26-49 Tax Rev.docx

Apostolic Prefect of Mountain Province v City Treasurer of Baguio City (1941)

Apostolic Prefect of Mountain Province v City Treasurer of Baguio City GR No 47252, April 18, 1941

FACTS: The Apostolic Prefect is a corporation sole, of religious character, organized under the Philippine laws, and with residence in Baguio. The City imposed a special assessment against properties within its territorial jurisdiction, including those of the Apostolic Prefect, which benefits from its drainage and sewerage system. The Apostolic Prefect contends that its properties should be free from tax.

ISSUE: Is the Apostolic Prefect exempt from paying?

RULING: No, it is liable.

In its broad meaning, tax includes both general taxes and special assessment. Yet actually, there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. A special assessment is not, strictly speaking, a tax; and neither the decree nor the Constitution exempt the Apostolic Prefect from payment of said special assessment.

Furthermore, arguendo that exemption may encompass such assessment, the Apostolic Prefect cannot claim exemption as it has not proven the property in question is used exclusively for religious purposes; but that it appears that the same is being used to other non-religious purposes.

Thus, the Apostolic Prefect is required to pay the special assessment.

APOSTOLIC PREFECT VS CITY TREASURER OF BAGUIO CITY GR 4752 April 18, 1941

Imperial, J.: FACTS: The Apostolic Prefect is a corporation , of religious character, organized under the Philippine laws, and with residence in Baguio. The City imposed a special assessment against properties within its territorial jurisdiction, including those of the Apostolic Prefect, which benefits from its drainage and sewerage system. The Apostolic Prefect contends that its properties should be free of tax being of religious in character. ISSUE: Whether or not Apostolic Prefect, as a religious entity is exempt from the payment of the special assessment. RULING: A special assessment is not a tax; and neither the decree nor the Constitution exempt petitioner from payment of said special assessment. Although it its broad meaning, tax includes both general taxes and special assessment, yet there is a recognized distinction: Assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with special benefits to the property assessed. Petitioner likewise, has proven that the property in question is used exclusively for religious purposes; but that it appears the same is being used to other non-religious purposes. Thus, petitioner is required to pay the special assessment.

VICTORIAS MILLING CO., INC., petitioner, vs OFFICE OF THE PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and PHILIPPINE PORTS AUTHORITY, respondents. August 27, 1987 PARAS, J. Petition for Review on Certiorari of the Decision of the OPALA dismissing an appeal from the PPA SHORT VERSION FACTS: Victoria’s Milling doesn’t want to pay what the PPA is charging it as fees and charges. VMC says that since it operates a private wharf on its own land and since the government has never spent anything for its maintenance, it shouldn’t pay. PPA still tells it to pay. It appeals to the CTA, is denied; to the SC, is denied; and t the Office of the President, and is denied for being filed out of the reglementary period. HELD: VMC’s Appeal is filed out of reglementary period and the prior filing of it in other forums does not toll the period. Such is stated in properly published rules of the PPA, authorized to make its own rules by a PD. Even if the appeal were to be heard, VMC still has to pay because the fees and charges PPA collects are not for the use of the wharf that petitioner owns but for the privilege of navigating in public waters, of entering

and leaving public harbors and berthing on public streams or waters regardless of whether the wharf is private or not. FACTS: Apr. 1981 —The Iloilo Port Manager of the PPA wrote Victorias Milling Co. (VMC) requiring it to: have its tugboats and barges undergo harbor formalities pay entrance/clearance fees and berthing fees secure a permit for cargo handling operations at its Da-an Banua wharf; and remit 10% of its gross income for said operations as the government's share. -VMC, through 2 letters dated June 1981, maintained that it was exempt from paying PPA any fee or charge because: the wharf and an its facilities were built and installed in its land; repair and maintenance thereof were and solely paid by it; even the dredging and maintenance of the Malijao River Channel from Guimaras Strait up to VMC’s private wharf are being done by their equipment and personnel; at no time has the government ever spent a single centavo for such activities.

-VMC also asserted that the wharf was being used mainly to handle sugar purchased from district planters pursuant to existing milling agreements. -Nov. 1981 —PPA sent a Memorandum of its executive officer which justified the PPA’s demands. It denied further request for reconsideration from VMC. -March 1982 —VMC notified PPA that they would be filing an appeal (through Petition for Review) with the Court of Tax Appeals, which it eventually did. -January 1984 —CTA dismissed VMC’s petition saying that it did not have jursidiction. It recommended that it file the appeal with the Office of the President.

-VMC filed the Petition for Review with the Supreme Court, but it was denied on Feb. 1984. -April 1984 —VMC filed an appeal with the Office of the President which issued a decision denying it on the ground that it was filed beyond the reglementary period. An MR was filed but also denied. VMC brought the Decision up to the SC which gave it due course. ISSUE: WON the 30 day period for appeal under Section 331 of the A.O. No13-77 was tolled by the pendency of the petitions first filed with the CTA and with the SC. (NO) ISSUE ON TOPIC: WON it was exempt from payment of any fees and charges. (NO)

HELD: The petition is devoid of merit. RATIO: VMC claims that in filing first with the CTA then the SC the petitions for appeal of the PPA decision, it did so in good faith. It contends that when RA No. 1125 (creating the Court of Tax Appeals) was passed in 1955, PPA was not yet in existence. The CTA had exclusive appellate jurisdiction over appeals from decisions of the Commissioner of Customs regarding, among others, customs duties, fees and other money charges imposed by the Bureau under the Tariff and Customs Code. CASE: THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CONSUELO L. VDA. DE PRIETO, respondent. G.R. No. L-13912 September 30, 1960

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

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

HELD: YES. For interest to be deductible, it must be shown that: (1) there be an indebtedness, (2) there should be interest upon it, and (3) what is claimed as an interest deduction should have been paid or accrued within the year. In this case, the last two requirements are undisputed. The only question is if interest on account of late payments of taxes be considered as indebtedness. Indebtedness has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered indebtedness. Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income. In conclusion, interest payment for delinquent taxes is not deductible as tax but the taxpayer is not precluded thereby from claiming said payment as deduction on account of interest. [G.R. No. 107135. February 23, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS CENTRAL VEGETABLE MANUFACTURING CO., INC., and THE COURT OF TAX APPEALS, respondents.

DECISION

PURISIMA, J.:

Before the Court is a Petition for Review on Certiorari from the judgment of the Court of Appeals affirming in toto the decision of the Court of Tax Appeals which required the Commissioner of Internal Revenue to credit the sales taxes paid by Central Vegetable Oil Manufacturing Co., Inc. (CENVOCO) on containers and packaging materials of its milled products, against the deficiency miller's tax due thereon for the year 1986.

As culled in the decision of the Court of Tax Appeals, the undisputed facts are, as follows:

"Petitioner (private respondent CENVOCO herein) is a manufacturer of edible and coconut/coprameal cake and such other coconut related oil subject to the miller's tax of 3%. Petitioner also manufactures lard, detergent and laundry soap subject to the sales tax of 10%.

In 1986, petitioner purchased a specified number of containers and packaging materials for its edible oil from its suppliers and paid the sales tax due thereon.

After an investigation conducted by respondent's Revenue Examiner, Assessment Notice No. FAS-B-8688-001661-001664 dated April 22, 1988 was issued against petitioner for deficiency miller's tax in the total amount of P1,575,514.70 x x x .

On June 29, 1988, petitioner filed with respondent a letter dated June 27, 1988 requesting for reconsideration of the above deficiency miller's tax assessments, contending that the final provision of Section 168 of the Tax Code does not apply to sales tax paid on containers and packaging materials, hence, the amount paid therefor should have been credited against the miller's tax assessed against it. Again, thru letter dated September 28, 1988, petitioner reiterated its request for reconsideration.

On November 17, 1988, respondent wrote CENVOCO, the full text of which letter reads

November 17, 1988

Central Vegetable Oil

Manufacturing Co. Inc.

P.O. Box 2816

Manila

Attention: Mr. James Chua

President

Gentlemen:

We have received your letter of September 28, 1988, relative to our assessment against your company in the amount of P1,575,514.75, as deficiency miller's tax for the year 1986.

Section 168 of the Tax Code provides that sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller's tax due. You contend that since packaging materials are not used in the milling process then, the sales taxes paid thereon should be allowed as a credit against the miller's tax due because they do not fall within the scope of the prohibition.

It is our position, however, that since the law specifically does not allow taxes paid on the raw materials or supplies used in the milling process as a credit against the miller's tax due, with more reason should the sales taxes paid on materials not used in the milling process be allowed as a credit against the miller's tax due. There is no provision of law which allows such a credit-to-be made.

In view of the above, we are reiterating the assessment referred to above. We request that you make payment immediately so that this case may be considered closed and terminated.

Very truly yours,

(SGD) EUFRACIO D. SANTOS

Deputy Commissioner

(CA Decision, pp.31-33 Rollo)

Dissatisfied with the adverse action taken by the BIR, CENVOCO filed a petition for review with the Court of Tax Appeals, which came out with a decision, dated December 3, 1990, in favor of CENVOCO, disposing, thus:

"WHEREFORE, in view of the foregoing, petitioner Central Vegetable Oil Manufacturing Co., Inc., is not liable for deficiency miller's tax for the year 1986 in the amount of P1,575,514.70.

No pronouncement as to costs.

SO ORDERED." (Rollo, p. 53)

Appealed to the Court of Appeals, the said decision was affirmed in toto. (Rollo, p. 38)

The Court of Appeals adopted the reasons cited and ratiocination by the Court of Tax Appeals for allowing the sales tax paid by CENVOCO on the containers and packaging materials of its millled products to be credited against the miller's tax due thereon, viz -

"The main issue in this case is whether or not respondent CENVOCO is liable for deficiency miller's tax for the year 1986 in the amount of P1,575,514.70. This in turn hinges on whether or not containers and packaging materials are raw materials used in the milling process within the contemplation of the final proviso of Section 168 of the National Internal Revenue Code, which reads:

'Provided, finally, that credit for any sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller's tax due, except in the case of a proprietor or operator of a refined sugar factory as provided hereunder.'

Luzon Stevedoring Corp v CTA (1988)

Luzon Stevedoring Corp v Court of Tax Appeals GR No L-30232, July 29, 1988

FACTS: Luzon Stevedoring Corp imported various engine parts and other equipment for tugboat repair and maintenance in 1961 and 1962. It paid the assessed compensation tax under protest. Unable to secure a tax refund from the Commissioner for the amount of P33,442.13, it filed a petition for review with the Court of Tax Appeals. The CTA denied the petition as well as the motion for reconsideration filed thereafter. Hence, this petition.

ISSUE: Is the Corporation exempt from compensation tax?

RULING:

No. As the power of taxation is a high prerogative of sovereignty, the relinquishment of such is never presumed and any reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the same must be couched in clear and unmistakable terms in order that it may be applied. The corporation’s tugboats do not fall under the categories of passenger or cargo vessels to avail of the exemption from compensation tax in Section 190 of the Tax Code. It may be further noted that the amendment of Section 190 of Republic Act of 3176 was intended to provide incentives and inducements to bolster the shipping industry and not in the business of stevedoring, in which the corporation is engaged in.

Thus, Luzon Stevedoring Corp is not exempt from compensation tax under Section 190, and is thus not entitled to refund. CIR v Gotamco (1987)

CIR v Gotamco GR No L-31092, February 27, 1987

FACTS: The World Health Organization (WHO) decided to construct a building to house its offices, as well as the other United Nations Offices in Manila. Inviting bids for the construction of the building, the WHO informed the bidders of its tax exemptions. The contract was awarded to John Gotamco and sons. The Commissioner opined that a 3% contractor’s tax should be due from the contractor. The WHO issued a certification that Gotamco should be exempted, but the Commissioner insisted on the tax. Raised in the Court of Tax Appeals, the Court ruled in favor of Gotamco.

ISSUE: Is Gotamco liable for the tax?

RULING: No. Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else.

Herein, the contractor’s tax is payable by the contractor but it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Such tax is an “indirect tax” on the organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building.

Hence, WHO’s exemption from “indirect taxes” implies that Gotamco is exempt from contractor’s tax. CIR v. CA, CTA, AdMU GR No.115349; 18 April 1997

F A C T S: Private respondent, Ateneo de Manila University, is a non-stock, non-profit educational institution with auxiliary units and branches all over the country. The Institute of Philippine Culture (IPC) is an auxiliary unit with no legal personality separate and distinct from private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies.

On 8 July 1983, private respondent received from CIR a demand letter dated 3 June 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor’s tax, and an assessment dated 27 June 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended 31 March 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a memorandum contesting the validity of the assessments.

After some time petitioner issued a final decision dated 3 August 1988 reducing the assessment for deficiency contractor’s tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

The lower courts ruled in favor of respondent. Hence this petition.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law. Petitioner states that the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax."

I S S U E: Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax Code and is subject to a 3% contractors tax.

H E LD: The petition is unmeritorious.

The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom.

Interpretation of Tax Laws. The doctrine in the interpretation of tax laws is that “(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.” In case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.

Ateneo’s Institute of Philippine Culture never sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Funds received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are “tax-exempt” as shown by private respondent’s compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution. Transaction of IPC not a contract of sale nor a contract for a piece of work. The transactions of Ateneo’s Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract for a piece of work. By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. In the case of a contract for a piece of work, “the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the

employer and transfer dominion over the thing. . . .” In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the Institute of Philippine Culture. Misamis Oriental vs Cagayan Electric (1990) February 15, 2013 markerwins Tax Law Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted a franchise in 1961 under RA 3247 to install, operate and maintain an electric light, heat and power system in Cagayan de Oro and its suburbs. In 1973, the Local Tax Code (PD 231) was promulgated, where Section 9 thereof providing for a franchise tax. Pursuant thereto, the province of Misamis Oriental enacted Provincial Revenue Ordinance 19, whose Section 12 also provides for a franchise tax. The Provincial Treasurer demanded payment of the provincial franchise tax from CEPALCO. CEPALCO paid under protest.

Issue: Whether CEPALCO is exempt from the provincial franchise tax.

Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it clear that the franchise tax provided in the Local Tax Code may only be imposed on companies with franchise that do not contain the exempting clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA 3247, 3571 and 6020 (Section 3 thereof), uniformly provides that “in consideration of the franchise and rights hereby granted, the grantee shall pay a franchise tax equal to 3% of the gross earnings for electric current sold under the franchise, of which 2% goes to the national Treasury and 1% goes into the treasury of the municipalities of Tagoloan, Opol, Villanueva, Jasaan, and Cagayan de Oro, as the case may be: Provided, that the said franchise tax of 3% of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise and poles, wires, transformers, and insulators of the grantee from which taxes and assessments the grantee is hereby expressly exempted. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS PHILIPPINES, INC. and THE HON. COURT OF TAX APPEALS, respondents. G.R. No. 108358 January 20, 1995 Facts: On 22 August 1986, Executive Order No. 41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985. Respondent R.O.H. Auto Products Philippines, Inc., availing of the amnesty, filed in October 1986 and November 1986, its Tax Amnesty Return and Supplemental Tax Amnesty Return No. and paid the corresponding amnesty taxes due. Prior to this availment, petitioner Commissioner of Internal Revenue, in a communication received by private respondent on August 13, 1986, assessed the latter deficiency income and business taxes for its fiscal years 1981 and 1982 in an aggregate amount of P1,410,157.71. Meanwhile, respondent averred that since it had been able to avail itself of the tax amnesty, the deficiency tax notice should forthwith be cancelled and withdrawn. This was denied by the CIR Revenue Memorandum Order No. 4-87,

implementing Executive Order No. 41, had construed the amnesty coverage to include only assessments issued by the Bureau of Internal Revenue after the promulgation of the executive order on August 22 1986 and not to assessments theretofore made. On appeal, The Court of Tax appeal upheld for the respondent, which was further upheld by the Court of Appeals. ISSUE: Whether or not the the deficiency assessments were extinguished by reason of respondent’s availment of the tax amnesty. HELD: Yes, as the scope of the amnesty covers the unpaid income taxes for the years 1981 to 1985. If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively) prior to August 22, 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it. Further, the law provides that, upon full compliance with the conditions of the tax amnesty and the rules and regulations issued pursuant to this Executive order, the taxpayer shall be relieved of any income tax liability on any untaxed income from January 1, 1981 to December 31, 1985, including increments thereto and penalties on account of the non-payment of the said tax. Civil, criminal or administrative liability arising from the non-payment of the said tax, which are actionable under the National Internal Revenue Code, as amended, are likewise deemed extinguished. ERNESTO M. MACEDA vs. HON. CATALINO MACARAIG, JR G.R. No. 88291

May 31, 1991

Gancaygo, J.

Facts: 1. On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake the development of hydraulic power and the production of power from other sources. 2. On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges - exempt from all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 3. On January 22, 1974, Presidential Decree No. 380 amended it - the exemption of NPC from such taxes, duties, fees, imposts and other charges imposed "directly or indirectly," on all petroleum products used by NPC in its operation. 4. On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of government-owned or controlled corporations including their subsidiaries. However, said law empowered the President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally, the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and duty.

5. On January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985. 6. However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty incentives granted to government and private entities which had been restored under Presidential Decree Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the scope and prescribe the date of effectivity of such tax and/or duty exemptions. 7. On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges effective March 10, 1987.

Issues: 1.

Whether petitioner have the standing to challenge the questioned orders and resolution.

2. Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the enactment of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974.

Ruling:

First issue:

Petitioner, as a taxpayer, may file the instant petition following the ruling in Lozada when it involves illegal expenditure of public money. The petition questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.

Difference between Direct tax and an Indirect Tax:

A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. Examples are the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal Revenue after converting the crude oil into petroleum products.

On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else ." For example, the excise and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by adding them to the "cash" and/or "selling price."

Second Issue:

It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover "all taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. No. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings."

The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC "shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion.

Petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes granting tax exemptions to NPC.

Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. Maceda v Macaraig Facts: The petition seeks to nullify certain decisions, orders, ruling, and resolutions of the respondents (Macaraig et. al) for exempting the National Power Corporation (NPC) from indirect tax and duties. Commonwealth Act 120 created NPC as a public corporation. RA 6395 revised the charter of NPC and provided in detail the exemption of NPC from all taxes, duties and other charges by the government. There were many resolutions and decisions that followed after RA 6395 which talked about the exemption and non-exemption from taxes of NPC.

Issue: Whether or not NPC is really exempt from indirect taxes

Held:

Yes. NPC is a non-profit public corporation created for the general good and welfare of the people. From the very beginning of its corporate existence, NPC enjoyed preferential tax treatment to enable it to pay its debts and obligations. From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious. The tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the country but more importantly, to assure cheaper rates to be paid by consumers. -----------------Some Notes on Direct and Indirect Taxes: Direct Taxes – those which a taxpayer is directly liable on the transaction or business it engages in. Examples are: custom duties, ad valorem taxes paid by oil companies for importation of crude oil Indirect Taxes – paid by persons who can shift the burden upon someone else. Examples are: ad valorem taxes that oil companies pay to BIR upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC

Dissenting Opinion of Justice Sarmiento: The fact that NPC has been tasked with the enormous undertaking to improve the quality of life, is no reason, to include indirect taxes, within the coverage of its preferential tax treatment. The deletion of “indirect taxes” as stated in one of the assailed orders (PD 938), is significant, because if said law truly intends to exempt NPC from indirect taxes, it would have said so specifically. CIR vs De La Salle University GR 196596 dated 9 November 2016 FACTS In 2004, the BIR issued an LOA covering the tax audit of DLSU’s fiscal year 2003 and unverified prior years. Consequently, the BIR issued a PAN and, eventually, a FAN assessing DLSU for deficiency taxes income tax on rental of property, VAT on business and DST on loans. The BIR argued that while DLSU is a non-stock, non-profit school, it is liable for taxes on income from its property (Section 30 of the Tax Code). DLSU questioned the assessment saying that the LOA is void as it covers unverified prior years. Moreover, DLSU insisted that it is not liable to the assessed deficiency taxes because all its income/revenues are actually, directly and exclusively used for

educational purposes.

(1) Validity of assessment based on LOA covering unverified prioryears ISSUE Whether or not the tax assessments arising from LOA covering unverified prior years are valid. RULING The LOA issued to DLSU is void only as far as the unverified prior years are concerned. However, the LOA, as well as, the FAN for 2003 is valid. RMO 43-90 prohibits the issuance of LOA covering audit of unverified prior years. However, the rule does not say that the LOA is void. It merely prescribes that if the audit includes several years, the periods must be specified. Otherwise, the audit of the unspecified years shall be void. Thus, if the LOA covers 2003 and unverified prior years, the same is not entirely void. The audit for 2003 will be valid.

(2) Use of fund is a controlling factor ISSUE Whether or not the revenues of DLSU used actually, directly and exclusively for educational are tax-exempt. RULING A non-stock, non-profit educational institution whose revenues and assets are exempt from tax provided that they are actually, directly and exclusively used for educational purposes. The tax exemption granted to non-stock, non-profit educational institutions is conditional only on the actual, direct and exclusive use of their revenues and assets for educational purposes. The constitutional provision does not require that the revenues and income must have been sourced from educational activities or activities related to the purposes of an educational

institution. (1) A hospital is not always tax-exempt (2) Good faith erases penalties

Hydro Resources Contractors Corporation v CTA Facts: National Irrigation Administration (NIA) entered into an agreement with Hydro Resources for the construction of the Magat River Multipurpose Project in Isabela. Under their contract, Hydro was allowed to procure new construction equipment, the payment for which will be advanced by NIA. Hydro shall repay NIA the costs incurred and the manner of repayment shall be through deductions from each monthly payment due to Hydro. Hydro shall repay NIA the full value of the construction before the eventual transfer of ownership. Upon transfer, Hydro was assessed an additional 3% ad valorem duty which it paid under protest. The Collector of Customs then ordered for the refund of the ad valorem duty in the form of tax credit. This was then reversed by the Deputy Minister of Finance. Issue: Whether or not the imposition of the 3% ad valorem tax on importations is valid. Held: No. EO 860 which was the basis for the imposition of the ad valorem duty took effect December 1982. The importations were effected in 1978 and 1979 by NIA. It is a cardinal rule that laws shall have no retroactive effect unless contrary is provided. EO 860 does not provide for its retroactivity. The Deputy Minister of Finance even clarified that letters of credit opened prior to the effectivity of EO 860 are not subject to its provisions. In the case, the procurement of the equipment was not on a tax exempt basis as the import liabilities have been secured to paid under a financial scheme. It is a matter of implementing a pre-existing agreement, hence, the imported articles can only be subject to the rates of import duties prevailing at the time of entry or withdrawal from the customs’ custody. 126 Phil. 685

REYES, J.B.L., J.:

Separate appeals, by the same petitioner, Central Azucarera Don Pedro, from two (2) decisions of the Court of Tax Appeals, the first (CTA Case No. 1273) holding it liable for the payment of the sum of P1,507.30, as 1/2% monthly (6% per annum) interest on the deficiency income tax assessed against it for the fiscal year ending August 31, 1954; and, the other (CTA Case No. 1278) denying its claim for refund

in the total amount of P2,307.10, already paid and collected, as 1/2% monthly (6% per annum) interest on the de-ficiency income taxes assessed against it for the fiscal years ending August 31 -1955, 1956, 1957, and 1958.

Inasmuch as these two (2) appeals involved the same parties and identical issues; and the Solicitor General, upon motion, was allowed by this Court to file a consolidated brief in these two cases, we will consider them jointly.

In G. R. No. L-23236 (CTA Case No. 1273), the undisputed facts are:

Petitioner Central Azucarera Don Pedro, a domestic corporation with office at Nasugbu, Batangas, had been filing its income tax re-turns on the "fiscal year" basis ending August 31 of every year. Within the period allowed it under Section 46 of the National Internal Revenue Code, petitioner filed, on October 24, 1954, with the Bureau of Internal Revenue, its income tax return for the fiscal year ending August 31, 1954, for which it paid the total sum of P491,038.00, as income tax, computed on the basis of said return.

On October 15, 1959, respondent Commissioner of Internal Revenue assessed against petitioner the amount of P167,935.00, as deficiency income tax for the abovementioned fiscal year, but he did not assess and impose any interest thereon.

Petitioner protested, in a letter dated October 26, 1959, said deficiency income tax assessment and requested that the same be cancelled.

Acting on this letter-protest, respondent finally ascertained and assessed, in a letter dated December 20, 1961, against petitioner the amount of P10,062.00, as deficiency income tax, to which was added the sum of P1,509.30, as 1/2% monthly interest thereon, which interest was imposed pursuant to Section 51(d) of the National Internal Revenue Code, as amended by Republic Act No. 2343 (ef-fective June 20, 1959), and computed from June 20, 1959 to December 20, 1961 which was the date of the revised assessment. In the same letter, respondent required petitioner to pay said revised assessment and interest thereon on or before January 16, 1962.

Petitioner was satisfied with the revised assessment of said deficiency income tax proper; and, accordingly, it paid, on January 16, 1962, the said amount of P10,062.00 to respondent; however, it objected, in a letter protest dated January 18, 1962 , to the demand and imposition of interest which was assessed and included for the first time in respondent's letter of December 20, 1961.

Respondent decided said protest in a letter dated September 22, 1962, maintaining the correctness and validity of the imposition of the interest.

In due time, petitioner went to the Tax Court in a petition for review, claiming that the imposition of 1/2 % monthly interest on its deficiency income tax for the fiscal year 1954, pursuant to Section 51(d) of the Revenue Code, as amended by Republic Act No. 2343, is illegal, because the imposition of interest on deficiency income tax earned prior to the effectivity of the amendatory law (Rep. Act 2343) will be tantamount to giving it (Rep. Act No. 2343) retroactive application.

Respondent filed his answer to the petition, and there being no genuine issue raised therein as to any material fact, petitioner presented a motion for summary judgment. Respondent did not oppose the mo-tion.

The Tax Court found that the only issue involved in the case is purely legal. It ordered the parties to submit their respective memo-randa and, upon so doing, the case was deemed submitted for decision.

On June 15, 1964, the Tax Court rendered its decision, upholding the ruling of respondent Commissioner.

In G. R. No. L-23254 (CTA Case No. 1278), the undisputed facts are as follows:

The same petitioner (Central Azucarera Don Pedro) filed its income tax returns within the prescribed period for the succeeding fiscal years ending August 31 - 1955, 1956, 1957, and 1958, for which it paid the corresponding income taxes, based on said returns.

After verification and examination of petitioner's income tax re-turns for the abovestated fiscal years, respondent Commissioner ascertained and assessed, for each of said fiscal years, against peti-tioner, deficiency income taxes in the total amount of P21,330.00, and interests thereon in the total sum of P2,307.10, which interests were likewise imposed pursuant to Section 51(d) of the Internal Revenue Code, as amended by Republic Act No. 2343.

Petitioner paid said deficiency income taxes and interests with-in the period prescribed by respondent to pay the same; however, on January 19, 1962, it filed with the latter a claim for refund or tax credit of the aforesaid sum of P2,307.00, which was paid as interests, claiming that said payment was erroneous

and the collection thereof by respondent was illegal, which contention is similar to that all alleged in its previous protest (now CTA Case r o. 1273).

Respondent Commissioner was unable to decide immediately this claim for refund, and in view of the fact that the two-year prescriptive period provided for in Section 306 of the Revenue Code was about to expire, petitioner filed, on October 23, 1962, its petition for re-view in the Court of Tax Appeals, disputing the legality and validity of the imposition of interests on taxable incomes earned prior to, although assessed after, the effectivity of Republic Act No. 2343, and praying that the said sum of P2,307.10, which it paid as in-terests, be ordered refunded.

Respondent answered the petition, maintaining, among other things, that the imposition of said interests is in accordance with law.

The issues having been joined, the case was set for hearing wherein the parties presented their respective evidences which were entirely documentary. Thereafter, the case was submitted for decision.

On June 29, 1964, the Court of Tax Appeals rendered its deci-sion, sustaining the ruling of respondent Commissioner.

In both cases, the Court of Tax Appeals ruled that Congress had power to impose interest on deficiency income tax due on income earned prior to the amendatory law, but assessed after its enactment; that the deficiency income tax in the case at bar was assessed after the effectivity of the new law (Rep. Act No. 2343), and inasmuch as the interest imposed thereon has been computed only from June 20, 1959 (which was the date of effectivity of said new law), Republic Act No. 2343 is not being applied retroactively. It also ruled that the provision of Section 13 of Republic Act No. 2343 providing that its new tax rates should apply to income earned in 1959, did not in-dicate that Congress intended to limit the applicability of the interest prescribed in Section 51(d) of the Revenue Code, as amended by Rep-ublic Act No. 2343, to the deficiency income tax on income earned after, the effectivity of the new law, since said Section 51(d) does not distinguish between taxable income earned prior to, or after, the effectivity of said Republic Act No. 2343.

The petitioner appealed in both cases to this Court, insisting on its original stand previously outlined.

The common issue posed in both cases is: whether or not the interest of six per centum (6%) per annum (or 1/2% monthly interest), provided for in Section 51(d) of the National Internal Revenue Code, as

amended by Republic Act No. 2343 (effective June 20, 1959) is imposable on deficiency income tax due on income earned prior to the effectivity of said Republic Act No. 2343, but assessed after it.

It is not disputed that petitioner is a domestic corporation which filed its income tax returns on a fiscal year basis; that it filed its income tax returns and paid the corresponding income taxes, based on said returns, within the period prescribed therefore; that the taxable incomes, in these two cases, were earned before, but were as-sessed after, the effectivity on June 20, 1959 of Republic Act No. 2343; that the deficiency income tax assessments proper, including the interests in the later case (CTA Case No. 1278) were paid by petitioner within the period prescribed by respondent Commissioner to pay the same; and that these deficiency income tax assessments were made on account of petitioner's erroneous (but not fraudulent or false) returns.

When petitioner filed its income tax returns and paid the corres-ponding income taxes, based on said returns, the pertinent provisions of the Tax Code then in force (before the effectivity of Rep. Act 2343) read -

"SEC. 51. Assessment and payment of income tax. - (a) Assessment of Tax - All assessments shall be made by the Collector of Internal Revenue and all persons and corporations subject to tax shall be notified of the amount for which they are respectively liable on or before the first day of May of each successive year. "(b) Time of payment. - The total amount of tax imposed by this Title shall be paid on or before the fifteenth day of May following the close of the calendar year, by the person subject to tax, and, in case of a corporation, by the president, vice president, or other responsible officer thereof. If the return is made on the basis of a fiscal year, the total amount of the tax shall be paid on or before the fifteenth day of the fifth month following the close of the fiscal year. x

x

x

x.

"(d) Refusal or neglect to make returns; fraudulent returns, etc. - In case(s) of x x x erroneous x x x returns, the Collector of Internal Revalue shall, upon discovery thereof, x x x make a return upon information obtained as provided for in this code or by existing law, or require the necessary corrections to be made, and the assessment made by the Collector of Internal Revenue thereon shall be paid by such person or corporation immediately upon notification of the amount of such assessment. "(e) Surcharge and interest in case of delinquency. - To any sum or sums due and unpaid after the dates pre-scribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons." "SEC. 46. Corporation returns. - x x x

"(b) When to file.- The return shall be rendered on or before the first day of March of each year for the preced-ing calendar year, or if the corporation has designated a fiscal year, then within sixty days after the close of such fiscal year." while the pertinent provisions of the same Sections 51 and 46, after their amendment by Republic Act No. 2343, read as follows:

"SEC. 51. Payment and Assessment of income tax. - (a) Payment of tax.- (1) In general. - The total amount of tax imposed by this Title shall be paid at the time the return is filed but not later than the fifteenth day of April fol-lowing the close of the calendar year, or, if the return is made on the basis of a fiscal year, then not later than the fifteenth day of the fourth month following the close of the fiscal year. Such tax shall be paid by the person subject thereto, and in the case of a corporation by the President, Vice-President, or other responsible officer thereof: Prov-ided, That if in any preceding year, the payer was entitled to a refund of any amount thereof, if not yet refunded, it may be deducted from the amount of tax to be paid. x

x

x.

"(b) Assessment and payment of deficiency tax. - After the return is filed, the Commissioner of Internal Revenue shall examine it and assess the correct amount of the tax. The tax or deficiency in tax so discovered shall be paid upon notice and demand from the Commissioner of Internal Revenue. x

x

x.

"(d) Interest on deficiency.- Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed: Provided, That the maximum amount that may be collected as interest on de-ficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions regard-ing prescription to the contrary notwithstanding." "SEC. 46. Corporation returns. - x x x. "(b) When to file. - The return shall be filed on or before the fifteenth day of April of each year for the pre-ceding calendar year, or if the corporation has designated a fiscal year, on or before the fifteenth day of the fourth month following the close of such fiscal year." and insofar as the effectivity of said Republic Act No. 2343 is con-cerned, Section 13 thereof provides -

"SEC. 13. This Act shall take effect upon its approval: Provided, That the rate hereinabove stipulated shall apply to income received from January first, nineteen hundred and fifty-nine, and for the fiscal periods ending after June thirty, nineteen hundred and fifty-nine."

From a perusal and comparison of the abovequoted sections of the Tax Code, before and after its amendment, it will be observed that, although the Commissioner (formerly Collector) of Internal Revenue, under the old, Section 51(a) was required to assess the tax due, based on the taxpayer's return, and notify the taxpayer of said assess-ment, still, under subsection (b) of the same old Section 51, the time prescribed for the payment of tax was fixed, whether or not a notice of the assessment was given to the taxpayer. Under the new provision, the time of payment is also fixed and pre-determined (usually coinciding with the filing of the return) without the necessity of giving notification of the assessment to the taxpayer by the Commissioner.

It should further be observed that, under the old Section 51(e), the interest on deficiency was imposed from the time the tax became due; while under the new Section 51 (d), said interest is imposed on the deficiency from the date prescribed for the payment of the tax.

It is thus evident that petitioner's contention that "interest on such deficiency accrued only when the taxpayer failed to pay the tax within the period prescribed therefor by respondent (Commissioner of Internal Revenue)" is not correct; said interest was imposable in case of non-payment on time, not only on the basic income tax, but also on the deficiency tax, since the deficiency was part and parcel of petitioner's income tax liability.

It appearing that the new Section 51(d) under Republic Act 2343 expressly provides that the interest on deficiency shall be assessed at the same time as the deficiency income tax; and that respondent Commissioner of Internal Revenue imposed and sought to collect the interest only from June 20, 1959, which was the date of effectivity of said Republic Act No. 2343; that the deficiency income taxes in question were assessed and unpaid when said Act was already in force; the Tax Court correctly held that said Section 51(d), as amend-ed, is not being applied retroactively as contended by petitioner herein.

Moreover, the application of said Section 51(d), as amended, in the cases at bar, operated and worked in favor of petitioner-appellant, since instead of imposing the rate of one per centum (1%) monthly interest prescribed in the old Section 51(e) from the time the tax became due, i.e., from January 15 1955, 1956, 1957, 1958 and 1959, respectively, respondent Commissioner merely imposed the new 1/2% monthly interest from January 20, 1959, which interests, as computed, are less than what would be due under the old law.

With respect to the petitioner's contention that the application of the amended provision (now Sec. 51d of the Tax Code) to the cases at bar would run counter to the constitutional restriction against the enactment of ex post facto laws, it is to be noted that the collection of interest in these cases is not penal in nature, thus -

"the imposition of x x x interest is but a just compensation to the state for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's hands (U.S. vs. Goldstein, 189 [2d] 752; Ross vs. U.S., 148 Fed. Supp. 330; U.S.vs. Joffray, 97 Fed. [2d] 488). The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory." (Castro vs. Coll. of Internal Revenue, G. R. No. L-12174, Resolution on Motion for Reconsideration, December 28, 1962) and we had already held that -

"The doctrine of unconstitutionality raised by appellant is based on the prohibition against ex post facto laws. But this prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or proceedings generally, or which affect or regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; 16 C.J.S., 889-891)." (Republic vs. Oasan Vda. de Fernandez, 99 Phil. 934, 937). Finally, section 13 of the amendatory Republic Act No. 2343 refers only to the basic tax rates, which are made applicable to income received in 1959 onward, but does not affect the interest due on deficiencies, which are left to be governed by section 51(d).

WHEREFORE, the decisions under review in G. R. No. L-23236 (CTA Case No. 1273) and G. R. No. L-23254 (CTA Case No. 1278) should be, as they are hereby, affirmed. With costs against petitioner-appellant Central Azucarera Don Pedro in both instances.

SO ORDERED. CIR v. Benguet Corp G.R. Nos. 134587 and 134588; January 8, 2005

Facts: Benguet Corporation is a domestic corporation engaged in the exploration, development and operation of mineral resources, and the sale or marketing thereof to various entities. It is a VAT registered enterprise.

The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of NIRC as amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated) depending on the classification of the transaction under Sec. 100 of the NIRC.

In January of 1988, Benguet applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank. On 28 August 1988 VAT Ruling No. 3788-88 was issued which declared that the sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100 of the Tax Code, as amended by EO 273.

Relying on its zero-rated status and the above issuances, Benguet sold gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT.

However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued subsequent to the consummation of the subject sales of gold to the Central Ban`k which provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances. Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would not be prejudicial to the Benguet pursuant Sec. 246 of the NIRC.

Issues: (1) WON Benguet’s sale of gold to the Central Bank during the period when such was classified by BIR issuances as zerorated could be taxed validly at a 10% rate after the consummation of the transactions involved; (2) WON there was prejudice to Benguet Corp due to the new BIR VAT Ruling.

Held: (1) NO. At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by Benguet ordained that gold sales to the Central Bank were zero-rated. Benguet should not be faulted for relying on the BIRs interpretation of the said laws and regulations.

While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of justice and fair play. (then the Court cited the ABS-CBN case).

(2) YES. The adverse effect is that Benguet Corp became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have

recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that Benguet suffered economic prejudice when it consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of Benguet’s transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.

Even assuming that the right to recover Benguets excess payment of income tax has not yet prescribed, this relief would only address Benguet’s overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for Benguet because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice enough. COMMISSIONER OF INTERNAL REVENUE vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. - Value Added Tax, Zero Rated

FACTS: A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC. The foreign entity then subcontracted the actual O&M to Burmeister. NPC paid the foreign consortium a mixture of currencies while the consortium, in turn, paid Burmeister foreign currency inwardly remitted into the Philippines. BIR did not want to grant refund since the services are “not destined for consumption abroad” (or the destination principle).

ISSUE: Are the receipts of Burmeister entitled to VAT zero-rated status?

HELD: PARTIALLY. Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior to the filing of CIR’s Answer in the CTA.

The claim has no merit since the consortium, which was the recipient of services rendered by Burmeister, was deemed doing business within the Philippines since its 15-year O&M with NPC can not be interpreted as an isolated transaction.

In addition, the services referring to ‘processing, manufacturing, repacking’ and ‘services other than those in (1)’ of Sec. 102 both require (i) payment in foreign currency; (ii) inward remittance; (iii) accounted for by the BSP; AND (iv) that the service recipient is doing business outside the Philippines. The Court ruled that if this is not the case, taxpayers can circumvent just by stipulating payment in foreign currency.

The refund was partially allowed since Burmeister secured a ruling from the BIR allowing zero-rating of its sales to foreign consortium. However, the ruling is only valid until the time that CIR filed its Answer in the CTA which is deemed revocation of the previously-issued ruling. The Court said the revocation can not retroact since none of the instances in Section 246 (bad faith, omission of facts, etc.) are present. 162 Phil. 287

ESGUERRA, J.:

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA No. 1346, cancelling and declaring of no force and effect the assessment made by the petitioner, Commissioner of Internal Revenue, against the accumulated surplus of the respondent, Ayala Securities Corporation. The factual background of the case is as follows:

On November 29, 1955, respondent Ayala Securities Corporation, a domestic corporation organized and existing under the laws of the Philippines, filed its income tax returns with the office of the petitioner for its fiscal year which ended on September 30, 1955. Attached to its income tax return was the audited financial statements of the respondent corporation as of September 30, 1955, showing a surplus of P2,758,442.37. The income tax due on the return of the respondent corporation was duly paid for within the time prescribed by law.

In a letter dated February 21, 1961, petitioner advised the respondent corporation of the assessment of P758,687.04 on its accumulated surplus reflected on its income tax return for the fiscal year which ended September 30, 1955 (Exh. D). The respondent corporation, on the other hand, in a letter dated

April 19, 1961, protested against the assessment on its retained and accumulated surplus pertaining to the taxable year 1955 and sought reconsideration thereof for the reasons (1) that the accumulation of the surplus was for a bona fide business purpose and not to avoid the imposition of income tax on the individual shareholders, and (2) that the said assessment was issued beyond the five-year prescriptive period (Exh. E).

On May 30, 1961, petitioner wrote respondent corporation's auditing and accounting firm with the "advise that your request for reconsideration will be the subject matter of further reinvestigation and a thorough analysis of the issues involved conditioned, however, upon the execution of your client of the enclosed form for waiver of the defense of prescription". (Exh. F) However, respondent corporation did not execute the requested waiver of the statute of limitations, considering its claim that the assessment in question had already prescribed.

On February 21, 1963, respondent corporation received a letter dated February 18, 1963, from the Chief, Manila Examiners, of the Office of the herein petitioner, calling the attention of the respondent corporation to its outstanding and unpaid tax in the amount of P758,687.04 and thereby requesting for the payment of the said amount within five (5) days from receipt of the said letter (Exh. G). Believing the aforesaid letter to be a denial of its protest, the herein respondent corporation filed with the Court of Tax Appeals a Petition for Review of the assessment, docketed as CTA Case No. 1346.

Respondent corporation in its Petition for Review alleges that the assessment made by petitioner Commissioner of Internal Revenue is illegal and invalid considering that (1) the assessment in question, having been issued only on February 21, 1961, and received by the respondent corporation on March 22, 1961, the same was issued beyond the five-year period from the date of the filing of respondent corporation's income tax return on November 29, 1955, and, therefore, petitioner's right to make the assessment has already prescribed, pursuant to the provision of Section 331 of the National Internal Revenue Code; and (2) the respondent corporation's accumulation of surplus for the taxable year 1955 was not improper, considering that the retention of such surplus was intended for legitimate business purposes and was not availed of by the corporation to prevent the imposition of the income tax upon its shareholders.

Petitioner in his answer alleged that the assessment made by his office on the accumulated surplus of the corporation as reflected on its income tax return for the taxable year 1955 has not as yet prescribed and, further, that the respondent corporation's accumulation of surplus for the taxable year 1955 was improper as the retention of such surplus was availed of by the corporation to prevent the imposition of the income tax upon the individual shareholders or members of the said corporation.

After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the dispositive portion of which is as follows:

"WHEREFORE, the decision of the respondent Commissioner of Internal Revenue assessing petitioner the amount of P758,687.04 as 25% surtax and interest is reversed. Accordingly, said assessment of respondent for 1955 is hereby cancelled and declared of no force and effect. Without pronouncement as to costs."

From this decision, the Commissioner of Internal Revenue interposed this appeal.

Petitioner maintains that respondent Court of Tax Appeals erred in holding that the letter dated February 18, 1963, (Exh. G) is a denial of the private respondent corporation's protest against the assessment, and as such, is a decision contemplated under the provisions of Sections 7 and 11 of Republic Act No. 1125. Petitioner contends that the letter dated February 18, 1963, is merely an ordinary office letter designed to remind delinquent taxpayers of their obligations to pay their taxes to the Government and, certainly not a decision on a disputed or protested assessment contemplated under Section 7(1) of R.A. 1125.

Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding that the assessment of P758,687.04 as surtax on private respondent corporation's unreasonably accumulated profits or surplus had already prescribed. Petitioner further contends that the applicable provision of law to this case is Section 332(a) of the National Internal Revenue Code which provides for a ten (10) year prescriptive period of assessment, and not Section 331 thereof as held by the Tax Court which provides a period of limitation of assessment for five (5) years only after the filing of the return. Petitioner's theory, therefore, is to the effect that since the corporate income tax return in question was filed on November 29, 1955, and the assessment thereto was issued on February 21, 1961, said assessment is not barred by prescription as the same was made very well within the ten (10) year period allowed by law.

Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding the issue as to whether or not the accumulated profits or surplus is indispensable to the business operations of the private respondent corporation. It is the contention of the petitioner that the accumulation of profits or surplus was resorted to by the respondent corporation in order to avoid the payment of taxes by its stockholders or members, and was not availed of in order to meet the reasonable needs of its business operations.

The legal issues for resolution by this Court in this case are: (1) Whether or not the instant case falls within the jurisdiction of the respondent Court of Tax Appeals; (2) Whether or not the applicable provision of law to this case is Section 331 of the National Internal Revenue Code, which provides for a five-year period of prescription of assessment from the filing of the return, or Section 332(a) of the same

Code which provides for a ten-year period of limitation for the same purpose; and (3) Whether or not the respondent Court of Tax Appeals committed a reversible error in not making any ruling on the reasonableness or unreasonableness of the accumulated profits or surplus in question of the private respondent corporation.

I

It is to be noted that the respondent Court of Tax Appeals is a court of special appellate jurisdiction created under R.A. No. 1125. Thus under Section 7(1), R.A. 1125, the Court of Tax Appeals exercises exclusive appellate jurisdiction to review by appeal "decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue".

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the reconsideration or protest of the respondent corporation on the assessment made by the petitioner, considering that the said letter is in itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made, and for the immediate payment of the sum of P758,687.04 in spite of the vehement protest of the respondent corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of the disputed assessment, in view of the continued refusal of the respondent corporation to execute the waiver of the period of limitation upon the assessment in question.

This being so, the said letter amounts to a decision on a disputed or protested assessment and, therefore, the court a quo did not err in taking cognizance of this case.

II

On the issue of whether Sec. 331 or Sec. 332(a) of the National Internal Revenue Code should apply to this case, there is no iota of evidence presented by the petitioner as to any fraud or falsity on the return with intent to evade payment of tax, not even in the income tax assessment (Exh. 5) nor in the letterdecision of February 18, 1963 (Exh. G), nor in his answer to the petition for review. Petitioner merely relies on the provisions of Section 25 of the National Internal Revenue Code, violation of which, according to petitioner, presupposes the existence of fraud. But this is begging the question and We do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. The finding of the trial court as to its existence and non-existence is final and cannot be reviewed here unless clearly shown to be erroneous (Republic of the Philippines vs. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207; Commissioner of Internal Revenue vs. Lilia Yusay Gonzales and the Court of Tax Appeals, L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to be presumed because it is a serious charge (Yutivo Sons Hardware Company vs. Court of Tax Appeals and Collector of Internal Revenue, L-13203, January 28, 1961, 1 SCRA 160).

The applicable provision of law in this case is Section 331 of the National Internal Revenue Code, to wit:

"SEC. 331. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code:"

Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities Corporation designated September 30, 1955, as the last day of the closing of its fiscal year, and under Section 46(b) the income tax returns for the said corporation shall be filed on or before the fifteenth (15th) day of the fourth (4th) month following the close of its fiscal year. The Ayala Securities Corporation could, therefore, file its income tax returns on or before January 15, 1956. The assessment by the Commissioner of Internal Revenue shall be made within five (5) years from January 15, 1956, or not later than January 15, 1961, in accordance with Section 331 of the National Internal Revenue Code herein above-quoted. As the assessment issued on February 21, 1961, which was received by the Ayala Securities Corporation on March 22, 1961, was made beyond the five-year period prescribed under Section 331 of said Code, the same was made after the prescriptive period had expired and, therefore, was no longer binding on the Ayala Securities Corporation.

III

This Court is of the opinion that the respondent court committed no reversible error in not making any ruling on the reasonableness or unreasonableness of the accumulated profits or surplus of the respondent corporation. For this reason, We are of the view that, after reaching the conclusion that the right of the Commissioner of Internal Revenue to assess the 25% surtax had already prescribed under Section 331 of the National Internal Revenue Code, to delve further into the reasonableness or unreasonableness of the accumulated profits or surplus of the respondent corporation for the fiscal year ending September 30, 1955, will only be an exercise in futility.

WHEREFORE, the decision appealed from is hereby affirmed in toto.

Without special pronouncement as to costs.

SO ORDERED. Pepsi-Cola vs. Municipality of Tanauan PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. MUNICIPALITY OF TANAUAN 69 SCRA 460 GR No. L-31156, February 27, 1976

"Legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax.

FACTS: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary injunction to declare Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27 denominated as "municipal production tax" of the Municipality of Tanauan, Leyte, null and void. Ordinance 23 levies and collects from soft drinks producers and manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked, and Ordinance 27 levies and collects on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of authority, appellant contends that it allows double taxation, and that the subject ordinances are void for they impose percentage or specific tax.

ISSUE: Are the contentions of the appellant tenable?

HELD: No. On the issue of undue delegation of taxing power, it is settled that the power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. By necessary implication, the

legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. Also, 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, so that 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. On the last issue raised, the ordinances do not partake of the nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the tax. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 , June 25, 1999 Taxation; Tax Treaties; Double Taxation; International Law; A cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation as this is a matter of negotiation between the contracting parties.—The above construction is based principally on syntax or sentence structure but fails to take into account the purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the 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 all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation as this is a matter of negotiation between the contracting parties. As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany.

Same; Same; Same; Same; Words and Phrases; International juridical double taxation is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods; The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies.—The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical

periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate.

Same; Same; Same; Same; Same; Methods resorted to in eliminating double taxation; Exemption and Credit Methods, Explained.—Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. 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 some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of 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 exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference 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.

Same; Same; Same; Same; In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country.—In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. Thus the petitioner correctly opined that the phrase “royalties paid under similar circumstances” in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated “circumstances that are tax related.”

Same; Same; Same; Same; Most Favored Nation Clause; The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances, they are not containing similar provisions on tax crediting.—Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar

circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RPGermany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid.

Same; Same; Same; Same; Same; Statutory Construction; Laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay down; A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.—The reason for construing the phrase “paid under similar circumstances” as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines. In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay down. It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose. The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

Same; Same; Same; Same; Same; The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the “most favored” among other countries.—The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the “most favored” among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in 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, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most favored nation clause to grant equality of

international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment.

Same; Tax Refunds; Statutory Construction; Tax refunds are in the nature of tax exemptions, and as such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption.—It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 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 organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RPUS Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. CIR v Rufino GR Nos> L-33665-68; February 27, 1987

Facts: This is a petition for review on certiorari of the CTA decision which absolved petitioners from liability for capital gains tax on stocks received by them from Eastern Theatrical, Inc. The Rufinos were majority stockholders of Eastern Theatrical Co., Inc (hereinafter Old ETC) which had a corporate term of 25 years, which terminated on January 25, 1959, president of which was Ernesto Rufino. On December 8, 1958, the Eastern Theatrical Co, Inc. (hereinafter New ETC, with a corporate term of 50 years) was organized, and the Rufinos were also the majority stockholders of the corporation, with Vicente Rufino as the General-Manager. Both ETCs were engaged in the same business.

Old ETC held a stockholder’s meeting to merge with the New ETC on December 17, 1958 to continue its business after the end of Old ETC’s corporate term. The merger was authorized by a board resolution. It was expressly declared that the merger was necessary to continue operating the Capitol and Lyric Theaters in Manila even after the expiration of corporate existence, to preserve both its booking contracts and to uphold its collective bargaining agreements. Through the two Rufinos (Ernesto and Vicente), a Deed of Assignment was executed, which conveyed and transferred all the business, property, assets and good will of the Old ETC to the New ETC in exchange for shares of stock of the latter to be issued to the shareholders at the rate of one stock for each stock held in the Old ETC. The Deed was to retroact from January 1, 1959. New ETC’s Board approved the merger and the Deed of Assignment on January 12, 1959 and all changes duly registered with the SEC.

The BIR, after examination, declared that the merger was not undertaken for a bona fide business purpose but only to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. He then imposed deficiency assessments against the private respondents, the Rufinos. The

Rufinos requested for a reconsideration, which was denied. Therefore, they elevated their matter to the CTA, who reversed the judgment of the CIR, saying that they found that there was “no taxable gain derived from the exchange of old stocks simply for new stocks for the New Corporation” because it was pursuant to a valid plan of reorganization. The CIR raised it to the SC on petition for review on certiorari.

Issue: WON there was a valid merger and that there was no taxable gain derived therefrom.

Held: YES, the CTA was correct in ruling that there WAS a merger and that no taxable gain was derived. CTA decision is AFFIRMED.

Rationale: Validity of transfer. In support of its argument that the Rufinos were trying to avoid the payment of capital gains tax, the CIR said that the New ETC did not actually issue stocks in exchange for the properties of the Old ETC. The increase in capitalization only happened in March 1959, or 37 days after the Old ETC expired. Prior to registration, the New ETC could not have validly performed the transfer. The SC ruled that the retroactivity of the Deed of Assignment cured the defect and there was no impediment. · Bona Fide Business Purpose. The criterion of the law is that the purpose of the merger must be for a bona fide business purpose and not for the purpose of escaping taxes. The case of Helvering v. Gregory stated that a mere “operation having no business or corporate purpose—a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business but to transfer a parcel of corporate shares.” When the corporation created is nothing more than a contrivance, there is no legitimate business purpose. The Court states that there is no such furtive intention in this case. In fact, the New ETC continues to operate the Capitol and Lyric movie theaters even up to 27 years after the merger. There is as yet no dissolution, so the Rufinos haven’t gained any benefit yet from the merger, which makes them no more liable than the time the merger took place.

The government’s remedy: The merger merely deferred the payment for taxes until the future, which the government may assert later on when gains are realized and benefits are distributed among the stockholders as a result of the merger. The taxes are not forfeited but merely postponed and may be imposed at the proper time later on. DELPHER TRADES CORPORATIONvs. IAC G.R. No. L-69259 January 26, 1988

Facts: Delfin Pacheco and sister Pelagia were the owners of a parcel of land in Polo (now Valenzuela). On April 3, 1974, they leased to Construction Components International Inc. the property and providing for a right of first refusal should it decide to buy the said property.

Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of Delfin and Pelagia. In 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the Pachecos conveyed to the latter the leased property together with another parcel of land also located in Malinta Estate, Valenzuela for 2,500 shares of stock of defendant corporation with a total value of P1.5M.

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of the lot.

Issue: WON the Deed of Exchange of the properties executed by the Pachecos and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the Hydro Phil's right of first refusal over the leased property included in the "deed of exchange,"

Held: No, by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal Estate of Benigno Toda Jr. G.R. No. 147188. September 14, 2004 DAVIDE, JR., C.J.

Lessons Applicable: Tax evasion v. Tax avoidance

Laws Applicable:

FACTS: March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and Owner of 99.991% of outstanding capital stock, to sell the Cibeles Building and 2 parcels of land which he sold to Rafael A. Altonaga on August 30, 1987 for P 100M who then sold it on the same day to Royal Match Inc. for P 200M. CIC included gains from sale of real property of P 75,728.021 in its annual income tax return while Altonaga paid a 5% capital gains tax of P 10M July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale of shares of stock which provides that the buyer is free from all income tax liabilities for 1987, 1988 and 1989. Toda Jr. died 3 years later. March 29, 1994: BIR sent an assessment notice and demand letter to CIC for deficiency of income tax of P 79,099, 999.22 January 27, 1995: BIR sent the same to the estate of Toda Jr. Estate filed a protest which was dismissed - fraudulent sale to evade the 35% corporate income tax for the additional gain of P 100M and that there is in fact only 1 sale. Since it is falsity or fraud, the prescription period is 10 years from the discovery of the falsity or fraud as prescribed under Sec. 223 (a) of the NIRC CTA: No proof of fraudulent transaction so the applicable period is 3 years after the last day prescribed by law for filing the return CA: affirmed CIR appealed ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance so the period for assessment has not prescribed.

HELD: YES. Estate shall be liable since NOT yet prescribed. Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. ax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion connotes the integration of three factors:

(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due (2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful. All are present in this case. The trial balance showed that RMI debited P 40M as "other-inv. Cibeles Building" that indicates RMI Paid CIC (NOT Altonaga) Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another. Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Generally, a sale of or exchange of assets will have an income tax incidence only when it is consummated but such tax incidence depends upon the substance of the transaction rather them mere formalities.

Doctrine of Equitable Recoupment

It provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes arising from the same transaction on which an overpayment is made and underpayment is due.

This doctrine, however, was rejected by the Supreme Court, saying that it was not convinced of the wisdom and proprietary thereof, and that it may work to tempt both the collecting agency and the taxpayer to delay and neglect their respective pursuits of legal action within the period set by law. (Collector vs UST, 104 PHIL 1062)

PHILEX MINING CORP. v. CIR GR No. 125704, August 28, 1998 294 SCRA 687

FACTS: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming the Court of Tax Appeals decision ordering it to pay the amount of P110.7 M as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P120 M plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities.

ISSUE: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the petitioner?

HELD: No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, Philex cannot be allowed to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted.Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of 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 Government in its sovereign capacity. xxx There can be no off-setting of taxes against the claims that the 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 greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. Philex Mining Corporation v CIR (1998)

Philex Mining Corporation v CIR GR No 125704, August 28, 1998

FACTS: BIR sent a letter to Philex asking it to settle its tax liabilities amounting to P124 million. Philex protested the demand for payment stating that it has pending claims for VAT input credit/refund amounting to P120 million. Therefore, these claims for tax credit/refund should be applied against the tax liabilities. In reply the BIR found no merit in Philex’s position. On appeal, the CTA reduced the tax liability of Philex.

ISSUES:

Whether legal compensation can properly take place between the VAT input credit/refund and the excise tax liabilities of Philex Mining Corp; Whether the BIR has violated the NIRC which requires the refund of input taxes within 60 days Whether the violation by BIR is sufficient to justify non-payment by Philex RULING: No, legal compensation cannot take place. The government and the taxpayer are not creditors and debtors of each other. Yes, the BIR has violated the NIRC. It took five years for the BIR to grant its claim for VAT input credit. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund No, despite the lethargic manner by which the BIR handled Philex’s tax claim, it is a settled rule that in the performance of government function, the State is not bound by the neglect of its agents and officers. It must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. CIR v. ESSO STANDARD EASTERN 254 Phil. 367

NARVASA, J.:

In two (2) cases appealed to it[1] by the private respondent, hereafter simply referred to as ESSO, the Court of Tax Appeals rendered judgment,2 sustaining the decisions of the Commissioner of Internal Revenue excepted to, save "the refund-claim ** in the amount of P39,787.94 as overpaid interest" which it ordered refunded to ESSO.

Reversal of this decision is sought by the Commissioner by a petition for review on certiorari filed with this Court. He ascribes to the Tax Court one sole error: "of applying the tax credit for overpayment of the 1959 income tax of ** ESSO, granted by the petitioner (Commissioner), to ** (ESSO'S) basic 1960 deficiency income tax liability** and imposing the 1-1/2% monthly interest[3] only on the remaining balance thereof in the sum of P146,961.00"4 (instead of the full amount of the 1960 deficiency liability in the amount of P367,994.00).[1] Reversal of the same judgment of the Court of Tax Appeals is also sought by ESSO in its own appeal (docketed as G.R. Nos. L-28508-09); but in the brief filed by it in this case, it indicates that it will not press its appeal in the event that "the instant petition for review be denied and that judgment be rendered affirming the decision of the Court of Tax Appeals."

The facts are simple enough and are quite quickly recounted.

ESSO overpaid its 1959 income tax by P221,033.00. It was accordingly granted a tax credit in this amount by the Commissioner on August 5, 1964. However, ESSO's payment of its income tax for 1960 was found to be short by P367,994.00. So, on July 10, 1964, the Commissioner wrote to ESSO demanding payment of the deficiency tax, together with interest thereon for the period from April 18, 1961 to April 18, 1964. On August 10, 1964, ESSO paid under protest the amount alleged to be due, including the interest as reckoned by the Commissioner. It protested the computation of interest, contending it was more than that properly due. It claimed that it should not have been required to pay interest on the total amount of the deficiency tax, P367,994.00, but only on the amount of P146,961.00 -- representing the difference between said deficiency, P367,994.00, and ESSO's earlier overpayment of P221,033.00 (for which it had been granted a tax credit). ESSO thus asked for a refund.

The Internal Revenue Commissioner denied the claim for refund. ESSO appealed to the Court of Tax Appeals. As aforestated, that Court ordered payment to ESSO of its "refund-claim ** in the amount of P39,787.94 as overpaid interest. Hence, this appeal by the Commissioner.

The CTA justified its award of the refund as follows:

" ** In the letter of August 5, 1964, ** (the Commissioner) admitted that ** (ESSO) had overpaid its 1959 income tax by P221,033.00. Accordingly ** (the Commissioner) granted to ** (ESSO) a tax credit of P221,033.00. In short, the said sum of P221,033.00 of (ESSO's) money was in the Government's hands at the latest on July 15, 1960 when it (ESSO) paid in full its second installment of income tax for 1959. On July 10, 1964 ** (the Commissioner) claimed that for 1960, ** (ESSO) underpaid its income tax by P367,994.00. However, instead of deducting from P367,994.00 the tax credit of P221,033.00 which ** (the Commissioner) had already admitted was due ** (ESSO), ** (the Commissioner) still insists in collecting the interest on the full amount of P367,994.00 for the period April 18, 1961 to April 18, 1964 when the Government had already in its hands the sum of P221,033.00 of ** (ESSO'S) money even before the latter's income tax for 1960 was due and payable. If the imposition of interest does not amount to a penalty but merely a just compensation to the State for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the Government's hand (Castro v. Collector, G.R. No. L-1274, Dec. 28, 1962), the collection of the interest on the full amount of P367,994.00 without deducting first the tax credit of P221,033.00, which has long been in the hands of the Government, becomes erroneous, illegal and arbitrary. " ** (ESSO) could hardly be charged of delinquency in paying P221,033.00 out of the deficiency income tax of P367,994.00, for which the State should be compensated by the payment of interest, because the said amount of P221,033.00 was already in the coffers of the Government. Neither could ** (ESSO) be charged for the concomitant use of funds that rightfully belong to the Government because as early as

July 15, 1960, it was the Government that was using ** (ESSO's) funds of P221,033.00. In the circumstances, we find it unfair and unjust for ** (the Commissioner) to exact the interest on the said sum of P221,033.00 which, after all, was paid to and received by the Government even before the incidence of the deficiency income tax of P367,994.00. (ltogon-Suyoc Mines, Inc. v. Commissioner, C.T.A. Case No. 1327, Sept. 30, 1965). On the contrary, the Government should be the first to blaze the trail and set the example of fairness and honest dealing in the administration of tax laws. "Accordingly, we hold that the tax credit of P221,033.00 for 1959 should first be deducted from the basic deficiency tax of P367,994.00 for 1960 and the resulting difference of P146,961.00 would be subject to the 18% interest prescribed by Section 51(d) of the Revenue Code. According to the prayer of ** (ESSO) **, (the Commissioner) is hereby ordered to refund to ** (ESSO) the amount of P39,787.94 as overpaid interest in the settlement of its 1960 income tax liability. However, as the collection of the tax was not attended with arbitrariness because ** (ESSO) itself followed ** (the Commissioner's) manner of computing the tax in paying the sum of P213,189.93 on August 10, 1964, the prayer of ** (ESSO) that it be granted the legal rate of interest on its overpayment of P39,787.94 from August 10, 1964 to the time it is actually refunded is denied. (See Collector of Internal Revenue v. Binalbagan Estate, Inc., G.R. No. L-12752, Jan. 30, 1965)." The Commissioner's position is that income taxes are determined and paid on an annual basis, and that such determination and payment of annual taxes are separate and independent transactions; and that a tax credit could not be so considered until it has been finally approved and the taxpayer duly notified thereof. Since in this case, he argues, the tax credit of P221,033.00 was approved only on August 5, 1964, it could not be availed of in reduction of ESSO's earlier tax deficiency for the year 1960; as of that year, 1960, there was as yet no tax credit to speak of, which would reduce the deficiency tax liability for 1960. In support of his position, the Commissioner invokes the provisions of Section 51 of the Tax Code pertinently reading as follows:

"(c) Definition of deficiency As used in this Chapter in respect of tax imposed by this Title, the term 'deficiency' means: (1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned, or otherwise in respect of such tax; * * *** (d) Interest on deficiency - Interest upon the amount determined as deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed; Provided, That the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the prevent provision regarding prescription to the contrary notwithstanding."

The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960, the Government already had in its hands the sum of P221,033.00 representing excess payment. Having been paid and received by mistake, as petitioner Commissioner subsequently acknowledged, that sum unquestionably belonged to ESSO, and the Government had the obligation to return it to ESSO. That acknowledgment of the erroneous payment came some four (4) years afterwards in nowise negates or detracts from its actuality. The obligation to return money mistakenly paid arises from the moment that payment is made, and not from the time that the payee admits the obligation to reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake, not from the payee's confession of the mistake or recognition of the obligation to reimburse. In other words, since the amount of P221,033.00 belonging to ESSO was already in the hands of the Government as of July, 1960, although the latter had no right whatever to the amount and indeed was bound to return it to ESSO, it was neither legally nor logically possible for ESSO thereafter to be considered a debtor of the Government in that amount of P221,033.00; and whatever other obligation ESSO might subsequently incur in favor of the Government would have to be reduced by that sum, in respect of which no interest could be charged. To interpret the words of the statute in such a manner as to subvert these truisms simply can not and should not be countenanced. "Nothing is better settled than that courts are not to give words a meaning which would lead to absurd or unreasonable consequences. That is a principle that goes back to In re Allen (2 Phil. 630) decided on October 29, 1903, where it was held that a literal interpretation is to be rejected if it would be unjust or lead to absurd results."[1] "Statutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or absurd conclusion."[2]

WHEREFORE, the petition for review is DENIED, and the Decision of the Court of Tax Appeals dated October 28, 1967 subject of the petition is AFFIRMED, without pronouncement as to costs.