TAXATION LAW 2 DIGESTS – ATTY.
PADILLA – AY 2018-2019 – 2nd SEMESTER
CHAPTER 1 – INCOME TAXATION
TOPIC: INCOME TAXATION
1. MADRIGAL vs. RAFFERTY, G.R. No. 12287 (1918)
FACTS: Vicente Madrigal and Susana Paterno Were legally married prior to
January 1, 1914. The marriage was contracted under the provisions of law
concerning conjugal partnerships. On February 25, 1915, Vicente Madrigal 􏰆led
a sworn declaration on the prescribed form with the Collector of Internal
Revenue, showing, as his total net income for the year 1914, the sum of
P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in fact the
income of the conjugal partnership existing between himself and his wife Susana
Paterno, and that in computing and assessing the additional income tax provided
by the Act of Congress of October 3, 1913, the income declared by Vicente
Madrigal should be divided into two equal parts, one-half to be considered the
income of Vicente Madrigal and the other half the income of Susana Paterno. The
general question had in the meantime been submitted to the Attorney-General of
the Philippine Islands who in an opinion dated March 17, 1915, held with the
petitioner Madrigal. The revenue officers being still unsatisfied, the
correspondence together with this opinion was forwarded to Washington for a
decision by the United States Treasury Department. The United States
Commissioner of Internal Revenue reversed the opinion of the Attorney-General,
and thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided
adversely by the Collector of Internal Revenue, action was begun by Vicente
Madrigal and his wife Susana Paterno in the Court of First Instance of the city of
Manila against the Collector of Internal Revenue and the Deputy Collector of
Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been
wrongfully and illegally assessed and collected by the defendants from the
plaintiff
The answer of the defendants, together with an analysis of the tax declaration,
the pleadings, and the stipulation, sets forth the basis of defendants' with the
resulting net income as P296,302.73.
The dispute between the plaintiffs and the defendants concerned the additional
tax provided for in the Income Tax Law. The trial court in an exhausted decision
found in favor of defendants, without costs.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be
divided into 2 in computing for the additional income tax
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HELD: No. Income as contrasted with capital or property is to be the test. The
essential difference between capital and income is that capital is a fund; income
is a flow. 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 in relation to such fund through a period of
time is called income. Capital is wealth, while income is the service of wealth.
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of
her husband Vicente Madrigal during the life of the conjugal partnership. She has
an interest in the ultimate property rights and in the ultimate ownership of
property acquired as income after such income has become capital. Susana
Paterno has no absolute right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno 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 the wife for the purposes
of the additional tax.
2. CONWI vs. CTA, G.R. No. 48532 (1992)
FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble,
Philippine Manufacturing Corporation, Said corporation is a subsidiary of
Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A.
During the years 1970 and 1971 petitioners were assigned, for certain
periods, to other subsidiaries of Procter & Gamble, outside of the Philippines,
during which petitioners were paid U.S. dollars as compensation for services
in their foreign assignments. When petitioners in C.T.A. Case No. 2511 filed
their income tax returns for the year 1970, they computed the tax due by
applying the dollar-to-peso conversion on the basis of the floating rate
ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows: from
January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to
U.S. $1.00. Petitioners in C.T.A. Case No. 2594 likewise used the above
conversion rate in converting their dollar income for 1971 to Philippine peso.
However, on February 8, 1973 and October 8, 1973, petitioners in said cases
filed with the office of the respondent Commissioner, amended income tax
returns for the above-mentioned years, this time using the par value of the
peso as prescribed in Section 48 of Republic Act No. as the basis for
converting their respective dollar income into Philippine pesos for purposes
of computing and paying the corresponding income tax due from them. The
aforesaid computation as shown in the amended income tax returns resulted
in the alleged overpayments, refund and/or tax credit. Accordingly, claims
for refund of said over-payments were filed with respondent Commissioner.
Without awaiting the resolution of the Commissioner of the Internal Revenue
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on their claims, petitioners filed their petitioner for review in the above-
mentioned cases. Upon joint motion of the parties on the ground that these
two cases involve common question of law and facts, that respondent Court
of Tax Appeals heard the cases jointly.
Petitioner’s contention: Petitioners claim that public respondent Court of
Tax Appeals erred in holding that the dollar earning receipts are derived
from foreign transactions, therefore it is exempted from taxation in the
Philippines. That the proper rate of conversion of petitioners' dollar earnings
for tax purposes in the prevailing free market rate of exchange and not the
par value of the peso; and that the use of the par value of the peso to convert
petitioners' dollar earnings for tax purposes into Philippine pesos is
"unrealistic" and, therefore, the prevailing free market rate should be the rate
used.
Respondent’s contention: Respondent Commissioner argues that CB
Circular No. 289 speaks of receipts for export products, receipts of sale of
foreign exchange or foreign borrowings and investments but not income tax.
He also claims that he had to use the prevailing free market rate of exchange
in these cases because of the need to ascertain the true and correct amount
of income in Philippine peso of dollar earners for Philippine income tax
purposes.
ISSUE: WON THE DOLLAR EARNING RECEIPTS ARE FOREIGN
TRANSACTIONS AND THEREFORE EXEMPTED FROM TAXATION IN PH
JURISDICTION?
HELD: NO. For a foreign exchange transaction is simply that — a transaction
in foreign exchange, foreign exchange being "the conversion of an amount of
money or currency of one country into an equivalent amount of money or
currency of another." When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their assigned
nation's currency and were ALSO spending in said currency. There was no
conversion, therefore, from one currency to another. The dollar earnings of
petitioners are the fruits of their labors in the foreign subsidiaries of Procter
& Gamble. It was a definite amount of money which came to them within a
specified period of time of two years as payment for their services. Section
21 of the National Internal Revenue Code, states as follows: Sec. 21. Rates of
tax on citizens or residents. — A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every
individual, whether a citizen of the Philippines residing therein or abroad or
an alien residing in the Philippines, determined in accordance with the
following schedule.
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DOCTRINE: Citizens of the Philippines, and their income, within or without,
and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as
amended, does not brook any exemption.
3. CONSOLIDATED MINES, INC. vs. CTA, G.R. Nos. L-18843-44 (1974)
FACTS: Petitioner Consolidated Mines, Inc. (the Company), a domestic
corporation engaged in mining, had filed its income tax returns for 1951, 1952,
1953, and 1956. In 1957, examiners of the BIR investigated the income tax
returns filed by the Company because on August 10, 1954, its auditor Felipe
Ollada claimed the refund of the sum of P107,472.00 representing alleged
overpayments of income taxes for the year 1951.
After the investigation, the examiners reported that (A) for the years
1951 to 1954 (1) the Company had not accrued as an expense the share in the
company profits of Benguet Consolidated Mines as operator of the Company’s
mines, although for income tax purposes the Company had reported income and
expenses on the accrual basis; (2) depletion and depreciation expenses had been
overcharged; and (3) the claims for audit and legal fees and miscellaneous
expenses for 1953 and 1954 had not been properly substantiated; and that (B)
for the year 1956 (1) the Company had overstated its claim for depletion; and (2)
certain claims for miscellaneous expenses were not duly supported by evidence.
In view of said reports, the CIR sent the Company a letter of demand
requiring it to pay certain deficiency income taxes for the years 1951-1954,
inclusive, and for the year 1956. Deficiency income tax assessment notices for
said years were also sent to the Company.
The Company requested a reconsideration of the assessment, but the CIR
refused to reconsider, hence the Company appealed to the CTA.
On May 6, 1961, the CTA rendered judgment ordering the Company to
pay the amounts of P107,846.56, P134,033.01 and P71,392.82 as deficiency
income taxes for the years 1953, 1954, and 1956, respectively. The CTA nullified
the assessments for the years 1951 and 1952 on the ground that they were issued
beyond the five-year period prescribed by Sec. 33 of the NIRC.
However, on August 7, 1961, upon motion of the Company, the CTA
reconsidered its decision and further reduced the deficiency income tax liabilities
of the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953,
1954, and 1956, respectively. In this amended decision, the CTA subscribed to the
theory of the Company that Benguet Consolidated Mining Co. had no right to
share in “Accounts Receivable,” hence one-half thereof may not be accrued as an
expense of the Company for a given year.
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Both the Company and the Commissioner appealed to Supreme Court.
The Company questions the rate of mine depletion adopted by the CTA and the
Disallowance of depreciation charges and certain miscellaneous. The CIR, on the
other hand, questions what he characterizes as the “hybrid” or “mixed” method
of accounting utilized by the Company, and approved by the CTA, in treating the
share of Benguet in the net profits from the operation of the mines in connection
with its income tax returns.
ISSUE/S: Whether or not the CTA erred with respect to the rate of mine depletion.
HELD: No. The Tax Code provides that in computing net income, there shall be
allowed as deduction, in the case of mines, a reasonable allowance for depletion
thereof not to exceed the market value in the mine of the produce thereof which
has been mined and sold during the year for which the return is made [Sec. 30(g)
(1) (B)].
The formula for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit Estimated Ore Deposit of Product
Mined and Sold.
The CIR and the Company do not agree as to the figures corresponding
to either factor that affects the rate of depletion per unit. The figures according
to the CIR are:
P2,646,878.44 (mine cost) P0.59189 (rate of
--------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
While the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
---------------------- = depletion per ton)
4,156,888 tons (estimated ore deposit)
They agree, however, that the “cost of the mine property” consists of
(1) mine cost and (2) expenses of development before production.
As an income tax concept, depletion is wholly a creation of the statute—
“solely a matter of legislative grace.” Hence, the taxpayer has the burden of
justifying the allowance of any deduction claimed. As in connection with all other
tax controversies, the burden of proof to show that a disallowance of depletion
by the CIR is incorrect or that an allowance made is inadequate is upon the
taxpayer, and this is true with respect to the value of the property constituting
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the basis of the deduction. This Burden of Proof Rule has been frequently applied
and a value claimed has been disallowed for lack of evidence.
The Company’s balance sheet for December 31, 1947 lists the “mine cost:
of P2,500,000 as “development costs” and the amount of P1,738,974.37 as
“suspense account (mining properties subject to war losses).” The Company
claims that its accountant, Mr. Calpo, made these errors, because he was then new
at the job. Granting that was what had happened, it does not affect the fact that
the evidence on hand is insufficient to prove the cost of development alleged by
the Company. Nor can we rely on the statements of Eligio S. Garcia who was the
Company’s treasurer and assistant secretary at the time he testified. He admitted
that he did not know how the figure P4,238,974.57 was arrived at, explaining: “I
only know that it is the figure appearing on the balance sheet as of December 31,
1946 as certified by the Company’s auditors; and this we made as the basis of the
valuation of the depletable value of the mines.”
We, therefore, have to rely on the CIR’s assertion that the “development
cost” was P131,878.44, broken down as follows: assessment, P34,092.12;
development, P61,484.63; exploration, P13,966.62; and diamond drilling,
P22,335.07.
The question as to which figure should properly correspond to “mine
cost” is one of fact. The findings of fact of the CTA, which was reasonably
supported by evidence, are conclusive upon the Supreme Court.
4. CIR vs. TOURS SPECIALISTS, INC., G.R. No. L-66416 (1990)
DOCTRINE: Gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong to them and do
not redound to the taxpayer’s benefit; and it is not necessary that there must be
a law or regulation which would exempt such monies or receipts within the
meaning of gross receipts under the Tax Code
FACTS: Petitioner (Tours Specialists, Inc.) had derived income from its activities
as a travel agency by servicing the needs of foreign tourists and travelers and
Filipino "Balikbayans" during their stay in this country. Some of the services
extended to the tourists consist of booking said tourists and travelers in local
hotels for their lodging and board needs; transporting these foreign tourists from
the airport to their respective hotels, and from the latter to the airport upon their
departure from the Philippines, transporting them from their hotels to various
embarkation points for local tours, visits and excursions; securing permits for
them to visit places of interest; and arranging their cultural entertainment,
shopping and recreational activities.
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In order to ably supply these services to the foreign tourists, petitioner and its
correspondent counterpart tourist agencies abroad have agreed to offer a
package fee for the tourists. Although the fee to be paid by said tourists is quoted
by the petitioner, the payments of the hotel room accommodations, food and
other personal expenses of said tourists, as a rule, are paid directly either by
tourists themselves, or by their foreign travel agencies to the local hotels and
restaurants or shops, as the case may be.
It is also the case that some tour agencies abroad request the local tour agencies,
such as the petitioner in the case that the hotel room charges, in some specific
cases, be paid through them. By this arrangement, the foreign tour agency
entrusts to the petitioner Tours Specialists, Inc., the fund for hotel room
accommodation, which in turn is paid by petitioner tour agency to the local hotel
when billed. The procedure observed is that the billing hotel sends the bill to the
petitioner. The local hotel identifies the individual tourist, or the particular
groups of tourists by code name or group designation and also the duration of
their stay for purposes of payment. Upon receipt of the bill, the petitioner then
pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency.
Despite this arrangement, respondent Commissioner of Internal Revenue
assessed petitioner for deficiency 3% contractor's tax as independent contractor
by including the entrusted hotel room charges in its gross receipts from services
for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner
received from respondent the 3% deficiency independent contractor's tax
assessment in the amount of P122,946.93 for the years 1974 to 1976. Petitioner
was also assessed to pay a compromise penalty of P500.00.
Subsequently on December 11, 1979, petitioner formally protested the
assessment made by respondent on the ground that the money received and
entrusted to it by the tourists, earmarked to pay hotel room charges, were not
considered and have never been considered by it as part of its taxable gross
receipts for purposes of computing and paying its contractor’s tax.
Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's
written protest, caused the issuance of a warrant of distraint and levy. And later,
respondent had petitioner's bank deposits garnished. Taking this action of
respondent as the adverse and final decision on the disputed assessment,
petitioner appealed to this Court.
ISSUE: W]hether or not the hotel room charges held in trust for foreign tourists
and travelers and/or correspondent foreign travel agencies and paid to local host
hotels form part of the taxable gross receipts for purposes of the 3% contractor's
tax.
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TAXATION LAW 2 DIGESTS – ATTY. PADILLA – AY 2018-2019 – 2nd SEMESTER
HELD: NO. As demonstrated in the above-mentioned case, gross receipts subject
to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayer's
benefit; and it is not necessary that there must be a law or regulation which would
exempt such monies and receipts within the meaning of gross receipts under the
Tax Code.
Parenthetically, the room charges entrusted by the foreign travel agencies to the
private respondent do not form part of its gross receipts within the definition of
the Tax Code. The said receipts never belonged to the private respondent. The
private respondent never benefited from their payment to the local hotels. As stated
earlier, this arrangement was only to accommodate the foreign travel agencies.
5. CIR vs. JAVIER, G.R. No. 78953 (1991)
FACTS: Victoria Javier, wife of respondent Javier, received from Prudential Bank
US$999,973.70 remitted by her sister Mrs. Dolores Ventosa, through banks in the
US including Mellon Bank. Mellon filed a case in CFI Rizal against Javier claiming
that the remittance of US$1,000,000.00 was a clerical error, and it should have
been US$1,000.00 only, praying the excess be returned, since the Javiers were
only trustees of an implied trust for the benefit of Mellon Bank with the clear,
immediate, and continuing duty to return the said amount from the moment it
was received.
The City Fiscal of Pasay City filed an Information with the then Circuit Criminal
charging the petitioner (private respondent herein) and his wife with the crime
of estafa, alleging that they misappropriated, misapplied, and converted to their
own personal use and benefit the amount of US$999,000.00 which they received
under an implied trust for the benefit of Mellon Bank and as a result of the
mistake in the remittance by the latter.
Petitioner (private respondent herein) filed his Income Tax Return for the taxable
year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88
and stating in the footnote of the return that "Taxpayer was recipient of some
money received from abroad which he presumed to be a gift but turned out to be
an error and is now subject of litigation."
Petitioner (private respondent herein) received a letter from the acting
Commissioner of Internal Revenue dated November 14, 1980, together with
income assessment notices for the years 1976 and 1977, demanding that
petitioner (private respondent herein) pay the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977
respectively.
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Petitioner (private respondent herein) wrote the Bureau of Internal Revenue that
he was paying the deficiency income assessment for the year 1976 but denying
that he had any undeclared income for the year 1977 and requested that the
assessment for 1977 be made to await final court decision on the case filed
against him for filing an allegedly fraudulent return.
Petitioner (private respondent herein) received from Acting Commissioner of
Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to
his December 15, 1980 letter-protest that "the amount of Mellon Bank's
erroneous remittance which you were able to dispose, is definitely taxable." The
Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal before the respondent Court of Tax Appeals on
December 10, 1981. CTA deleted the 50% fraud penalty, saying that there was no
fraud.
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's
ruling, elevated the matter to us, by the present petition
ISSUE: Whether or not a taxpayer who merely states as a footnote in his income
tax return that a sum of money that he erroneously received and already spent is
the subject of a pending litigation and there did not declare it as income is liable
to pay the 50% penalty for filing a fraudulent return.
HELD: NO. In the case at bar, there was no actual and intentional fraud through
willful and deliberate misleading of the government agency concerned, the
Bureau of Internal Revenue, headed by the herein petitioner. The government
was not induced to give up some legal right and place itself at a disadvantage so
as to prevent its lawful agents from proper assessment of tax liabilities because
Javier did not conceal anything. Error or mistake of law is not fraud. The
petitioner's zealousness to collect taxes from the unearned windfall to Javier is
highly commendable. Unfortunately, the imposition of the fraud penalty in this
case is not justified by the extant facts. Javier may be guilty of swindling charges,
perhaps even for greed by spending most of the money he received, but the
records lack a clear showing of fraud committed because he did not conceal the
fact that he had received an amount of money although it was a "subject of
litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the
deficiency assessment should be deleted.
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National
Internal Revenue Code), a taxpayer who files a false return is liable to pay the
fraud penalty of 50% of the tax due from him or of the deficiency tax in case
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payment has been made on the basis of the return filed before the discovery of
the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there
is no fraud in the filing of the return and agree fully with the Court of Tax Appeals'
interpretation of Javier's notation on his income tax return filed on March 15,
1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation
that it was an "error or mistake of fact or law" not constituting fraud, that such
notation was practically an invitation for investigation and that Javier had
literally "laid his cards on the table."
6. ROXAS vs. CTA, G.R. No. L-25043 (1968)
FACTS: Don Pedro Roxas and Dona Carmen Ayala, transmitted to their
grandchildren by hereditary succession the following properties: (1) Agricultural
lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province; (2) A residential house and lot located at Wright St., Malate,
Manila; and (3) Shares of stocks in different corporations. To manage the
properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas,
formed a partnership called Roxas y Compania.
The tenants who have all been tilling the lands in Nasugbu for generations
expressed their desire to purchase from Roxas y Cia, the parcels which they
actually occupied. For its part, the Government, in consonance with the
constitutional mandate to acquire big landed estates and apportion them among
landless tenants-farmers, persuaded the Roxas brothers to part with their
landholdings. The Roxas brothers agreed to sell 13,500 hectares to the
Government for distribution to actual occupants for a price of P2,079,048.47 plus
P300,000.00 for survey and subdivision expenses. It turned out however that the
Government did not have funds to cover the purchase price, and so a special
arrangement was made for the Rehabilitation Finance Corporation to advance to
Roxas y Cia. The amount of P1,500,000.00 as loan. Collateral for such loan were
the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia
allowed the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation to pay its loan from the
proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955
Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes
as gain on the sale of capital asset held for more than one year pursuant to Section
34 of the Tax Code.
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During their bachelor days the Roxas brothers lived in the residential house at
Wright St., Malate, Manila, which they inherited from their grandparents. After
Antonio and Eduardo got married, they resided somewhere else leaving only Jose
in the old house. Jose paid to Roxas y Cia. rentals for the house in the sum of
P8,000.00 a year.
Commissioner of Internal Revenue demanded from Roxas y Cia the payment of
real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00
compromise penalty for late payment, and P150.00 tax for dealers of securities
for 1952 plus P10.00 compromise penalty for late payment. The assessment for
real estate dealer's tax was based on the fact that Roxas y Cia. received house
rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the
Tax Code, an owner of a real estate who derives a yearly rental income therefrom
in the amount of P3,000.00 or more is considered a real estate dealer and is liable
to pay the corresponding fixed tax.
In the same assessment, the Commissioner assessed deficiency income taxes
against the Roxas Brothers for the years 1953 and 1955. The deficiency income
taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50%
of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm
lands to the tenants. For the reason that Roxas y Cia. subdivided its Nasugbu farm
lands and sold them to the farmers on installment, the Commissioner considered
the partnership as engaged in the business of real estate, hence, 100% of the
profits derived therefrom was taxed.
ISSUE: Is the gain derived from the sale of the Nasugbu farm lands an ordinary
gain, hence 100% taxable? NO
Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers (RE:
8,000 rental fee)? Yes
HELD: Although they paid for their respective holdings in installment for a period
of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate
dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very
farmers who tilled them for generations was not only in consonance with, but
more in obedience to the request and pursuant to the policy of our Government
to allocate lands to the landless. However, the Government could not comply with
its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's
burden, went out of its way and sold lands directly to the farmers in the same way
and under the same terms as would have been the case had the Government done
it itself. The power of taxation is sometimes called also the power to destroy.
Therefore, it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly,
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lest the tax collector kill the "hen that lays the golden egg". In fine, Roxas y Cia.
cannot be considered a real estate dealer for the sale in question. Hence, pursuant
to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and
the gain derived from the sale thereof is capital gain, taxable only to the extent of
50%.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax
upon it, because although it earned a rental income of P8,000.00 per annum in
1952, said rental income came from Jose Roxas, one of the partners. Section 194
of the Tax Code, in considering as real estate dealers owners of real estate
receiving rentals of at least P3,000.00 a year, does not provide any qualification
as to the persons paying the rentals. The law, which states: "Real estate dealer"
includes any person engaged in the business of buying, selling, exchanging,
leasing or renting property on his own account as principal and holding himself
out as a full or part-time dealer in real estate or as an owner of rental property or
properties rented or offered to rent for an aggregate amount of three thousand
pesos or more a year” is too clear and explicit to admit construction.
7. FISHER vs. TRINIDAD, G.R. No. L-17518 (1922)
FACTS: During 1919, the Ph American Drug Company (PADC) was a corp
organized and existing under Ph laws, doing business in Manila. Fisher was a
stockholder. As a result of the business for 1919, PADC declared a “stock dividend”
and Fisher’s share was P24,800. The stock dividend was issued to Fisher and in
1920, Fisher paid under protest P899.91 as income tax on said stock dividend.
Fisher filed an action to recover the sum paid but Trinidad demurred to the
petition on the ground that it did not state facts sufficient to constitute a cause of
action. Fisher cited US Supreme Court decisions assailing that in those cases, an
effort was made to collect an “income tax” upon “stock dividends” and that “stock
dividends” were capital and not an “income” and therefore not subject to “income
tax” law. Trinidad contends that US SC decisions should not be followed because
the US statute providing for tax upon stock dividends is different from Ph laws.
Section 2 of Act of Congress Chapter 463 attempts to define what is an income. The
definition follows:
That the term "dividends" as used in this title shall be held to mean any distribution made
or ordered to made by a corporation, . . . which stock dividend shall be considered income,
to the amount of its cash.
Section 25 of said Act no. 2883 attempts to define the application of the income tax.
The term "dividends" as used in this Law shall be held to mean any distribution made or
ordered to be made by a corporation, out of its earnings or profits accrued since March 1,
6

1913, payable to its shareholders, whether in cash or in stock of the corporation. Stock
dividend shall be considered income, to the amount of the earnings or profits distributed.
But no important argument can be based in the slight difference of the wordings in the 2
sections.
Further argued by Trinidad, the Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on property which
is not an "income." a statute expressly adopted for one purpose cannot, without
amendment, be applied to another purpose which is entirely distinct and different. The
Legislature cannot, by a statutory declaration, change the real nature of a tax which it
imposes. Example, a law which imposes an important tax on rice only cannot be construed
to an impose an importation tax on corn. It is true that the statute in question provides for
an income tax and contains a further provision that "stock dividends" shall be considered
income and are therefore subject to income tax provided for in said law. If "stock
dividends" are not "income" then the law permits a tax upon something not within the
purpose and intent of the law.
“Stock dividends” represent undistributed increase in the capital of corps for a particular
period.
“Income” according to Gray vs Darlington states that mere advance in value does not
constitute income specified in Revenue law as income of the owner for the year in which
the sale of the property was made; its merely an increase of capital.
“Income” according to Towne vs. Eisner refers to cash or its equivalent, and does not
pertain to unrealized increments in the value of the property. Stock dividend rakes nothing
from the property of the corp, and adds nothing to the interests of shareholders.
“Income” according to Doyle vs Mitchell Bros. Co. pertains to importing something distinct
from principal or capital and conveying the idea of gain or increase arising from corporate
activity.
“Income” according to Eisner vs Macomber is defined as the gain derived from capital,
labor or both provided it includes profit gained through a sale or conversion of capital
assets
The Legislature, when it provided for an "income tax," intended to tax only the "income"
of corporations, firms or individuals, as that term is generally used in its common
acceptation; that is that the income means money received, coming to a person or
corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a
corporation, firm, or individual, should be taxed as "income." If the holder of the stock
dividend is required to pay an income tax on the same, the result would be that he has paid
a tax upon an income which he never received. Such a conclusion is absolutely
contradictory to the idea of an income. An income subject to taxation under the law must
be an actual income and not a promised or prospective income.
Trinidad argues that there is nothing in Sec 25 of Act 2883 contravenes the provisions of
the Jones Law; that income shall include gains, profits, and income derived from salaries,
wages or compensation for personal services as well as from interest, rent, dividends,
securities, etc. Trinidad emphasizes the "income from dividends." Of course, income
received as dividends is taxable as an income but an income from "dividends" is a very
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different thing from receipt of a "stock dividend." One is an actual receipt of profits; the
other is a receipt of a representation of the increased value of the assets of corporation.
ISSUE: WON stock dividends are income which can be taxed as “income tax”
HELD: No. SC followed the same US doctrine. Stock dividends are not income
hence cannot be taxed under Act No 2883 which provides for a tax upon income
stating Sec25 Act 2833 “Stock dividends shall be considered income, to the
amount of the earnings or profits distributed”. Under the guise of an income tax,
property which is not an income cannot be taxed. When the assets of a
corporation have increased so as to justify the issuance of a stock dividend, the
increase of the assets should be taken account of the Government in the ordinary
tax duplicates for the purposes of assessment and collection of an additional tax.
An income subject to taxation under the law must be an actual income and not a
promised or prospective income.
8. LIMPAN INVESTMENT CORP. vs. CIR, G.R. No. L-21570 (1966)
FACTS: Petitioner, a domestic corporation, is engaged in the business of leasing
real properties. Its principal stockholders are the spouses Isabelo and
Purificacion Lim. Said properties are situated in Manila and Pasay City.
Petitioner corporation duly filed its 1956 and 1957 income tax returns. The BIR
conducted an investigation of the said returns in 1956 and 1957, they discovered
and ascertained that petitioner had underdeclared its rental incomes during said
taxable years. CIR issued a letter-assessment and demanded for payment of the
deficiency.
Petitioner corporation requested CIR to reconsider the assessment but denied
the request and adding surcharge. Hence, the corporation filed its petition for
review before the CTA, questioning the validity and correctness of the
assessment given by the CIR. It disclaimed having received and collected the
unreported rental income for 1956 contending that ‘the previous owners of the
leased building have to collect part of the total rentals in 1956 to apply to their
payment of rental. They also argued that the rentals were deposited in Court thus,
not receiving the rental payments when in fact they did not collect said payments.
For 1957 rental income, petitioner corporation said that Isabelo Lim did not turn
over it to them.
Vicente Solis, Secretary-Treasurer of petitioner corporation admitted that it had
omitted to report rental income in both 1956 and 1957 tax return. Solis also tried
to establish that it did not collect or receive the payments from the tenants
because the refuse to recognize the new owner (petitioner corporation).
7

The BIR examiner found that the tenants of petitioner regularly made their
payments to petitioner corporation or Isabelo Lim.
CIR: Demanded the deficiency income tax + surcharges from petitioner
corporation for the undeclared rental income.
CTA: Upheld CIR’s assessment and demand for the deficiency income tax
ISSUE: Whether or not the BIR was correct in assessing deficiency taxes against
Limpan Corporation for undeclared rental income.
HELD: Yes. Petitioner admitted that it indeed had undeclared income through its
Secretary-Treasurer, Solis. They failed to prove their arguments and excuses
through clear and convincing evidence. There is already constructive payment
when the rental payments were deposited to the court. It is deemed to have
constructively received by them.
DOCTRINE: Sec. 23(E) of the NIRC, general principles: “A domestic corporation
is taxable on all income derived from sources within and without the Philippines.”
CHAPTER 2 – TAXPAYERS
TOPIC: RESIDENT ALIENS
9. GARRISON vs. CA, G.R. Nos. L-4450105 (1990)
FACTS: All 6 petitioners alleged that they are US citizens working in the US Naval
Base in Olongapo City. They received separate notices from the District Revenue
Officer of Olongapo City, informing them that they had not filed their respective
income tax returns for the year 1969 as required by the NIRC. They were asked
to file their returns within 10 days from the receipt of the notice. The accused
refused to file their income tax returns, claiming that they are not resident aliens nationals concerned to invoke and prima facie establish their tax-exempt status.
but only special temporary visitors, having entered this country under the
Philippine Immigration Act. The accused also claimed exemption from filing the
return in the Philippines by virtue of the provisions of the US-RP Military Bases
Agreement. Given these facts, the petitioner contend that they are not required
to file income tax returns. The petitioners claim that they are covered by this
exempting provision of the Bases Agreement since, as is admitted on all sides,
they are all U.S. nationals, all employed in the American Naval Base at Subic Bay
(involved in some way or other in "construction, maintenance, operation or
defense" thereof), and receive salary therefrom exclusively and from no other
source in the Philippines; and it is their intention, as is shown by the unrebutted
evidence, to return to the United States on termination of their employment. That
claim had been rejected by the Court of Appeals with the terse statement that the
Bases Agreement "speaks of exemption from the payment of income tax, not from
the filing of the income tax returns”. But even if exempt from paying income tax,
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said petitioners were, it is contended by the respondents, not excused from filing
income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the
filing of an income tax return also by any "alien residing in the Philippines,
regardless of whether the gross income was derived from sources within or
outside the Philippines;" and since the petitioners, although aliens residing
within the Philippines, had failed to do so, they had been properly prosecuted and
convicted for having thus violated the Code.
ISSUE: W/N petitioners are exempt from paying their income tax
HELD: Quite apart from the evidently distinct and different character of the
requirement to pay income tax in contrast to the requirement to file a tax return,
it appears that the exemption granted to the petitioners by the Bases Agreement
from payment of income tax is not absolute. By the explicit terms of the Bases
Agreement, it exists only as regards income derived from their employment "in
the Philippines in connection with construction, maintenance, operation or
defense of the bases;" it does not exist in respect of other income, i.e., "income
derived from Philippine sources or sources other than the US sources." Obviously,
with respect to the latter form of income, i.e., that obtained or proceeding from
"Philippine sources or sources other than the US sources," the petitioners, and all
other American nationals who are residents of the Philippines, are legally bound
to pay tax thereon. In other words, so that American nationals residing in the
country may be relieved of the duty to pay income tax for any given year, it is
incumbent on them to show the Bureau of Internal Revenue that in that year they
had derived income exclusively from their employment in connection with the
U.S. bases, and none whatever "from Philippine sources or sources other than the
US sources." They have to make this known to the Government authorities. It is
not in the first instance the latter's duty or burden to make unaided verification
of the sources of income of American residents. The duty rests on the U.S.
It cannot simply be presumed that they earned no income from any other sources
than their employment in the American bases and are therefore totally exempt
from income tax. The situation is no different from that of Filipino and other
resident income-earners in the Philippines who, by reason of the personal
exemptions and permissible deductions under the Tax Code, may not be liable to
pay income tax year for any particular year; that they are not liable to pay income
tax, no matter how plain or irrefutable such a proposition might be, does not
exempt them from the duty to file an income tax return.
8

TOPIC: RESIDENT FOREIGN CORPORATIONS
10. CIR vs. BRITISH OVERSEAS AIRWAYS CORPORATION, G.R. Nos. L-
65773-74 (1987)
FACTS: BOAC is a 100% British Government-owned corporation organized and
existing under the laws of the United Kingdom. It is engaged in the international
airline business and is a member-signatory of the Interline Air Transport
Association (IATA). During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the Philippines,
and was not granted a Certificate of public convenience and necessity to operate
in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month
period, partly in 1961 and partly in 1962, when it was granted a temporary
landing permit by the CAB. Consequently, it did not carry passengers and/or
cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines — Warner
Barnes and Company, Ltd., and later Qantas Airways — which was responsible
for selling BOAC tickets covering passengers and cargoes.
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income
taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January
1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this
new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79,
which claim was denied by the CIR on 16 February 1972. But before said denial,
BOAC had already filed a petition for review with the Tax Court on 27 January
1972, assailing the assessment and praying for the refund of the amount paid.
On 17 November 1971, BOAC was assessed deficiency income taxes, interests,
and penalty for the fiscal years 1968/1969 to 1970-1971 in the aggregate amount
of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as
compromise penalties for violation of Section 46 (requiring the 􏰆ling of
corporation returns) penalized under Section 74 of the National Internal
Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded
and set aside. In a letter, dated 16 February 1972, however, the CIR not only
denied the BOAC request for refund in the First Case but also re-issued in the
Second Case the deficiency income tax assessment for P534,132.08 for the years
1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the
Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August
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1973. This prompted BOAC to file the Second Case before the Tax Court praying
that it be absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing
the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in
the Philippines by Warner Barnes and Company, Ltd., and later by Qantas
Airways, during the period in question, do not constitute BOAC income from
Philippine sources "since no service of carriage of passengers or freight was
performed by BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax. The CTA position was that income from
transportation is income from services so that the place where services are
rendered determines the source.
ISSUE: Whether or not the revenue derived by BOAC from sales of tickets in the
Philippines for air transportation, while having no landing rights here, constitute
income of BOAC from Philippine sources, and, accordingly, taxable
HELD: Yes. Under Section 20 of the 1977 Tax Code:
"(h) the term 'resident foreign corporation' applies to a foreign corporation
engaged in trade or business within the Philippines or having an office or place
of business therein.
"(i) The term 'non-resident foreign corporation' applies to a foreign corporation
not engaged in trade or business within the Philippines and not having any office
or place of business therein.
It is our considered opinion that BOAC is a resident foreign corporation. 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 peculiar
environmental circumstances.
"In order that a foreign corporation may be regarded as doing business within a
State, there 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.'
BOAC, during the periods covered by the subject-assessments, maintained a
general sales agent in the Philippines. That general sales agent, 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
9

different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement."
Those activities were in exercise of the functions, which are normally incident to,
and are in progressive pursuit of, the purpose and object of its organization as an
international air carrier.
In fact, the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments.
11. N.V. REEDERIJ “AMSTERDAM” and ROYAL INTEROCEAN LINES vs.
CIR, G.R. No. L-46029 (1988)
FACTS: From March 27 to April 30, 1963, M.V. Amstelmeer and from September
24 to October 28, 1964, MV "Amstelkroon, " both of which are vessels of
petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports to load
cargoes for foreign destination. The freight fees for these transactions were paid
abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In
these two instances, petitioner Royal Interocean Lines acted as husbanding agent
for a fee or commission on said vessels. No income tax appears to have been paid
by petitioner N.V. Reederij "AMSTERDAM" on the freight receipts. Respondent
CIR filed the corresponding income tax returns for and in behalf of the former
under Section 15 of the National Internal Revenue Code. Applying the then
prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of
petitioner N.V. Reederij "Amsterdam" for 1963 and 1964 amounted to
P382,882.50 and P535,052.00, respectively. On June 30, 1967, respondent
Commissioner assessed said petitioner in the amounts of P193,973.20 and
P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as "a non-
resident foreign corporation not engaged in trade or business in the Philippines
under Section 24 (b) (1) of the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in
trade or business in the Philippines, on August 28, 1967, petitioner Royal
Interocean Lines filed an income tax return of the aforementioned vessels
computed at the exchange rate of P2.00 to USs1.00 1 and paid the tax thereon in
the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 and
37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue
Regulations No. 2. On the same two dates, petitioner Royal Interocean Lines as
the husbanding agent of petitioner N.V. Reederij "AMSTERDAM" filed a written
protest against the abovementioned assessment made by the respondent
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Commissioner which protest was denied by said respondent in a letter dated
March 3, 1969: On March 31, 1969.
Petitioners filed a petition for review with the respondent Court of Tax Appeals
praying for the cancellation of the subject assessment. After due hearing, the
respondent court, on December 1, 1976, rendered a decision modifying said
assessments by eliminating the 50% fraud compromise penalties imposed upon
petitioners. Petitioners filed a motion for reconsideration of said decision but this
was denied by the respondent court.
ISSUE: WON N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY OFFICE OR PLACE
OF BUSINESS IN THE PHILIPPINES, WHOSE VESSELS CALLED ON THE
PHILIPPINE PORTS FOR THE PURPOSE OF LOADING CARGOES SHOULD BE
TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADE/BUSINESS WITHIN
THE PH?
RULING: NO. Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not
authorized or licensed to do business in the Philippines. It does not have a branch
office in the Philippines and it made only two calls in Philippine ports, one in 1963
and the other in 1964. In order that a foreign corporation may be considered
engaged in trade or business, its business transactions must be continuous. A
casual business activity in the Philippines by a foreign corporation, as in the
present case, does not amount to engaging in trade or business in the Philippines
for income tax purposes. Here, petitioner N.V. Reederij "Amsterdam" is a non-
resident foreign corporation, organized and existing under the laws of The
Netherlands with principal office in Amsterdam and not licensed to do business
in the Philippines. As a non-resident foreign corporation, it is thus a foreign
corporation, not engaged in trade or business within the Philippines and not
having any office or place of business therein. WHEREFORE, the petition is
DENIED with costs against petitioners. This decision is immediately executory
and no extension of time to file motion for reconsideration shall be entertained.
DOCTRINE: A domestic corporation is taxed on its income from sources within
and without the Philippines, but a foreign corporation is taxed only on its income
from sources within the Philippines. However, while a foreign corporation doing
business in the Philippines is taxable on income solely from sources within the
Philippines, it is permitted to deductions from gross income but only to the extent
connected with income earned in the Philippines. On the other hand, foreign
corporations not doing business in the Philippines are taxable on income from all
sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities Compensations, remunerations, emoluments, or other fixed
or determinable annual or periodical or casual gains, profits and income and
capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1),
Tax Code.
10

12. MARUBENI CORP. vs. CIR, G.R. No.76573 (1989)
FACTS: Petitioner Marubeni Corporation is a foreign corporation duly organized
and existing under the laws of Japan and duly licensed to engage in business
under Philippine laws.
Marubeni Corporation of Japan (Marubeni Japan) has equity investments
in Atlantic, Gulf & Pacific Co. (AG&P) of Manila.
AG&P declared and directly remitted the cash dividends to Marubeni’s
head office in Tokyo, Japan, net not only of the 10% final dividend tax in the
amounts of P764,748 for the first and third quarters of 1981, but also of the
withheld 15% profit remittance tax based on the remittable amount after
deducting the final withholding tax of 10%.
Thereafter, Marubeni, through Sycip, Gorres, Velayo and Company (SGV),
sought a ruling from the BIR on whether or not the dividends it received from
AG&P are effectively connected with its business in the Philippines as to be
considered branch profits subject to profit remittance tax.
The Acting Commissioner ruled that the dividends received by Marubeni
are not income from the business activity in which it is engaged. Thus, the
dividend if remitted abroad are not considered branch profits subject to profit
remittance tax.
Pursuant to such ruling, petitioner Marubeni filed a claim for refund for
the profit tax remittance erroneously paid on the dividends remitted by AG&P.
Respondent CIR denied the claim ruling that since Marubeni is a non-
resident corporation not engaged in trade or business in the Philippines, it shall
be subject to tax on income earned from Philippine sources at the rate of 35% of
its gross income.
Petitioner Marubeni, on the other hand, contends that following the
principal-agent relationship theory, Marubeni Japan is a resident foreign
corporation subject only to final tax on dividends received from a domestic
corporation.
ISSUE: Whether or not Marubeni Japan is a resident foreign corporation.
HELD: No. The general rule is that a foreign corporation is the same juridical
entity as its branch office in the Philippines. The rule is based on the premise that
the business of the foreign corporation is conducted through tis branch office,
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following the principal-agent relationship theory. It is understood that the branch
becomes its agent.
However, when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is set
aside. The transaction becomes one of the foreign corporation, and not of the
branch. Consequently, the taxpayer is the foreign corporation, not the branch or
the resident foreign corporation.
Thus, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is considered as a separate and
distinct income taxpayer from the branch in the Philippines.
13. ACCENTURE, INC. vs. CIR, G.R. No 190102 (2012)
FACTS: Petitioner Accenture, Inc. (Accenture) is a corporation engaged in the
business of providing management consulting, business strategies development,
and selling and/or licensing of software. It is duly registered with the Bureau of
Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or enterprise in
accordance with Section 236 of the National Internal Revenue Code (Tax Code).
The monthly and quarterly VAT returns of Accenture show that, notwithstanding
its application of the input VAT credits earned from its zero-rated transactions
against its output VAT liabilities, it still had excess or unutilized input VAT credits.
These VAT credits are in the amounts of P9,355,809.80 for the 1st period and
P27,682,459.38 for the 2nd period, or a total of P37,038,269.18.
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an
administrative claim for the refund or the issuance of a Tax Credit Certificate
(TCC). The DoF did not act on the claim of Accenture. Hence, on 31 August 2004,
the latter filed a Petition for Review with the First Division of the Court of Tax
Appeals (Division), praying for the issuance of a TCC in its favor in the amount of
P35,178,844.21.
Respondent’s contention. The Commissioner of Internal Revenue (CIR), in its
Answer, argued thus: 1. the sale by Accenture of goods and services to its clients
are not zero-rated transactions. 2. Claims for refund are construed strictly against
the claimant, and Accenture has failed to prove that it is entitled to a refund,
because its claim has not been fully substantiated or documented.
The First Division of the CTA denied the Petition of Accenture for failing to prove
that the latter’s sale of services to the alleged foreign clients qualified for zero
percent VAT. On appeal before the CTA en banc, Accenture argued that because
11

the case pertained to the third and the fourth quarters of taxable year 2002, the
applicable law was the 1997 Tax Code, and not R.A. 9337 and that prior to the
amendment introduced by (R.A.) 9337, there was no requirement that the
services must be rendered to a person engaged in business conducted outside the
Philippines to qualify for zero-rating. Nevertheless, the CTA en banc affirmed the
decision of the division. Hence this present petition for review before the SC.
ISSUE: WON the recipient of the services be "doing business outside the
Philippines" for the transaction to be zero-rated under Section 108(B)(2) of the
1997 Tax Code?
Whether or not Accenture has established that the recipients of its services do
business outside the
Philippines
Whether or not Accenture is entitled to the refund
HELD: Recipient of services must be doing business outside the Philippines
for the transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code,
which allows the refund of unutilized input VAT earned from zero-rated or
effectively zero-rated sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. - (A) Zero-Rated or Effectively
Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2),
the acceptable foreign currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods of properties or
services, and the amount of creditable input tax due or paid cannot be directly
and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 27333
further amended provisions of Title IV. E.O. 273 by transferring the old Title IV
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provisions to Title VI and filling in the former title with new provisions that
imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act
No. (R.A.) 7716. This law, which was approved on 5 May 1994, widened the tax
base.
Section 3 thereof reads: SECTION 3. Section 102 of the National Internal Revenue
Code, as amended, is hereby further amended to read as follows: "SEC. 102.
Value-added tax on sale of services and use or lease of properties. x x x "(b)
Transactions subject to zero-rate. — The following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP).
"(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP)."
Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O.
273, and R.A. 7716—provides that if the consideration for the services provided
by a VAT-registered person is in a foreign currency, then this transaction shall be
subjected to zero percent rate.
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section
108(B), to wit: (B) Transactions Subject to Zero Percent (0%) Rate. - The
following services performed in the Philippines by VAT- registered persons shall
be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(2) Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP); x x x.
12

On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing
provision, became effective. It reads: SEC. 6. Section 108 of the same Code, as
amended, is hereby further amended to read as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
(B) Transactions Subject to Zero Percent (0%) Rate. –
The following services performed in the Philippines by VAT-registered persons
shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
"(2) Services other than those mentioned in the preceding paragraph rendered
to a person engaged in business conducted outside the Philippines or to a
nonresident person not engaged in business who is outside the Philippines when
the services are performed, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied)
We rule that the recipient of the service must be doing business outside the
Philippines for the transaction to qualify for zero-rating under Section 108(B)
of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B)
of the 1997 Tax Code is a verbatim copy of Section 102(b) of the 1977 Tax Code,
any interpretation of the latter holds true for the former.
Moreover, even though Accenture’s Petition was filed before Burmeister was
promulgated, the pronouncements made in that case may be applied to the
present one without violating the rule against retroactive application. When this
Court decides a case, it does not pass a new law, but merely interprets a
preexisting one. When this Court interpreted Section 102(b) of the 1977 Tax Code
in Burmeister, this interpretation became part of the law from the moment it
became effective. It is elementary that the interpretation of a law by this Court
constitutes part of that law from the date it was originally passed, since this
Court's construction merely establishes the contemporaneous legislative intent
that the interpreted law carried into effect.
That the recipient of the service should be doing business outside the Philippines
to qualify for zero-rating is the only logical interpretation of Section 102(b)(2) of
the 1977 Tax Code, as we explained in Burmeister:
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This can only be the logical interpretation of Section 102 (b) (2). If the provider
and recipient of the "other services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102 (a) can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of services. To
interpret Section 102 (b) (2) to apply to a payer-recipient of services doing
business in the Philippines is to make the payment of the regular VAT under
Section 102 (a) dependent on the generosity of the taxpayer. The provider of
services can choose to pay the regular VAT or avoid it by stipulating payment in
foreign currency inwardly remitted by the payer-recipient. Such interpretation
removes Section 102 (a) as a tax measure in the Tax Code, an interpretation this
Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.
xxxxxxxxx
Further, when the provider and recipient of services are both doing business in
the Philippines, their transaction falls squarely under Section 102 (a) governing
domestic sale or exchange of services. Indeed, this is a purely local sale or
exchange of services subject to the regular VAT, unless of course the transaction
falls under the other provisions of Section 102 (b).
Lastly, it is worth mentioning that prior to the promulgation of Burmeister,
Congress had already clarified the intent behind Sections 102(b)(2) of the 1977
Tax Code and 108(B)(2) of the 1997 Tax Code amending the earlier provision.
R.A. 9337 added the following phrase: "rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed."
2. Accenture has failed to establish that the recipients of its services do
business outside the Philippines.
In the CTA’s opinion, however, the documents presented by Accenture merely
substantiate the existence of the sales, receipt of foreign currency payments, and
inward remittance of the proceeds of these sales duly accounted for in
accordance with BSP rules. Petitioner presented no evidence whatsoever that
these clients were doing business outside the Philippines. Accenture insists,
however, that it was able to establish that it had rendered services to foreign
corporations doing business outside the Philippines, unlike in Burmeister, which
allegedly involved a foreign corporation doing business in the Philippines.
3. We deny Accenture’s Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are
foreign. This fact does not automatically mean, however, that these clients were
doing business outside the Philippines. After all, the Tax Code itself has
provisions for a foreign corporation engaged in business within the Philippines
and vice versa, to wit:
13

SEC. 22. Definitions - When used in this Title: (H) The term "resident foreign
corporation" applies to a foreign corporation engaged in trade or business within
the Philippines.
(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation
not engaged in trade or business within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough
that the recipient of the service be proven to be a foreign corporation; rather, it
must be specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. We ruled thus in Commissioner of Internal Revenue v.
British Overseas Airways Corporation: x x x. 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 peculiar environmental circumstances. The term
implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of commercial
gain or for the purpose and object of the business organization. "
In order that a foreign corporation may be regarded as doing business within a
State, there 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."
A taxpayer claiming a tax credit or refund has the burden of proof to establish the
factual basis of that claim. Tax refunds, like tax exemptions, are construed strictly
against the taxpayer.
Accenture failed to discharge this burden. It alleged and presented evidence to
prove only that its clients were foreign entities. However, as found by both the
CTA Division and the CTA En Banc, no evidence was presented by Accenture to
prove the fact that the foreign clients to whom petitioner rendered its services
were clients doing business outside the Philippines.
14. AIR CANADA vs. CIR, G.R. No. 169507 (2016)
FACTS: Air Canada is a foreign corporation organized and existing under the laws
of Canada. On April 24, 2000, it was granted an authority to operate as an offline
carrier by the Civil Aeronautics Board, subject to certain conditions, which
authority would expire on April 24, 2005. As an off-line carrier, Air Canada does
not have flights originating from or coming to the Philippines and does not
operate any airplane in the Philippines.
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On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel)
as its general sales agent in the Philippines. Aerotel sells Air Canada’s passage
documents in the Philippines. For the period ranging from the third quarter of
2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly
and annual income tax returns and paid the income tax on Gross Philippine
Billings in the total amount of ₱5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to ₱5,185,676.77 before the Bureau of
Internal Revenue (BIR). It’s basis was found in the revised definition of Gross
Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal
Revenue Code (NIRC).
To prevent the running of the prescriptive period, Air Canada filed a Petition for
Review before the Court of Tax Appeals (CTA).
The CTA denied the petition. It found that Air Canada was engaged in business in
the Philippines through a local agent that sells airline tickets on its behalf. As such,
it held that while Air Canada was not liable for tax on its Gross Philippine Billings
under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate
income tax on income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1). On appeal, the CTA En Banc affirmed
the ruling of the CTA First Division.
ISSUE: Whether petitioner Air Canada, as an offline international carrier selling
passage documents through a general sales agent in the Philippines, is-a resident
foreign corporation within the meaning of Section 28(A)(1) of the 1997 National
Internal Revenue Code;
HELD: Petitioner, an offline carrier, is a resident foreign corporation for income
tax purposes. Petitioner falls within the definition of resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code.
Commonwealth Act No. 466, known as the National Internal Revenue Code
defined "resident foreign corporation" as applying to "a foreign corporation
engaged in trade or business within the Philippines or having an office or place
of business therein."
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 peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions
14

normally incident to, and in progressive prosecution of commercial gain or
for the purpose and object of the business organization. In order that a
foreign corporation may be regarded as doing business within a State, there
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.
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides
guidance with its definition of "doing business" with regard to foreign
corporations. Section 3(d) of the law enumerates the activities that constitute
doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred
eighty (180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works,
or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That' the phrase "doing business" shall not be
deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its
own account.
An offline carrier is "any foreign air carrier not certificated by the Civil
Aeronautics Board, but who maintains office or who has designated or appointed
agents or employees in the Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier and/or others, or negotiate for,
or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation."
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in
the Philippines.
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Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioner's business. The activities of Aerotel bring
direct receipts or profits to petitioner. There is nothing on record to show that
Aerotel solicited orders alone and for its own account and without interference
from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into
any contract on behalf of petitioner Air Canada without the express written
consent of the latter," and it must perform its functions according to the
standards required by petitioner.68 Through Aerotel, petitioner is able to engage
in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to
operate as an offline carrier in the Philippines for a period of five years, or from
April 24, 2000 until April 24, 2005.
Petitioner is, therefore, a resident foreign corporation that is taxable on its
income derived from sources within the Philippines. Petitioner's income from
sale of airline tickets, through Aerotel, is income realized from the pursuit of its
business activities in the Philippines.
OTHER RELATED ISSUES:
Whether Air Canada is subject to the 2½% tax on Gross Philippine
Billings pursuant to Section 28(A)(3).
NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section
28(A)(3). The tax attaches only when the carriage of persons, excess baggage,
cargo, and mail originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage documents were sold. Not
having flights to and from the Philippines, petitioner is clearly not liable for the
Gross Philippine Billings tax.
Whether Air Canada is a resident foreign corporation engaged in trade or
business and thus, can be subject to the regular corporate income tax of
32% pursuant to Section 28(A)(1);
YES. Petitioner falls within the definition of resident foreign corporation under
Section 28(A)(1)1, thus, it may be subject to 32% tax on its taxable income.
The Court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation declared British Overseas Airways Corporation, an international air
carrier with no landing rights in the Philippines, as a resident foreign corporation
15

engaged in business in the Philippines through its local sales agent that sold and
issued tickets for the airline company. According to said case, 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 peculiar environmental circumstances.
The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization.
An offline carrier is “any foreign air carrier not certificated by the Civil
Aeronautics Board, but who maintains office or who has designated or appointed
agents or employees in the Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier and/or others, or negotiate for,
or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation.”
Petitioner is undoubtedly “doing business” or “engaged in trade or business” in
the Philippines. In the case at hand, Aerotel performs acts or works or exercises
functions that are incidental and beneficial to the purpose of petitioner’s business.
The activities of Aerotel bring direct receipts or profits to petitioner. Further,
petitioner was issued by the Civil Aeronautics Board an authority to operate as
an offline carrier in the Philippines for a period of five years. Petitioner is,
therefore, a resident foreign corporation that is taxable on its income derived
from sources within the Philippines.
Whether petitioner Air Canada is entitled to the refund.
NO. As discussed in South African Airways, the grant of a refund is founded on the
assumption that the tax return is valid, that is, the facts stated therein are true
and correct. The deficiency assessment, although not yet final, created a doubt as
to and constitutes a challenge against the truth and accuracy of the facts stated in
said return which, by itself and without unquestionable evidence, cannot be the
basis for the grant of the refund.
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner
was computed at the rate of 1 ½% of its gross revenues amounting to
P345,711,806.08149 from the third quarter of 2000 to the second quarter of
2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the
1997 NIRC 32% of taxable income, that is, gross income less deductions will
exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII
of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is
forthcoming.
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TOPIC: NON-RESIDENT FOREIGN CORPORATIONS
15. GATCHALIAN vs. CIR, G.R. No. L-45425 (1939)
FACTS: Prior to December 15, 1934 plaintiffs, in order to enable them to
purchase one sweepstakes ticket valued at two pesos (P2), subscribed and paid
a certain sum totaling to P2; plaintiffs purchased, from one of the duly authorized
agents of the National Charity Sweepstakes Office one ticket bearing No. 178637
and that the said ticket was registered in the name of Jose Gatchalian and
Company; the ticket won one of the third prizes in the amount of P50,000 and
that the corresponding check covering the prize of P50,000 was drawn in favor
of Jose Gatchalian & Company against the PNB, which check was cashed by Jose
Gatchalian & Company; on December 29, 1934, Jose Gatchalian was required by
income tax examiner to file the corresponding income tax return covering the
prize won by Jose Gatchalian & Company.
The defendant made an assessment against Jose Gatchalian & Company
requesting the payment of the sum of P1,499.94 to the deputy provincial
treasurer of Pulilan, Bulacan. The plaintiffs, sent to defendant a reply, requesting
exemption from payment of the income tax; defendant denied this request.
Because of the failure to pay the amount the CIR issued a warrant of distraint and
levy against the property of the plaintiffs. The plaintiffs on June 15, 1935, paid
under protest the sum of P601.51 as part of the tax and penalties to the municipal
treasurer of Pulilan, Bulacan, and requested defendant that plaintiffs be allowed
to pay under protest the balance of the tax and penalties by monthly installments.
That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by
two solvent persons to guarantee prompt payment of each installments as it
becomes due; On July 16, 1935 the said plaintiffs formally protested against the
payment of the sum of P602.51. That, in view of the failure of the plaintiffs to pay
the monthly installments in accordance with the terms and conditions of bond
filed by them, the defendant ordered the municipal treasurer to execute within
five days the warrant of distraint and levy issued against the plaintiffs; in order
to avoid annoyance and embarrassment arising from the levy of their property,
the plaintiffs paid under protest the sum of P1,260.93 representing the unpaid
balance of the income tax and penalties demanded by defendant and that on
September 3, 1936, the plaintiffs formally protested to the defendant against the
payment of said amount and requested the refund thereof, the defendant
overruled the protest and denied the refund thereof; plaintiffs demanded upon
defendant the refund of the total sum of one thousand eight hundred and sixty
three pesos and forty-four centavos (P1,863.44) paid under protest by them but
that defendant refused to refund the said amount notwithstanding the plaintiffs'
demands.
16

ISSUE: W/N the plaintiffs formed a partnership and thus liable for the payment
of income tax?
HELD: Yes. There is no doubt that if the plaintiffs merely formed a community of
property the latter is exempt from the payment of income tax under the law. But
according to the stipulation facts the plaintiffs organized a partnership of a civil
nature because each of them put up money to buy a sweepstakes ticket for the
sole purpose of dividing equally the prize which they may win, as they did in fact
in the amount of P50,000 (article 1665, Civil Code). The partnership was not only
formed, but upon the organization thereof and the winning of the prize, Jose
Gatchalian personally appeared in the office of the Philippines Charity
Sweepstakes, in his capacity as co-partner, as such collection the prize, the office
issued the check for P50,000 in favor of Jose Gatchalian and company, and the
said partner, in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and formed a
community of property only.
Having organized and constituted a partnership of a civil nature, the said
entity is the one bound to pay the income tax which the defendant collected under
the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No.
3761. There is no merit in plaintiff's contention that the tax should be prorated
among them and paid individually, resulting in their exemption from the tax.
16. PASCUAL vs. CIR, G.R. No. 78133 (1988)
FACTS: Petitioners bought 2 parcels of land from Bernardino, and another 3 from
Roque. The first 2 parcels were sold by petitioners to Marenir Devt. Corp in 1968
and the other 3 were sold to Reyes and Samson in 1970. Petitioners had a net
profit in the sale lands. Petitioners paid Capital Gains Taxes in 1973 and 1974 by
availing of the tax amnesties in those years.
March 31, 1979, petitioners were assessed and required to pay 107,101.70 as
alleged deficiency corporate income taxes for 1968 and 1970.
Petitioners protested with CIR, June 26, 1979 asserting that they availed
amnesties in 1974.
In a reply August 22, 1979, CIR informed petitioners that in the years 1968 and
1970, petitioners as co-owners in the real estate transactions formed an
unregistered partnership or joint venture taxable as a corporation under Section
20(b) and its income was subject to the taxes prescribed under Section 24, both
of the National Internal Revenue Code, that the unregistered partnership was
subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the
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availment of tax amnesty under P.D. No. 23 “Proclaiming a tax amnesty”, as
amended, by petitioners relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the deficiency income
tax assessed.
CTA Decision-Petitioners filed a petition for review with CTA. CTA affirmed CIR’s
decision against petitioners wherein CIR ruled that an unregistered partnership
was formed by petitioners which, like a corporation was subject to corporate
income tax distinct from that imposed on the partners based on the principle
enunciated in Evangelista case.
In a dissenting opinion by Associate Judge Roaquin, although there might be a co-
ownership between the petitioners, there was no adequate basis that they
formed an unregistered partnership which made them liable for corporate
income tax under the Tax Code.
ISSUE: a) WON CTA erred in holding that the determination of CIR that
petitioners formed an unregistered partnership is subject to corporate income
tax
b) WON CTA erred in making a finding solely on the basis of isolated sale
transactions that unregistered partnership existed, ignoring the requirements
laid by law that would warrant the presumption/conclusion that a partnership
exists
c) WON CTA erred in ruling that tax amnesty did not relieve the petitioners from
payment of other taxes for the period covered by such amnesty
HELD: Petition is meritorious. Basing on the Evangelista case wherein CIR
demanded payment of income tax on a corporation as the issue in the Evangelista
case is whether the petitioners are subject to tax on corporations provided for by
NIRC as well as residence tax for corps and real estate dealers’ fixed tax. It ruled
in this case that there was no partnership not having satisfied the two essential
elements: a)an agreement to contribute money, property, or industry to a
common fund; and b) intent to divide the profits among the contracting parties.
The sharing of returns does not in itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form 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.
It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
17

In this case there is clear evidence of co-ownership between petitioners. There is
no basis that they formed an unregistered partnership. The 2 isolated
transactions did not make them partners; they merely shared in the gross profits
as co-owners and paid their capital gains taxes on their net profits and availed of
tax amnesty.
a) Yes CTA erred in affirming CIR’s decision that an unregistered
partnership was formed. Petitioners did not form an unregistered
partnership which would make them liable for corporate income tax.
They are mere co-owners. And even assuming for the sake of argument
that such unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency
corporate income tax, then petitioners can be held individually liable as
partners for this unpaid obligation of the partnership.
b) Yes CTA erred in making a finding solely on the basis of the isolated sale
transactions. It is evident that an isolated transaction whereby two or
more persons contribute funds to buy certain real estate for profit in the
absence of other circumstances showing a contrary intention cannot be
considered a partnership. There 2 isolated transactions did not make
them partners.
c) Yes. As petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are thereby relieved of
any further tax liability arising therefrom.
Petition is granted and decision of CTA is reversed and set aside. Petitioners are
relieved from paying corporate income tax liability.
17. CIR vs. S.C. JOHNSON AND SON, INC., G.R. No. 127106 (1999)
FACTS: Respondent, a domestic corporation organized and operating under PH
Laws, entered into a license agreement with SC Johnson and Son, USA, a non-
resident foreign corporation based in the US pursuant to which the respondent
was granted the right to use the trademark, patents and technology owned by the
latter including the right to manufacture, package and distribute products
covered by the agreement.
For the use of the trademark or technology, respondent was obliged to pay SC
Johnson and Son royalties based on a percentage of net sales and subjected the
same 25% withholding tax on royalty payments which respondent paid from July
1992 to May 1993.
On October 1993, respondent filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties
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arguing that, the antecedent facts attending respondents’ case fall squarely
within the same circumstances under which said MacGeorge and Gillete rulings
were issued. Since the agreement was approved by the Technology Transfer
Board, the preferential tax rate of 10% should apply to respondent. Thus,
royalties paid by the respondent to SC Johnson and Son is only subject to 10%
withholding tax.
The CIR did not act on said claim for refund. SC Johnson and Son filed a petition
for review before the CTA, to claim a refund of the overpaid withholding tax on
royalty payments from July 1992 to May 1993.
CTA: Rendered its decision in favor of SC Johnson and ordered the CIR to issue a
tax credit certificate representing overpaid withholding tax on royalty payments
from July 1992 to May 1993.
CIR: Filed a petition for review to the CA
CA: Finds no merit in the petition and affirming in toto the CTA ruling.
ISSUE: (1) Whether or not SC Johnson and Son, a foreign corporation is entitled
to the MOST FAVORED NATION CLAUSE which provides that tax rate of 10% on
royalties as provided in the RP-US TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY
(2) Whether or not tax refunds are considered as tax exemptions
HELD: (1) No, said clause cannot be invoked for the reason that when a tax treaty
contemplates circumstances attendant to the payment of a tax, or royalty
remittances for that matter, these must necessarily refer to circumstances that
are tax-related.
(2) It has been discussed in Taxation Law I that tax refunds are in the nature of
tax exemptions. As such they are registered as in derogation of sovereign
authority and to be construed strictissimi juris against the person or entity
claiming the exemption. SC Johnson and Son is claiming for a refund of the alleged
overpayment of tax on royalties; however there is nothing on record to support
a claim that the tax on royalties under the RP-US Treaty is paid under similar
circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
DOCTRINE: (1) Most favored nation clause which provides that the lowest rate of
the Philippine tax at 10% may be imposed on royalties derived by a resident of
the US from sources within the Philippines only if the circumstances of the
resident of the US are similar to those of the resident of West Germany.
18

(2) Tax refunds are in the nature of tax exemptions. It must be construed strictly
against the taxpayer claiming the exemption. Burden of proof is upon the
taxpayer and he must be able to justify his claim by the clearest grant of organic
or statute law.
18. REYES vs. CIR, G.R. Nos. L-24020-21 (1968)
FACTS: Petitioners in this case were assessed by respondent Commissioner of
Internal Revenue the sum of P46,647.00 as income tax, surcharge and
compromise for the years 1951 to 1954, an assessment subsequently reduced to
P37,528.00. This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to respondent Court of Tax Appeals. Thereafter, another
assessment was made against petitioners, this time for back income taxes plus
surcharge and compromise in the total sum of P25,973.75, covering the years
1955 and 1956. There being a failure on their part to have such assessments
reconsidered, the matter was likewise taken to the respondent Court of Tax
Appeals.
Petitioners father and son purchased a lot and building known as the Gibbs
Building for P835,000.00 of which they paid the sum of P375,000.00, leaving a
balance of P460,000.00, representing the mortgage obligation of the vendors
with the China Banking Corporation, which mortgage obligations were assumed
by the vendees. The initial payment of P375,000.00 was shared equally by
petitioners. At the time of the purchase, the building was leased to various
tenants, whose rights under the lease contracts with the original owners, the
purchasers, petitioners herein, agreed to respect. The administration of the
building was entrusted to an administrator who collected the rents; kept its
books and records and rendered statements of accounts to the owners;
negotiated leases; made necessary repairs and disbursed payments, whenever
necessary, after approval by the owners; and performed such other functions
necessary for the conservation and preservation of the building. Petitioners
divided equally the income of operation and maintenance. The gross income from
rentals of the building amounted to about P90,000.00 annually.
From the above facts, the respondent Court of Tax Appeals applying the
appropriate provisions of the National Internal Revenue Code, the first of which
imposes an income tax on corporations "organized in, or existing under the laws
of the Philippines, no matter how created or organized but not including duly
registered general co-partnerships (companias colectivas), ...,"6 a term, which
according to the second provision cited, includes partnerships "no matter how
created or organized, ...,"7 and applying the leading case of Evangelista v.
Collector of Internal Revenue,8 sustained the action of respondent Commissioner
of Internal Revenue, but reduced the tax liability of petitioners, as previously
noted.
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Petitioners maintain the view that the Evangelista ruling does not apply; for them,
the situation is dissimilar. Consequently they allege that the reliance by
respondent Court of Tax Appeals was unwarranted and the decision should be
set aside. If their interpretation of the authoritative doctrine therein set forth
commands assent, then clearly what respondent Court of Tax Appeals did fails to
find shelter in the law. That is the crux of the matter. A perusal of the Evangelista
decision is therefore unavoidable
ISSUE: W/N petitioners are subject to the tax on corporations as required by the
NIRC
HELD: Yes. After referring to another section of the National Internal Revenue
Code, which explicitly provides that the term corporation "includes partnerships"
and then to Article 1767 of the Civil Code of the Philippines, defining what a
contract of partnership is, the opinion goes on to state that "the essential
elements of a partnership are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at
bar, for, admittedly, petitioners have agreed to and did, contribute money and
property to a common fund.
This is the way it was disposed of in the opinion of the present Chief Justice: "This
pretense was correctly rejected by the Court of Tax Appeals."14 Then came the
explanation why: "To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different from
"partnerships". When our Internal Revenue Code includes "partnerships" among
the entities subject to the tax on "corporations", said Code must allude, therefore,
to organizations which are not necessarily "partnerships", in the technical sense
of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships", which constitute
precisely one of the most typical forms of partnerships in this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the
tax on corporations. Again, pursuant to said section 84(b), the term "corporation"
includes, among others, "joint accounts, (cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent of
that of its members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general co-partnerships" —
which are possessed of the aforementioned personality - have been expressly
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excluded by law (sections 24 and 84[b]) from the connotation of the term
"corporation". "The opinion went on to summarize the matter aptly: "For
purposes of the tax on corporations, our National Internal Revenue Code, include
these partnerships — with the exception only of duly registered general co-
partnerships within the purview of the term "corporation." It is, therefore, clear
to our mind that petitioners herein constitute a partnership, insofar as said Code
is concerned, and are subject to the income tax for corporations."
In the light of the above, it cannot be said that the respondent Court of Tax
Appeals decided the matter incorrectly. There is no warrant for the assertion that
it failed to apply the settled law to uncontroverted facts. Its decision cannot be
successfully assailed. Moreover, an observation made in Alhambra Cigar &
Cigarette Manufacturing Co. v. Commissioner of Internal Revenue,17 is well-
worth recalling. Thus: "Nor as a matter of principle is it advisable for this Court
to set aside the conclusion reached by an agency such as the Court of Tax Appeals
which is, by the very nature of its functions, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an expertise on
the subject, unless, as did not happen here, there has been an abuse or
improvident exercise of its authority.
19. EVANGELISTA vs. CIR, G.R. No. L-9996 (1957)
FACTS: This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and
Francisca Evangelista, for review of a decision of the Court of Tax Appeals. The
petitioners borrowed from their father the sum of P59, 140.00 which amount
together with their personal monies was used by them for the purpose of buying
real properties; The petitioners purchased several different properties during
the years 1943-1944. In a document dated August 16, 1945, they appointed their
brother Simeon Evangelista to 'manage their properties with full power to lease;
to collect and receive rents; to issue receipts therefor; in default of such payment,
to bring suits against the defaulting tenant; to sign all letters, contracts, etc., for
and in their behalf, and to endorse and deposit all notes and checks for them. After
having bought the above-mentioned real properties, the petitioners had the same
rented or leased to various tenants. From the month of March, 1945 up to and
including December, 1945, the total amount collected as rents on their real
properties was P9,599.00 while the expenses amounted to P3,650.00 thereby
leaving them a net rental income of P5,948.33. In 1946, they realized a gross
rental income in the sum of P24,786.30, out of which amount was deducted the
sum of P16,288.27 for expenses thereby leaving them a net rental income of
P7,498.13; In 1948 they realized a gross rental income of P17,453.00 out of the
which amount was deducted the sum of P4,837.65 as expenses, thereby leaving
them a net rental income of P12,615.35."
It further appears that on September 24, 1954, respondent Collector of Internal
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Revenue demanded the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the years 1945-1949
After appropriate proceedings, the Court of Tax Appeals rendered the decision
for the respondent, the dispositive part of which reads: "FOR ALL THE
FOREGOING, we hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same in the total amount of
P6,878.34, which is hereby affirmed and the petition for review filed by
petitioners is hereby dismissed with costs against petitioners." and, a petition for
reconsideration and new trial having been subsequently denied.
ISSUE: Whether or not the petitioners are subject to the tax on corporations as
well as to the residence tax for corporations and the real estate dealers' fixed tax.
HELD: Yes. With respect to the tax on corporations, the issue hinges on the
meaning of the terms "corporation" and "partnership", as used in sections 24 and
84 of said Code, the pertinent parts of which read:
"SEC. 24. Rate of tax on corporations. — There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships
"Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations or insurance
companies, but does not include duly registered general copartnerships.”
Pursuant to this article, the essential elements of a partnership are two, namely:
(a) an agreement to contribute money, property or industry to a common fund;
and (b) intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and property to a common fund. Hence,
the issue narrows down to their intent in acting as they did.
Upon consideration of all the facts and circumstances surrounding the case, we
are fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves. Said common fund
was not something they found already in existence. It was not a property
inherited by them pro indiviso. They invested the same, not merely in one
transaction, but in a series of transactions. The number of lots (24) acquired and
transactions undertaken, is strongly indicative of a pattern or common design
20

that was not limited to the conservation and preservation of the aforementioned
common fund or even of the property acquired by petitioners. In other words,
one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality
independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.
Considering that the pertinent part of this provision is analogous to that of
sections 24 and 84(b) of our National Internal Revenue Code, and that the latter
was approved on June 15, 1939, the day immediately after the approval of said
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms
"corporation" and "partnership" are used in both statutes with substantially the
same meaning. Consequently, petitioners are subject, also, to the residence tax
for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the
properties above mentioned for a period of over twelve years, and that the yearly
gross rentals of said properties from 1945 to 1948 ranged from P9,599 to
P17,453. Thus, they are subject to the tax provided in section 193 (q) of our
National Internal Revenue Code, for real estate dealers.
20. ROYAL INTEROCEAN LINES vs. CIR, G.R. No. L-46029 (1988)
FACTS: Appeal by the Commissioner of Internal Revenue from a decision of the
Court of Tax Appeals reversing that of said official, in connection with the liability
of the Royal Interocean Lines, Inc., for deficiency carrier’s percentage tax, plus
surcharge.
Said Royal Interocean, Liner, Inc. — hereinafter referred to as the taxpayer — is
a foreign corporation duly licensed to do business in the Philippines, with head
office in Amsterdam, Holland. The taxpayer is engaged in the operation of ocean-
going vessels, plying between the Philippines and other countries, transporting
passengers and cargo. It is, likewise, an agent and representative of the Holland
East Asia Lines, a Dutch shipping company, from which the taxpayer receives
compensation in the form of commissions for services rendered. It is not disputed
that from February to May, 1962, inclusive, vessels of the taxpayer and/or the
Holland East Asia Lines called at Philippine ports to load cargo, with freight,
payable at destination, valued at US $37,501.50. This sum had been collected by
and paid to the taxpayer’s head office in Holland. and was not actually turned over
or forwarded, as such freight fees, to the taxpayer in the Philippines. The only
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remittances received by the latter from its aforementioned head office were
those made, through its agent bank, for the operational expenses of the branch
office in the Philippines.
Prior to January, 1962, its dollar earnings derived from freight revenues were
converted into the Philippine peso equivalent thereof, under the prevailing free
market rate, for purposes of the common carrier’s tax prescribed in Section 192
of the National Internal Revenue Code. Thereafter, the taxpayer discontinued this
practice and, since February, 1962, it reported said revenues, in its monthly
returns for carrier’s tax, based on the parity rate of P2 to $1, and paid P1,500.00
as such carrier’s tax. Upon examination of the records of the taxpayer, the
Commissioner of Internal Revenue, hereinafter referred to as the petitioner, held
that, applying the free market conversion rate, the taxpayer’s gross receipts from
February to May, 1962, aggregated P163,776.38, and, based thereon demanded
payment of P2,219.35 as deficiency common carrier’s tax, plus surcharge and
penalty.
RESPONDENT’S CONTENTION: The theory of the taxpayer to the effect that, not
having been physically remitted to the Philippines, the fees in question do not
partake of the nature of revenues derived from foreign exchange transactions is
manifestly devoid of merit. The transactions from which said revenues were
derived involved the loading of cargo in the Philippines, the transportation of said
cargo to its ports of destination, the delivery of the cargo to the respective
consignees, and the payment of the corresponding fees to the taxpayer’s head
office at Amsterdam. As regards the taxpayer, the transactions were
consummated upon delivery of the cargo to the consignee. Upon the other hand,
the obligations of the latter or the shipper were discharged upon payment of the
freight. Insofar as the parties to said transaction were concerned, the same were
fully completed upon payment of the fees at Amsterdam.
ISSUE: WON the freight revenues in the case at bar is a foreign exchange
transaction?
HELD: YES. It is, thus, our considered view that the freight revenues accruing to
the taxpayer in the present case, even though collected abroad and not remitted
to its branch office in the Philippines, are part of its foreign exchange operations
and subject to the common carrier’s tax, computed at the free market rate then
prevailing. The remittance or non-remittance of fees paid to the head office for
services performed by the employees in the branch office can not affect the
nature of said transactions involving foreign exchange for it is not a part thereof
in any manner whatever.
It is next urged that the 25% surcharge sought to be collected by the petitioner
should not be imposed upon the taxpayer, it having acted in good faith in doing
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what it did, for it merely followed the advice of counsel. The aforementioned
surcharge was imposed by petitioner herein in accordance with Section 183 of
the National Internal Revenue Code, 4 subdivision (a) of which reads:
"SEC. 183. Payment of percentage taxes — (a) In general. — It shall be the duty
of every person conducting a business on which a percentage tax is imposed
under this Title, to 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 within twenty days after the end
of each month, pay the tax due thereon: Provided, That any person retiring from
a business subject to the percentage tax shall notify the nearest internal revenue
officer thereof, file his return or declaration, and pay the tax due thereon within
twenty days after closing his business. "If the percentage tax on any business is
not paid within the time specified above, the amount of the tax shall be increased
by twenty-five per centum, the increment to be a part of the tax.
21. OÑA vs. CIR, G.R. No. L-19342 (1972)
FACTS: Julia Bunales died leaving as heirs her surviving spouse Lorenzo Ona
and her five children.
A civil case was instituted for the settlement of her estate, in which Ona
was appointed administrator and subsequently a guardian of the three heirs who
were still minors when the project of partition was approved. The heirs had an
undivided ½ interest in 10 parcels of land, 6 houses and money from the War
Damage Commission.
Although the project of partition was approved by the Court, no attempt
was made to divide the properties and they remained under the management of
Ona who used said properties in business by leasing or selling them and investing
the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners’ properties and investments
gradually increased. Petitioners returned for income tax purposes their shares in
the net income, but they did not actually receive their shares because this was left
with Ona who had invested them.
Based on these facts, CIR decided that petitioners formed an
unregistered partnership and, therefore, subject to the corporate income tax,
particularly for years 1955 and 1956.
Petitioners asked for reconsideration, which was denied, hence, this
petition for review assailing the decision of the CTA.
ISSUE/S:
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1) Whether or not there was a co-ownership or an unregistered
partnership.
2) Whether or not petitioners are liable for the deficiency corporate
income tax.
HELD:
1) Unregistered partnership.
The CTA found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of Ona and allowed
him to use their shares as part of the common fund for their ventures, even as
they paid corresponding income taxes on their respective shares.
2) Yes.
For tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said
common properties and/or the incomes derived therefrom are used as a common
fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed
in an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly,
he becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a
single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or
instrument were executed, for the purpose, for tax purposes, at least, an
unregistered partnership is formed.
For purposes of the tax on corporations, our NIRC includes as
partnerships: a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or
venture is carried on, with the exception only of duly registered general co-
partnerships—within the purview of the term “corporation.” It is, therefore, clear
to our mind that petitioners herein constitute a partnership, insofar as said Code
is concerned, and are subject to the income tax for corporations.
22