MACEDA vs.

MACARAIG, JR

223 SCRA 217 June 8, 1993

Topic: Classification of Taxes According to Burden or Incidence (Direct or Indirect)

Facts: This matter of indirect tax exemption of the private respondent National Power Corporation
(NPC) is brought to this Court a second time. Unfazed by the Decision We promulgated on May 31,
1991 petitioner Ernesto Maceda asks this Court to reconsider said Decision.

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions.

1. On November 3, 1936, Commonwealth Act No. 120: creating the National Power Corporation. The
main source of funds for the NPC was the flotation of bonds in the capital markets 4 and these
bonds...“issued under the authority of this Act shall be exempt from the payment of all taxes by the
Commonwealth of the Philippines…”

2. On June 24, 1938, C.A. No. 344, the provision on tax exemption in relation to the issuance of the
NPC bonds was neither amended nor deleted.

3. On September 30, 1939, C.A. No. 495, the provision on tax exemption in relation to the issuance of
the NPC bonds was neither amended nor deleted.

4. On June 4, 1949, Republic Act No. 357, any such loan or loans shall be exempt from taxes, duties,
fees, imposts, charges, contributions and restrictions of the Republic of the Philippines

5. On the same date, R.A. No. 358, to facilitate payment of its indebtedness, the National Power
Corporation shall be exempt from all taxes.

6. On July 10, 1952, R.A. No. 813 amended R.A. No. 357. The tax provision as stated in R.A. No. 357,
was not amended.

7. On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real
estate taxes.

8. On September 8, 1955, R.A. No. 1397, the tax exemption provision related to the payment of this
total indebtedness was not amended nor deleted.

9. On June 13, 1958, R.A. No. 2055, the tax provision related to the repayment of loans was not
amended nor deleted.

10. On June 18, 1960, R.A. No 2641 converted the NPC from a public corporation into a stock
corporation. No tax exemption was incorporated in said Act.
11. On June 17, 1961, R.A. No. 3043. No tax provision was incorporated in said Act.

12. On June 17, 1967, R.A. No 4897. No tax provision was incorporated in said Act.

13. On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC. The bonds
issued shall be exempt from the payment of all taxes. As to the foreign loans the NPC was authorized to
contract, shall also be exempt from all taxes,

14. On January 22, 1974, P.D. No. 380…shall also be exempt from all direct and indirect taxes,

15. On February 26, 1970, P.D. No. 395, no tax exemption provision was amended, deleted or added.

16. On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated
annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which
amount would be taken from taxes accruing to the General Funds of the Government, proceeds from
loans, issuance of bonds, treasury bills or notes to be issued

17. On May 27, 1976 P.D. No. 938, declared exempt from the payment of all forms of taxes…

18. On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to
imports

19. On July 30, 1977, P.D. 1177, All units of government, including government-owned or controlled
corporations, shall pay income taxes, customs duties and other taxes and fees are imposed under
revenues laws: provided, that organizations otherwise exempted by law from the payment of such
taxes/duties may ask for a subsidy from the General Fund

20. On July 11, 1984, P.D. No. 1931, all exemptions from the payment of duties, taxes, fees, imposts and
other charges heretofore granted in favor of government-owned or controlled corporations including
their subsidiaries, are hereby withdrawn.

21. On December 17, 1986, E.O. No. 93 was issued with a view to correct presidential restoration or
grant of tax exemption to other government and private entities without benefit of review by the Fiscal
Incentives Review Board, “WHEREAS, in addition to those tax and duty exemption privileges were
restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and
private, had their tax and duty exemption privileges restored”

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC.

Issue: WON NPC is exempted to pay Indirect Income Tax

Held: Yes. Classifications or kinds of Taxes: According to Persons who pay or who bear the burden:

a. Direct Tax — that where the person supposed to pay the tax really pays it. WITHOUT transferring the
burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence
tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who
ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and
customs indirect taxes (import duties, special import tax and other dues)

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC
was to be completely tax exempt from all forms of taxes — direct and indirect.

P.D. No. 380 added phrase "directly or indirectly,"

P.D. No. 938 amended into “exempt from the payment of ALL FORMS OF taxes”

President Marcos must have considered all the NPC statutes from C.A. No. 120 up to P.D. No. 938.

One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as
of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total
foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal
is to be achieved.

The tax exemption stood as is — with the express mention of "direct and indirect" tax exemptions.
Lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect.

Therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under
P.D. No. 938.
The Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the
taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the
economic burden of such taxation is expected to be passed on through the channels of commerce to the
user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct
and indirect taxation, the NPC must be held exempted from absorbing the economic burden of indirect
taxation

PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION

vs. THE MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL

G.R. No. L-24265 December 28, 1979

TOPIC: Nature and amount of license

FACTS: Plaintiff-appellant is a domestic corporation with principal offices in Manila. lt is a consolidated

corporation of Procter & Gamble Trading Company and Philippine Manufacturing Company, which later
became Procter & Gamble Trading Company, Philippines. It is engaged in the manufacture of soap,
edible oil, margarine and other similar products, and for this purpose maintains a "bodega" in defendant
Municipality where it stores copra purchased in the municipality and therefrom ships the same for its
manufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna enacted Municipal Ordinance No. 4, Series of
1957 or An Ordinance imposing storage fees of all exportable copra deposited in the bodega within the
jurisdlcti0n of the municipality of jagna bohol. For a period of six years, from 1958 to 1963, plaintiff paid
defendant Municipality, allegedly under protest, storage fees in the total sum of P42,265.13.

On March 3, 1964, plaintiff filed this suit in the Court of First Instance of Manila, Branch VI, wherein it
prayed that 1) Ordinance No. 4 be declared inapplicable to it, or in the alter. native, that it be
pronounced ultra-vires and void for being beyond the power of the Municipality to enact; and 2) that
defendant Municipality be ordered to refund to it the amount of P42,265.13 which it had paid under
protest; and costs.
The trial Court upheld its jurisdiction as well as defendant Municipality's power to enact the Ordinance
in question under section 2238 of the Revised Administrative Code, otherwise known as the general
welfare clause.

ISSUES: Whether defendant Municipality was authorized to impose and collect the storage fee provided
for in the challenged Ordinance under the laws then prevailing.

Whether the imposition of P0.10 per 100 kilos of copra stored in a bodega within the municipality
ofJagnas' territory is beyond the cost of regulation and surveillance

HELD: The validity of the Ordinance must be upheld pursuant to the broad authority conferred upon
municipalities by Commonwealth Act No. 472, which was the prevailing law when the Ordinance was
enacted.

A municipality is authorized to impose three kinds of licenses: (1) a license for regulation of useful
occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or
enterprises; and (3) license for revenue. 4 It is thus unnecessary, as plaintiff would have us do, to
determine whether the subject storage fee is a tax for revenue purposes or a license fee to reimburse
defendant Municipality for service of supervision because defendant Municipality is authorized not only
to impose a license fee but also to tax for revenue purposes.

The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on
persons, firms and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within
the Municipality's territorial jurisdiction. For the term "license tax" has not acquired a fixed meaning. It
is often used indiseriminately to designate impositions exacted for the exercise of various privileges. In
many instances, it refers to revenue-raising exactions on privileges or activities.

(2) Municipal corporations are allowed wide discretion in determining the rates of imposable license
fees even in cases of purely police power measures. In the absence of proof as to municipal conditions
and the nature of the business being taxed as well as other factors relevant to the issue of arbitrariness
or unreasonableness of the questioned rates, Courts will go slow in writing off an Ordinance. In the case
at bar, appellant has not sufficiently shown that the rate imposed by the questioned Ordinance is
oppressive, excessive and prohibitive.
Procter & Gamble vs. Municipality of Jagna

Post under case digests, Taxation at Saturday, February 04, 2012 Posted by Schizophrenic Mind

Facts: Petitioner domestic corporation owns a Bodega within the jurisdiction of respondent.

Respondent issued a Municipal Ordinance charging 10 centavos for every 100 kilos of stored copra with
a fine/imprisonment if not followed.

For 6 years after, petitioner paid under protest.

Petitioner then claimed that ordinance should be ruled inapplicable to it and that a refund be made.
Petitioner claims it is not really in the business of trading copra, but only uses it in connection to its
business, and that it is an export tax. Petitioner also alleges that it would lead to double taxation
because it is not involved in the business of copra.

Issues:
(1) Whether or not respondent has the authority to issue the Municipal Order.

(2) Whether or not there is double taxation.

(3) Whether or not it is an export tax which is prohibited.

Held:
(1) YES. Broad authority has been granted to municipalities, including the power to exercise license
taxes. In this case, theordinance is charging a license tax for the privilege of storing copra. This is valid
because copra is highly flammable, and safety of the public is the intent of charging the tax. Also the
rate is not oppressive or unreasonable.

(2) NO. It is immaterial what the business of the petitioner is. The tax is, as said, for the privilege to store
copra in their bodega which is entirely different from a tax on petitioner’s products. For doubletaxation
to exist, the same thing must be taxed twice within the same jurisdiction, which is not the case here.

(3) NO. Only where there is a clear showing that what is being taxed is an export to any foreign
country would the prohibition come into play. When the Ordinance itself speaks of "exportable" copra,
the meaning is not exclusively export to a foreign country but shipment out of the municipality. The
storage fee impugned is not a tax on export because it is imposed not only upon copra to be exported
but also upon copra sold and to be used for domestic purposes if stored in any warehouse in the
Municipality and the weight thereof is 100 kilos or more.

The action has not yet prescribed because in the case of Municipality of Opon v. Caltex, the period to
recover municipal license taxes is 6 years, and therefore the claim here is within the prescriptive period.
Ordinance sustained.

21. CIR v. CA, CTA, AdMU

GR No.115349; 18 April 1997

F A C T S: Private respondent, Ateneo de Manila University, is a non-stock, non-profit educational

institution with auxiliary units and branches all over the country. The Institute of Philippine Culture (IPC)
is an auxiliary unit with no legal personality separate and distinct from private respondent. The IPC is a
Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international organizations, private foundations and
government agencies.

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

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

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

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

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

The term "independent contractors" include persons (juridical or natural) not enumerated above (but
not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.

Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without
first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously
both illogical and impractical to determine who are exempted without first determining who are
covered by the aforesaid provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes
and other burdens on the populace, before asking Ateneo to prove its exemption therefrom.

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

Ateneo’s Institute of Philippine Culture never sold its services for a fee to anyone or was ever engaged in
a business apart from and independently of the academic purposes of the university. Funds received by
the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations
which are “tax-exempt” as shown by private respondent’s compliance with the requirement of Section
123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational
institution.

Transaction of IPC not a contract of sale nor a contract for a piece of work. The transactions of
Ateneo’s Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract for a
piece of work. By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money
or its equivalent. In the case of a contract for a piece of work, “the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain price or compensation. . . . If the contractor
agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing. . . .” In the case at bench, it is clear from the evidence
on record that there was no sale either of objects or services because, as adverted to earlier, there was
no transfer of ownership over the research data obtained or the results of research projects undertaken
by the Institute of Philippine Culture.

23. HYDRO RESOURCES V. COURT OF TAX APPEALS ET AL.

GR 80276; December 21, 1990

FACTS Hydro Resources Contractors Corporation entered into a contract of sale with the National
Irrigation Authority (NIA) for the construction of Magat River Multipurpose Project in Isabella in August
1978. The contract provided that Hydro will import parts, construction equipment and tools and taxes
and duties to be paid by NIA. Tools and equipment arrived during 1978 and 1979. NIA reneged on the
contract. Therefore causing the transfer its sale to Hydro in seperate dates in December 6, 1982 and
March 24, 1983. Executive Order 860 took effect during December 21, 1982 provided for 3% ad valorem
tax on importations and it specifically provided that it should have no retroactive effect. During the
contract of sale execution, Hydro was assessed and paid the said 3% ad valorem tax worth P 281,591
under protest. The Hydro when filing for refund with Customs Commissioner who indorsed the approval
of the refund but was denied by the Secretary of Finance and motion was denied by the Court of Tax
Appeals.

ISSUE Whether or not should the Executive Order 860 should have a retroactive effect.

HELD The Court of Tax Appeals erred in applying a retroactive effect for the Executive Order therefore
should not have been subject to the additional 3% ad valorem tax. In general tax laws are not
retroactive in nature. Not only that Executive Order 860 specifically provides that it is not retroactive in
nature, but also when the conditional contract of sale was executed, its had a suspensive condition
contemplated in the Civil Code (Article 1187) where it returned ownership to the seller Hydro because
NIA was not able to comply with its part of the contract, it was deemed executed as if during the
constitution of the obligation which was in 1978 and not in 1982.

Hydro Resources Contractors Corporation v CTA

Facts:

National Irrigation Administration (NIA) entered into an agreement with Hydro Resources for the
construction of the Magat River Multipurpose Project in Isabela. Under their contract, Hydro was
allowed to procure new construction equipment, the payment for which will be advanced by NIA. Hydro
shall repay NIA the costs incurred and the manner of repayment shall be through deductions from each
monthly payment due to Hydro. Hydro shall repay NIA the full value of the construction before the
eventual transfer of ownership.

Upon transfer, Hydro was assessed an additional 3% ad valorem duty which it paid under protest. The
Collector of Customs then ordered for the refund of the ad valorem duty in the form of tax credit. This
was then reversed by the Deputy Minister of Finance.

Issue:

Whether or not the imposition of the 3% ad valorem tax on importations is valid.

Held:

No. EO 860 which was the basis for the imposition of the ad valorem duty took effect December 1982.
The importations were effected in 1978 and 1979 by NIA. It is a cardinal rule that laws shall have no
retroactive effect unless contrary is provided. EO 860 does not provide for its retroactivity. The Deputy
Minister of Finance even clarified that letters of credit opened prior to the effectivity of EO 860 are not
subject to its provisions.

In the case, the procurement of the equipment was not on a tax exempt basis as the import liabilities
have been secured to paid under a financial scheme. It is a matter of implementing a pre-existing
agreement, hence, the imported articles can only be subject to the rates of import duties prevailing at
the time of entry or withdrawal from the customs’ custody.

Central Azucarera Don Pedro vs. CTA and CIR (1967)

Post under case digests, Taxation at Tuesday, February 21, 2012 Posted by Schizophrenic Mind

Facts: This case involves 2 consolidated cases filed by petitioner Central Azucarera assailing the
constitutionality of Sec. 51(d) of the Revenue Code which imposes ½ % monthly interest on its deficiency
tax.

1st case:

CIR assessed against petitioner P167,935 as deficiency income tax for the fiscal year 1954 but he did not
assess and impose any interest thereon. Petitioner protested said deficiency income tax assessment and
requested that it be cancelled. CIR eventually assessed the amount of P10,062 as deficiency income tax
to which was added P1,509.30 as ½ % monthly interest, which was imposed pursuant to Sec 51(d) of the
NIRC as amended by RA2343 (effective June 20, 1959), and computed from June 20, 1959 to Dec. 20,
1961 which was the date of the revised assessment.
Petitioner paid the revised assessment and it paid on Jan. 16, 1962 the P10,062. However, it objected, in
a letter protest, to the demand and imposition of interest. CIR maintained the correctness and validity of
the imposition of the interest.

Petitioner went to the CTA claiming that the imposition of the ½ % monthly interest on its deficiency tax
for 1954 is illegal because the imposition of interest on efficiency income tax earned prior to the
effectivity of RA2343 will be tantamount to giving it retroactiveapplication. CTA upheld CIR’s ruling.

2nd case:

CIR assessed against petitioner the amount of P21,330 as deficiency income tax plus P2,307.10 as
interest. Petitioner paid the deficiency taxes and interests but it filed a claim for refund of taxcredit on
the P2,307.10. It claimed that the payment of the interest was erroneous and the collection therefore is
illegal. CIR maintained the legality of the imposition. CTA sustained CIR’s ruling.

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

Issue: Whether or not the interest of 6% per annum (or ½% monthly interest), provided for in Section 51
(d) as amended by Republic Act No. 2343 (effective June 20, 1959) is imposable on deficiency income tax
due on income earned prior to the effectivity of said Republic Act No. 2343, but assessed after it.

Held: YES. When petitioner filed its income tax returns and paid the corresponding income taxes, the
pertinent provisions of the NIRC read:
Sec 51 (d) Refusal or neglect to make returns; fraudulent returns, etc. — In case(s) of . . . erroneous . . .
returns, the Collector of Internal Revenue shall, upon discovery thereof, . . . make a return upon
information obtained as provided for in this code or by existing law, or require the necessary corrections
to be made, and the assessment made by the Collector of Internal Revenue thereon shall be paid by
such person or corporation immediately upon notificationof the amount of such assessment.

(e) Surcharge and interest in case of delinquency.—To any sum or sums due and unpaid after the dates
prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of
five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon
said tax from the time the same became due, except from the estates of insane, deceased, or insolvent
persons.

After the amendment the same section reads:

Sec 51 (d) (d) Interest on deficiency. — Interest upon the amount determined as a deficiency shall be
assessed at the same time as the deficiency and shall be paid upon notice and demand from the
Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per
centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid
ininstallments, from the date prescribed for the payment of the first installment) to the date the
deficiency is assessed: Provided, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of three years, the present
provisions regarding prescription to the contrary notwithstanding.

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

Although the CIR, under the old Sec 51(e), the interest on deficiency was imposed from the time the tax
became due; while under the new Section 51 (d), said interest is imposed on the deficiency from the
date prescribed for the payment of the tax.

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

Moreover, the application of said Section 51 (d), as amended, in the cases at bar, operated and worked
in favor of petitioner-appellant, since instead of imposing the rate of one per centum (1%) monthly
interest prescribed in the old section 51 (e) from the time the tax became due, i.e., from January 15, —
1955, 1956, 1957, 1958 and 1959, respectively, respondent Commissioner merely imposed the new ½%
monthly interest from January 20, 1959, which interests, ascomputed, are less than what would be due
under the old law.

Ex post facto law contention:

The SC ruled that the collection of interest is not penal in nature but a just compensation to the state for
the delay in paying the tax and for the concomitant use by the tax payer of funds that rightfully should
be in the government’s hands. The fact that the interest charged is made proportionate to the period of
delay constitutes the best evidence that such interest is not penal but compensatory.

The doctrine of unconstitutionality raised by appellant is based on the prohibition against ex

post facto laws. But this prohibition applies only to criminal or penal matters, and not to laws which
concern civil matters or proceedings generally, or which affect or regulate civil or private rights.

Central Azucarera Don Pedro –v– CIR and CTA

G.R. Nos. L-23236 and L-23254 May 31, 1967

FACTS: Central Azucarera Don Pedro, a domestic corporation with office at Nasugbu, Batangas, had
been filing its income tax returns on the "fiscal year" basis ending August 31, of every year.

[It had been assessed deficiency tax plus interest. It paid the deficiency tax but protested on the
imposition of the interest], claiming that the imposition of ½% monthly interest on its deficiency tax for
the fiscal year 1954 to 1958, Pursuant to Section 51 (d) of the Revenue Code, as amended by Republic
Act No. 2343, is illegal, because the imposition of interest on efficiency income tax earned prior to the
effectivity of the amendatory law (Rep. Act 2343) [on 1959] will be tantamount to giving it (Rep. Act No.
2343) retroactive application. [It further contends that] the application of the amended provision (now
Sec. 51-d of the Tax Code) to the cases at bar would run counter to the constitutional restriction against
the enactment of ex post facto laws.

ISSUE: Whether or not the imposition of the interest, is unconstitutional

HELD: NO – [the interest was correctly imposed]. It is to be noted that the collection of interest in these
cases is not penal in nature, thus —

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

and we had already held that —

The doctrine of unconstitutionality raised by appellant is based on the prohibition against ex post facto
laws. But this prohibition applies only to criminal or penal matters, and not to laws which concern civil
matters or proceedings generally, or which affect or regulate civil or private rights (Ex parte Garland, 18
Law Ed., 366; 16 C.J.S., 889-891). (Republic vs. Oasan Vda. de Fernandez, 99 Phil. 934, 937).

Finally, section 13 of the amendatory Republic Act No. 2343 refers only to the basic tax rates, which are
made applicable to income received in 1959 onward, but does not affect the interest due on
deficiencies, which are left to be governed by section 51 (d).

CIR v. Benguet Corp

G.R. Nos. 134587 and 134588; January 8, 2005

Facts: Benguet Corporation is a domestic corporation engaged in the exploration, development and
operation of mineral resources, and the sale or marketing thereof to various entities. It is a VAT
registered enterprise.
The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of
NIRC as amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or business,
sells, barters or exchanges goods, renders services, or engages in similar transactions and any person
who imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated) depending on the
classification of the transaction under Sec. 100 of the NIRC.

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

Section 100 of the Tax Code, as amended by EO 273.

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

corresponding to input VAT.

However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that
was issued subsequent to the consummation of the subject sales of gold to the Central Ban`k which
provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall
be subject to 10% VAT. BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent
BIR issuances.

Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only
if such application would not be prejudicial to the Benguet pursuant Sec. 246 of the NIRC.

Issues: (1) WON Benguet’s sale of gold to the Central Bank during the

period when such was classified by BIR issuances as zerorated could be taxed validly at a 10% rate after
the consummation of the transactions involved; (2) WON there was prejudice to Benguet Corp due to
the new BIR VAT Ruling.
Held: (1) NO. At the time when the subject transactions were consummated, the prevailing BIR
regulations relied upon by Benguet ordained that gold sales to the Central Bank were zero-rated.
Benguet should not be faulted for relying on the BIRs interpretation of the said laws and regulations.

While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain
unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested
right arising from an erroneous interpretation of law, these principles must give way to

exceptions based on and in keeping with the interest of justice and fair play. (then the Court cited the
ABS-CBN case).

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

Even assuming that the right to recover Benguets excess payment of income tax has not yet prescribed,
this relief would only address Benguet’s overpayment of income tax but not the other burdens
discussed above. Verily, this remedy is not a feasible option for Benguet because the very reason why it
was issued a deficiency tax assessment is that its input VAT

was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an
unnecessary and cumbersome refund process is prejudice enough.

CIR v Bursmeiters & Wain Scandinavian

GR 153205; January 22, 2007

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

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

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

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

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

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

COMMISSIONER OF INTERNAL REVENUE vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR

MINDANAO, INC. - Value Added Tax, Zero Rated

FACTS:

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

ISSUE:

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

HELD:

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

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

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

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

25. Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan

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

Facts: In February 1963, plaintiff commenced a complaint seeking to declare Section 2 of R.A. 2264
(Local Autonomy Act) unconstitutional as an undue delegation of taxing power and to declare Ordinance
Nos. 23 and 27 issued by the Municipality of Tanauan, Leyte as null and void.

Municipal Ordinance No. 23 levies and collects from soft drinks producers and manufacturers one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked. On the other hand, Municipal
Ordinance No. 27 levies and collects on soft drinks produced or manufactured within the territorial
jurisdiction of the municipality a tax of one centavo (P0.01) on each gallon of volume capacity. The tax
imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.”

Issues: (1) Is Section 2 of R.A. 2264 an undue delegation of the power of taxation? (2) Do Ordinance
Nos. 23 and 24 constitute double taxation and impose percentage or specific taxes?

Held: (1) NO. The power of taxation is purely legislative and cannot be delegated to the executive or
judicial department of the government without infringing upon the theory of separation of powers. But
as an exception, the theory does not apply to municipal corporations. Legislative powers may be
delegated to local governments in respect of matters of local concern. (2) NO. The Municipality of
Tanauan discovered that manufacturers could increase the volume contents of each bottle and still pay
the same tax rate since tax is imposed on every bottle corked. To combat this scheme, Municipal
Ordinance No. 27 was enacted. As such, it was a repeal of Municipal Ordinance No. 23. In the stipulation
of facts, the parties admitted that the Municipal Treasurer was enforcing Municipal Ordinance No. 27
only. Hence, there was no case of double taxation.

Pepsi-Cola Bottling Company v Tanauan (1976)

Pepsi-Cola Bottling Company of the Phils, Inc v Tanauan GR No. L-31156, February 27, 1976

FACTS:
Pepsi Cola Bottling Company commenced a complaint with preliminary injunction before the Court of
First Instance of
Leyte for the court to declare Section 2 of RA 2264 (Local Autonomy Act) unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos 23 and 27 of municipality of
Tanauan, Leyte. Municipal Ordinance No. 23 (9/25/1962) levies and collects from softdrinks producers
and manufacturers a tax of 1/16 of a centavo for every bottle of softdrink corked. Municipal ordinance
no. 27 (10/28/1962) levies and collects on softdrinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of 1 centavo on each gallon of volume capacity. The taxes imposed
are denominated as “municipal production tax”. CFI-Leyte dismissed the complaint. Hence, this
petition.

ISSUES:

1. Is Section 2 of RA 2264 an undue delegation of power, confiscatory and oppressive?

2. Do ordinances nos. 23 and 27 constitute double taxation and impose percentage or specific
taxes?
 3. Are ordinance nos. 23 and 27 unjust and unfair?

RULING:

1. No. Under the New Constitution, local governments are granted the autonomous authority to
create their own sources of
revenue and to levy taxes. Section 5, Article XI provides: “Each local government unit shall have
the power to create its sources of revenue and to levy taxes, subject to such limitations as may
be provided by law.” Thus, legislative powers may be delegated to local governments in respect
of matters of local concern.

2. No. 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 is not a percentage tax as the
volume capacity of the taxpayer’s production of softdrinks is considered solely for purposes of
determining the tax rate on the products but there is no set ratio between volume of sales and
amount of the tax. Nor can the tax levied be treated as a specific tax. Softdrink is not one of
those specified articles.

3. No. Municipal corporations are allowed much discretion in determining the rates of imposable
taxes. This is in line with the constitutional policy of according the widest possible autonomy to
local governments in matters of local taxation, an aspect that is given expression in the Local Tax
Code.

Pepsi-Cola vs. Municipality of Tanauan

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. MUNICIPALITY OF
TANAUAN
69 SCRA 460
GR No. L-31156, February 27, 1976

"Legislative power to create political corporations for purposes of local self-government

carries with it the power to confer on such local governmental agencies the power to tax.

FACTS: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary

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

ISSUE: Are the contentions of the appellant tenable?

HELD: No. On the issue of undue delegation of taxing power, it is settled that the power
of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of
right to every independent government, without being expressly conferred by the people.
It is a power that is purely legislative and which the central legislative body cannot
delegate either to the executive or judicial department of the government without
infringing upon the theory of separation of powers. The exception, however, lies in the
case of municipal corporations, to which, said theory does not apply. Legislative powers
may be delegated to local governments in respect of matters of local concern. By
necessary implication, the legislative power to create political corporations for purposes
of local self-government carries with it the power to confer on such local governmental
agencies the power to tax.
Also, there is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may
not be exercised. The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, so that double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity or by the same jurisdiction for
the same purpose, but not in a case where one tax is imposed by the State and the other
by the city or municipality.
On the last issue raised, the ordinances do not partake of the nature of a percentage tax
on sales, or other taxes in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity of the taxpayer's
production of soft drinks is considered solely for purposes of determining the tax rate on
the products, but there is not set ratio between the volume of sales and the amount of the
tax.
69 SCRA 460 – Taxation – Delegation to Local Governments – Double Taxation
Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In September 1962, the
Municipality approved Ordinance No. 23 which levies and collects “from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked.”

In December 1962, the Municipality also approved Ordinance No. 27 which 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 of volume capacity.”

Pepsi Cola assailed the validity of the ordinances as it alleged that they constitute double taxation in two
instances: a) double taxation because Ordinance No. 27 covers the same subject matter and impose
practically the same tax rate as with Ordinance No. 23, b) double taxation because the two ordinances
impose percentage or specific taxes.

Pepsi Cola also questions the constitutionality of Republic Act 2264 which allows for the delegation of
taxing powers to local government units; that allowing local governments to tax companies like Pepsi
Cola is confiscatory and oppressive.

The Municipality assailed the arguments presented by Pepsi Cola. It argued, among others, that only
Ordinance No. 27 is being enforced and that the latter law is an amendment of Ordinance No. 23, hence
there is no double taxation.

ISSUE: Whether or not there is undue delegation of taxing powers. Whether or not there is double
taxation.

HELD: No. There is no undue delegation. The Constitution even allows such delegation. Legislative
powers may be delegated to local governments in respect of matters of local concern. By necessary
implication, the legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to tax. Under the
New Constitution, local governments are granted the autonomous authority to create their own sources
of revenue and to levy taxes. Section 5, Article XI provides: “Each local government unit shall have the
power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided
by law.” Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local governments the power of local taxation.

There is no double taxation. The argument of the Municipality is well taken. Further, Pepsi Cola’s
assertion that the delegation of taxing power in itself constitutes double taxation cannot be merited. It
must be observed that the delegating authority specifies the limitations and enumerates the taxes over
which local taxation may not be exercised. The reason is that the State has exclusively reserved the
same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law unlike in other jurisdictions. Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for
the same purpose, but not in a case where one tax is imposed by the State and the other by the city or
municipality.
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 overpaid withholding tax on
royalty paymentsbeginning 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 taxexemptions. 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.

COMMISSIONER OF INTERNAL REVENUE vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS

309 SCRA 87 ; June 25, 1999

Topic: Double Taxation

Facts: SC. JOHNSON AND SON, INC., a domestic corporation organized and operating under the
Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America
(USA), a non-resident foreign corporation was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and distribute the products.
License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents,
Trade Marks and Technology Transfer under Certificate of Registration No. 8064. SC. JOHNSON AND
SON, INC 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 from July 1992
to May 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 Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10% should apply hence royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-
favored nation clause of the RP-US Tax Treaty.

The Commissioner did not act on said claim for refund. Respondent filed a petition for review before the
CTA to claim a refund of the overpaid withholding tax on royalty payments. CTA decided for Respondent
and ordered CIR to issue a tax credit certificate in the amount of P963,266.00 representing overpaid
withholding tax on royalty payments, beginning July, 1992 to May, 1993. CIR filed a petition for review
with CA. CA upheld CTA.

CIR contends that under RP-US Tax Treaty, which is known as the "most favored nation" clause, the
lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United
States from sources within the Philippines only if the circumstances of the resident of the United States
are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching
credit" provision as that provided in RP-West Germany Tax Treaty, the tax on royalties under the RP-US
Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax
Treaty. Also petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is
in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties,
the provisions of the treaty must be construed strictly against it.
Respondent countered that the "most favored nation" clause under the RP-US Tax Treaty refers to
royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the
phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject
matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the
country of residence of such taxpayer is also a party thereto, subject to the basic condition that the
subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under
which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under
similar circumstances".

Issue: WON SC Johnson can refund.

Ruling: NO. The tax rates on royalties and the circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on nationality in the circumstances of such
payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no
similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of
negotiation between the contracting parties. This dissimilarity is true particularly in the treaties between
the Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into
for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the
national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view
towards the elimination of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and
for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the
free flow of goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies.

Double taxation usually takes place when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states impose tax on that income or
capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out
the respective rights to tax of the state of source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of source is limited.

Double taxation usually takes place when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states impose tax on that income or
capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out
the respective rights to tax of the state of source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of source is limited. On the other hand, in
the credit method, although the income or capital which is taxed in the state of source is still taxable in
the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the tax. 15

The phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP
Tax Treaty necessarily contemplated "circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United
States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under
the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the
royalties, with a restraint on the tax that may be collected by the state of source.

the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if
the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid
under similar circumstances. This would mean that private respondent must prove that the RP-US Tax
Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon
royalties earned from sources within the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain
similar provisions on tax crediting.

If the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a
concomitant commitment on the part of the state of residence to grant some form of tax relief, whether
this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected
by the Philippine government will simply be collected by another state, defeating the object of the tax
treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of
residence does not grant some form of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax
rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather
than lose much-needed revenues to another country.

The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for
royalties) would derogate from the design behind the most grant equality of international treatment
since the tax burden laid upon the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for equality of treatment.

Respondent cannot be deemed entitled to the 10 percent rate granted under the RP-West Germany Tax
Treaty for the reason that there is no payment of taxes on royalties under similar circumstances in RP-
US treaty.
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 overpaid withholding tax on
royalty paymentsbeginning 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 taxexemptions. 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.

27. CIR v Rufino

GR Nos> L-33665-68; February 27, 1987

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

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

The BIR, after examination, declared that the merger was not undertaken for a bona fide business
purpose but only to avoid liability for the capital gains tax on the exchange of the old for the new shares
of stock. He then imposed deficiency assessments against the private respondents, the Rufinos. The
Rufinos requested for a reconsideration, which was denied. Therefore, they elevated their matter to the
CTA, who reversed the judgment of the CIR, saying that they found that there was “no taxable gain
derived from the exchange of old stocks simply for new stocks for the New Corporation” because it was
pursuant to a valid plan of reorganization. The CIR raised it to the SC on petition for review oncertiorari.
Issue: WON there was a valid merger and that there was no taxable gain derived therefrom.

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

Rationale:

 Validity of transfer. In support of its argument that the Rufinos were trying to avoid the payment
of capital gains tax, the CIR said that the New ETC did not actually issue stocks in exchange for
the properties of the Old ETC. The increase in capitalization only happened in March 1959, or 37
days after the Old ETC expired. Prior to registration, the New ETC could not have validly
performed the transfer. The SC ruled that the retroactivity of the Deed of Assignment cured the
defect and there was no impediment.

· Bona Fide Business Purpose. The criterion of the law is that the purpose of the merger must be for
a bona fide business purpose and not for the purpose of escaping taxes. The case of Helvering v.
Gregory stated that a mere “operation having no business or corporate purpose—a mere devise which
put on the form of a corporate reorganization as a disguise for concealing its real character and the sole
object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a
business but to transfer a parcel of corporate shares.” When the corporation created is nothing more
than a contrivance, there is no legitimate business purpose. The Court states that there is no such
furtive intention in this case. In fact, the New ETC continues to operate the Capitol and Lyric movie
theaters even up to 27 years after the merger. There is as yet no dissolution, so the Rufinos haven’t
gained any benefit yet from the merger, which makes them no more liable than the time the merger
took place.

The government’s remedy: The merger merely deferred the payment for taxes until the future, which
the government may assert later on when gains are realized and benefits are distributed among the
stockholders as a result of the merger. The taxes are not forfeited but merely postponed and may be
imposed at the proper time later on.

DELPHER TRADES CORPORATIONvs. IAC

G.R. No. L-69259 January 26, 1988

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

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

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

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

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

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be
considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to
a third party. The Pacheco family merely changed their ownership from one form to another. The
ownershipremained in the same hands. Hence, the private respondent has no basis for its claim of a
light of first refusal
CIR v. Toda, Jr.

GR No. 147188; 14 September 2004

F A C T S: On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
outstanding capital stock, to sell the Cibeles Building. 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. Three and a half years later Toda died. On 29 March 1994, the
BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989.
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 from the CIR for deficiency income
tax for the year 1989. The Estate thereafter filed a letter of protest. The Commissioner dismissed the
protest. On 15 February 1996, the Estate filed a petition for review with the CTA. In its decision 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 pre-conceived scheme was adopted by CIC, the same
constituted mere tax avoidance, and not tax evasion. Hence, the CTA declared that the Estate is not
liable for deficiency of income tax. The Commissioner filed a petition for review with the Court of
Appeals. The Court of Appeals affirmed the decision of the CTA, hence, this recourse.

I S S U E: Whether or not this is a case of tax evasion or tax avoidance.

H E L D: Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e. the
payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due; (2) an accompanying state of mind which is described as being “evil,” in “bad
faith,” “willfull,” or “deliberate and not accidental”; and (3) a course of action or failure of action which
is unlawful. All these factors are present in the instant case. 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.
Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was
to create a tax shelter. 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.

CIR v. Estate of Benigno Toda Jr.

G.R. No. 147188. September 14, 2004
DAVIDE, JR., C.J.
Lessons Applicable: Tax evasion v. Tax avoidance

Laws Applicable:

FACTS:

 March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and
Owner of 99.991% of outstanding capital stock, to sell the Cibeles Building and 2 parcels of land
which he sold to Rafael A. Altonaga on August 30, 1987 for P 100M who then sold it on the same
day to Royal Match Inc. for P 200M.

 CIC included gains from sale of real property of P 75,728.021 in its annual income tax return
while Altonaga paid a 5% capital gains tax of P 10M

 July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale of
shares of stock which provides that the buyer is free from all income tax liabilities for 1987, 1988
and 1989.

 Toda Jr. died 3 years later.

 March 29, 1994: BIR sent an assessment notice and demand letter to CIC for deficiency of
income tax of P 79,099, 999.22

 January 27, 1995: BIR sent the same to the estate of Toda Jr.

 Estate filed a protest which was dismissed - fraudulent sale to evade the 35% corporate income
tax for the additional gain of P 100M and that there is in fact only 1 sale.

 Since it is falsity or fraud, the prescription period is 10 years from the discovery of the
falsity or fraud as prescribed under Sec. 223 (a) of the NIRC

 CTA: No proof of fraudulent transaction so the applicable period is 3 years after the last day
prescribed by law for filing the return

 CA: affirmed

 CIR appealed

ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance so the period for
assessment has not prescribed.

HELD: YES. Estate shall be liable since NOT yet prescribed.

  Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. ax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the
other hand, is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.

 Tax evasion connotes the integration of three factors:

 (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to
be legally due, or the non-payment of tax when it is shown that a tax is due

 (2) an accompanying state of mind which is described as being evil, in bad faith,
willfull,or deliberate and not accidental; and

 (3) a course of action or failure of action which is unlawful.

 All are present in this case. The trial balance showed that RMI debited P 40M as "other-
inv. Cibeles Building" that indicates RMI Paid CIC (NOT Altonaga)

 Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another.

 Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount
of tax to be paid especially that the transfer from him to RMI would then subject the
income to only 5% individual capital gains tax, and not the 35% corporate income tax.

 Generally, a sale of or exchange of assets will have an income tax incidence only when it
is consummated but such tax incidence depends upon the substance of the transaction
rather them mere formalities.

CIR vs. Estate of Benigno Toda; Tax Evasion

7/3/2013

G.R. No. 147188. September 14, 2004

Facts:
Cebiles Insurance Corporation 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.
 Toda purportedly sold the property for P100 million to Rafael A. Altonaga.
However, Altonaga in turn, sold the same property on the same day to Royal
Match Inc. 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 Royal Dutch, Altonaga paid capital gains tax
[6%] in the amount of P10 million.

Issue:
Whether or not the scheme employed by Cibelis Insurance Company
constitutes tax evasion.

Ruling:
Yes! The scheme, explained the Court, 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.

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.”

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. Altonaga’s 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 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.

Generally, a sale or exchange of assets will have an income tax incidence only
when it is consummated. 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 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.

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. The two sale
transactions should be treated as a single direct sale by CIC to RMI.

Domingo v. Garlitos

GR No. L-18993 29 June 1963

F A C T S: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory
the order of the Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges
and penalties amounting to P40,058.55 by the Estate of the late Walter Scott Price. The petition for
execution filed by the fiscal, however, was denied by the lower court. The Court held that the execution
is unjustified as the Government itself is indebted to the Estate for 262,200; and ordered the amount of
inheritance taxes be deducted from the Government’s indebtedness to the Estate.

I S S U E: Whether a tax and a debt may be compensated.

H E L D: 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 by a
corresponding law (RA 2700). Under the 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 as well as fully liquidated. Compensation, therefore, takes place by operation of law, in
accordance with Article 1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount. In other words, the estate and inheritance taxes are set off, by virtue of the
government’s indebtedness to the estate.

Domingo vs. Garlitos

GR L-18993

29 June 1963

FACTS:

In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory the order
of the Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges and
penalties amounting to P40,058.55 by the Estate of the late Walter Scott Price. The petition for
execution filed by the fiscal, however, was denied by the lower court. The Court held that the execution
is unjustified as the Government itself is indebted to the Estate for 262,200; and ordered the amount of
inheritance taxes be deducted from the Government’s indebtedness to the Estate.

ISSUE:

Whether a tax and a debt may be compensated.

HELD:

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 by a
corresponding law (RA 2700). Under the 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 as well as fully liquidated. Compensation, therefore, takes place by operation of law, in
accordance with Article 1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount.

DOMINGO VS GARLITOS
G.R. NO. 18993 June 29, 1963
Labrador, J.:
FACTS:
In Domingo vs. Moscoso, the Supreme Court declared as final and executor the order of the lower court
for the payment of estate and inheritance taxes, charges and penalties amounting to Php 40,058.55 by
the estate of the of the late Walter Price. The petitioner for execution filed by the fiscal was denied by
the lower court. The court held that the execution is unjustified as the Government is indebted to the
estate for Php262,200 and ordered the amount of inheritance taxes can be deducted from the
Government’s indebtedness to the estate.
ISSUE:
Whether of not a tax and a debt may be compensated.
RULING:
The court having jurisdiction of the Estate had found that the claim of the Estate against the government
has been recognized and the amount has already been appropriated by a corresponding law. 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 takes place by
operation of law and both debts are extinguished to the concurrent amount. Therefore the petitioner
has no clear right to execute the judgment for taxes against the estate of the deceased Walter Price.

CIR V PASCOR REALTY & DEV’T CORP et. al.

GR No. 128315, June 29, 1999

Facts: The CIR authorized certain BIR officers to examine the books of accounts and
otheraccounting records of Pascor Realty and Development Corp. (PRDC) for 1986, 1987 and 1988. The
examination resulted in recommendation for the issuance of an assessment of P7,498,434.65 and
P3,015,236.35 for 1986 and 1987, respectively. The Commissioner filed acriminal complaint for tax
evasion against PRDC, its president and treasurer before the DOJ. Private respondents filed immediately
an urgent request for reconsideration on reinvestigation disputing the tax assessment and tax liability.
The Commissioner denied private respondent’s request for reconsideration/reinvestigation on the
ground that no formal assessment has been issued which the latter elevated to the CTA on a petition for
review. The Commissioner’s motionto dismiss on the ground of the CTA’s lack of jurisdiction denied by
CTA and ordered the Commissioner to file an answer. Instead of complying with the order of CTA,
Commissioner filed a petition with the CA alleging grave abuse of discretion and lack of jurisdiction on
the part of CTA for considering the affidavit/report of the revenue officers and the endorsement of said
report as assessment which may be appealed to the CTA. The CA sustained the CTA decision and
dismissed the petition.
Issues: (1) Whether or not the criminal complaint for tax evasion can be construed as an assessment. (2)
Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted.

Held: The filing of the criminal complaint with the DOJ cannot be construed as a formal assessment.
Neither the Tax Code nor the revenue regulations governing the protest assessments provide a specific
definition or form of an assessment.

An assessment must be sent to and received by the taxpayer, and must demand payment of the taxes
described therein within a specific period. The revenue officer’s affidavit merely contained a
computation of respondent’s tax liability. It did not state a demand or period for payment. It was
addressed to the Secretary of Justice not to the taxpayer. They joint affidavit was meant to support the
criminal complaint for tax evasion; it was not meant to be a notice of tax due and a demand to private
respondents for the payment thereof. The fact that the complaint was sent to the DOJ, and not to
private respondent, shows that commissioner intended to file a criminal complaint for tax evasion, not
to issue an assessment.

An assessment is not necessary before criminal charges can be filed. A criminal charge need not only be
supported by a prima facie showing of failure to file a required return. The CIR had, in such tax evasion
cases, discretion on whether to issue an assessment, or to file a criminal caseagainst the taxpayer, or to
do both.

CIR V PASCOR REALTY & DEV’T CORP et. al. (GR No. 128315, June 29, 1999)

Wednesday, January 21, 2009 Posted by Coffeeholic Writes

Labels: Case Digests, Taxation

Facts: The CIR authorized certain BIR officers to examine the books of accounts and other accounting
records of Pascor Realty and Development Corp. (PRDC) for 1986, 1987 and 1988. The examination
resulted in recommendation for the issuance of an assessment of P7,498,434.65 and P3,015,236.35 for
1986 and 1987, respectively.

On March 1, 1995, Commissioner filed a criminal complaint for tax evasion against PRDC, its president
and treasurer before the DOJ. Private respondents filed immediately an urgent request for
reconsideration on reinvestigation disputing the tax assessment and tax liability.

On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the
criminal complaint. In a letter dated, May 17, 1995, the Commissioner denied private respondent’s
request for reconsideration (reinvestigation on the ground that no formal assessment has been issued
which the latter elevated to the CTA on a petition for review. The Commissioner’s motion to dismiss on
the ground of the CTA’s lack of jurisdiction inasmuch as no formal assessment was issued against private
respondent was denied by CTA and ordered the Commissioner to file an answer but did not instead filed
a petition with the CA alleging grave abuse of discretion and lack of jurisdiction on the part of CTA for
considering the affidavit/report of the revenue officers and the endorsement of said report as
assessment which may be appealed to he CTA. The CA sustained the CTA decision and dismissed the
petition.

Issues:

1. Whether or not the criminal complaint for tax evasion can be construed as an assessment.
2. Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted.

Held:
The filing of the criminal complaint with the DOJ cannot be construed as a formal assessment. Neither
the Tax Code nor the revenue regulations governing the protest assessments provide a specific
definition or form of an assessment.

An assessment must be sent to and received by the taxpayer, and must demand payment of the taxes
described therein within a specific period. The revenue officer’s affidavit merely contained a
computation of respondent’s tax liability. It did not state a demand or period for payment. It was
addressed to the Secretary of Justice not to the taxpayer. They joint affidavit was meant to support the
criminal complaint for tax evasion; it was not meant to be a notice of tax due and a demand to private
respondents for the payment thereof. The fact that the complaint was sent to the DOJ, and not to
private respondent, shows that commissioner intended to file a criminal complaint for tax evasion, not
to issue an assessment.

An assessment is not necessary before criminal charges can be filed. A criminal charge need not only be
supported by a prima facie showing of failure to file a required return. The CIR had, in such tax evasion
cases, discretion on whether to issue an assessment, or to file a criminal case against the taxpayer, or to
do both.

CIR vs. PASCOR

309 SCRA 402
GR No. 128315 June 29, 1999
"An assessment is not necessary before a criminal charge can be filed."

FACTS: The BIR examined the books of account of Pascor Realty and Devt Corp for years 1986, 1987 and
1988, from which a tax liability of 10.5 Million Pesos was found. Based on the recommendations of the
examiners, the CIR filed an information with the DOJ for tax evasion against the officers of Pascor. Upon
receipt of the subpoena, the latter filed an urgent request for reconsideration/reinvestigation with the
CIR, which was immediately denied upon the ground that no formal assessment has yet been issued by
the Commisioner. Pascor elevated the CIR's decision to the CTA on a petition for review. The CIR filed a
Motion to Dismiss on the ground of lack of jurisdiction of CTA as there was no formal assessment made
against the respondents. The CTA dismissed the motion, hence this petition.

ISSUE: Is a formal assessment necessary in the filing of a criminal complaint?

HELD: No. Section 222 of the NIRC states that an assessment is not necessary before a criminal charge
can be filed. This is the general rule. Private respondents failed to show that they are entitled to an
exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to
file a required return. This fact need not be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is
then given a chance to submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the
taxpayer informing the latter specifically and clearly that an assessment has been made against him or
her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly
with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not
that the commissioner has issued an assessment. It must be stressed that a criminal complaint is
instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

Taxation – Function of an Assessment Notice – Filing of Criminal Case for Tax Evasion

Pascor Realty and Development Corporation (PRDC) was found out to be liable for a total of P10.5
million tax deficiency for the years 1986 and 1987. In March 1995, the Commissioner of Internal
Revenue (CIR) filed a criminal complaint against PRDC with the Department of Justice. Attached to the
criminal complaint was a joint affidavit executed by the tax examiners.

PRDC then filed a protest with the Court of Tax Appeals (CTA). PRDC averred that the affidavit attached
to the criminal complaint is tantamount to a formal assessment notice (FAN) hence can be subjected to
protest; that there is a simultaneous assessment and filing of criminal case; that the same is contrary to
due process because it is its theory that an assessment should come first before a criminal case of tax
evasion should be filed. The CIR then filed a motion to dismiss (MTD) on the ground that the CTA has no
jurisdiction over the case because the CIR has not yet issued a FAN against PRDC; that the affidavit
attached to the complaint is not a FAN; that since there is no FAN, there cannot be a valid subject of a
protest.

The CTA however denied the MTD. It ruled that the joint affidavit attached to the complaint submitted
to the DOJ constitutes an assessment; that an assessment is defined as simply the statement of the
details and the amount of tax due from a taxpayer; that therefore, the joint affidavit which contains a
computation of the tax liability of PRDC is in effect an assessment which can be the subject of a protest.
This ruling was affirmed by the Court of Appeals.

ISSUE: Whether or not the Court of Tax Appeal is correct.

HELD: No. An assessment contains not only a computation of tax liabilities, but also a demand for
payment within a prescribed period. It also signals the time when penalties and protests begin to accrue
against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires
that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by
revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that can be questioned before the CTA. Further, such
affidavit was not issued to the taxpayer, it was submitted as an attachment to the DOJ. It must also be
noted that not every document coming from the Bureau of Internal Revenue which provides a
computation of the tax liability of a taxpayer can be considered as an assessment. An assessment is
deemed made only when the CIR releases, mails or sends such notice to the taxpayer.

Anent the issue of the filing of the criminal complaint, Section 222 of the National Internal Revenue
Code specifically states that in cases where a false or fraudulent return is submitted or in cases of failure
to file a return such as this case, proceedings in court may be commenced without an assessment.
Furthermore, Section 205 of the NIRC clearly mandates that the civil and criminal aspects of the case
may be pursued simultaneously.

Marcos II vs. CA

273 SCRA 47 1997

Facts: Ferdinand R. Marcos II assailed the decision of the Court of Appeals declaring the deficiency
income tax assessments and estate tax assessments upon the estate and properties of his late father
despite the pendency of the probate proceedings of the will of the late President. On the other hand,
the BIR argued that the State’s authority to collect internal revenue taxes is paramount.

Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his estate,
and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus,
respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are
premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034
and 0141, which were filed by the government to question the ownership and interests of the late
President in real and personal properties located within and outside the Philippines. Petitioner,
however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes
upon the decedent's estate were among those involved in the said cases pending in the Sandiganbayan.
Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact
that the decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax
assessments over the properties indubitably included in his estate.

Issue: Is the contention of Marcos correct?

Held: No. The approval of the court, sitting in probate or as a settlement tribunal over the deceased’s
estate, is not a mandatory requirement in the collection of estate taxes.

There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the
probate or estate settlement court's approval of the state's claim for estate taxes, before the same can
be enforced and collected.

The enforcement of tax laws and the collection of taxes are of paramount importance for the
sustenance of government. Taxes are the lifeblood of government and should be collected without
unnecessary hindrance. However, such collection should be made in accordance with law as any
arbitrariness will negate the existence of government itself.

It is not the Department of Justice which is the government agency tasked to determine the amount of
taxes due upon the subject estate, but the Bureau of Internal Revenue whose determinations and
assessments are presumed correct and made in good faith. The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful
where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon
the complaining party to show clearly that the assessment is erroneous. Failure to present proof of
error in the assessment will justify the judicial affirmance of said assessment. In this instance, petitioner
has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise
to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged.
But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

Marcos II vs. CA/CIR

GRN 120880 June 5, 1997
Torres, J.:

FACTS:
After the death of former President Marcos, Special audit team disclosed that Marcoses failed to file a
written notice of the death of the decedent, an estate tax returns as well as several income tax returns
covering the years 1982 to 1986. BIR issued deficiency estate tax assessment among others and were
personally and constructively served to the last known address of Marcoses. No administrative protest
were served by Imelda or the heir of the late President, thus notices of levy on real property were
issued. Having no response, properties were awarded in favor of the government. Marcos II questioned
the levy assailing that said properties were under probate hearing thus, should not be summarily levied
by BIR.

ISSUE:
Whether or not the BIR has authority to collect by the summary remedy of levying upon, and sale of real
properties of the decedent, estate tax deficiencies, without the cognition and authority of the court
sitting in probate over the supposed will of the deceased.

RULING:
The approval of the curt, sitting in probate, or as a settlement tribunal over the deceased is not a
mandatory requirement in the collection of estate taxes… there is nothing in the tax code, and in the
pertinent remedial laws that implies the necessity of the probate or estate settlement court’s approval
of the state’s claim for the estate taxes, before the same can be enforced and collected. If there is any
issue as to the validity of the BIR’s decision to assess the estate taxes, this should have been pursued
through the proper administrative and judicial avenues provided for by law.

Even an assessment based on the estimate is prima facie valid and lawful where it does not appear to
have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to
show clearly that the assessment is erroneous.

NB: The nature of the process of estate tax collection

…the inheritance tax does not directly involve the administration of the decedent’s estate although it
may be viewed as an incident to the complete settlement of an estate, and under some statutes, it is
made the duty of the probate court to make the amount of the inheritance tax a part of the final decree
of distribution of the estate. It is not against the property of decedent, nor it is a claim against the estate
as much, but it is against the interest or property right which the heir… has in the property formerly held
by decedent… it is a proceeding in rem.

MARCOS II vs. CA
273 SCRA 47
GR No. 120880, June 5, 1997
"The approval of the court sitting in probate is not a mandatory requirement in the collection of estate
taxes."
"In case of failure to file a return, the tax may be assessed at anytime within 10 years after the
omission."

FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's
petition to levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies
during the period of his exile in the US. The Marcos family was assessed by the BIR after it failed to file
estate tax returns. However the assessment were not protested administratively by Mrs. Marcos and
the heirs of the late president so that they became final and unappealable after the period for filing of
opposition has prescribed. Marcos contends that the properties could not be levied to cover the tax
dues because they are still pending probate with the court, and settlement of tax deficiencies could not
be had, unless there is an order by the probate court or until the probate proceedings are terminated.
Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR's Notices of Levy
on the Marcos properties were issued beyond the allowed period, and are therefore null and void.

ISSUE: Are the contentions of Bongbong Marcos correct?

HELD: No. The deficiency income tax assessments and estate tax assessment are already final and
unappealable -and-the subsequent levy of real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary
tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and
Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted
by the government.
The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's estate is
not a mandatory requirement in the collection of estate taxes. On the contrary, under Section 87 of the
NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial
administrator of the decedent's estate to deliver any distributive share to any party interested in the
estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes
have been paid. This provision disproves the petitioner's contention that it is the probate court which
approves the assessment and collection of the estate tax.
On the issue of prescription, the omission to file an estate tax return, and the subsequent failure to
contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under Sec.223 of
the NIRC, in case of failure to file a return, the tax may be assessed at anytime within 10 years after the
omission, and any tax so assessed may be collected by levy upon real property within 3 years (now 5
years) following the assessment of the tax. Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting the validity of the said assessment, there
is no reason why the BIR cannot continue with the collection of the said tax.

Marcos II v CA (1997)

Marcos II v CA
GR No 120880, June 5, 1997

FACTS:
The Cir is being questioned by petitioner for assessing and collecting through the summary remedy of
levy on real property, estate and income tax delinquencies upon the estate and properties of the late
Ferdinand Marcos despite the pendency of the proceedings on the probate of the will of the late
president.

ISSUE:
Are summary tax remedies affected by the probate proceedings?

RULING:
No. From the foregoing, it is discernible that the approval of the court, sitting in probate or as a
settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes.
It cannot be therefore be argued that the tax bureau erred in proceeding with the levying sale of the
properties on the ground that it was required to seek court approval.

Marcos II vs. CA

MARCOS II v. CA
GR No. 120880, June 5, 1997
293 SCRA 77

FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant CIR's
petition to levy the properties of the late Pres. Marcos to cover the payment of his tax delinquencies
during the period of his exile in the US. The Marcos family was assessed by the BIR, and notices were
constructively served to the Marcoses, however the assessment were not protested administratively by
Mrs. Marcos and the heirs of the late president so that they became final and unappealable after the
period for filing of opposition has prescribed. Marcos contends that the properties could not be levied to
cover the tax dues because they are still pending probate with the court, and settlement of tax
deficiencies could not be had, unless there is an order by the probate court or until the probate
proceedings are terminated.

ISSUE: Is the contention of Bongbong Marcos correct?

HELD: No. The deficiency income tax assessments and estate tax assessment are already final and
unappealable -and-the subsequent levy of real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary
tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and
Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted
by the government.
 The approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a
mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax
Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late
President, on the ground that it was required to seek first the probate court's sanction. There is nothing
in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes, before the same can be enforced and
collected. On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is
bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any
distributive share to any party interested in the estate, unless it is shown a Certification by the
Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the
petitioner's contention that it is the probate court which approves the assessment and collection of the
estate tax.

Meralco Securities Corporation vs. Savellano

GR No. L-36181 October 23, 1982

Facts: On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his wife and
children) submitted to petitioner Commissioner of Internal Revenue confidential denunciation against
the Meralco Securities Corporation for tax evasion for having paid income tax only on 25 % of the
dividends it received from the Manila Electric Co. for the years 1962-1966, thereby allegedly
shortchanging the government of income tax due from 75% of the said dividends.

Petitioner Commissioner of Internal Revenue caused the investigation of the denunciation after which
he found and held that no deficiency corporate income tax was due from the Meralco Securities
Corporation on the dividends it received from the Manila Electric Co. and accordingly denied Maniago's
claim for informer's reward on a non-existent deficiency.

On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an amended petition for
mandamus, in the Court of First Instance of Manila, docketed therein as Civil Case No. 80830, against
the Commissioner of Internal Revenue and the Meralco Securities Corporation to compel the
Commissioner to impose the alleged deficiency tax assessment on the Meralco Securities Corporation
and to award to him the corresponding informer's reward under the provisions of R.A. 2338.
Respondent judge granted the said petition and thereafter, denied the motions for reconsideration filed
by all the parties.
Issues: (1) Whether or not respondent judge has jurisdiction over the subject matter of the case; (2)
Whether or not respondent heirs of Maniago are entitled to informer’s reward.

Held: (1) Respondent judge has no jurisdiction to take cognizance of the case because the subject matter
thereof clearly falls within the scope of cases now exclusively within the jurisdiction of the Court of Tax
Appeals. Section 7 of Republic Act No. 1125, enacted June 16, 1954, granted to the Court of Tax Appeals
exclusive appellate jurisdiction to review by appeal, among others, decisions of the Commissioner of
Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue. The
law transferred to the Court of Tax Appeals jurisdiction over all cases involving said assessments
previously cognizable by courts of first instance, and even those already pending in said courts. The
question of whether or not to impose a deficiency tax assessment on Meralco Securities Corporation
undoubtedly comes within the purview of the words "disputed assessments" or of "other matters
arising under the National Internal Revenue Code . . . .In the case of Blaquera vs. Rodriguez, et al, this
Court ruled that "the determination of the correctness or incorrectness of a tax assessment to which the
taxpayer is not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of the Court of
First Instance, for under the provisions of Section 7 of Republic Act No. 1125, the Court of Tax Appeals
has exclusive appellate jurisdiction to review, on appeal, any decision of the Collector of Internal
Revenue in cases involving disputed assessments and other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal Revenue."

(2) Considering then that respondent judge may not order by mandamus the Commissioner to issue the
assessment against Meralco Securities Corporation when no such assessment has been found to be due,
no deficiency taxes may therefore be assessed and collected against the said corporation. Since no taxes
are to be collected, no informer's reward is due to private respondents as the informer's heirs.
Informer's reward is contingent upon the payment and collection of unpaid or deficiency taxes. An
informer is entitled by way of reward only to a percentage of the taxes actually assessed and collected.
Since no assessment, much less any collection, has been made in the instant case, respondent judge's
writ for the Commissioner to pay respondents 25% informer's reward is gross error and without factual
nor legal basis.

Petitions granted and the questioned decision of respondent judge and order reversed and set aside.

Taxation – Courts Cannot Issue Mandamus to Compel CIR to Collect Taxes

 In 1967, Juan Maniago informed the Commissioner of Internal Revenue (CIR) that MERALCO Securities
Corporation did not pay the proper taxes from 1962 to 1966. The CIR conducted an investigation and it
found out that MERALCO did actually pay the proper amount of tax due within said period. The CIR then
informed Maniago of its decision and also informed him that since no deficiency tax was collected,
Maniago is not entitled to the informer’s reward then offered to individuals who report tax evaders.

Maniago then filed a petition for mandamus against the CIR. After hearing, Judge Victorino Savellano
granted Maniago’s petition and ordered the CIR to collect the deficiency taxes and further ordered the
CIR to pay Maniago’s informer’s reward.

ISSUE: Whether or not Judge Savellano is correct.

HELD: No. The power to assess or not to assess tax deficiency against a taxpayer is a discretionary
function vested in the CIR. As such, the CIR may not be compelled by mandamus. Mandamus only lies to
enforce the performance of a ministerial act or duty and not to control the performance of a
discretionary power. Especially so in this case where the CIR found that no tax deficiency is due. It
should be noted further that regular courts have no jurisdiction over the subject matter of this case.
Section 7 of Republic Act No. 1125, enacted June 16, 1954, granted to the Court of Tax Appeals exclusive
appellate jurisdiction to review by appeal, among others, decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal Revenue.

SY PO vs. CTA

G.R. No. 81446; August 18, 1988

Facts: Po Bien Sing, the sole proprietor of Silver Cup Wine Factory (SCWF), engaged in the business of
manufacture and sale of compounded liquors. On the basis of a denunciation against SCWF allegedly
"for tax evasion amounting to millions of pesos, Secretary of Finance directed the Finance-BIR--NBI team
to investigate.

On the basis of the team's report of investigation, the respondent Commissioner of Internal Revenue
assessed Mr. Po Bien Sing deficiency income tax for 1966 to 1970 in the amount of P7,154,685.16 and
for deficiency specific tax for January 2,1964 to January 19, 1972 in the amount of P5,595,003.68
Petitioner protested the deficiency assessments. The BIR recommended the reiteration of the
assessments in view of the taxpayer's persistent failure to present the books of accounts for
examination.

Issue: WON the assessments have valid and legal basis.

Held: The law is specific and clear. The rule on “The Best Evidence Obtainable” applies when a tax report
required by law for the purpose of assessment is not available or when tax report is incomplete or
fraudulent.

The tax assessment by tax examiners are presumed correct and made in good faith. The taxpayer has
the duty to prove otherwise. In the absence of proof of irregularities in the performance of duties, an
assessment duly made by the BIR examiner and approved by his superior officers will not be disturbed.
All presumptions are in favour of the correctness of tax assessments.

FACTS: Petitioner Sy Po is the widow of Po Bien Sing, the owner of Silver Cup Wine Factory. Upon
investigation of the BIR, it was found that Silver Cup has deficiency taxes amounting to millions of pesos.
Po/Silver Cup was mandated to produce their tax records and reports but they continued to fail to do so.
The BIR was then forced to seize the wine bottles in order to account for the taxes due from Silver Cup.

It was also revealed that Po Bien Sing was operating illegally, bringing in untaxed liquor from Cebu. He
was able to do so without the revenue inspector knowing and he was also involved in the false entries in
the accounting books.

Petitioner contests the validity of the tax assessment, submitting that the same are wrong.

ISSUE: Whether or not the tax assessment made by the BIR is correct.

RULING: YES, the tax assessment of the BIR is correct. "Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof
of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal
Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in
favor of the correctness of tax assessments."
Moreover:

"The law is specific and clear. The rule on the "best evidence obtainable" applies when a tax report
required by law for the purpose of assessment is not available or when the tax report is incomplete or
fraudulent.

In the instant case, the persistent failure of the late Po Bien Sing and the herein petitioner to present
their books of accounts for examination for the taxable years involved left the Commissioner of Internal
Revenue no other legal option except to resort to the power conferred upon him under Section 16 of
the Tax Code."

Bache and Co vs Ruiz GR 32409 27 February 1971

Facts: Commissioner of Internal Revenue, wrote a letter addressed to respondent Judge Vivencio M.
Ruiz requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the
National Internal Revenue Code. Revenue Examiner Rodolfo de Leon and Arturo Logronio went to CFI
with proper documents. Judge Vivencio Ruiz asked his secretary to take the deposition and when done
stenographer read it to the judge. Logronio took the oath ans was warned by judge that he may be
charged with perjury if found lying. Search warrant was issued and served. Petitioners’ lawyers
protested the search on the ground that no formal complaint or transcript of testimony was attached to
the warrant. The agents nevertheless proceeded with their search which yielded six boxes of
documents. BIR based on the documents seized. Petitioner contend that judged failed to personally
examine the complainant and witnesses.

Issue: Whether or not search warrant is null and void on the ground of no personal examination of the
jusge?

Decision: This cannot be consider a personal examination. If there was an examination at all of the
complainant and his witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the
Constitution and the rules require a personal examination by the judge. It was precisely on account of
the intention of the delegates to the Constitutional Convention to make it a duty of the issuing judge to
personally examine the complainant and his witnesses that the question of how much time would be
consumed by the judge in examining them came up before the Convention, as can be seen from the
record of the proceedings quoted above. The reading of the stenographic notes to respondent Judge did
not constitute sufficient compliance with the constitutional mandate and the rule; for by that manner
respondent Judge did not have the opportunity to observe the demeanor of the complainant and his
witness, and to propound initial and follow-up questions which the judicial mind, on account of its
training, was in the best position to conceive. These were important in arriving at a sound inference on
the all-important question of whether or not there was probable cause.

CIR vs. CA, CTA and FORTUNE TOBACCO CORP.

G.R. No. 119761; August 29, 1996

Facts: Fortune Tobacco Corporation ("Fortune Tobacco"), engaged in the manufacture of different
brands of cigarettes, registered "Champion," "Hope," and "More" cigarettes. BIR classified them as
foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies.
However, Fortun changed the names of 'Hope' to 'Hope Luxury'and 'More' to 'Premium More,' thereby
removing the said brands from the foreign brand category.

A 45% Ad Valorem taxes were imposed on these brands. Then Republic Act ("RA") No. 7654 was enacted
– 55% for locally manufactured foreign brand while 45% for locally manufactured brands. 2
days before the effectivity of RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was
issued by the BIR saying since there is no showing who the real owner/s are of Champion, Hope and
More, it follows that the same shall be considered locally manufactured foreign brand for purposes of
determining the ad valorem tax - 55%. BIR sent via telefax a copy of RMC 37-93 to Fortune Tobacco
addressed to no one in particular. Then Fortune Tobacco received, by ordinary mail, a certified xerox
copy of RMC 37-93. CIR assessed Fortune Tobacco for ad valorem tax deficiency amounting to
P9,598,334.00.

Fortune Tobacco filed a petition for review with the CTA. 8 CTA upheld the position of Fortune. CA
affirmed.

Issue: WON it was necessary for BIR to follow the legal requirements when it issued its RMC

Held. YES. CIR may not disregard legal requirements in the exercise of its quasi-legislative powers which
publication, filing, and prior hearing.

When an administrative rule is merely interpretative in nature, its applicability needs nothing further
than its bare issuance for it gives no real consequence more than what the law itself has already
prescribed. BUT when, upon the other hand, the administrative rule goes beyond merely providing for
the means that can facilitate or render least cumbersome the implementation of the law but
substantially increases the burden of those governed, the agency must accord, at least to those directly
affected, a chance to be heard, before that new issuance is given the force and effect of law.

RMC 37-93 cannot be viewed simply as construing Section 142(c)(1) of the NIRC, as amended, but has, in
fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and
"Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to
thereby have them covered by RA 7654 which subjects mentioned brands to 55% the BIR not simply
interpreted the law; verily, it legislated under its quasi-legislativeauthority. The due observance of the
requirements of notice, of hearing, and of publication should not have been then ignored.

CIR vs. Burroughs Ltd. [G.R. No. L-66653. June 19, 1986.] Second Division, Paras (J): 4 concurring Facts:
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines
through a branch office located at De la Rosa corner Esteban Streets, Legaspi Village, Makati, Metro
Manila. Sometime in March 1979, said branch office applied with the Central Bank for authority to remit
to its parent company abroad, branch profit amounting to P7,647,058.00. Thus, on 14 March 1979, it
paid the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office
the amount of P6,499,999.30. Claiming that the 15% profit remittance tax should have been computed
on the basis of the amount actually remitted (P6,499,999.30) and not on the amount before profit
remittance tax (P7,647,058.00), Burroughs Ltd. filed on 24 December 1980, a written claim for the
refund or tax credit of the amount of Taxation Law I, 2003 ( 21 ) Haystacks (Berne Guerrero)
P172,058.90 representing alleged overpaid branch profit remittance tax. On 24 February 1981,
Burroughs Ltd. filed with the Court of Tax Appeals, a petition for review (CTA Case) 3204 for the
recovery of the amount of P172,058.81. On 27 June 1983, the tax court rendered its Decision, ordering
the Commission of Internal Revenue to grant a tax credit in favor of Burroughs Ltd. the said amount
claimed; without pronouncement as to costs. Unable to obtain a reconsideration from the decision, the
Commissioner filed the petition for certiorari before the Supreme Court. The Supreme Court affirmed
the assailed decision of the Court of Tax Appeals; without pronouncement as to costs. 1. Section 24 (b)
(2) (ii) of the National Revenue Code The pertinent provision of the National Revenue Code is Sec. 24 (b)
(2) (ii) which states: “Sec. 24. Rates of tax on corporations. . . . (b) Tax on foreign corporations. . . . (2) (ii)
Tax on branch profits remittances. — Any profit remitted abroad by a branch to its head office shall be
subject to a tax of fifteen per cent (15%) . . . .” 2. Interpretation of the provision as per ruling of the BIR
21 January 1980 In a Bureau of Internal Revenue ruling dated 21 January 1980 by then Acting
Commissioner of Internal Revenue Hon. Efren I. Plana, Section 24 (b) (2) (ii) had been interpreted to
mean that “the tax base upon which the 15% branch profit remittance tax . . . shall be imposed . . . (is)
the profit actually remitted abroad and not on the total branch profits out of which the remittance is to
be made.” Based on such ruling Burroughs Ltd. should have paid only the amount of P974,999.89 in
remittance tax computed by taking the 15% of the profits of P6,499,999.89 in remittance tax actually
remitted to its head office in the United States, instead of P1,147,058.70, on its net profits of
P7,647,058.00. Undoubtedly, it has overpaid its branch profit remittance tax in the amount of
P172,058.90. 3. Memorandum Circular 8-82 (17 March 1982) does not apply What is applicable in the
present case is still the Revenue Ruling of 21 January 1980 because Burroughs Limited paid the branch
profit remittance tax in question on 14 March 1979. Memorandum Circular 8-82 dated 17 March 1982,
which states that “considering that the 15% branch profit remittance tax is imposed and collected at
source, necessarily the tax base should be the amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted abroad,” cannot be given retroactive effect in the
light of Section 327 of the National Internal Revenue Code. 4. Section 327 of the National Internal
Revenue Code Section 327 (Non-retroactivity of rulings) of the National Internal Revenue Code provides
“any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance
with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation, modification, or reversal will be prejudicial to the
taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where
the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the
facts on which the ruling is based, or (c) where the taxpayer acted in bad faith.” (ABS-CBN Broadcasting
Corp. v. CTA, 108 SCRA 151-152) 5. Burroughs Limited will be prejudiced by the retroactive application
of Memorandum Circular 8-82 The prejudice that would result to Burroughs Limited by a retroactive
application of Memorandum Circular 8-82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. Insofar as the enumerated exceptions are concerned, admittedly, Burroughs
Limited does not fall under any of them.

ABS-CBN vs. CTA G.R. No. L-52307

Retroactive Effect of Tax Statues

Republic of the Philippines

Supreme Court Ruling

G.R. No. L-52307 October 12, 1981

ABS-CBN Broadcasting Corporation, Petitioner

vs.

Court of Tax Appeals and the Commissioner of Internal revenue, Respondent

FACTS:

The ABS-CBN Broadcasting Corporation (herein shall be called the “Company”) was engaged in the
business of telecasting local as well as foreign films acquired from foreign corporations not engaged in
trade or business with the Philippines. Under Section 24 (b) of the National Revenue Code, a withholding
tax of 30% (RA 2343). It was implemented through Circular No. V-334. Pursuant to the foregoing, ABS-
CBN dutifully withheld and turned over to the BIR the amount of 30% of one-half of the film rentals paid
by it to foreign corporations not engaged in trade or business within the Philippines. The last year that
ABS-CBN withheld taxes pursuant to the foregoing Circular was in 1968.

RA 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from 30 % to 35 % and revising
the tax basis from “such amount” referring to rents, etc. to “gross income.” The following was
implemented by Circular No. 4-71.

Petitioner requested for a reconsideration and withdrawal of the assessment.

ISSUE/S:

Whether or not respondent can apply General Circular No. 4-71 retroactively and issue a deficiency
assessment against petitioner.

HELD/DECISION:

Any rulings or circulars promulgated by the CIR have no retroactive application when it would be
prejudicial to taxpayers. The retroactive application of Memorandum Circular No. 4-71 prejudices ABS-
CBN since:

1. The assessment and demand on petitioner to pay deficiency withholding income tax was also made
three years after 1968 for a period of time commencing in 1965.

2. ABS-CBN was no longer in a position to withhold taxes due from foreign corporations because it had
already remitted all film rentals and no longer had any control over them when the new Circular was
issued.

ABS-CBN Broadcasting Corp. vs. Court of Tax Appeals [G.R. No. L-52306. October 12, 1981]

Post under case digests, Taxation at Thursday, March 29, 2012 Posted by Schizophrenic Mind

Facts: During the period pertinent to this case, petitioner corporation was engaged in the business of
telecasting local as well as foreign films acquired from foreign corporations not engaged in trade or
business within the Philippines. for which petitioner paid rentals after withholding income tax of 30%of
one-half of the film rentals. In implementing Section 4(b) of the Tax Code, the Commissioner issued
General Circular V-334. Pursuant thereto, ABS-CBN Broadcasting Corp. dutifully withheld and turned
over to the BIR 30% of ½ of the film rentals paid by it to foreign corporations not engaged in trade or
business in the Philippines. The last year that the company withheld taxes pursuant to the Circular was
in 1968. On 27 June 1908, RA 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from
30% to 35% and revising the tax basis from “such amount” referring to rents, etc. to “gross income.” In
1971, the Commissioner issued a letter of assessment and demand for deficiency withholding income
tax for years 1965 to 1968. The company requested for reconsideration; where the Commissioner did
not act upon.

Issue: Whether Revenue Memorandum Circular 4-71, revoking General Circular V-334, may be
retroactively applied.

Held: Rulings or circulars promulgated by the Commissioner have no retroactive application where to so
apply them would be prejudicial to taxpayers. Herein ,the prejudice the company of the retroactive
application of Memorandum Circular 4-71 is beyond question. It was issued only in 1971, or three years
after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The
assessment and demand on petitioner to pay deficiency withholding income tax was also made three
years after 1968 for a period of time commencing in 1965. The company was no longer in a position to
withhold taxes due from foreign corporations because it had already remitted all film rentals and had no
longer control over them when the new circular was issued. Insofar as the enumerated exceptions are
concerned, the company does not fall under any of them.

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