M.E. Holding Corporation vs. CA, GR No.

160193, March 3, 3008

The deductions M.E. claimed amounted to PhP 603,424. However, it filed the return under protest, arguing that the discount
to senior citizens should be treated as tax credit under Sec. 4(a) of RA 7432, and not as mere deductions from M.E.'s gross
income as provided under RR 2-94.

Sec. 4(a) of RA 7432 states: That private establishments may claim the cost as tax credit;

On December 27, 1996, M.E. sent BIR a letter-claim stating that it overpaid its income tax owing to the BIR's erroneous
interpretation of Sec. 4(a) of RA 7432. Due to the inaction of the BIR, and to toll the running of the two-year
prescriptive period in filing a claim for refund, M.E. filed an appeal before the Court of Tax Appeals (CTA), reiterating
its position that the discount should be treated as tax credit, and that RR 2-94, particularly Section 2(i), was without effect
for being inconsistent with RA 7432.

CTA rendered a Decision in favor of M.E. (122,195.74 – partially granted claim)

The CTA ruled that the 20% sales discount granted to qualified senior citizens should be treated as tax credit and not as
item deduction from the gross income or sales, pointing out that Sec. 4(a) of RA 7432 was unequivocal on this point. The
CTA held that Sec. 2(i) of RR 2-94 contravenes the clear proviso of RA 7432 prescribing that the 20% sales discount should
be claimed as tax credit. Further, it ruled that RA 7432 is a law that necessarily prevails over an administrative issuance
such as RR 2-94.

Unfortunately, the victory of M.E. before the CTA was watered down by the tax court's declaration that, while the
independent auditor M.E. hired found the amount PhP 603,923.46 as sales discount to qualified senior citizens, M.E. failed
to properly support the claimed discount with corresponding cash slips.

M.E. filed an MR, attributing its failure to submit and offer certain documents, specifically the cash slips, to the inadvertence
of its independent auditor who failed to transmit the documents to M.E.'s counsel. It also argued that the tax credit should
be based on the actual

discount and not on the acquisition cost of the medicines.

CTA denied M.E.'s motion for reconsideration which contained a prayer to present additional evidence consisting of
duplicate copies of the cash slips allegedly not submitted to M.E. by its independent auditor. In refuting M.E.'s contention
that the tax credit should be based on the actual discount and not on the acquisition cost of the medicines. CIR v. Elmas
Drug Corporation, where the term "cost of the discount" was interpreted to mean only the direct acquisition cost,
excluding administrative and other incremental costs.

Aggrieved, M.E. went to the CA on a petition for review. CA rendered its Decision, dismissing the petition. CA pointed out
that forgotten evidence is not newly discovered evidence which can be presented to the appellate tax court. Likewise, the
CA interpreted, the term "cost" to mean only the direct acquisition cost, adding that to interpret the word "cost" to include
"all administrative and incremental costs to sales to senior citizens" would open the floodgates for drugstores to pad the
costs of the sales with such broad, undefined, and varied administrative and incremental costs such that the government
would ultimately bear the escalated costs of the sales. And citing Commissioner of Internal Revenue v. Tokyo Shipping Co.,
Ltd., the CA held that claims for refund should be construed in strictissimi juris against the taxpayer.

CA denied MR hence this review.

ISSUE: WON CA erred and has deviated from applicable laws and jurisprudence in not appreciating other competent
evidence proving the amount of discounts granted to senior citizens and merely relying solelu on the cash slips

WON the term cost is equivalent only to acquisition cost

HELD: (1) No.

RATIO: The 20% sales discount to senior citizens may be claimed by an establishment owner as tax credit. RA 7432, the
applicable law, is unequivocal on this. The implementing RR 2-94 that considers such discount as mere deductions to the
taxpayer's gross income or gross sales clearly clashes with the clear language of RA 7432, the law sought to be
implemented.

(1) The determination of the exact amount M.E. claims as the 20% sales discount it granted to the senior citizens calls for
an evaluation of factual matters. The unyielding rule is that the findings of fact of the trial court, particularly when affirmed
by the CA, are binding upon this Court, save when the lower courts had overlooked, misunderstood, or misinterpreted
certain facts or circumstances of weight, which, if properly considered, would affect the result of the case and warrant a
reversal of the decision. The instant case does not fall under the exception; hence, we do not find any justification to review
all over again the evidence presented before the CTA, and the factual conclusions deduced.

CTA was correct in disallowing and not considering the belatedly-submitted cash slips to be part of the 20% sales discount
for M.E.'s taxable year 1995. This is as it should be in the light of Sec. 34 of Rule 132 prescribing that no evidence shall be
considered unless formally offered with a statement of the purpose why it is being offered. In addition, the rule is that the
best evidence under the circumstance must be adduced to prove the allegations in a complaint, petition, or protest. Only
when the best evidence cannot be submitted may secondary evidence be considered. But, in the instant case, the
disallowed cash slips, the best evidence at that time, were not part of M.E.'s offer of evidence. While it may be true
that the authenticated special record books yield the same data found in the cash slips, they cannot plausibly be considered
by the courts a quo and made to corroborate pieces of evidence that have, in the first place, been disallowed. Recall also
that M.E. offered the disallowed cash slips as evidence only after the CTA had rendered its assailed decision. The belatedly-
submitted cash slips do not constitute newly-found evidence that may be submitted as basis for a new trial or
reconsideration of the decision.

(2) the term "cost" found in Sec. 4(a) of RA 7432 as referring to the amount of the 20% discount extended by a private
establishment to senior citizens in their purchase of medicines. There we categorically said that it is the Government that
should fully shoulder the cost of the sales discount granted to senior citizens. Thus, we reversed and set aside the CA's
Decision in CA-G.R. SP No. 49946, which construed the same word "cost" to mean the theoretical acquisition cost of the
medicines purchased by qualified senior citizens. Accordingly, M.E. is entitled to a tax credit equivalent to the actual 20%
sales discount it granted to qualified senior citizens.

It ought to be noted, however, that on February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending
RA 7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax treatment for sales discount
purchases of qualified senior citizens of medicines. Sec. 4(a) of RA 9257 provides:

SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, x x x;

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net
cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount
of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for
tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended. (Emphasis supplied.)

Conformably, starting taxable year 2004, the 20% sales discount granted by establishments to qualified senior citizens is to
be treated as tax deduction, no longer as tax credit

Respondent Commissioner of Internal Revenue is ORDERED to issue a tax credit certificate in favor of M.E. in the amount
of PhP 151,201.71.
Pansacola

UNITED AIRLINES, INC. vs. COMMISSIONER OF INTERNAL REVENUE - Gross Philippine Billings (GPB)

FACTS:

Petitioner used to be an online carrier but ceased operating cargo flights from the Philippines starting 2001. It is now an offline

international air carrier but has a general sales agent in the Philippines which sells passage documents for its off-line flights for carriage

of passengers and cargo. It filed a claim for refund on the Gross Philippine Billings (GPB) tax it paid. The CTA ruled that Petitioner was

not liable for the GBP but was liable to pay 32% tax on its net income derived from the sales of passage documents in the Philippines.

International airline, petitioner United Airlines, filed a claim for income tax refund. Petitioner sought to be refunded the erroneously
collected income tax from in the amount of P5,028,813.23 on passenger revenue from tickets sold in the Philippines, the uplifts of which
did not originate in the Philippines, arguing that it cannot be considered as income from sources within the philipppines. The airlines
ceased operation originating form the Philippines since February 21, 1998.

Court of tAx appeals ruled the petitioner is not entitled to a refund because under the NIRC, income tax on GPB also includes gross
revenue from carriage of cargoes from the Philippines. And upon assessment by the CTA, it was found out that petitioner deducted items
from its cargo revenues which should have entitled the government to an amount of P 31.43 million, which is obviously higher than the
amount the petitioner prayed to be refunded.

ISSUE:

Is Petitioner liable for either the GPB or the 32% tax?

HELD:

32% tax. The Court reiterated the ruling in South African Airways and BOAC stating that it is the sale of tickets which is the revenue-

generating activity subject to Philippine tax. The correct interpretation of the applicable rules is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air

carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed

at the rate of 32% of such income.

assessment be resolved jointly with the its claim for refund – and doing so does not violate the rule against offsetting of taxes.

Bank Of America v CIR

In the 15% remittance tax, the law specifies its own tax base to be on the “profit remitted abroad.” There is absolutely nothing equivocal

or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further.

FACTS:

1. Bank of America is a foreign corporation licensed to engage in business in the Philippines through a branch in Makati.

2. Bank of America paid 15% branch profit remittance tax amounting to PhP7.5M from its REGULAR UNIT OPERATIONS and another

405K PhP from its FOREIGN CURRENCY DEPOSIT OPERATIONS

3. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax.

4. Bank of America thereafter filed a claim for refund with the BIR for the portion the corresponds with the 15% branch profit remittance

tax. BOA’s claim: “BIR should tax us based on the profits actually remitted (45M), and NOT on the amount before profit remittance tax

(53M)... The basis should be the amount actually remitted abroad.”

5. CIR contends otherwise and holds that in computing the 15% remittance tax, the tax should be inclusive of the sum deemed

remitted.

ISSUES: Whether or not the branch profit remittance tax should be base on the amount actually remitted?

HELD: YES.

1. It should be based on the amount actually committed, NOT what was applied for.

2. There is nothing in Section 24which indicates that the 15% tax/branch profit remittance is on the total amount of profit; where the law

does NOT qualify that the tax is imposed and collected at source, the qualification should not be read into law.

3. Rationale of 15%: To equalize/ share the burden of income taxation with foreign corporations
CIR V SC JOHNSON INC. June 25, 1999
Monday, January 26, 2009 Posted by Coffeeholic Writes
Labels: Case Digests, Taxation

Facts: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a licensed agreement with

the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which the respondent was granted the

right to use the trademark, patents and technology owned by the later including the right to manufacture, package and distribute the

products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son USA.

For the use of trademark or technology, respondent was obliged to pay SC Johnson and Son, USA royalties based on a percentage of

net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992

to May 1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid

withholding tax on royalties arguing that, the antecedent facts attending respondents case fall squarely within the same circumstances

under which said MacGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board,

the preferential tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only

subject to 10% withholding tax.

The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review before

the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit certificate in the amount

of P163,266.00 representing overpa

id withholding tax on royalty payments beginning July 1992 to May 1993.

The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7, 1996 finding no

merit in the petition and affirming in toto the CTA ruling.

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign

authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who

claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent
is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a claim that the tax

on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

N.V REEDERIJ “AMSTERDAM” AND ROYAL INTEROCEAN LINES VS. COMMISSIONER OF INTERNAL REVENUE

Category: Income Taxation

In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous

FACTS:

• Both vessels of petitioner N.V. Reederij “Amsterdam” called on Philippine ports to load cargoes for foreign destinations.

• The freight fees for these transactions were paid in abroad. In these two transactions, petition Royal Interocean Lines acted as

husbanding agent for a fee or commission on said vessels. No income tax has been paid by “Amsterdam” on the freight receipts.

• As a result, Commissioner of Internal Revenue filed the corresponding income tax returns for the petitioner. Commissioner assessed

petitioner for deficiency of income tax, as a non-resident foreign corporation NOT engaged in trade or business.

• On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines, petitioner Royal

Interocean Lines filed an income tax return of the aforementioned vessels and paid the tax in pursuant to their supposed

classification.

• On the same date, petitioner Royal Interocean Lines, as the husbanding agent of “Amsterdam”, filed a written protest against the

abovementioned assessment made by the respondent Commissioner. The protest was denied.

• On appeal, CTA modified the assessment by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioner

still was not satisfied and decided to appeal to the SC.

ISSUE: Whether or not N.V. Reederij “Amsterdam” should be taxed as a foreign corporation not engaged in trade or
business in the Philippines?

HELD:

• Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines. It does not have a branch in the

Philippines, and it only made two calls in Philippine ports, one in 1963 and the other in 1964.

• In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A

casual business activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines

for income tax purposes.

• A foreign corporation doing business in the Philippines is taxable on income solely from sources within the Philippines. It is permitted
to claim deductions from gross income but only to the extent connected with income earned in the Philippines. On the other hand,

foreign corporations not doing business in the Philippines are taxable on income from all sources within the Philippines . The tax is

30% (now 35% for non-resident foreign corp which is also known as foreign corp not engaged in trade or business) of such gross

income. (*take note that in a resident foreign corp, what is being taxed is the taxable income, which is with deductions, as compared
 to a non-resident foreign corp which the tax base is gross income)

• Petiioner “Amsterdam” is a non-resident foreign corporation, organized and existing under the laws of the Netherlands with principal

office in Amsterdam and not licensed to do business in the Philippines.

CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204 SCRA 377)

Category: Income Taxation

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate

stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF the country of domicile of the foreign stockholder

corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax

payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the

Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends

amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed

a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National

Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted

was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES. P&G Philippines is entitled.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate

stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he country of domicile of the foreign stockholder

corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax

payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the

Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the
regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes

deemed paid in the Philippines” applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage

points. Requirements were met.

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10% of remitting foreign

corporation) shall be deemed to have paid a proportionate extent of taxes paid by such foreign corporation upon its remittance of

dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils

x 35% -- Philippine income tax rate

P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00
- 35.00

65. 00 -- available for remittance

P 65. 00

x 35% -- Regular Philippine dividend tax rate

P 22.75 -- regular dividend tax

P 65.0o

x 15% -- Reduced dividend tax rate

P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate

P 55.25 -- dividends actually remitted to P&G USA

Dividends actually

remitted by P&G Phil = P 55.25

---------------------------------- ------------- x P35 = P29.75

Amount of accumulated P 65.00

profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax ‘deemed paid’ by the parent company.
Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand

why these were divided and multiplied. Point is, requirements were met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the

Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines

but “deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on Income,” the Philippines, by treaty commitment,

reduced the regular rate of dividend tax to a maximum of 20% of he gross amount of dividends paid to US parent corporations, and

established a treaty obligation on the part of the United States that it “shall allow” to a US parent corporation receiving dividends from

its Philippine subsidiary “a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary].

Note:

The NIRC does not require that the US tax law deem the parent corporation to have paid the 20 percentage points of dividend tax

waived by the Philippines. It only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to

the 20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit;

it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of

earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not

benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation by

allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly

Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a “deemed paid” tax credit at

least equal in amount to the 20 percentage points of dividend tax foregone by the Philippines, in the assumption that a positive

incentive effect would thereby be felt by the investor.