Pensions, retirement benefit, or separation pay

Case
CIR v. GCT Retirement, 0307 SCRA 487
Facts: GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension,
disability and death benefits to its employees. As such, it was exempt from income tax.

GCL made investments and earned interest income from which was withheld the fifteen per centum (15%)
final withholding tax.

GCL filed with CIR a claim for refund for the amounts withheld. GCL disagreed with the collection of the
15% final withholding tax from the interest income as it is an entity fully exempt from income tax.

The refund requested having been denied, GCL elevated the matter to the CTA, which ruled in favor of
GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and
ordering a refund of the tax withheld. CA upheld the CTA Decision.

CIR seeks a reversal of the decision.

Issue: Whether or not GCL is exempt from the final withholding tax on interest income

Held: YES. Employees' trusts or benefit plans normally provide economic assistance to employees upon
the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It
provides security against certain hazards to which members of the Plan may be exposed. It is an
independent and additional source of protection for the working group. What is more, it is established for
their exclusive benefit and for no other purpose.

The tax advantage was conceived in order to encourage the formation and establishment of such private
plans for the benefit of laborers and employees outside of the Social Security Act.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.

There can be no denying either that the final withholding tax is collected from income in respect of which
employees' trusts are declared exempt. The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income
taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status
from income, we see no logic in withholding a certain percentage of that income which it is not supposed to
pay in the first place.

F. Source rules in determining income from within and without (See section 42, par C, D, E and F)
G. Situs of Income Taxation (See Section 42, par A and B of NIRC)
Cases:
1. CIR v. Japan Airlines, 202 SCRA 450
FACTS
Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign
corporation engaged in the business of international air carriage. From 1959 to 1963, JAL
did not have planes that lifted or landed passengers and cargo in the Philippines as it had
not been granted then by the Civil Aeronautics Board (CAB) a certificate of public
convenience and necessity to operate here. However, since mid-July, 1957, JAL had
maintained an office at the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not
sell tickets but was maintained merely for the promotion of the company's public
relations and to hand out brochures, literature and other information playing up the
attractions of Japan as a tourist spot and the services enjoyed in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales
agent in the Philippines. As an agent, PAL, among other things, sold for and in behalf of
JAL, plane tickets and reservations for cargo spaces which were used by the passengers
or customers on the facilities of JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand
letter from petitioner Commissioner of Internal Revenue (hereinafter) referred to as
Commissioner for brevity), all dated February 28, 1972, for a total amount of
P2,099,687.52 inclusive of 50% surcharge and interest, for years 1959 through 1963 On
June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign
corporation, it was taxable only on income from Philippine sources as determined under
Section 37 of the Tax Code, and there being no such income during the period in
question, it was not liable for the deficiency income tax liabilities assessed

ISSUE
WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS
SOLD IN THE PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES
WITHIN THE PHILIPPINES.

RULING
YES. PROCEEDS FROM SALES OF AIRLINE TICKET SOLD IN THE PHILIPPINES;
TAXABLE AS INCOME FROM SOURCES WITHIN THE PHILIPPINES. In Commissioner
of Internal Revenue vs. Air India and the Court of Tax Appeals (G.R. No. 72443, January 29, 1988,
157 SCRA 648) the Court held that the revenue derived from the sales of airplane tickets through its
agent Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income, and
more recently, in the case of Commissioner of Internal Revenue vs. American Airlines, Inc. and
Court of Tax Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was likewise
declared that for the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activities within this country regardless of the absence of
flight operations within Philippine territory.
2. Manila Electric Co. v. Yatco, 69 Phil. 89- JOFAE
FACTS
In 1935, plaintiff Manila Electric Company, a corporation organized and existing
under the laws of the Philippines, with its principal office and place of business in
the City of Manila, insured with the City of New York Insurance Company and the
United States Guaranty Company, certain real and personal properties situated in
the Philippines. The insurance was entered into in behalf of said plaintiff by its
broker in New York City. The insurance companies are foreign corporations not
licensed to do business in the Philippines and having no agents therein. The policies
contained provisions for the settlement and payment of losses upon the occurrence of any
risk insured against, a sample of which is policy No. 20 of the New York Insurance
Company attached to and made an integral part of the agreed statement of facts.

Plaintiff through its broker paid, in New York, to said insurance company premiums in
the sum of P91,696. The Collector of Internal Revenue, under the authority of section
192 of Act No. 2427, as amended, assessed and levied a tax of one per centum on said
premiums, which plaintiff paid under protest.

ISSUE
Whether or not Manila Electric Cos insurance premiums is subject to one percentum tax

RULING
Yes. Where the insured is within the Philippines, the risk insured against also within the
Philippines, and certain incidents of the contract are to be attended to in the Philippines,
such as, payment of dividends when received in cash, sending of an adjuster into the
Philippines in case of dispute, or making of proof of loss, the Commonwealth of the
Philippines has the power to impose the tax upon the insured, regardless of whether the
contract is executed in a foreign country and with a foreign corporation. Under such
circumstances, substantial elements of the contract may be said to be so situated in the
Philippines as to give its government the power to tax. And, even if it be assumed that the
tax imposed upon the insured will ultimately be passed on to the insurer, thus constituting
an indirect tax upon the foreign corporation, it would still be valid, because the foreign
corporation, by the stipulation of its contract, has subjected itself to that taxing
jurisdiction of the Philippines. After all, the Commonwealth of the Philippines, by
protecting the properties insured, benefits the foreign corporation, and it is but reasonable
that the latter should pay a just contribution therefor. It would certainly be a
discrimination against domestic corporations to hold the tax valid when the policy is
given by them and invalid when issued by foreign corporations.

3. NDC v. CIR, 151 SCRA 472- JOFAE

FACTS
The National Development Company entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going vessels. 1
The purchase price was to come from the proceeds of bonds issued by the Central Bank.
 The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as
interest on the balance of the purchase price. No tax was withheld. The Commissioner
then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations
followed but failed. The BIR thereupon served on the NDC a warrant of distraint and
levy to enforce collection of the claimed amount.

ISSUE
Whether or not NDC is liable for tax

RULING
Yes. Although NDC is not the one taxed since it was the Japanese shipbuilders who were liable on
the interest remitted to them under Section 37 of the Tax Code, still, the imposition is valid.

The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the same from
the Japanese shipbuilders. Such liability is imposed by Section 53c of the Tax Code. NDC was
remiss in the discharge of its obligation as the withholding agent of the government and so should
be liable for the omission.

I. Deductions from Gross Income

1. General rules
Cases:
1. Commissioner v. Phil. Acetylene, 39 SCRA 70- JOFAE
FACTS
Philippine Acetylene Co. Inc. is engaged in the manufacture and sale of oxygen and
acetylene gases. It sold its products to the National Power Corporation (Napocor), an
agency of the Philippine Government, and the Voice of America (VOA), an agency of the
United States Government. When the commissioner assessed deficiency sales tax and
surcharges against the company, the company denied liability for the payment of tax on
the ground that both Napocor and VOA are exempt from taxes.

ISSUE
Whether or not the Philippine Acetylene Co. is liable for tax

RULING
Yes. Sales tax are paid by the manufacturer or producer who must make a true and
complete return of the amount of his, her or its gross monthly sales, receipts or earnings
or gross value of output actually removed from the factory or mill, warehouse and to pay
the tax due thereon. The tax imposed by Section 186 of the Tax Code is a tax on the
manufacturer or producer and not a tax on the purchaser except probably in a very remote
and inconsequential sense. Accordingly, its levy on the sales made to tax- exempt entities
like the Napocor is permissible.

On the other hand, there is nothing in the language of the Military Bases Agreement to
warrant the general exemption granted by General Circular V-41 (1947). Thus, the
expansive construction of the tax exemption is void; and the sales to the VOA are subject
to the payment of percentage taxes under Section 186 of the Tax Code. Therefore, tax
exemption is strictly construed and exemption will not be held to conferred unless the
terms under which it is granted clearly and distinctly show that such was the intention.

2. BPI v. Trinidad, 45 Phil. 384- JOFAE

FACTS
On the 13th day of July, 1916, the defendant Collector of Internal Revenue, through his
duly authorized agent at Zamboanga, seized and distrained certain personal property,
consisting of machinery for saw ing lumber which is particularly enumerated and
described in paragraph 3 of the complaint and advertised the same for sale, to realize the
sum of P2,159.79, alleged to be due to the Government of the Philippine Islands from
Pujalte & Co., as forestry charges. The defendant claimed that said personality belonged
to the said company, was used in the business on which the taxes were due, and was
liable to seizure to cover said taxes. On the other hand, the plaintiff claimed to be the
owner of said property, and demanded its release The demand being denied, the plaintiff
paid to the defendant the said sum of P2,159.79 under protest to prevent the sale of said
property, and immediately brought the present action in the Court of First Instance of
Zamboanga to recover the said sum of P2,159.79 together with interest and costs.

ISSUE
Whether or not the company is liable for tax
RULING
The personal property mortgaged by P. & Co. to B was not subject to seizure for the
payment of taxes due from P. Co. "The property used in the business or occupation,"
referred to in section 149 of Act No. 2339 (sec. 1558, Act No. 2711), can only mean
property belonging to the owner of the business or occupation. A chattel mortgage being
a "conditional sale of personal property," the dominion with respect to the mortgaged
personality rests with the mortgagee, so long as the mortgage exists. Such property ceases
to be the property of the debtor for the reason that it has become the property of the
creditor, in like manner as the dominion of a thing sold is transferred to the purchaser and
ceases to belong to the vendor from the moment of the delivery thereof as a result of the
sale.

3. CIR v. Central Luzon Drug Corp., GR No. 159647, 15 April 2005 JOFAE
FACTS
Respondent is a domestic corporation engaged in the retailing of medicines and other
pharmaceutical products. In 1996 it operated six (6) drugstores under the business
name and style Mercury Drug. From January to December 1996 respondent granted
20% sales discount to qualified senior citizens on their purchases of medicines pursuant
to RA 7432. For said period respondent granted a total of 904,769.

On April 15, 1997, respondent filed its annual ITR for taxable year 1996 declaring
therein net losses. On Jan. 16, 1998 respondent filed with petitioner a claim for tax
refund/credit of 904,769.00 alledgedly arising from the 20% sales discount. Unable
to obtain affirmative response from petitioner, respondent elevated its claim to the CTA
via Petition for Review. CTA dismissed the same but on MR, CTA reversed its earlier
ruling and ordered petitioner to issue a Tax Credit Certificate in favor of respondent
citing CA GR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing
that Sec. 229 of RA 7432 deals exclusively with illegally collected or erroneously paid
taxes but that there are other situations which may warrant a tax credit/refund. CA
affirmed CTA decision reasoning that RA 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the availment of a tax credit.
Moreover, such credit is not tantamount to an unintended benefit from the law, but
rather a just compensation for the taking of private property for public use.

ISSUE
W/N respondent, despite incurring a net loss, may still claim the 20% sales
discount as a tax credit.

RULING
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of
obtaining a 20% discount on their purchase of medicine from any private establishment
in the country. The latter may then claim the cost of the discount as a tax credit. Such
credit can be claimed even if the establishment operates at a loss. A tax credit generally
refers to an amount that is subtracted directly from ones total tax liability. It is an
allowance against the tax itself or a deduction from what is owed by a taxpayer to the
government.

A tax credit should be understood in relation to other tax concepts. One of these is tax
deductionwhich is subtraction from income for tax purposes, or an amount that is
allowed by law to reduce income prior to the application of the tax rate to compute the
amount of tax which is due. In other words, whereas a tax credit reduces the tax due,
tax deduction reduces the income subject to tax in order to arrive at the taxable income.

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax
Liability before the tax credit can be applied. Without that liability, any tax credit
application will be useless. There will be no reason for deducting the latter when
there is, to begin with, no existing obligation to the government. However, as will be
presented shortly, the existence of a tax credit or its grant by law is not the same as
the availment or use of such credit. While the grant is mandatory, the availment or use
is not.

If a net loss is reported by, and no other taxes are currently due from, a business
establishment, there will obviously be no tax liability against which any tax credit
can be applied. For the establishment to choose the immediate availment of a
tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains
that, under RA 7432, Congress has granted without conditions a tax credit benefit to all
covered establishments. However, for the losing establishment to immediately apply such
credit, where no tax is due, will be an improvident usance.

In addition, while a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of such credit,
neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete
with provisions granting or allowing tax credits, even though no taxes have been
previously paid.