessed ₱1,721,099.78 in interests and ₱25,000.00 as
1.15. In payment of its subscription in FAC, FDC executed a
compromise penalty in Assessment Notice No. SP-DST-97-00021-2000
Deed of Assignment transferring to FAC a portion of FDC’s right
or a total of ₱5,796,699.40. The imposition of deficiency interest is
and interests in the Project to the extent of ₱500.7 million.
justified under Sec. 249 (a) and (b) of the NIRC which authorizes the
assessment of the same "at the rate of twenty percent (20%), or such
higher rate as may be prescribed by regulations", from the date 1.16. FDC reported a net loss of ₱190,695,061.00 in its Annual
prescribed for the payment of the unpaid amount of tax until full Income Tax Return for the taxable year 1996."71
payment.68 The imposition of the compromise penalty is, in turn,
warranted under Sec. 25069 of the NIRC which prescribes the imposition Alongside the principle that tax revenues are not intended to be liberally
thereof "in case of each failure to file an information or return, statement construed,72 the rule is settled that the findings and conclusions of the
or list, or keep any record or supply any information required" on the date CTA are accorded great respect and are generally upheld by this Court,
prescribed therefor. unless there is a clear showing of a reversible error or an improvident
exercise of authority.73 Absent showing of such error here, we find no
To our mind, no reversible error can, finally, be imputed against both the strong and cogent reasons to depart from said rule with respect to the
CTA and the CA for invalidating the Assessment Notice issued by the CTA's finding that no deficiency income tax can be assessed on the gain
CIR for the deficiency income taxes FDC is supposed to have incurred as on the supposed dilution and/or increase in the value of FDC's
a consequence of the dilution of its shares in FAC. Anent FDC’s shareholdings in FAC which the CIR, at any rate, failed to establish.
Shareholders’ Agreement with RHPL, the record shows that the parties Bearing in mind the meaning of "gross income" as above discussed, it
were in agreement about the following factual antecedents narrated in the cannot be gainsaid, even then, that a mere increase or appreciation in
14 February 2001 Stipulation of Facts, Documents and Issues they the value of said shares cannot be considered income for taxation
submitted before the CTA,70 viz.: purposes. Since "a mere advance in the value of the property of a person
or corporation in no sense constitute the ‘income’ specified in the revenue
law," it has been held in the early case of Fisher vs. Trinidad,74 that it
"1.11. On November 15, 1996, FDC entered into a Shareholders’
"constitutes and can be treated merely as an increase of capital." Hence,
Agreement (‘SA’) with Reco Herrera Pte. Ltd. (‘RHPL’) for the
the CIR has no factual and legal basis in assessing income tax on the
formation of a joint venture company named Filinvest Asia
increase in the value of FDC's shareholdings in FAC until the same is
actually sold at a profit.

WHEREFORE, premises considered, the CIR's petition for review on

certiorari in G.R. No. 163653 is DENIED for lack of merit and the CA’s 16
December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The
CIR’s petition in G.R. No. 167689 is PARTIALLY GRANTED and the
CA’s 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.

Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-

DST-97-00021-2000 issued for deficiency documentary stamp taxes due
on the instructional letters as well as journal and cash vouchers
evidencing the advances FDC extended to its affiliates are declared valid.

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000,

SP-INC-97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency
income assessed on (a) the "arms-length" interest from said advances;
(b) the gain from FDC’s Deed of Exchange with FAI and FLI; and (c)
income from the dilution resulting from FDC’s Shareholders’ Agreement
with RHPL is, however, upheld.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice