2. 2c digests tax i (updated)

8/10/2019 2. 2C Digests TAX I (Updated)

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Tax I Gruba Notes 2 Digests1 Madrigal v. Rafferty, GR No. L-12287, 7 August 1918 ............................................................... 3

2 Conwi v. Court of Tax Appeals, GR Nos. 48532 and 48533, 31 August 1992 ........................... 4

3 CIR v. Court of Appeals, GR No. 108576, 20 January 1999 ...................................................... 5

4 Chamber of Real Estate and Builders Associations, Inc. v. Romulo, GR No. 160756, 9 March 2010...................................................................................................................................................... 8

5 CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April 1987 ................ 10

6 CIR v. Baier-Nickel, GR No. 153793, 29 August 2006 ............................................................. 12

7 Republic of the Philippines v. Manila Electric Company, GR Nos. 141314 and 141369, 15 November2002 ............................................................................................................................................ 14

8 CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003 ....................................... 16

9 Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October 1994 ......................................... 1710 Obillos v. CIR, GR No. L-68118, 29 October 1985 ................................................................ 18

11 Pascual v. CIR, GR No. L-78133, 18 October 1988 ............................................................... 18

12 Afisco Insurance Corporation v. Court of Appeals, GR No. 112675, 25 January 1999 .......... 20

13 CIR v. Tokyo Shipping Co., Ltd., GR No. 68252, 26 May 1995 ............................................. 22

14 N.V. Reederij Amsterdam v. CIR, GR No. L-46029, 23 June 1988 ..................................... 23

15 Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989 ....................................... 24

16 State Investment House, Inc. v. Citibank, N.A., GR Nos. 79926-27, 17 October 1991 .......... 25

17 China Banking Corporation v. CIR, GR Nos. 146749, 10 June 2003 ..................................... 2618 CIR v. Bank of Commerce, GR No. 149636, 8 June 2005 ..................................................... 27

19 Ericsson Telecommunications, Inc. v. City of Pasig, GR No. 176667, 22 November 2007 ... 28

20 Chua v. Court of Appeals, GR No. 119255, 9 April 2003 ....................................................... 29

21 Torcuator v. Bernabe, GR No. 134219, 8 June 2005 ............................................................. 31

22 CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October 2006 .......................................... 32

23 Manila International Airport Authority v. City of Pasay, GR No. 163072, 2 April 2009 ........... 33

24 Compagnie Financiere Sucres et Denrees v. CIR, GR No. 133834, 28 August 2006 ........... 35

25 Vive Eagle Land, Inc. v. Court of Appeals, GR No. 150308, 26 November 2004 .................. 37

26 CIR v. Burroughs Limited, GR No. L-66653, 19 June 1986 ................................................... 39

27 Bank of America NT & SA v. Court of Appeals, GR Nos. 103092 and 103106, 21 July 199440

28 CIR v. Wander Philippines, Inc., GR No. L-68375, 15 April 1988 .......................................... 41

29 CIR v. Procter & Gamble Philippine Manufacturing Corporation, GR No. 66838, 2 December 1991.................................................................................................................................................... 43


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30 Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September 1967 ........................................ 44

31 Manila Wine Merchants, Inc. v. CIR, GR No. L-26145, 20 February 1984 ............................ 46

32 CIR v. Antonio Tuason, Inc., GR No. 85749, 15 May 1989 .................................................... 48

33 Cyanamid Philippines, Inc. v. Court of Appeals, GR No. 108067, 20 January 2000 .............. 50

34 CIR v. Court of Appeals, GR No. 124043, 14 October 1998 .................................................. 51


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1 Madrigal v. Rafferty, GR No. L-12287, 7 August 1918Q: What is income? How is it different from capital? p. 1

Facts Vicente Madrigal and Susana Paterno were married under the provisions of law concerning

conjugal partnerships Sometime in 1915, Vicente filed his tax return with the Collector of Internal Revenue showing as

his total net income for the year 1914 the amount of around P296,000 Subsequently, Madrigal submitted the claim that the amount as stated in the return did not

represent his personal income, but was the income of the conjugal partnership existing betweenhim and his wife Susana

o Vicente claimed that in computing and assessing the additional income tax, the incomehe previously declared should actually be divided into two equal parts- ! to himself and! to Susana-wife

o Why did Vicente want to lessen his previously declared income? Because in doing so hewould avoid paying an additional income tax as provided by an Act of Congress

The US Commissioner of Internal Revenue decided against the ! theory of Vicente, and soVicente was forced to pay under protest

After payment under protest, Vicente and Susana filed a case in the Court of First Instanceagainst the CIR for the recovery of around P3,000, alleged to have been the amount wrongfullyand illegally collected by the CIR (but the CFI ruled against the couple)

Vicentes argument: Since he and his wife have a conjugal partnership, the income he originallydeclared is actually shared with his wife, so his personal income is only 50% of that declaredamount

CIRs argument: the taxes imposed by the Income Tax Law are taxes upon income tax and notupon capital and property

Issue: W/N the actual income of Vicente is only half of that he originally declared considering that he ismarried to Susana under the law on conjugal partnerships?

Held: NO It is true that Susana has an inchoate (just begun) right in the property of her husband Vicente Susana has an interest in the ultimate property rights and in the ultimate ownership of property

acquired as income after such income has become capital. HOWEVER, Susana has NO absolute right to one-half the income of the conjugal partnership Not being seized of a separate estate, Susana cannot make a separate return in order to

receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from

her husband's property, the income cannot properly be considered the separate income of thewife for the purposes of the additional tax.

IMPORTANT: Income as contrasted with capital or property is to be the test. The essentialdifference between capital and income is that capital is a fund; income is a flow.

o A tax on income is not a tax on property. "Income," as here used, can be defined as"profits or gains." A fund of property existing at an instant of time is called capital. A flow of services rendered by

that capital by the payment of money from it or any other benefit rendered by a fund of capital inrelation to such fund through a period of time is called an income. Capital is wealth, whileincome is the service of wealth.


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2 Conwi v. Court of Tax Appeals, GR Nos. 48532 and 48533, 31 August 1992

What is income? How is it different from capital? p.1How is a resident citizen taxed? p.11

FACTS: Petitoners are Filipino Citizens and employees of P&G who is a foreign corporation based in the

US. During 1970-71, petitioners where assigned to other subsidiaries of P&G OUTSIDEPhilippines to which they were paid in US Dollars as compensation.

When they filed their income tax returns, for 1970, they computed tax due by applying dollar topeso conversion [Jan-Feb 1970 is P3.90 to $1.00 and Feb-Dec 1970 is P6.25 to $1.00]

o They also used above conversion rate for their 1971 income tax returno However, 1973, they filed their amended income tax return using the par value of peso

section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act No.265 in relation to Section 6 of Commonwealth Act No. 699 as the basis which resulted inOVERPAYMENTS.

Petitioners filed for REFUND for alleged overpayments CTA said that proper conversion rates should be under Revenue Memorandum Circular nos 7-

71 and 41-71. DENIED the claim for REFUND/ TAX CREDIT.o Section 21 of the National Internal Revenue Code, before its amendment by Presidential

Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,respectively, imposed a tax upon the taxable net income received during each taxableyear from all sources by a citizen of the Philippines, whether residing here or abroad.

ISSUE: 1. W/N Were petitioners liable to pay income tax on their dollar earnings? 2. What is the exchange rate used to determine the peso equivalent of their dollar

earnings?

HELD: 1. YES. Petitioners should pay income tax on their dollar earnings. 2. The PAR VALUE of peso shall be the guiding rate used for purposes of computing

income tax and NOT the prevailing free market exchange rate.

This involves and INCOME TAX case wherein an INCOME is defined as an amount of moneycoming to a person or a corporation within a specified time, whether as payment for services,interest or profit from investment.

o Cash/Equivalent or fruits of ones labor FOREIGN EXCHANGE TRANSACTION is conversion of an amount of money or currency of

one country into an equivalent amount of money or currency of another.o When petitioners were earning nations currency, they spending said currency, therefore

there was no conversion. Section 21 of the old Tax Code, amended up to 4 August 1969, which imposed a tax upon the

TAXABLE NET INCOME received during each taxable year from all sources by a citizen of thePhilippines, whether RESIDING HERE OR ABROAD.

o As CITIZENS of the Philippines, and their income, within or without, and in these caseswholly without, are subject to INCOME TAX. Sec. 21, NIRC, as amended, does notbrook any exemption.

Having already paid their 1970 and 1971 income taxes under the uniform rate of exchangeprescribed under the aforestated Revenue Memorandum Circulars, NO REASON FORREFUND any taxes to petitioner as said Revenue Memorandum Circulars, being of longstanding and not contrary to law, are VALID.

[Today, 1997 Tax Code treats resident and non-resident citizens differently]


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3 CIR v. Court of Appeals, GR No. 108576, 20 January 1999

What is income? How is it different from capital? p.2What is income tax? P. 5

Petitioner: CIRRespondent: CA, CTA, A. Soriano Corp. (ANSCOR)

Facts: During the 1930s, Don Andres Soriano (US Citizen) formed A Soriano Y Cia, corporation which

is now known as ANSCOR, and is now wholly owned and controlled by his family. When hedied in 1964, his shares in the company were divided to his wife and to his estate.

On several occasions, ANSCOR increased its capital stock and the estate and Dona Carmen(wife) received their respective stock dividends. Dona Carmen asked the US IRS (InternalRevenue Service) if an exchange of common with preferred shares can be considered as a taxavoidance scheme to which the US IRS replied that it is not tax avoidance but a recapitalization

scheme.o So both Dona Carmen and the Estate converted portions of their common shares into

preferred shares. (exchange)o ANSCOR then redeemed (bought back) the common shares from the estate which

reduced the Estates common shareholdings in the company. And based on the BoardResolution, the purpose was to partially retire said stocks as treasury shares in order toreduce the companys foreign exchange remittances in case cash dividends aredeclared. (redemption)

CIR then assessed ANSCOR for deficiency withholding tax-at-source pursuant to Sec. 53 and54 of the 1939 Revenue Code. (Withholding tax at source = withholding of tax by a payer priorto payment of various types of income)

o ANSCOR protested - said that it was covered by tax amnesty PD 23.o ANSCOR filed a petition for review with CTA

CTA reversed CIRs ruling saying that there was sufficient evidence to overcome the prima faciecorrectness of the questioned assessments.

CA affirmed CTA.

Issue: W/N the redemption of stock and exchange of common with preferred shares isequivalent to distribution of taxable dividends?

Petitioners (CIR) position: exchange transaction is cancellation. It was the duty of ANSCOR towithhold the tax-at-source arising from the exchange of common shares to preferred shares by DonaCarmen and the Estate.

Respondents (ANSCOR) position: it had no duty to withhold tax from such exchanges becausethese were done to reduce foreign exchange remittances and also filipinized ownership of ANSCOR(since theyre reducing the capital stock from foreigners -- heirs of Don Andres).

Held: Only the redeemed stocks can be taxed. The exchange of common shares to preferred shareddid NOT amount to income. But the redemption of shares caused the stock dividends to be realized asincome. Thus, only the PROCEEDS from the redemption of the stock dividends are taxable.


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Ratio: Sec. 83(b) of the 1939 Revenue Act states that Distribution of dividends are taxable if a

corporation cancels or redeems stock issued as a dividend at such time and in a manner that itamounts to a taxable dividend.

In short, the capital stock of corporations are not taxable because these represent capital and ifyoure going to tax them, you are imposing tax on a capital increase. Stock dividends areunrealized gain as compared to income which is already realized gain.

Tax income can be only be imposed if there was any gain or profit derived from the transaction.In this case, 108,000 shares were redeemed from the Estate alone. 25,247.5 of that wasoriginal issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to havebeen from stock dividend shares sold to others. Sale of stock dividends is taxable since yourereacquiring it in exchange for cash or property but mere issuance of stock dividends is nottaxable. It is also to be noted that in the absence of evidence to the contrary, the TaxCode presumes that every distribution of corporate property, in whole or in part, is made out ofcorporate profits such as stock dividends.

Discussions in the guidenotes:a. Income vs. Capital (p.2)

The exchange of stocks did not result to a proportional interest in the Estate and Dona Carmen.So since the exchange did not result to a flow of wealth, there was no income tax liability.

Income is defined as an amount of money coming to a person within a specified time, whetheras payment for services, interest, or profit from investment. Cash or equivalent.

Capital is wealth or fund; Income is profit or gain or flow of wealth. determining factor: whether any gain or profit was derived from the transaction.

b. Definition of Income tax (p. 5) income taxpayer = all persons who derive taxable income taxable income = 3 elements in imposition of income tax:

i. 1. gain or profit

ii. 2. such gain or profit is realized or received, actually or constructivelyiii. 3. gain or profit is not exempted by law or treaty from income tax.

It doesnt matter where the income comes from or how it was earned or the purpose for which itwas derived.

c. Dividends (p. 44) General rule is: Stock dividends represent transfer for surplus to capital and do not constitute

income to its recipient. Exception : if a corporation cancels or redeems stock issued as a dividend at such time and in

such manner to make the distribution and cancellation or redemption essentially equivalent tothe distribution of a taxable dividend, the amount distributed is taxable income to the extentthat it represents a distribution of earnings or profits accumulated after March 1, 1913. ( Sec.

83(b) of the 1939 Revenue Act). the question of whether the amount distributed in the redemption should be treated as

taxable dividend depends upon the circumstances. Thus, the mere issuance of stock dividends as a means of redemption is not subject to income

tax since, in effect, you are just returning capital. But, proceeds from the redeemed stock dividends are then subject to income tax.

Other issues:


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> on applicability of tax amnesty - SC held that being a withholding agent, ANSCOR is not protected bythe amnesty. Because as an agent, he is only liable if there is a breach in his legal duty to withhold(whereas it is the taxpayer who has the duty to pay). Plus, PD 370 explicitly states that tax liabilitieswith or without assessments on withholding tax at source are not covered by the tax amnesty.Definitions:>Redemption = reacquisition of stock by a corporation in exchange for cash or property to be givenback to the shareholder.>Exchange = act of taking common stocks for preferred stocks or vice versa.


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4 Chamber of Real Estate and Builders Associations, Inc. v. Romulo, GR No. 160756, 9 March2010

Q: What is income? How is it different from capital?

FACTS: Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporationsand creditable withholding tax (CWT) on sales of real properties classified as ordinary assets bypersons habitually engaged in the real estate business. Without payment of CWT, the sale, barter orexchange will not be recorded by the Registry of Deeds.

Under the MCIT scheme, a corporation is assessed an MCIT of 2% of its gross income when suchMCIT is greater than the normal corporate income tax. If the regular income tax is higher than MCIT,the corporation does not pay the MCIT. Any excess if the MCIT paid over the normal tax shall becarried forward and credited against the normal income tax for the 3 immediately succeeding taxableyears.

Petitioner argues that MCIT violates the due process clause because it levies income tax even if thereis no realized gain. This is because gross income only considers the cost of goods sold and other directexpenses. Other major expenditures, such as administrative and interest expenses necessary toproduce gross income, were not taken into account.Petitioner also alleges that MCIT tantamount to deprivation of property because it is being imposedeven when there is actually a loss.

It also allegedly contravened the equal protection clause because the CWT is being levied upon realestate enterprises but not other business enterprise.

ISSUES: 1. Whether or not the imposition of the MCIT on domestic corporations is unconstitutional.2. Whether or not the imposition of CWT on income from sales of real properties classified as ordinary

assets is unconstitutional.

SC RULING: [MCIT Scheme]

Constitutional.

MCIT came about as a result of the perceived inadequacy of the self-assessment system in capturingthe true income of corporations to ensure that everyone will make some minimum contribution to thesupport of the public sector.

Congress intended to put a stop to corporations which, having large turn-overs, report minimal or

negative net income resulting to minimal or zero income taxes through under or over-declaration ofexpenses or tax shelters.

Petitioner is correct in saying that income is distinct from capital. Income means all the wealthflowing into the taxpayer other than mere return on capital. Capital is a fund or property existingat one distinct point in time while income denotes a flow of wealth during a definite period oftime. Income is derived from capital.


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For income to be taxable, there must be (1) gain (2) gain must be realized or received (3) gain must notbe excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.However, MCIT is not a tax on capital.

MCIT is imposed on gross income which is arrived at by deducting the capital spent in the sale of itsgoods. Clearly, capital is not being taxed.

Furthermore, MCIT is not an additional tax imposition but it is imposed in lieu of the normal net incometax and if the latter is suspiciously low. Besides, there is no legal objection to a broader tax base ortaxable income by eliminating all deductible items and at the same time, reducing the applicable taxrate.

[CWT]

Constitutional.

No deprivation of property since the tax withheld will be deducted from the tax due from the taxpayer.The seller can claim a tax refund in the event that its net income is less than the taxes withheld.

No violation of equal protection clause because the real estate industry is, by itself, a class and can bevalidly treated differently. What distinguishes the real estate business from other enterprises is theprices of their goods sold and the number of transactions involved. Income from sale of real property isbigger and its frequency of transaction limited, making it less cumbersome for the parties to comply.


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5 CIR v. British Overseas Airways Corporation, GR Nos. L-65773-74, 30 April 1987

Q: What is the source of an income? Q: Give examples of non resident foreign corporation. Q: Explain the concept of gross Philippine billings.

Facts: British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation

engaged in international airline business and is a member of the Interline Air Transport Association, and thus, it operates air transportation services and sells transportation tickets overthe routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus,did not carry passengers and/or cargo to or from the Philippines but instead maintained ageneral sales agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways -which was responsible for selling BOAC tickets covering passengers and cargoes. TheCommissioner of Internal Revenue assessed deficiency income taxes against BOAC.

Issue: 1. W/N the revenue derived by BOAC from ticket sales in the Philippines, constitute income of

BOAC from Philippine sources, and accordingly taxable.2. W/N BOAC was a resident foreign corporation doing business in the Philippines

Held: 1. Yes. The source of income is the property, activity of service that produces the income.

For the source of income to be considered coming from the Philippines, it is sufficient that theincome is derived from the activity coming from the Philippines. The tax code provides that forrevenue to be taxable, it must constitute income from Philippine sources. In this case, the saleof tickets in the Philippines was the activity that produced the income. The tickets exchangedhands here and payment for fares were also made here in Philippines currency.The situs of thesource of payments is the Philippines.

o The flow of wealth proceeded from, and occurred within Philippine territory, enjoying theprotection accorded by the Philippine government. In consideration of such protection,

the flow of wealth should share the burden of supporting the government.2. Yes. BOAC, from 1959 to 1971, was engaged in: (1) Selling and issuing tickets, (2) Breaking

down the whole trip into series of trips each trip in the series corresponding to a differentairline company, (3) Receiving the fare from the whole trip and (4) Consequently allocating tothe various airline companies on the basis of their participation in the services rendered throughthe mode of interline settlement.

o Those activities were in exercise of the functions of its organization as an internationalair carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of theairline business, the generation of sales being the paramount objective. There should beno doubt then that BOAC was "engaged in" business in the Philippines through alocal agent during the period covered by the assessments. Accordingly, it is aresident foreign corporation subject to tax upon its total net income received in

the preceding taxable year from all sources within the Philippines o There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiarenvironmental circumstances. The term implies a continuity of commercial dealings andarrangements, and contemplates, to that extent, the performance of acts or works or theexercise of some of the functions normally incident to, and in progressive prosecution ofcommercial gain or for the purpose and object of the business organization. In orderthat a foreign corporation may be regarded as doing business within a State, there


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must be continuity of conduct and intention to establish a continuous business,such as the appointment of a local agent, and not one of a temporary character .

Discussions from Dean Grubas notes:Q: Explain the concept of gross Philippine billings.

"Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world byany international carrier doing business in the Philippines of passage documents sold therein,whether for passenger, excess baggage or mail provided the cargo or mail originates from thePhilippines

Gross Philippine billings tax is an income tax, i.e., a direct tax on the income of persons andother entities of whatever kind and in whatever form derived from any source. On the otherhand, common carriers tax is an excise tax, that is, a tax on the activity of transporting,conveying or removing passengers and cargo from one place to another.


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6 CIR v. Baier-Nickel, GR No. 153793, 29 August 2006

Q: What is the source of an income?

Key doctrine: The important factor which determines the source of income of personal services is notthe residence of the payer, or the place where the contract for service is entered into, or the place ofpayment, but the place where the services were actually rendered .

Facts:

CIR appeals the CA decision, which granted the tax refund of respondent Baier-Nickel and reversedthat of the CTA. Juliane Baier-Nickel, a non-resident German, is the president of JUBANITEX, adomestic corporation engaged in the manufacturing, marketing and selling of embroidered textileproducts. Through Jubanitexs general manager, Marina Guzman, the company appointed respondentas commission agent with 10% sales commission on all sales actually concluded and collected throughher efforts.

In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return butthen claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex andthat her sales commission income was compensation for services rendered in Germany not Philippinesand thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but CAreversed the decision on appeal, holding that the commission was received as sales agent not asPresident and that the source of income arose from marketing activities in Germany.

Issue: W/N respondent is entitled to refund because respondents sales commission income is not

taxable here in the PhilippinesHeld:

NO. Sec 25 of NIRC states that non-resident aliens, whether or not engaged in trade or business, aresubject to the Philippine income taxation on their income received from all sources in the Philippines. Indetermining the meaning of source, the Court resorted to origin of Act 2833 (the first Philippineincome tax law), the US Revenue Law of 1916, as amended in 1917.

US SC has said that income may be derived from three possible sources only: (1) capital and/or (2)labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is doneshould be decisive; if it is done in this country, the income should be from sources within the UnitedStates. If the income is from capital, the place where the capital is employed should be decisive; if it isemployed in this country, the income should be from sources within the United States. If the income isfrom the sale of capital assets, the place where the sale is made should be likewise decisive. Sourceis not a place; it is an activity or property. As such, it has a situs or location, and if that situs is withinthe United States the resulting income is taxable to nonresident aliens and foreign corporations.


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The source of an income is the property, activity or service that produced the income. For thesource of income to be considered as coming from the Philippines, it is sufficient that theincome is derived from activity within the Philippines.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be

construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burdenof proving that the transaction subjected to tax is actually exempt from taxation.

In the instant case, respondent failed to give substantial evidence to prove that she performed theincoming producing service in Germany, which would have entitled her to a tax exemption for incomefrom sources outside the Philippines. Petition granted.


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7 Republic of the Philippines v. Manila Electric Company, GR Nos. 141314 and 141369, 15November 2002

Does income tax form part of operating expenses? No. Facts:

Meralco applied for an increase in its energy rates with the Energy Regulatory Board (ERB). This wasconditionally granted, subject to the condition that should the ERB determine that Meralco is entitled toa lesser rate of increase, the difference between the rate provisionally approved and the rate Meralcowas entitled would be refunded to its customers.

After an audit by the Commission on Audit (COA), said body recommended that the payment of incometaxes be excluded from Meralcos operating expenses. This was adopted by the ERB.Upon appeal by the Meralco to the Court of Appeals (CA), this was reversed. The CA ordered thereinstatement of income taxes as part of Meralcos operating expenses.Tax Issue: Should income taxes be included in a companys, in this case, Meralcos, operating expenses?Ruling: It should not be part of Meralcos operating expenses.I.

On the doctrine of primary jurisdiction, the Supreme Court ruled that the findings of administrativebodies, in this case, the ERB, are binding upon the Court, in the absence of any patent error or graveabuse of discretion.II.Grubas Guide Notes In general, operating expenses are those which are reasonably incurred in connection withbusiness operations to yield revenue or income. They are items of expenses which contributeor are attributable to the production of income or revenue. Income tax, it should be stressed, is imposed on an individual or entity as a form of excise taxor a tax on the privilege of earning income.

End of Grubas Guide Notes In exchange for the protection extended by the State to the taxpayer, the government collects taxes asa source of revenue to finance its activities. Clearly, by its nature, income tax payments of a publicutility are not expenses which contribute to or are incurred in connection with the production of profit ofa public utilityIncome tax should be borne by the taxpayer alone as they are payments made in exchange forbenefits received by the taxpayer from the State. No benefit is derived by the customers of a publicutility for the taxes paid by such entity and no direct contribution is made by the payment of income taxto the operation of a public utility for purposes of generating revenue or profit.

Meralco cited an American case, which allowed income taxes to be imputed as an operating expense.The Court replied, to wit:

The Court cannot give in to the importunings of MERALCO that we blindly apply therulings of American courts on the treatment of income tax as operating expenses in rateregulation cases. An approach allowing the indiscriminate inclusion of income taxpayments as operating expenses may create an undesirable precedent and serve as ablanket authority for public utilities to charge their income tax payments to operatingexpenses and unjustly shift the tax burden to the customer. To be sure, public utilitytaxation in the United States is going through the eye of criticism. Some commentatorsare of the view that by allowing the public utility to collect its income tax payment from itscustomers, a form of sales tax is, in effect, imposed on the public for consumption of


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public utility services. By charging their income tax payments to their customers, publicutilities virtually become tax collectors rather than taxpayers.

Kenneth Cajigal: I submit that, although not particularly mentioned in the original text of thecase, this boils down to the lifeblood theory of taxation. Up to you how you are to jibber-jabberyour way through this if you desire to do so.

III. A discussion ensues on the proper method to use in determining the proper tax base. Here, what arebeing taxed are Meralcos properties that are in service for the fiscal year taxed. Which should be used,the net average investment method or the average investment method?Under the net average investment method, properties and equipment used in the operation of a publicutility are entitled to a return only on the actual number of months they are in service during the period.In contrast, the average investment method computes the proportionate value of the property byadding the value of the property at the beginning and at the end of the test year with the resulting sumdivided by two.

The ERB did not abuse its discretion when it applied the net average investment method. Thereasonableness of net average investment method is borne by the records of the case. In its report, theCOA explained that the computation of the proportionate value of the property and equipment inaccordance with the actual number of months such property or equipment is in service for purposes ofdetermining the rate base is favored, as against the trending method employed by MERALCO,

At the end of the day, the Court favored the findings of the ERB, as a corollary, the doctrine of primary jurisdiction of the ERB, finding no grave abuse of discretion.Petitions granted, the ERB resolution was reinstated.


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8 CIR v. Solidbank Corporation, GR No. 148191, 25 November 2003

Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting toP1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receiptsfrom passive income which was already subjected to 20%final withholding tax (FWT).

The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWTshould not form part of its taxable gross receipts for purposes of computing the tax. Solidbank,relying on the strength of this decision, filed with the BIR a letter-request for the refund or taxcredit. It also filed a petition for review with the CTA where the it ordered the refund.

The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receiptsbecause the FWT was not actually received by the bank but was directly remitted to thegovernment.

The Commissioner claims that although the FWT was not actually received by Solidbank, thefact that the amount redounded to the banks benefit makes it part of the taxable gross receiptsin computing the Gross Receipts Tax. Solidbank says the CA ruling is correct.

Issue: Whether or not the FWT forms part of the gross receipts tax.

Held: Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is

imposed. The payor, a separate entity, acts as no more than an agent of the government for thecollection of tax in order to ensure its payment. This amount that is used to settle the tax liabilityis sourced from the proceeds constitutive of the tax base.

These proceeds are either actual or constructive. Both parties agree that there is no actualreceipt by the bank. What needs to be determined is if there is constructive receipt. Since thepayee is the real taxpayer, the rule on constructive receipt can be rationalized.

The Court applied provisions of the Civil Code on actual and constructive possession. Article531 of the Civil Code clearly provides that the acquisition of the right of possession is through

the proper acts and legal formalities established. The withholding process is one suchact. There may not be actual receipt of the income withheld; however, as provided for in Article532, possession by any person without any power shall be considered as acquired when ratifiedby the person in whose name the act of possession is executed.

In our withholding tax system, possession is acquired by the payor as the withholding agent ofthe government, because the taxpayer ratifies the very act of possession for the government.There is thus constructive receipt.

The processes of bookkeeping and accounting for interest on deposits and yield on depositsubstitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides,Solidbank admits that its income is subjected to a tax burden immediately upon receipt,although it claims that it derives no pecuniary benefit or advantage through the withholdingprocess.

There being constructive receipt, part of which is withheld, that income is included as part of thetax base on which the gross receipts tax is imposed.


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9 Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October 1994

What are the kinds of tax systems? How are partners of a general professional partnership taxed? Facts

The petitioners challenge the constitutionality of RA 7496 or the Simplified Net Income TaxationScheme which amended certain provisions of the National Internal Revenue Code as well asthe validity of Sec. 6, Revenue Regulations No. 2-93 promulgated pursuant to RA 7496.

The petitioners allege that RA 7496 violates (1) the one subject-one bill rule, (2) the rule onuniformity of taxation, and (3) the due process clause.

Issues/Ruling As regards the allegation that RA 7496 violates the one subject-one bill rule " The purpose of such rule is merely to prevent log-rolling legislation, to prevent surprises or fraud

upon the legislator and fairly apprise the people. These objectives have been sufficiently met inthe case at bar.

As regards the allegation that said law violates the rule on uniformity of taxation (according topetitioners, the law seeks to tax single proprietorships and professionals differently fromcorporations and partnerships) "

o Such system of income taxation is the prevailing rule even prior to RA 7496o Uniformity of taxation merely requires that all subjects or objects of taxation, similarly

situated, are to be treated alike both in privileges and liabilities.o Classification is allowed so long as

! The standards are substantial.! The categorization is germane to the purpose of the law.! The law applies to both present and future conditions.! The classification applies equally to all those belonging to the same class.

o What may be perceived from the law is the legislative intent to [answers the 1 st question]:

! Increasingly shift the income tax system towards the scheduler approach (a

system employed where the income tax treatment varies and made to depend onthe kind or category of taxable income of the taxpayer) in the income taxation ofindividual taxpayers.

! Maintain the present global treatment (a system where the tax treatment viewsindifferently the tax base and generally treats in common all categories of taxableincome of the taxpayer) on taxable corporations.

o The due process clause may only be invoked when there is a clear contravention ofinherent or constitutional limitations in the exercise of the tax power.

o With the legislative lies the discretion to determine the nature, object, extent, coverageand situs of taxation. Courts, therefore, cannot delve into these matters.

As regards the allegation that public respondents have exceeded their authority in promulgating

Sec. 6, Revenue Regulations No. 2-93 (which says that RA 7496 applies to general professionalpartnerships and the partners therein) to carry out RA 7496.o The Supreme Court clarified that the partnership is not itself subject to income tax.o The income tax is imposed on the partners themselves in their individual capacity

computed on their distributive shares of partnership profits [answers the 2 nd question].o This is similar to Sec. 23 of the Tax Code which was not amended by RA 7496


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10 Obillos v. CIR, GR No. L-68118, 29 October 1985

! Definition of corporation for income tax purposes, as provided under Section 22(B) of the1997 Tax Code ! Difference in treatment between a co-owner and a partner FACTS

This case is about the income tax liability of four brothers and sisters who sold two parcels ofland which they had acquired from their father, Jose Obillos, Sr.

Jose Obillos, Sr. bequeathed two lots located in Greenhills, San Juan to his four children (hereinpetitioners) to enable them to build their residences.

After more than a year, petitioners resold the lots to Walled City Securities Corporation andCanda.

Petitioners derived from the sale a total profit of Php 134,341.88, or Php 33,584 for each ofthem.

Petitioners treated each of their profits as a capital gain and paid an income tax on ! thereof. Later, the CIR issued an assessment against petitioners for deficiency income tax on the ground

that petitioners formed an unregistered partnership or joint venture. Hence, the CIR requiredpetitioners to pay corporate income tax on the total profit, in addition to individual income tax oneach of their shares.

The CIR assessed Php37,018 as corporate income tax, Php18,509 as 50% fraud surcharge andPhp15,547.56 as 42% accumulated interest, or a total of Php71,074.56.

The CIR also considered the share of the profits of each of petitioners as a distributive dividendtaxable in full (not a mere capital gain of which ! is taxable) aggregating Php56,707.20including the 50% fraud surcharge and the accumulated interest.

ISSUE Whether or not the siblings formed a partnership or joint venture and are liable to pay corporate

income tax on total profit plus individual income tax on each of their share in the profit

HELD NO

o The Supreme Court held that it was error to consider petitioners as having formed apartnership. Petitioners were merely co-owners . To consider them as partners wouldobliterate the distinction between a co-ownership and a partnership. The petitionerswere not engaged in any joint venture by reason of that isolated transaction. Theiroriginal purpose was to divide the lots for residential purposes. If later on they found itnot feasible to build their residences on the lots because of the high cost of construction,then they had no choice but to resell the same to dissolve the co-ownership. The divisionof the profit was merely incidental to the dissolution of the co-ownership which was in thenature of things a temporary state. It had to be terminated sooner or later.

o To regard the petitioners as having formed a taxable unregistered partnership wouldresult in oppressive taxation and confirm the dictum that the power to tax involves the

power to destroy. That eventuality should be obviated.o The Civil Code provides that "the sharing of gross returns does not of itself establish a

partnership, whether or not the persons sharing them have a joint or common right orinterest in any property from which the returns are derived". There must be anunmistakable intention to form a partnership or joint venture.

11 Pascual v. CIR, GR No. L-78133, 18 October 1988

What are considered corporations for income tax purposes?


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FACTS:

Petitioners Mariano Pascual and Renato Dragon bought 2 parcels of land from SantiagoBernardino and another 3 parcels from Juan Roque.

The first 2 parcels were subsequently sold to Marenir Development Corporation, while the other3 were sold to Erlinda Reyes and Maria Samson.

Petitioners derived a profit of P165,224.70 from the first sale and P60,000.00 from the secondsale. Corresponding capital gains taxes were paid through tax amnesties.

1979 - Petitioners were assessed and required to pay a total amount of P107,101.70 as allegeddeficiency corporate income taxes for the years 1968 and 1970 (years of the 2 sales)

BIR Commissioner Plana informed petitioners than in the years 1968 and 1970, petitioners asco-owners in the real estate transactions formed an unregistered partnership or jointventure taxable as a corporation.

o unregistered partnership was subject to corporate income tax as distinguished fromprofits derived from the partnership by them which is subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject toindividual income tax.

o tax amnesty relieved them of their individual income tax liabilities but not from the taxliability of the unregistered partnership.

ISSUE: Whether petitioners formed an unregistered partnership subject to corporate income tax

HELD/RATIO: NO. There is no evidence that petitioners entered into an agreement to contributed money,

property or industry to a common fund, and that they intended to divide the profits amongthemselves. Respondent Commissioner just assumed these conditions to be present on thebasis of the fact that petitioners purchased certain parcels of land and became co-ownersthereof.

The sharing of returns does not in itself establish a partnership whether or not the persons

sharing therein have a joint or common interest in the property. There must be a clear intent toform a partnership, the existence of a juridical personality different from the individual partners,and the freedom of each party to transfer or assign the whole property.

As there was no partnership formed, petitioners are not liable for corporate income tax.Furthermore, as petitioners have availed of the benefits of tax amnesty as individual taxpayersin these transactions, they are thereby relieved of any further tax liability arising therefrom.


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12 Afisco Insurance Corporation v. Court of Appeals, GR No. 112675, 25 January 1999

What are considered corporations for income tax purposes?

FACTS: Petitioners are 41 non-life insurance corporations which entered into a Quota Share

Reinsurance Treaty and a Surplus Reinsurance Treaty with a non-resident foreign insurancecorporation (Munchener Ruckversicherungs-Gesselschaft or "Munich"). This was pursuant tothe issuance by petitioners of machinery insurance policies.

The reinsurance treaties required petitioners to form a pool, which petitioners did. The Commissioner of Internal Revenue assessed the pool of machinery insurers with deficiency

corporate taxes (Php 1.8 million) and withholding taxes (Php 1.7 million and Php 89k ondividends paid to Munich and to petitioners, respectively)

Petitioners protested the assessment. The CTA sustained petitioners' liability for deficiency income tax, interest, and withholding tax. The CA ruled that the pool of machinery insurers was a partnership taxable as a corporation,

and considered as taxable income the said pool's collection of premiums on behalf of itsmember companies.

Petitioners deny the existence of a partnership becauseo as reinsurers, they did not share the same risk or solidary liabilityo there was no common fundo the executive board of the pool did not exercise control and management of the funds,

ando the pool was not engaged in the business of reinsurance from which it could have

derived income for itself.

ISSUE: W/N the pool of machinery insurers (acting as a mere agent and performing strictlyadministrative functions, which did not insure or assume any risk in its own name) was a partnership orassociation subject to tax as a corporation

HELD: YES , the pool is taxable as a corporation.

RATIO: Unregistered partnerships and even associations or joint accounts, which had no legal

personalities apart from their individual members, come within the definition of a "corporation"as contemplated by the NIRC and the Tax Reform Code.

In Evangelista vs Collector of Internal Revenue , the Supreme Court said that the term'partnership' includes a syndicate, group, pool, joint venture, or other unincorporatedorganization, through or by means of which any business, financial operation, or venture iscarried on.

A partnership is formed when persons contract to devote to a common purpose either money,property, or labor with the intention of dividing the profits between themselves. Meanwhile, an

association implies associates who enter into a joint enterprise for the transaction of business. In the instant case, the ceding companies entered into a Pool Agreement or an association that

would handle all the insurance business covered under the Quota Share Reinsurance Treatyand Surplus Reinsurance Treaty with Munich.

The following indicates a partnership or association covered by NIRC Section 24:o The pool has a common fund, consisting of money and other valuables that are

deposited in the name and credit of the pool. This common fund pays for theadministration and operation expenses of the pool.


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o The pool functions through an executive board, which resembles the board of directorsof a corporation, composed of one representative for each of the ceding companies.

o Although the pool itself is NOT a reinsurer and does NOT issue any insurance policy, itswork is indispensable, beneficial, and economically useful to the business of the cedingcompanies and Munich. Without it, they (the companies) would not have received theirpremiums. The ceding companies share in the business ceded to the pool and in theexpenses according to a "Rules of Distribution" annexed to the Pool Agreement. Profitmotive or business is the primordial reason for the pool's formation.

FINAL RULING: The CA ruling is affirmed; petitioners are liable for assessed taxes.


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14 N.V. Reederij Amsterdam v. CIR, GR No. L-46029, 23 June 1988

Nonresident foreign corporation not engaged in trade or business 2 transactions only not continuous

Facts: " Two vessels (MV Amstelmeer in 1963 and Amstelkroom in 1964) of petitioner NB Reedij

Amsterdam loaded cargoes for foreign destination from Philippine ports.# The freight fees were paid abroad.# The husbanding agent of petitioner in the Philippines, Royal Interocean Lines, filed theincome tax return of petitioner on the assumption that the petitioner was a foreign corporationengaged in trade or business in the Philippines.# CIR assessed petitioner for deficiency income taxes as a non-resident foreigncorporation not engaged in trade or business in the Philippines.# Royal Interocean filed a written protest against the assessment.

Issue: WON N.V Reederij Amsterdam was a corporation engaged in trade or business or not engagedin trade or business in the Philippines

Ruling: NOT engaged in trade or business in the Philippines# Petitioner is a foreign corporation not authorized or licensed to do business in thePhilippines.# It does not have a branch or office and it made only two calls in the Philippine ports, onein 1963 and the other in 1964.# In order that a foreign corporation may be considered engaged in trade or business, itsbusiness transactions must be continuous. # A casual business activity in the Philippines by a foreign corporation does not amount toengaging trade or business in the Philippines for income tax purposes.# TAX BASIS engaged in trade or business --> net come (may expenses deduction)

Rate: 25% on net income below 100k and 35% on net income above 100k not engaged in trade or business --> gross income

Rate: 35% on gross income


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15 Marubeni Corporation v. CIR, GR No. 76573, 14 September 1989

Facts: Marubeni Corporation, a foreign corporation organized in Japan made financial investments with Atlantic, Gulf and Pacific Company. In 1981, AG&P twice remitted (1 st quarter and 3 rd quarter) cashdividends to Marubeni Corporation Head Office in Tokyo Japan net of the 15% profit remittance taxbased on the remittable amount after deducting the final withholding tax of 10%. Thereafter, MarubeniJapan, via SGV posed a query on the CIR regarding the applicability of the 15% profit remittance tax tothe dividends remitted. Upon receiving favorable response from the CIR, Marubeni claimed for aPhp229,424.40 refund representing profit tax remittance erroneously paid on the dividends remitted by

Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to x x x head office inTokyo. The CIR, to whom the CTA concurred, rejected the application since the refund which wassupposedly available was to be applied to a 25% income tax pursuant to a Tax Treaty between Japanand the Republic of the Philippines.

Issue: W/N Marubeni Japan is entitled to the refund?

Held: Yes, but only up to Php144,452.40. In order to determine the qualification for the refund, the SCresolved whether Marubeni can be considered a resident foreign or a non-resident foreign corporationin this particular transaction. Ruling for the latter status, the SC cited the Solicitor General saying:The general rule that a foreign corporation is the same juridical entity as its branch office in thePhilippines cannot apply here. This rule is based on the premise that the business of the foreigncorporation is conducted through its branch office, following the principal agent relationship theory. It isunderstood that the branch becomes its agent here. So that when the foreign corporation transactsbusiness in the Philippines independently of its branch, the principal-agent relationship is set aside. Thetransaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer isthe foreign corporation, not the branch or the resident foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the latter becomes thetaxpayer, and not the foreign corporation.

Having ruled that it is non-resident foreign corporation, Marubeni cannot claim the lower tax rate of10% since this is not an activity related to business. Applying the relevant Treaty provisions (tax sparingrule) and the then Tax Code, Marubeni is liable for a 15% tax on the income provided that theJapanese Government extends unto it a tax credit of not less than 20% of the dividends received.


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16 State Investment House, Inc. v. Citibank, N.A., GR Nos. 79926-27, 17 October 1991

Facts: -Respondent foreign banks filed a petition for involuntary insolvency against ConsolidatedMines, Inc.(CMI). CMI allegedly has outstanding loans from the 3 banks -State Investment House (SIHI) separately instituted an action against CMI for the collection ofsums of money which the latter owed. -SIHI opposed the 3 banks' petition for involuntary insolvency claiming that the banks are notresident creditors of CMI in contemplation of the Insolvency Law -The Insolvency law provides that: An adjudication of insolvency may be made on the petition of three or more creditors, residentsof the Philippine Islands, whose credits or demands accrued in the Philippine Islands, and theamount of which credits or demands are in the aggregate not less than one thousand pesos:Provided, that none of said creditors has become a creditor by assignment, however made,within thirty days prior to the filing of said petition. Such petition must be filed in the Court ofFirst Instance of the province or city in which the debtor resides or has his principal place ofbusiness, and must be verified by at least three (3) of the petitioners. . .

Issue: WON foreign banks licensed to do business in the Philippines may be considered"residents of the Philippine Islands" within the meaning of Sec.20 of the Insolvency Law? YES

Ratio: -Sec. 123 of the Corporation Code provides for a definition of foreign corporation: one formed,organized or existing under laws other than those of the Philippines and which laws allowFilipino citizens and corporations to do business. It is clear that the 3 banks are foreigncorporations doing business in the Philippines through branch offices, agencies, and foreigncurrency deposit units -The Insolvency Law does not contain a definition of "resident" however other statutessubsequently enacted provide a definition for the term. -NIRC defines resident foreign corporations as a foreign corporation engaged in trade or

business in the Philippines while nonresident foreign corporations are those not engaged intrade or business within the Philippines -Offshore Banking Law states that branches, subsidiaries, affiliation, extension offices or anyother units of corporation or juridical person organized under the laws of any foreign countryoperating in the Philippines shall be considered. -General Banking Act, Republic Act No. 337, places "branches and agencies in the Philippinesof foreign banks . . . (which are) called Philippine branches," in the same category as"commercial banks, savings associations, mortgage banks, development banks, rural banks,stock savings and loan associations" (which have been formed and organized under Philippinelaws) -The Court itself said in one case that "our laws and jurisprudence indicate a purpose toassimilate foreign corporations duly licensed to do business here to the status of domestic

corporations -In American law: the residence of a corporation, if it can be said to have a residence, isnecessarily where it exercises corporate functions. -It is not the grant of license to do business that determines whether a foreign corporation is aresident or not. What effectively makes such a foreign corporation a resident corporation in thePhilippines is its actually being in the Philippines and licitly doing business here, "locality ofexistence" being, the "necessary element in . . . signification" of the term, resident corporation. -Distinguish: residence (place where the corporation operates and transacts business) fromdomicile (the state of the corporation's formation or organization)


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17 China Banking Corporation v. CIR, GR Nos. 146749, 10 June 2003

FACTS :

1994: CBC paid approximately 12M as gross receipts tax on its income. January 1996: Court of Tax Appeals rendered a decision ruling that 20% final withholding tax on

a banks passive interest income does not form part of its taxable gross receipts. In this regard, CBC filed a formal claim for tax refund or credit of approximately P1M from the

P12M it paid. Commissioner argued otherwise: The final withholding tax on a banks interest income forms

part of its gross receipts in computing the gross receipts tax because gross receipts mean entireincome or receipt without any deduction.

Court of Tax Appeals rendered a decision partially in favor of CBC. It only allowed for a refundof approximately P100,000 but denied the remaining amount for insufficiency of evidence.

ISSUE :

Whether the 20% final withholding tax on interest income should form part of CBCs grossreceipts in computing the gross receipts tax on banks (MAIN ISSUE)

HELD : The 20% final withholding tax on interest income should form part of CBCs gross receipts incomputing the gross receipts tax on banks.

Petitioner CBCs argument:o 01: We have a right to refund on the basis of the Court of Tax Appeals decision in the

case of Asia Banking where it ruled the final withholding tax should not form part of thebanks taxable gross receipts. The Court of Tax Appeals in this case cited Sec. 4 (3) ofRevenue Regulation 12-80 which provided that gross receipts shall be based on allitems actually received. It argued that since withholding taxes are directly remitted to thegovernment, earmarked by law or regulation, then it can be considered that it was neveractually received by the bank and thus should not form part of the gross receipts.

o 02: Including withheld income tax as part of gross receipts for taxing amounts to doubletaxation.

Courts Response:o 01 : Court of Tax Appeal already reversed its ruling. Its interpretation amounts to a tax

exemption when no exemption is provided. Note that tax exemptions should beexpressly provided. CBCs argument will create tax exemptions where none exist.Further, court defined gross receipts: Absent statutory definition, the ordinary meaningof the concept shall be applied. The term has been consistently defined as the entirereceipt without any deduction. Deducting any amount from the gross receipts changesthe result, and the meaning, to net receipts. Any deduction from gross receipts isinconsistent with a law that mandates a tax on gross receipts, unless the law itselfmakes an exception.

o 02: There is no double taxation when Section 121 of the Tax Code imposes a grossreceipts tax on interest income that is already subjected to the 20% final withholding taxunder Section 27 of the Tax Code. The gross receipts tax is a business tax under Title Vof the Tax Code, while the final withholding tax is an income tax under Title II of theCode. There is no double taxation if the law imposes two different taxes on the sameincome, business or property.


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18 CIR v. Bank of Commerce, GR No. 149636, 8 June 2005FACTS

In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of interestsor discounts from its investments in government securities and private commercial papers.

On several occasions during that period, it paid 5% gross receipts tax on its income. Included thereinwere the respondent banks passive income from the said investments amounting to P85M+, whichhad already been subjected to a final tax of 20%.

Meanwhile, CTA held in the Case ASIA BANK CORP. VS CIR, that the 20% final withholding tax oninterest income from banks does not form part of taxable gross receipts for Gross Receipts Tax (GRT)purposes. The CTA relied on Sec 4(e) of Revenue Regulations.12-80.

The respondent bank filed an administrative claim for refund with the Commissioner of InternalRevenue on July 19, 1996. It claimed that it had overpaid its gross receipts tax for 1994 to 1995 byP853K+ submitted its own computation.

Before the Commissioner could resolve the claim, the respondent bank filed a petition for review withthe CTA

The CIR answered that the alleged refundable/creditable gross receipts taxes were collected and paidpursuant to law and pertinent BIR implementing rules and regulations; hence, the same are notrefundable. Petitioner must prove that the income from which the refundable/creditable taxes were paidfrom, were declared and included in its gross income during the taxable year under review;-That thealleged excessive payment does automatically warrant the refund/credit ISSUE: 1. What constitutes gross receipts? 2. WON the final income tax withheld should form part of the gross receipts of the taxpayerfor GRT purposes

On Issue 1 Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physicalreceipt or constructive receipt. When the depository bank withholds the final tax to pay the tax liabilityof the lending bank, there is prior to the withholding a constructive receipt by the lending bank of the

amount withheld. From the amount constructively received by the lending bank, the depository bankdeducts the final withholding tax and remits it to the government for the account of the lendingbank. Thus, the interest income actually received by the lending bank, both physically andconstructively, is the net interest plus the amount withheld as final tax. The word gross must be used in its plain and ordinary meaning. It is defined as whole, entire, total,without deduction. A common definition is without deduction. Gross is also defined as taking inthe whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separateor specified parts. Gross is the antithesis of net. Indeed, in China Banking Corporation v. Court of

Appeals the Court defined the term in this wise: As commonly understood, the term gross receipts means the entire receipts without anydeduction. Deducting any amount from the gross receipts changes the result, and the meaning, to netreceipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross

receipts, unless the law itself makes an exception.Issue 2 - YesThe concept of a withholding tax on income obviously and necessarily implies that the amount of thetax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheldconstitutes income earned by the taxpayer, then that amount manifestly forms part of the taxpayersgross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership tothe government in payment of his tax liability. The amount withheld indubitably comes fromincome of the taxpayer, and thus forms part of his gross receipts.


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19 Ericsson Telecommunications, Inc. v. City of Pasig, GR No. 176667, 22 November 2007

Facts:

Ericsson Telecommunications, Inc. is a corporation with principal office in Pasig City. It isengaged in the design, engineering, and marketing of telecommunication facilities/system.

The City of Pasig assessed Ericsson with a business tax deficiency based on its gross revenuesas reported in its audited financial statements for the years 1997 and 1998.

Ericsson protested the assessment and claimed that it should be based on gross receipts andnot on gross revenues.

When City of Pasig denied the protest, Ericsson filed a petition for review for the annulment andcancellation of its deficiency local business taxes.

RTC declared City of Pasig in default for failure to include a notice of hearing in its motion todismiss, allowed Ericsson to present evidence ex parte , and subsequently ruled in favor ofEricsson.

CA overturned RTCs decision and dismissed the petition. It declared that the petition filed in theRTC should be dismissed as Ericsson failed to show that Atty. Ramos, their Manager for Taxand Legal Affairs and the person who signed the Verification and Certification of Non-Forum

Shopping, was duly authorized by their Board of Directors.

Issue: W/N the local business tax, as imposed by the Pasig City Revenue Code and LGC of 1991,

should be based on gross receipts or gross revenues

Held: Local business tax should be based on gross receipts, and not on gross revenues City of Pasig assessed deficiency local business taxes on Ericsson based on the latters gross

revenue as reported in its financial statements, arguing that gross receipts is synonymous withgross earnings/revenue, which, in turn, includes uncollected earnings.

LGC specifically provides that the business tax should be based on gross receipts. LGC defines gross receipts as :

o Gross Sales or Receipts include the total amount of money or its equivalentrepresenting the contract price, compensation or service fee, including the amountcharged or materials supplied with the services and the deposits or advance paymentsactually or constructively received during the taxable quarter for the services performedor to be performed for another person excluding discounts if determinable at the time ofsales, sales return, excise tax, and value-added tax (VAT);

In contrast, gross revenue covers money or its equivalent actually or constructively received,including the value of services rendered or articles sold, exchanged or leased, the payment ofwhich is yet to be received.

Ericssons audited financial statements reflect income or revenue which accrued to it during thetaxable period although not yet actually or constructively received or paid because it uses the

accrual method of accounting >income is reportable when all the events have occurred thatfix the taxpayers right to receive the income, and the amount can be determined withreasonable accuracy; the right to receive income, and not the actual receipt, determines whento include the amount in gross income.

Taxing Ericsson based on its gross revenue will amount to double taxation. PETITION GRANTED.


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20 Chua v. Court of Appeals, GR No. 119255, 9 April 2003

(Sales case where one of the parties tore the deeds of sale into pieces)

Facts: Valdes-Choy advertised for sale her house and lot in Makati City. Chua responded to the

advertisement and after several meetings, Chua and Valdes-Choy agreed on a purchase priceof P10.8M payable in cash.

On June 30, 1989, Chua paid P100K earnest money evidenced by a receipt. In the morning of July 13, 1989, Chua secured a PBCom managers check for P480K.

Strangely, after securing the managers check, Chua immediately gave PBCom a verbal stoppayment prder claiming that the check was lost and/or misplaced.

In the afternoon of the same day, Chua and Valdes-Choy met to execute the necessarydocuments and arrange the payments. They also signed 2 Deeds of Sale, 1 for the house andlot and the second for the furnishings, fixtures and movable properties contained in the house.The parties also computed the capital gains tax amounting to P485, 000.

On 14 July 1989, the parties met again at the office of Valdes-Choy's counsel. Chua handed toValdes-Choy the PBCom manager's check for P485,000 so Valdes-Choy could pay the capitalgains tax as she did not have sufficient funds to pay the tax. Valdes-Choy issued a receiptshowing that Chua had a remaining balance of P10,215,000 after deducting the advances madeby Chua.

On the same day, Valdes-Choy, accompanied by Chua, deposited the P485,000.00 manager'scheck to her account with Traders Royal Bank. She then purchased a Traders Royal Bankmanager's check for P480,000.00 payable to the Commissioner of Internal Revenue for thecapital gains tax.

It was then also that Chua showed to Valdes-Choy a PBCom Managers check for P10,215,000representing the balance of the purchase price. Chua, however did not give the check toValdes-Choy because the TCT was still registered with Valdes-Choy. This angered Valdes-Choy who tore up the deeds of sale, claiming that what Chua required was not part of theiragreement.

Still on the same day, Chua confirmed his stop payment border, however, PBCom assistant VPPe, testified that the managers check was nevertheless honored because Chua subsequentlyverbally advised the bank that he was lifting the stop-payment order.

On 15 July 1989, Valdes-Choy suggested to her counsel that to break the impasse Chua shoulddeposit in escrow the P10,215,000.00 balance. Upon such deposit, Valdes-Choy was willing tocause the issuance of a new TCT in the name of Chua even without receiving the balance of thepurchase price. Valdes-Choy believed this was the only way she could protect herself if thecertificate of title is transferred in the name of the buyer before she is fully paid.

Chua filed a complaint for specific performance against Valdes-Choy. The TC ruled in favor ofChua.

Valdes-Choy appealed to the CA which reversed the decision of the TC.o The Court of Appeals did not consider the non-payment of the capital gains tax as failure

by Valdes-Choy to put the papers "in proper order." The Court of Appeals explained thatthe payment of the capital gains tax has no bearing on the validity of the Deeds of Sale.It is only after the deeds are signed and notarized can the final computation andpayment of the capital gains tax be made.

Issue(s): 1 . Contract of sale or contract to sell?- We hold that the agreement between Chua and Valdes-Choy, as evidenced by the Receipt, is acontract to sell and not a contract of sale


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2. WON the non-payment of the capital gains tax precludes Valdes-Choy from forfeiting the earnestmoney.- There is a variance of interpretation on the phrase "all papers are in proper order" as written inthe Receipt. There is no dispute though, that as long as the papers are "in proper order," Valdes-Choyhas the right to forfeit the earnest money if Chua fails to pay the balance before the deadline.- The trial court interpreted the phrase to include payment of the capital gains tax, with the Bureauof Internal Revenue receipt as proof of payment. The Court of Appeals held otherwiseo The trial court made much fuss in connection with the payment of the capital gains tax, of whichSection 33 of the National Internal Revenue Code of 1977, is the governing provision insofar as itscomputation is concerned. The trial court failed to consider Section 34-(a) of the said Code, the lastsentence of which provides, that "[t]he amount realized from the sale or other disposition of propertyshall be the sum of money received plus the fair market value of the property (other than money)received;" and that the computation of the capital gains tax can only be finally assessed by theCommission on Internal Revenue upon the presentation of the Deeds of Absolute Sale themselves,without which any premature computation of the capital gains tax becomes of no moment. At any rate,the computation and payment of the capital gains tax has no bearing insofar as the validity andeffectiveness of the deeds of sale in question are concerned, because it is only after the contracts ofsale are finally executed in due form and have been duly notarized that the final computation of thecapital gains tax can follow as a matter of course.- We see no reason to disturb the ruling of the Court of Appeals.- Customarily, in the absence of a contrary agreement, the submission by an individual seller tothe buyer of the following papers would complete a sale of real estate: (1) owner's duplicate copy of theTorrens title; (2) signed deed of absolute sale; (3) tax declaration; and (3) latest realty tax receipt. Thebuyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the sellercan pay the tax, depending on the agreement of the parties.- The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government isconcerned, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain fromthe sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to thetransfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and

notarization of the deed of absolute sale.- Chua had no reason to fear being swindled. Valdes-Choy was prepared to turn-over to him theowner's duplicate copy of the TCT, the signed Deeds of Sale, the tax declarations, and the latest realtytax receipt. There was no hindrance to paying the capital gains tax as Chua himself had advanced themoney to pay the same and Valdes-Choy had procured a manager's check payable to the Bureau ofInternal Revenue covering the amount. It was only a matter of time before the capital gains tax wouldbe paid.


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21 Torcuator v. Bernabe, GR No. 134219, 8 June 2005

FACTS The Salvadors purchased a parcel of land from the Developers of Ayala Alabang with the

following conditions:

(a) that the lot buyer shall deposit with Ayala Corporation a cash bond which shall be refundedto him if he builds a residence thereon within two (2) years of purchase, otherwise the depositshall be forfeited,

(b) architectural plans for any improvement shall be approved by Ayala Corporation, and (c) no lot may be resold by the buyer unless a residential house has been constructed thereon

They later sold the parcel of land to the spouses Bernabes without building the residential housebut athourized the latter to build one.

Without building the house, the Bernabes contracted to sell the parcel of land to the spousesTorcuators and since no residential house has been constructed as of yet, they made it appearthat the sale was directly from the Salvadors to the Torcuators and that the latter would have theobligation to construct a residential house conformably with the conditions.

A case ensued when the consideration was not paid.

The lower courts ruled that the Bernabes and Torcuators entered into the contract with theintention of circumventing the condition that the lot cannot be transferred without having firstbuilt a residential house.

The CA likewise held that the method they used in making it appear that the sale was directlyfrom the Salvadors to the Torcuators deprived the government of taxes as each transactionwould have had taxes imposed.

ISSUE

W/N the agreement violated the law as it deprived the government of capital gains tax

RULING

It is wholly irrelevant at this point. Capital gains taxes are only imposed on gains presumed tohave been realized from sales, exchanges or dispositions of property. Having declared that thecontract to sell in this case was aborted by the spouses Torcuators failure to comply with thetwin suspensive conditions of full payment and construction of a residence, the obligation to paytaxes never arose.


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22 CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October 2006


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23 Manila International Airport Authority v. City of Pasay, GR No. 163072, 2 April 2009

FACTS:

Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy AquinoInternational Airport (NAIA) Complex under Executive Order No. 903 (EO 903), 3otherwise known as theRevised Charter of the Manila International Airport Authority, issued by then President Ferdinand E.Marcos. The NAIA Complex is located along the border between Pasay City and Paraaque City. MIAA received Final Notices of Real Property Tax Delinquency from the City of Pasay for the taxableyears 1992 to 2001. The Court of Appeals upheld the power of the City of Pasay to impose and collectrealty taxes on the NAIA Pasay properties. MIAA filed a motion for reconsideration, which the Court of

Appeals denied. On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and injunction withprayer for preliminary injunction or temporary restraining order. The petition sought to enjoin the City ofPasay from imposing real property taxes on, levying against, and auctioning for public sale the NAIAPasay propertiesISSUE:

1. Whether the NAIA Pasay properties of MIAA are exempt from real property tax.2. Differentiate GOCC from government instrumentalityRULING:

1. Yes. The Supreme Court held that the Airport Lands and Buildings of MIAA are propertiesdevoted to public use and thus are properties of public dominion. Properties of public dominion areowned by the State or the Republic.2. To summarize, M IAA is not a government-owned or controlled corporation under Section2(13) of the Introductory Provisions of the Administrative Code because it is not organized as astock or non-stock corporation. Neither is MIAA a government-owned or controlled corporationunder Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test ofeconomic viability. MIAA is a government instrumentality vested with corporate powers and performing

essential public services pursuant to Section 2(10) of the Introductory Provisions of the AdministrativeCode. As a government instrumentality, MIAA is not subject to any kind of tax by local governmentsunder Section 133(o) of the Local Government Code.

The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not ataxable entity under the Local Government Code. Such exception applies only if the beneficial use ofreal property owned by the Republic is given to a taxable entity.The definition of " instrumentality" under Section 2(10) of the Introductory Provisions of the

Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlledcorporations" which means that a government "instrumentality" may or may not be a "government-owned or controlled corporation." Obviously, the term government "instrumentality" is broaderthan the term "government-owned or controlled corporation." Section 2(10) provides:

EC. 2. General Terms Defined . x x x(10) Instrumentality refers to any agency of the national Government, not integrated within thedepartment framework, vested with special functions or jurisdiction by law, endowed with some if not allcorporate powers, administering special funds, and enjoying operational autonomy, usually through acharter. This term includes regulatory agencies, chartered institutions and government-owned orcontrolled corporations.The term " government-owned or controlled corporation" has a separate definition under Section 2(13) 8 of the Introductory Provisions of the Administrative Code of 1987:


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SEC. 2. General Terms Defined . x x x(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary innature, and owned by the Government directly or through its instrumentalities either wholly, or, whereapplicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of itscapital stock: Provided , That government-owned or controlled corporations may further be categorizedby the department of Budget, the Civil Service Commission, and the Commission on Audit for thepurpose of the exercise and discharge of their respective powers, functions and responsibilities withrespect to such corporations.

A close scrutiny of the definition of "government-owned or controlled corporation" in Section 2(13) willshow that MIAA would not fall under such definition . MIAA is a government "instrumentality" thatdoes not qualify as a "government-owned or controlled corporation."


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24 Compagnie Financiere Sucres et Denrees v. CIR, GR No. 133834, 28 August 2006

Facts: Compagnie Financiere Sucres et Denrees is a non-resident private corporation organized underthe laws of the Republic of France. Compagnie transferred its 8% equity interest in the Makati Shangri-La Hotel and Resort to Kerry Holdings which is evidenced by a Deed of Sale and Assignment of

Subscription and Rights of Subscription. The following were transferred to Kerry: (a) 107,929 issuedshares of stock valued at P100.00 per share with a total par value of P10,792,900.00; (b) 152,031 witha par value of P100.00 per share with a total par value of P15,203,100.00; (c) deposits on stocksubscriptions amounting to P43,147,630.28; and (d) petitioners right of subscription. Subsequently,Compagnie paid, under protest, DST and capital gains tax. Under the belief that the transfer of depositson stock subscription is not a sale/assignment of shares of stock which is subject to DST and capitalgains tax, Compagnie filed with the CIR a claim for refund which the latter denied.

Issues: 1. Whether or not the deposit on stock subscription is subject to DST.

2. Whether or not the deposit on stock subscription is subject to capital gains tax.

Held: 1. NO

Since a tax refund is a derogation of the States taxing power then, like tax exemptions, it isconstrued in strictissimi juris against the tax payer. In the instant case, Compagnie failed to point anyprovision that allows its claim of tax refund. On the contrary, Section 176 of the NIRC provides:

SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transferof due-bills, certificates of obligation, or shares or certificates of stock. On all sales, or agreements tosell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares orcertificates of stock in any association, company, or corporation, or transfer of such securities byassignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences

of transfer or sale whether entitling the holder in any manner to the benefit of such due bills, certificatesof obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificates of obligation or stock, there shall be collected a documentary stamp tax of fifty centavos(P1.50) on each two hundred pesos(P200.00), or fractional part thereof, of the par value of such due-bill, certificates of obligation or stock: Provided , That only one tax shall be collected on each sale ortransfer of stock or securities from one person to another, regardless of whether or not a certificate ofstock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer; and Provided,further, That in case of stock without par value the amount of the documentary stamp tax hereinprescribed shall be equivalent to twenty-five percentum (25%) of the documentary stamp tax paid uponthe original issue of the said stock.

2. NO

Petitioner contends that the assignment of its deposits on stock subscription is not subject tocapital gains tax because there is no gain to speak of. In the Capital Gains Tax Return on StockTransaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of theshares it sold, including the stock subscription isP69,143,630.28. The transfer price to Kerry Holdings,Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount of P1,189,239.64. As theCTA aptly ruled, atax on the profit of sale on net capital gain is the very essence of the

2. 2c digests tax i (updated)

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