Case Digests Of The Assignment.docx

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LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City Principles: -

To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.

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A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.

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Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

LONG DIGEST: FACTS: The petitioner Lung Center of the Philippines is a non-stock and nonprofit entity. It is the registered owner of a parcel of land, Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government.

Both the land and the hospital building of the petitioner were assessed for real property taxes the City Assessor of Quezon City. The petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The petitioner’s request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City. The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the petitioner liable for real property taxes It was affirmed on appeal by the Central Board of Assessment Appeals of Quezon City (CBAA) which ruled that the petitioner was not a charitable institution and that its real properties were not actually, directly and exclusively used for charitable purposes; hence, it was not entitled to real property tax exemption under the constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA. Petitioner’s side: The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying patients and renders medical services to them, leases portions of the land to private parties, and rents out portions of the hospital to private medical practitioners from which it derives income to be used for operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives subsidies from the government attests to its character as a charitable institution. It contends that the "exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income, it does not lose its character as a charitable institution, and its exemption from the payment of real estate taxes on its real property. The petitioner further contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution. Respondent’s side: Respondents aver that the petitioner is not a charitable entity. The petitioner’s real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution and that the said property is actually, directly and exclusively used for charitable purposes. The respondents noted that in a newspaper report, it appears that graft charges were filed with the Sandiganbayan against the director of the petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a month as determined by the Commission on Audit; and that instead of complying with the directive of the COA for the cancellation of the contract for being grossly prejudicial to the government, the petitioner

Page |2 renewed the same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the subsidies granted by the government for charity patients and uses the rest of its income from the property for the benefit of paying patients, among other purposes. They aver that the petitioner failed to adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent patients. The respondents further assert, thus: 13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before a patient is admitted for treatment in the Center, first impression is that it is pay-patient and required to pay a certain amount as deposit. That even if a patient is living below the poverty line, he is charged with high hospital bills. And, without these bills being first settled, the poor patient cannot be allowed to leave the hospital or be discharged without first paying the hospital bills or issue a promissory note guaranteed and indorsed by an influential agency or person known only to the Center; that even the remains of deceased poor patients suffered the same fate. Moreover, before a patient is admitted for treatment as free or charity patient, one must undergo a series of interviews and must submit all the requirements needed by the Center, usually accompanied by endorsement by an influential agency or person known only to the Center. These facts were heard and admitted by the Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients, instead of seeking treatment with the Center, they prefer to be treated at the Quezon Institute. Can such practice by the Center be called charitable? ISSUES: 1.

Whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160;

2.

Whether the real properties of the petitioner are exempt from real property taxes.

SC Ruling: 1.

The petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.

A charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. It may be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and promotion of the happiness of man. The word "charitable" is not restricted to relief of the poor or sick. The test of a charity and a charitable organization are in law the same.

The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage. The petitioner is a non-profit and non-stock corporation which, subject to the provisions of the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, (help people, develop… etc….noble and public purposes.. too many to enumerate) Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust purposes and cannot be diverted to private profit or benefit. Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character as a charitable institution simply because the gift or donation is in the form of subsidies granted by the government. The petitioner adduced substantial evidence that it spent its income, including the subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital.

2.

Those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

Page |3 Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall enjoy the tax exemptions and privileges: SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. x

x

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The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung Center. It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been among the enumerate==on of tax exempt privileges. Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. The tax exemption under this constitutional provision covers property taxes only.. The Constitutional Commission explained that what is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes." Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and exclusively used for charitable purposes. While portions of the hospital are used for the

treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals for their clinics and a canteen. The portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. The respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the area thereof which are leased to private persons, and to compute the real property taxes due thereon as provided for by law.

QUICK DIGEST: FACTS: The petitioner Lung Center of the Philippines is a non-stock and nonprofit entity. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. When they were assessed for real property taxes, they claimed for tax exemption which was denied in all proceedings they underwent. Petitioner’s side: The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. It asserts that the fact that it receives subsidies from the government attests to its character as a charitable institution. It contends that the "exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income, it does not lose its character as a charitable institution, and its exemption from the payment of real estate taxes on its real property. The petitioner further contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution. Respondent’s side: Respondents aver that the petitioner is not a charitable entity. The petitioner’s real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution and that the said property is actually, directly and exclusively used for charitable purposes.

Page |4 ISSUES: 1.

2.

Whether the petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; Whether the real properties of the petitioner are exempt from real property taxes.

LUZON STEVEDORING CORPORATION vs.CTA and the HONORABLE COMMISSIONER OF INTERNAL REVENUE Note: 3 pages case ni sa full text… very short. And I think mao ni ang crux sa case. No need to put long/quick digest. Kamo na bahala og pa shorten sa digest by deleting some paragraphs.

SC RULING: Principle: 1.

The petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.

2.

Those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. It is plain as day that under the law, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should have been among the enumeration of tax exempt privileges. Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

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The general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer.

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In order that the importations in question may be declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation.

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Republic Act No. 3176 limit tax exemption from the compensating tax to imported items to be used by the importer himself as operator of passenger and/or cargo vessel.

FACTS: Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its tugboats, imported various engine parts and other equipment for which it paid, under protest, the assessed compensating tax. Unable to secure a tax refund from the Commissioner of Internal Revenue, it filed a Petition for Review with the CTA, praying among others, that it be granted the refund. The CTA denied the various claims for tax refund. Petitioner contends that tugboats are embraced and included in the term cargo vessel under the tax exemption provisions. He argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former towing the latter for loading and unloading of a vessel in part, constitute a single vessel. It concludes that the engines, spare parts and equipment imported by it and used in the repair and maintenance of its tugboats are exempt from compensating tax Respondents-appellees counter that petitioner-appellant's "tugboats" are not "Cargo vessel" because they are neither designed nor used for carrying and/or transporting persons or goods by themselves but are mainly employed for towing and pulling purposes. As such, it cannot be claimed that the tugboats in question are used in carrying and transporting passengers or cargoes as a common carrier by water, either coastwise or oceangoing and, therefore, not within the purview of the Tax Code. ISSUE: Whether or not petitioner's tugboats" can be interpreted to be included in the term "cargo vessels" for purposes of the tax exemption provided for in Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176.

Page |5 SC RULING:

Petition is DISMISSED.

No. Said law provides: Sec. 190. Compensating tax. — ... And Provided further, That the tax imposed in this section shall not apply to articles to be used by the importer himself in the manufacture or preparation of articles subject to specific tax or those for consignment abroad and are to form part thereof or to articles to be used by the importer himself as passenger and/or cargo vessel, whether coastwise or oceangoing, including engines and spare parts of said vessel. .... The general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer. In order that the importations in question may be declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation. Republic Act No. 3176 limit tax exemption from the compensating tax to imported items to be used by the importer himself as operator of passenger and/or cargo vessel. A tugboat is defined as follows: a strongly built, powerful steam or power vessel, used for towing and, now, also used for attendance on vessel; a diesel or steam power vessel designed primarily for moving large ships to and from piers for towing barges and lighters in harbors, rivers and canals; a steam vessel built for towing, synonymous with tugboat. Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance The CTA found that no evidence was adduced by petitioner-appellant that tugboats are passenger and/or cargo vessels used in the shipping industry as an independent business. On the contrary, petitionerappellant's own evidence supports the view that it is engaged as a stevedore, that is, the work of unloading and loading of a vessel in port; and towing of barges containing cargoes is a part of petitioner's undertaking as a stevedore. In fact, even its trade name is indicative that its sole and principal business is stevedoring and lighterage, taxed under the National Internal Revenue Code as a contractor, and not an entity which transports passengers or freight for hire which is taxed. The Court will not set aside the conclusion reached by an agency such as the CTA, which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority, which is not present in the instant case.

LUTZ VS. ARANETA Principle: It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that “inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.” The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. FACTS: This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of the export taxes."In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise.A tax equivalent to the difference between the money value of the rental or consideration collected and the amount representing 12 per centum of the assessed value of such land.Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under Sec.3 of the Act, alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff’s opinion is not a public purpose for which a tax may be constitutionally levied. The action has been dismissed by the Court of First Instance. ISSUE: Whether or not the tax imposed is constitutional. RULING: Yes.

Page |6 The act is primarily an exercise of the police power. It is shown in the Act that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that “inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.” The funds raised under the Act should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; but the legislature is not required by the Constitution to adhere to a policy of “all or nones.”

PHILEX MINING VS CIR Principle: a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. FACTS: BIR sent a letter to Philex asking it to settle its tax liabilities amounting to P123,821,982.52. Philex protested the demand for payment stating that it has pending claims for VAT input credit/refund amounting to P119,977,037.02 plus interest. Citing the ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. claims for tax credit/refund should be applied against the tax liabilities, In reply, the BIR, in a letter found no merit in Philexs position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund against its exercise tax obligation, Philex raised the issue to the Court of Tax Appeals.In the course of the proceedings, the BIR issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latters tax obligation of P110,677,688.52.Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit: Thus, for legal compensation to take place, both obligations must be liquidated and demandable.( The case for refund was still pending)Aggrieved with the decision, Philex appealed the case before the Court of Appeals.Nonetheless, on April 8, 1996, the Court of Appeals affirmed the Court of Tax Appeals observation. Philex filed a motion for reconsideration which was, nevertheless, denied.However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund .In view of the grant of its VAT input credit/refund, Philex now contends that, off-set its excise tax liabilities since both had already become due and demandable, as well as fully liquidated, legal compensation can properly take place.

ISSUE: WON there should be offsetting? RULING: No.A taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.Further, Philexs reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, is no longer without any support in statutory law. It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, when it took five years for the latter to grant its tax claim for VAT input credit/refund.In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes.Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals. Short digest. Philex mining incured an excise tax liabiity worth P123,821,982.52 at the same time Philex has a pending case of a VAT tax credit/refund of P119,977,037.02. Philex argues that it should be set-off or compensated. BIR denies such contention since the case is still pending legal compensation cannot take affect because both credits should be legally due and demandable at time of the compensation. Philex files a case in the CTA but was dismissed( same reason as BIR ). Philex files a petition to the CA but was denies, then it files an MR to the CA but it was subsequently denied also. Days after th denial of the MR Philex was granted the tax credit/refund. Philex now contends that since the refund is already due and demandable offset can set-in.

ERNESTO MACEDA V. HON. CATALINO MACARAIG

FACTS:

Page |7

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. On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges

ISSUE: 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:

On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress declared as a national policy the total electrification of the Philippines through the development of power from all sources to meet the needs of industrial development and rural electrification which should be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions.

On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of Republic Act No. 6395 by specifying, among others, 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. Presidential Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by integrating the tax exemption in general terms under one paragraph.

The Tax exemption was later on withdrew by Presidential Decree No. 1931which withdrew all tax exemption privileges granted in favor of government-owned or controlled corporations including their subsidiaries. 4 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. Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and duty exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985. 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.

NO. It may be useful to make a distinction, for the purpose of this disposition, between a 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 ." 13 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." The NPC is a non-profit public corporation created for the general good and welfare 23 wholly owned by the government of the Republic of the Philippines. 24 From the very beginning of its corporate existence, the NPC enjoyed preferential tax treatment 25 to enable the Corporation to pay the indebtedness and obligation and in furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No. 6395" 26which provides: Sec. 1. Declaration of Policy—Congress hereby declares that (1) the comprehensive development, utilization and conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the total electrification of the Philippines through the development of power from all sources to meet the need of rural electrification are primary objectives of the nation which shall be pursued coordinately and supported by all instrumentalities and agencies of the government including its financial institutions. From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious. The preamble of P.D. No. 938 states—

On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges effective March 10, 1987. On October 5, 1987, the President, through respondent Executive Secretary Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87.

WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit character of the NPC has not been fully utilized because of restrictive interpretations of the taxing agencies of the government on said provisions. . . . (Emphasis supplied.)

NPC instituted this petition to claim for refunds of taxes and duties originally paid by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the BIR; and for Customs duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its crude oil importation.

It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938 shall be construed strictly against NPC. On the contrary, the law mandates that it should be interpreted liberally so as to enhance the tax exempt status of NPC.

Page |8

SSS V. CITY OF BACOLOD

FACTS:

Petitioner, Social Security System, maintains a number of regional offices, one of which is the five-storey building, known as SSS Building in Bacolod City, occupying four parcels of land. In 1970, said lands and building were assessed for taxation at P1,744,840.00. For petitioner's failure to pay the realty taxes for the years 1968, 1969 and 1970 which, including penalties, amounted to P104,956.06, respondent city sometime in early 1970 levied upon said lands and building; and on April 3, 1970, it declared said properties forfeited in its favor.

In protest, petitioner addressed a letter dated July 27, 1970 to the City Mayor of Bacolod, through respondent city treasurer, seeking reconsideration of the forfeiture proceedings on the ground that petitioner, being a government-owned and controlled corporation, is exempt from payment of real estate taxes.

Section 29 of the Commonwealth Act No. 326, otherwise known as the Charter of the City of Bacolod, provides that lands and buildings owned by the United States of America, the Commonwealth of the Philippines, the City of Bacolod, the Province of Occidental Negros, and cemeteries, churches and their adjacent parsonages and convents, and lands, buildings and improvements used exclusively for religious, charitable, scientific or educational purposes, and not for profit, shall be exempt from taxation; but such exemptions shall not extend to lands or buildings held for investment, though the income therefrom be devoted to religious, charitable, scientific or educational purposes. We hold that under Section 29 of the Charter of the City of Bacolod they are so exempt. It bears emphasis that the said section does not contain any qualification whatsoever in providing for the exemption from real estate taxes of "lands and buildings owned by the Commonwealth or Republic of Philippines." Hence, when the legislature exempted lands and buildings owned by the government from payment of said taxes, what it intended was a broad and comprehensive application of such mandate, regardless of whether such property is devoted to governmental or proprietary purpose.

Villegas vs Hiu Chiong Facts:

No action was taken, therefore, petitioner filed an action in the Court of First Instance of Negros Occidental for nullification of the forfeiture proceedings.

The Court rendered a decision declaring that SSS is not exempt from tax. Hence, this petition.

ISSUE:

Whether or not SSS is exempt from taxation.

The Municipal Board of Manila enacted Ordinance 6537 requiring aliens (except those exempted by law) to procure the requisite mayor’s permit as requirement to be employed or engage in trade in the City of Manila. The permit fee is P50, and the penalty for the violation of the ordinance is 3 to 6 months imprisonment or a fine of P100 to P200, or both. The respondent, a foreigner employee, assailed the Ordinance arguing that as a revenue measure imposed on aliens, it is discriminatory and a violation of the rule of the uniformity in taxation; Petitioner Manila Mayor Villegas argues that Ordinance No. 6537 violate the rule on uniformity of taxation because the rule applies only to purely tax or revenue measures and that Ordinance No. 6537 is not a tax or revenue measure but is an exercise of the police power of the state, it being principally a regulatory measure in nature. Issue: Whether the ordinance imposes a regulatory fee or a tax.

RULING:

YES.

Ruling: The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its principal purpose is regulatory in nature has no merit. While it is true that the first part which requires that the alien shall secure an employment permit from the Mayor involves the exercise of discretion and judgment in the processing and approval or disapproval of applications for employment permits and therefore is regulatory in

Page |9 character the second part which requires the payment of P50.00 as employee's fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50.00 from aliens who have been cleared for employment. It is obvious that the purpose of the ordinance is to raise money under the guise of regulation. The ordinance’s purpose is clearly to raise money under the guise of regulation by exacting P50 from aliens who have been cleared for employment. The amount is unreasonable and excessive because it fails to consider difference in situation among aliens required to pay it, i.e. being casual, permanent, part-time, rank-and-file or executive. [ The Ordinance was declared invalid as it is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus deprived of their rights to life, liberty and property and therefore violates the due process and equal protection clauses of the Constitution. Further, the ordinance does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion, thus conferring upon the mayor arbitrary and unrestricted powers.]

We accordingly say that the designation given by the municipal authorities does not decide whether the imposition is properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be apparent from the provisions of the ordinance. 22 Thus, "[w]hen no police inspection, supervision, or regulation is provided, nor any standard set for the applicant 23 to establish, or that he agrees to attain or maintain, but any and all persons engaged in the business designated, without qualification or hindrance, may come, and a license on payment of the stipulated sum will issue, to do business, subject to no prescribed rule of conduct and under no guardian eye, but according to the unrestrained judgment or fancy of the applicant and licensee, the presumption is strong that the power of taxation, and not the police power, is being exercised." 24 Precisely because of these considerations the present imposition must be treated as a levy for revenue purposes. A quick glance at the big amount of maximum annual tax set forth in the ordinance, P40,000.00 for sugar centrals, and P40,000.00 for sugar refineries, will readily convince one that the tax is really a revenue tax. And then, we read in the ordinance nothing which would as much as indicate that the tax imposed is merely for police inspection, supervision or regulation.

Victorias Milling vs Municipality of Victorias Doctrine: Facts: Ordinance 1 (1956) was approved by the municipal council of Victorias by way of an amendment to 2 municipal ordinances separately imposing license taxes on operators of sugar centrals and sugar refineries. The changes were: (1) with respect to sugar centrals, by increasing the rates of license taxes; and (2) as to sugar refineries, by increasing the rates of license taxes as well as the range of graduated schedule of annual output capacity. Victorias Milling questioned the validity of Ordinance 1 on the ground that it is discriminatory since it singles out plaintiff which is the only operator of a sugar central and a sugar refinery within the jurisdiction of defendant municipality Issue: Was Ordinance No. 1, series of 1956, passed by defendant's municipal council as a regulatory enactment or as a revenue measure? Ruling: A revenue measure. Ordinance No. 1, series of 1956, is but an amendment of Ordinance No. 18, series of 1947, in reference to refineries, and Ordinance No. 25, series of 1953, covering sugar centrals. Ordinance No. 18 imposes "municipal taxes on persons, firms or corporations operating refinery mills in this municipality." Ordinance No. 25 speaks of municipal taxes "relative to the output of the sugar centrals." Ordinance 1 does not impose any regulation upon which the imposition of payment.

NITAFAN v. CIR, GR 78780, July 23, 1987 PRINCIPLE: The imposition of income tax upon the salary of judges is NOT a diminution and therefore does not violate the constitution prescribing that, during the continuance of the office of judges, their salary shall not be decreased. FACTS: Petitioners, the duly appointed and qualified Judges seek to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme Court, from making any deduction of withholding taxes from their salaries. In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of the 1987 Constitution mandating that "(d)uring their continuance in office, their salary shall not be decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in and by said Constitution." ISSUE: Whether or not taxes on the salary of judges constitutes a “decrease” thereof, in violation of the constitution. HELD: NO.

P a g e | 10 The debates, interpellations and opinions expressed regarding the constitutional provision in question until it was finally approved by the Commission disclosed that the true intent of the framers of the 1987 Constitution, in adopting it, was to make the salaries of members of the Judiciary taxable. The ascertainment of that intent is but in keeping with the fundamental principle of constitutional construction that the intent of the framers of the organic law and of the people adopting it should be given effect.10 The primary task in constitutional construction is to ascertain and thereafter assure the realization of the purpose of the framers and of the people in the adoption of the Constitution. 11 it may also be safely assumed that the people in ratifying the Constitution were guided mainly by the explanation offered by the framers.

PHILIPPINE RURAL ELECTRIC COOPERATIVE (PHILRECA) v. SECRETARY OF DILG FACTS: PHILRECA is an association of 119 electric cooperatives in the country, all are organized and existing under P.D. 296 or the National Electrification Administration Decree Section 39 of PD 296 state, inter alia: a.

b.

Provided that it operates in conformity with the purposes and provisions of this Decree, cooperatives (1) shall be permanently exempt from paying income taxes The cooperatives shall be exempt from the payment (a) of all National Government, local government and municipal taxes and fees, including franchise, filing, recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court or administrative proceeding in which it may be a party, and (b) of all duties or imposts on foreign goods acquired for its operations

Whether or not a.) the withdrawal of PHILMECA’s tax exemption is in violation of equal protection clause, and b) that it impairs the obligation of contract between the Philippine government and the USA. HELD: Equal Protection NO. We hold that there is reasonable classification under the Local Government Code to justify the different tax treatment between electric cooperatives covered by P.D. No. 269, as amended, and electric cooperatives under R.A. No. 6938. The pertinent parts of Sections 193 and 234 of the Local Government Code provide: Section 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned and controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. …. Section 234. Exemptions from real property tax.—The following are exempted from payment of the real property tax: …. (d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938

In the meantime, in order to finance the projects envisioned under PD 296, NEA entered into loan agreements with the USA. The loan agreement states among other things that the loan provided (USD 28M) the principal and interest payment shall be made without any deduction and free from any taxation or fees imposed.

Petitioners alleged that said provisions unduly discriminate against petitioners who are duly registered cooperatives under P.D. No. 269, as amended, and not under R.A. No. 6938 or the Cooperative Code of the Philippines. They stress that cooperatives under PD 269 is deliberately singled out.

Petitioners contend that pursuant to the provisions of P.D. No. 269, as amended, and the above-mentioned provision in the loan agreements, they are exempt from payment of local taxes, including payment of real property tax.

First, substantial distinctions exist between cooperatives under P.D. No. 269, as amended, and cooperatives under R.A. No. 6938. These distinctions are manifest in at least two material respects which go into the nature of cooperatives envisioned by R.A. No. 6938 and which characteristics are not present in the type of cooperative associations created under P.D. No. 269

With the passage of the Local Government Code, however, they allege that their tax exemptions have been invalidly withdrawn. In particular, petitioners assail Sections 193 and 234 of the Local Government Code on the ground that the said provisions discriminate against them, in violation of the equal protection clause. Further, they submit that the said provisions are unconstitutional because they impair the obligation of contracts between the Philippine Government and the United States Government. ISSUES:

Firstly, as to contribution. Under RA 6938 the members of the cooperatives are required to contribute pro rata with other members before being qualified as such. On the other hand, under PD 269, it is mostly the government thru NEA that funds the electric cooperatives. Secondly, on the extent of control of the government. Under RA 6938, the Cooperative Code adheres to the principle of subsidiarity. Pursuant to this principle, the government may only engage in development activities where cooperatives do not posses the capability nor the

P a g e | 11 resources to do so and only upon the request of such cooperatives. Whereas, PD 269 is replete with provisions wherein NEA takes over the management of the cooperatives in certain cases. Second, the classification of tax-exempt entities in the Local Government Code is germane to the purpose of the law. The Constitutional mandate that every local government unit shall enjoy local autonomy, does not mean that the exercise of power by local governments is beyond regulation by Congress. Thus, while each government unit is granted the power to create its own sources of revenue, Congress, in light of its broad power to tax, has the discretion to determine the extent of the taxing powers of local government units consistent with the policy of local autonomy.23 Section 193 of the Local Government Code is indicative of the legislative intent to vest broad taxing powers upon local government units and to limit exemptions from local taxation to entities specifically provided therein Finally, Sections 193 and 234 of the Local Government Code permit reasonable classification as these exemptions are not limited to existing conditions and apply equally to all members of the same class. Exemptions from local taxation, including real property tax, are granted to all cooperatives covered by R.A. No. 6938 and such exemptions exist for as long as the Local Government Code and the provisions therein on local taxation remain good law. Non-impairment clause There is no violation of the non-impairment clause A law which changes the terms of a legal contract between parties, either in the time or mode of performance, or imposes new conditions, or dispenses with those expressed, or authorizes for its satisfaction something different from that provided in its terms, is law which impairs the obligation of a contract and is therefore null and void. Petitioners contend that the withdrawal by the Local Government Code of the tax exemptions of cooperatives under P.D. No. 269, as amended, is an impairment of the tax exemptions provided under the loan agreements. Petitioners argue that as beneficiaries of the loan proceeds, pursuant to the above provision, "[a]ll the assets of petitioners, such as lands, buildings, distribution lines acquired through the proceeds of the Loan Agreements … are tax exempt."31 A plain reading of the provision quoted above readily shows that it does not grant any tax exemption in favor of the borrower or the beneficiary either on the proceeds of the loan itself or the properties acquired through the said loan. It simply states that the loan proceeds and the principal and interest of the loan, upon repayment by the borrower, shall be without deduction of any tax or fee that may be payable under Philippine law as such tax or fee will be absorbed by the borrower with funds other than the loan proceeds. Thus, the withdrawal by the Local Government Code under Sections 193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the borrower, the lender or the beneficiary under the loan agreements as in fact, no tax exemption is granted therein.

G.R. No. 134062

April 17, 2007

COMMISSIONER OF INTERNAL vs. BANK OF THE PHILIPPINE ISLANDS, Respondent.

REVENUE, Petitioner,

Basic Principle/s: Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: xxx xxx xxx The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Facts: This is a petition for review on certiorari 1 of a decision2 of the Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715. In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63: 1986 – Deficiency Percentage Tax Deficiency percentage tax

P 7, 270,892.88

Add: 25% surcharge

1,817,723.22

20% interest from 1-21-87 to 10-28-88

3,215,825.03

Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE

15,000.00 P12,319,441.13

1986 – Deficiency Documentary Stamp Tax Deficiency percentage tax

P93,723,372.40

Add: 25% surcharge

23,430,843.10

Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE

15,000.00 P117,169,215.50.5

P a g e | 12 BPI, in their answer, contended that these are not assessments and requested that the examiner concerned be required to state, even in the briefest form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the percentage tax, it is important that the taxpayer be informed also as to what particular percentage tax the assessment refers to. BPI received a letter from CIR indicating that the former’s letter failed to qualify as a protest under Revenue Regulations No. 12-85 and this constitutes the final decision on the matter. BPI requested a reconsideration of the assessments which was denied by the CIR. On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125. 12 It denied reconsideration in a resolution dated May 27, 1996. On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to the CTA14 for a decision on the merits. 15 It ruled that the October 28, 1988 notices were not valid assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared that the proper assessments were those contained in the May 8, 1991 letter which provided the reasons for the claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the CTA on time.17 The CIR elevated the case to this Court. Issue/s: Whether or not the October 28, 1988 notices19 were valid assessments so that BPI could be liable for the said taxes. Held:

In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997).23 In CIR v. Reyes,24 we held that: In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997. First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid. It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law. 25 (emphasis supplied; italics in the original) Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a written statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less. Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period. 26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence.

Yes. BPI’s contention has no merit. The present Section 228 of the NIRC provides: Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: xxx xxx xxx The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.

QUICK DIGEST: Facts: In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63: 1986 – Deficiency Percentage Tax Deficiency percentage tax

P 7, 270,892.88

Add: 25% surcharge

1,817,723.22

20% interest from 1-21-87 to 10-28-88

3,215,825.03

Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE

15,000.00 P12,319,441.13

P a g e | 13 1986 – Deficiency Documentary Stamp Tax Deficiency percentage tax Add: 25% surcharge Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE

were based. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less. P93,723,372.40 Jurisprudence, on the other hand, simply required that the assessments 23,430,843.10contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period. 26 Everything 15,000.00 considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence. P117,169,215.50.

BPI, in their answer, contended that these are not assessments and requested that the examiner concerned be required to state, even in the briefest form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the percentage tax, it is important that the taxpayer be informed also as to what particular percentage tax the assessment refers to.

G.R. No. L-31156 February 27, 1976

CIR indicated that the former’s letter failed to qualify as a protest under Revenue Regulations No. 12-85 and this constitutes the final decision on the matter.

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiffappellant, vs. MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees

BPI requested a reconsideration of the assessments which was denied by the CIR.

Basic Principle/s:

BPI filed a petition for review in the CTA which was dismissed for lack of jurisdiction since the subject assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986. It denied reconsideration.

1.

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.

2.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes.

The case was elevated to CA and reversed the decision of the CTA. Issue/s: Whether or not the October 28, 1988 notices19 were valid assessments so that BPI could be liable for the said taxes. Held: Yes. BPI’s contention has no merit. The present Section 228 of the NIRC provides: Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: xxx xxx xxx The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a written statement to the taxpayer of the law and facts on which the assessments

Facts: This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959). On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 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, series of 1962, of the municipality of Tanauan, Leyte, null and void.

P a g e | 14 Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, 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."

governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax is imposed by the State and the other by the city or municipality. 2.

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, 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."

As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that effect.

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.' On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs." From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended. Issue/s:

Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19

1. — Whether or not Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive. 2. — Whether or not ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes. Held: 1.

No.

No. The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes 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. 13 The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified. Quick Digest: Facts: Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 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, series of 1962, of the municipality of Tanauan, Leyte, null and void. Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects "from soft drinks producers and

P a g e | 15 manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked."

As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that effect.

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, 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." The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.' The Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs. Issue/s:

Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19

1. — Whether or not Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive. 2. — Whether or not ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes. Held: 1.

No. Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes 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. 13 The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax is imposed by the State and the other by the city or municipality. 2.

No.

G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs. HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price,respondents. FACTS: This case pertains to the inheritance tax, charges and penalties amounting to P40,058.55 on the estate of Walter Scott Price which the court ordered as paid because of the receivable of the estate against the government. It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final

P a g e | 16 and executory the order for the payment by the estate of the estate and inheritance taxes. In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under administration in the amount of P262,200. There is already an existing appropriation under Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price. The Court orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960)

ISSUE: Whether compensation of inheritance tax against the claim of the estate against the government proper? HELD:

EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P. FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and LAND BANK OF THE PHILIPPINES,Respondents. PRINCIPLE: For a taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act. FACTS: On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of Cagayan approved Ordinance No. 19-2002, 8 authorizing the bond flotation of the provincial government in an amount not to exceed P500 million to fund the construction and development of the new Cagayan Town Center. The Resolution likewise granted authority to Gov. Lara to negotiate, sign and execute contracts and agreements necessary and related to the bond flotation subject to the approval and ratification by the Sangguniang Panlalawigan. On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-2003 9 ratifying the Cagayan Provincial Bond Agreements entered into by the provincial government, represented by Gov. Lara, to wit:

Yes. The court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus: ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price.

G.R. No. 165109

December 14, 2009

MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO, Petitioners, vs.

a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) – Trust and Investment Division and Malayan Insurance Company, Inc. (MICO). b. Deed of Assignment by way of security with the RCBC and the Land Bank of the Philippines (LBP). c. Transfer and Paying Agency Agreement with the RCBC – Trust and Investment Division. d. Guarantee Agreement with the RCBC – Trust and Investment Division and MICO. e. Underwriting Agreement with RCBC Capital Corporation. On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-2003, ratifying the Agreement for the Planning, Design, Construction, and Site Development of the New Cagayan Town Center. On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation, giving to the latter the planning, design, construction and site development of the town center project for a fee of P213,795,732.39. On December 12, 2003, petitioners filed a Petition for Annulment of Contracts and Injunction with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction. The petition was dismissed for lack of cause of action. Petitioners filed a Motion for Reconsideration to which respondents filed their respective Oppositions. Petitioners then filed a Motion to

P a g e | 17 Inhibit, which the court granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao City. On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution denying petitioners’ plea for reconsideration. The court found the motion to be a mere scrap of paper as the notice of hearing was addressed only to the Clerk of Court in violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the court sustained the findings of Branch 5 that petitioners lack legal standing to sue and that the issue involved is political.

TIU VS CA

CREBA VS ROMULO ISSUE: Whether or not taxpayer’s suit is proper. HELD: YES. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. 39 A person suing as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds derived from taxation. 40 He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury because of the enforcement of the questioned statute or contract. 41 In other words, for a taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act. 42

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Coadministrators Lorna Kapunan and Mario Luza Bautista, respondents. Principles:



Tax 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;

A taxpayer need not be a party to the contract to challenge its validity. 43 As long as taxes are involved, people have a right to question contracts entered into by the government.

2.

An accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and

In this case, although the construction of the town center would be primarily sourced from the proceeds of the bonds, which respondents insist are not taxpayer’s money, a government support in the amount of P187 million would still be spent for paying the interest of the bonds. 44 In fact, a Deed of Assignment 45 was executed by the governor in favor of respondent RCBC over the Internal Revenue Allotment (IRA) and other revenues of the provincial government as payment and/or security for the obligations of the provincial government under the Trust Indenture Agreement dated September 17, 2003. Records also show that on March 4, 2004, the governor requested the Sangguniang Panlalawigan to appropriate an amount of P25 million for the interest of the bond. 46Clearly, the first requisite has been met.

3.

A course of action or failure of action which is unlawful.

As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury test" bearing in mind that locus standi is a procedural technicality. 47 By invoking "transcendental importance", "paramount public interest", or "far-reaching implications", ordinary citizens and taxpayers were allowed to sue even if they failed to show direct injury. 48 In cases where serious legal issues were raised or where public expenditures of millions of pesos were involved, the court did not hesitate to give standing to taxpayers. 49

Facts: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.[4] On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. [5]For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6] On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.

P a g e | 18 On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.[9] On 16 January 1994, Toda died. On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice[10] and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The new CIC asked for reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. [11] On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment[12] dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The Estate thereafter filed a letter of protest.[13] In the letter dated 19 October 1995, [14] the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. On 15 February 1996, the Estate filed a petition for review. In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent.

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax 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. [23]Tax evasion connotes the integration of three factors: 1. 2. 3.

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; an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and a course of action or failure of action which is unlawful. [24]

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC receivedP40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance [26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.[29] The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a preconceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion.

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.[30]

The CTA denied[20] the motion for reconsideration, prompting the Commissioner to file a petition for review[21] with the Court of Appeals.

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. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate. [22] Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition. Issue: 

Ruling: YES.

Whether or not the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. [31] Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. [32] The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be

P a g e | 19 determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.[33] To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.[34] The two sale transactions should be treated as a single direct sale by CIC to RMI. Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows: Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following:

stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deedof Sale of Shares of Stocks.

SMART COMMUNICATIONS, INC., PETITIONER, VS. THE CITY OF DAVAO, REPRESENTED HEREIN BY ITS MAYOR HON. RODRIGO DUTERTE, AND THE SANGGUNIANG PANLUNSOD OF DAVAO CITY, RESPONDENTS. G.R. NO. 155491 JULY 21, 2009 Principle:



Tax exemptions are highly disfavored and that a tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even in the instances when it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.



The power to tax by local government units emanates from Section 5, Article X of the Constitution which empowers them to create their own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government. VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit.

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos. CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986 [35] (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld. Short Digest: Facts: CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90million. 30 August 1989, Toda purportedly sold the property for P100million to Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public .For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million. On 16 April 1990, CIC filed its corporate annual income tax return for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021.After crediting withholding taxes of P254,497.00, it paidP26,341,207 for its net taxable income of P75,987,725.On 12 July 1990, Toda sold his entire shares of

Facts: On February 18, 2002, Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is exempt from payment of franchise tax to the City. On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for reconsideration, which was denied by the trial court in an Order dated September 26, 2002. Smart filed an appeal before this Court, but the same was denied in a decision dated September 16, 2008. Hence, the instant motion for reconsideration raising the following grounds: 1. 2.

3. 4.

the "in lieu of all taxes" clause in Smart’s franchise, Republic Act No. 7294 (RA 7294), covers local taxes; the rule of strict construction against tax exemptions is not applicable; the "in lieu of all taxes" clause is not rendered ineffective by the Expanded VAT Law; Section 23 of Republic Act No. 7925 4 (RA 7925) includes a tax exemption; and the imposition of a local franchise tax on Smart would violate the constitutional prohibition against impairment of the obligation of contracts.

P a g e | 20 Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart’s legislative franchise contains the contentious "in lieu of all taxes" clause. The Section reads: Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality clause, contains the word "exemption," viz.: SEC. 23. Equality of Treatment in the Telecommunications Industry — Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of the service authorized by the franchise.6

The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word "exemption" as used in the statute refers or pertains merely to an exemption from regulatory or reporting requirements of the Department of Transportation and Communication or the National Transmission Corporation and not to an exemption from the grantee’s tax liability. Aside from the national franchise tax, the franchisee is STILL LIABLE TO PAY the local franchise tax, UNLESS it is expressly and unequivocally exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority. Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or municipaties. The power to tax by local government units emanates from Section 5, Article X of the Constitution which empowers them to create their own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national government. VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local government unit.

Issue: Whether or not Smart Communications is still liable to pay the local franchise tax under the Tax Code of the City of Davao, which imposes a franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Ruling: YES. In PLDT v. City of Davao, wherein the Court, speaking through Mr. Justice Vicente V. Mendoza, held that in approving Section 23 of RA No. 7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities. Section 23 cannot be considered as having amended PLDT’s franchise so as to entitle it to exemption from the imposition of local franchise taxes. The Court further held that tax exemptions are highly disfavored and that a tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even in the instances when it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

PHILIPPINE BANK OF COMMUNICATIONS vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS PRINCIPLE: 

"taxes are the lifeblood of the nation." Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement.



Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. These remedies are in the alternative, and the choice of one precludes the other.

FACTS:

P a g e | 21 Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. But only after 3 years thereafter or on 1988 that petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). CTA’s decision: On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us. Petitioner’s contention: its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985 by the BIR. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. ISSUE: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21 Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute. Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other. that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. PETITION IS DENIED.

RULING: No.

Quick digest:

P a g e | 22 Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

[G.R. No. 136975. March 31, 2005] COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING CO., INC., respondent. Principle:

But only after 3 years thereafter or on 1988 that petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. However, CTA denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law.

the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer.

Petitioner’s contention: its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985 by the BIR. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. ISSUE: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years? RULING: No. "taxes are the lifeblood of the nation." Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. These remedies are in the alternative, and the choice of one precludes the other. that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative.

FACTS: The respondent is a corporation duly organized and existing under the laws of the Philippines. Being engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of CounterIntelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hantex receive a subpoena to present its books of account which it failed to do. The bureau cannot fi nd any original copies of the products Hantex imported since the originals were eaten by termites. Thus, the Bureau relied on the certi fi ed copies of the respondent ’s Profi t and Loss Statement for 1987 and1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitt ed by the informer, as well as excerpts from the entries certi fi ed by Tomas and Danganan. The case was submitted to the CTA which ruled that Hantex have tax defi ciency and is ordered to pay, per investi gati on of the Bureau. CA’s decision: The income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators. The CA added that the CTA should not have just brushed aside the legal requisites provided for under the pertinent provisions of the Rules of Court in the matter of the admissibility of public documents, considering that substantive rules of evidence should not be disregarded. ISSUE:

P a g e | 23 Whether the December 10, 1991 final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latters 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law. RULING: NO. Secti on 16 of the NIRC of 1977, as amended, provides that the Commissioner of I n t e r n a l R e v e n u e h a s t h e p o w e r t o m a k e a s s e s s m e n t s a n d p r e s c r i b e a d d i ti o n a l requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b), which provides that “Failure to submit required returns, statements, reports and other documents. – When a report required by law as a basisfor the assessment of any nati onal internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the p r o p e r t a x o n t h e b e s t e v i d e n c e o b t a i n a b l e .” T h i s p r o v i s i o n a p p l i e s w h e n t h e Commissioner of Internal Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayer’s failure to file one, or to amend a return already filed in the BIR. The “best evidence” envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the a c c o u n ti n g r e c o r d s o f o t h e r t a x p a y e r s e n g a g e d i n t h e s a m e l i n e o f b u s i n e s s , including their gross profi t and net profi t sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and informati on secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines the Bureau of Customs, and the Tariff and Customs Commission. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer.

QUICK DIGEST: FACTS: The respondent is a corporation duly organized and existing under the laws of the Philippines. Being engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code.

(EIIB) received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hantex receive a subpoena to present its books of account which it failed to do. The bureau cannot fi nd any original copies of the products Hantex imported since the originals were eaten by termites. Thus, the Bureau relied on the certi fi ed copies of the respondent ’s Profi t and Loss Statement for 1987 and1988 on file with the SEC. ISSUE: Whether the December 10, 1991 final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latters 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law. RULING: NO. Secti on 16 of the NIRC of 1977, as amended, provides that the Commissioner of I n t e r n a l R e v e n u e h a s t h e p o w e r t o m a k e a s s e s s m e n t s a n d p r e s c r i b e a d d i ti o n a l requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b), which provides that “Failure to submit required returns, statements, reports and other documents. – When a report required by law as a basisfor the assessment of any nati onal internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the p r o p e r t a x o n t h e b e s t e v i d e n c e o b t a i n a b l e .” The “best evidence” envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the a c c o u n ti n g r e c o r d s o f o t h e r t a x p a y e r s e n g a g e d i n t h e s a m e l i n e o f b u s i n e s s , including their gross profi t and net profi t sales. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer.

P a g e | 24