ABAKADA GURO PARTY LIST v. PURISIMA Ordinance 27 was intended as a plain substitute for the prior Ordinance No.
intended as a plain substitute for the prior Ordinance No. 23, and
Facts:
RA 9335 or the “Attrition Act of 2005” is a tax reform legislation enacted by the Congress.
It was enacted to optimize the revenue-generation capability and collection of the BIR
and BoC. The law intends to encourage BIR and BOC officials and employees to exceed
their revenue targets by providing a system of rewards and sanctions through the creation
of a Rewards and Incentives Fund (Fund) and a Revenue Performance Evaluation Board
(Board).
Petitioners assert that the law unduly delegates the power to fix revenue targets to the
President as it lacks a sufficient standard on that matter. While Section 7(b) and (c) of
RA 9335 provides that BIR and BOC officials may be dismissed from the service if their
revenue collections fall short of the target by at least 7.5%, the law does not, however,
fix the revenue targets to be achieved. Instead, the fixing of revenue targets has been
delegated to the President without sufficient standards.
Issue:
WON there was unduly delegation of power to fix revenue targets to the President
Ruling:
NO.
TWO TESTS TO DETERMINE VALIDITY OF DELEGATION:
1. Completeness Test – law is complete in itself to be executed by the delegate
2. Sufficient Standard Test – provides adequate guidelines to map out the
boundaries of the delegate’s authority.
Revenue targets are determined by the Development Budget and Coordinating
Committee. Revenue targets are based on the original estimated revenue collection
expected respectively of the BIR and BOC for a given fiscal year. Thus, the determination
of the revenue targets does not rest solely on the President as it also undergoes the
scrutiny of DBCC.
PEPSI COLA v. TANAUAN
Facts:
The petitioner filed a Complaint before the RTC Leyte to declare Section 2 of RA 2264
unconstitutional as an undue delegation of taxing authority.
Ordinance 23 – 1/16 of a centavo for every bottle corked
Ordinance 27 – one centavo on each gallon of volume capacity
Ruling:
operates as a repeal of the latter.
Ordinance 27 does not partake of the nature of percentage tax on sales. The tax is levied
on the produce and not on the sales.
There was no double taxation because there are different taxing authorities
“Moreover, double taxation, in general, is not forbidden by our fundamental law,
since we have not adopted as part thereof the injunction against double taxation
found in the Constitution of the United States and some states of the Union.
Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity or by the same jurisdiction for the
same purpose, but not in a case where one tax is imposed by the State and the
other by the city or municipality.”
There was no undue delegation of the power of taxation
“It is a power that is purely legislative and which the central legislative body cannot
delegate either to the executive or judicial department of the government without
infringing upon the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of
matters of local concern. xxx Under the new Constitution, local governments
are granted the autonomous authority to create their own sources of revenue and
to levy taxes, subject to such limitations as may be provided by law.” Section 5,
Article XI provides: "Each local government unit shall have the power to create its
sources of revenue and to levy taxes, subject to such limitations as may be
provided by law."
PEPSI COLA v. BUTUAN
Facts:
Ordinance No. 110 was enacted by the City of Butuan which was subsequently
amended by Ordinance No. 122. It imposes a tax on “any agent/consignee of any
person, association, partnership or corporation engaged in selling softdrinks or
carbonated drinks of P0.10 per case of 24 bottles of Pepsi-Cola” and the plaintiff
paid under protest.
Issue:
1. WON ordinance partakes of the nature of an import tax
2. It amounts to double taxation
3. Excessive, oppressive, and confiscatory
4. Highly unjust and discriminatory
5. Unconstitutional delegation of legislative powers
Ruling:
1. Agents/Consignees (taxpayer) of another dealer entails that must be
one engaged outside the City of Butuan. These agents are recipient of
soft drinks for resale
 2. No double taxation
3. The tax of P0.10 per case of 24 bottles or less than P0.0042 per bottle
is too small to be excessive
4. YES. Since only sales by agents or consignees of outside dealers would
be subject to tax.
 Double Taxation is not prohibited by our Constitution. It is only
unconstitutional if it is obnoxious.
 Kinds of Double Taxation
Direct Indirect
Same type Same type
Same subject matter Same subject matter
Same taxable period Same taxable period
Same taxing authorities Different taxing authorities
It would still be invalid, as discriminatory, and hence, violative of the uniformity
required by the Constitution and the law therefor, since only sales by “agents or
consignees” of outside dealers would be subject to the tax. Sales by local dealers,
not acting for or on behalf of other merchants, regardless of the volume of their
sales, and even if the same exceeded those made by said agents or consignees
of producers or merchants established outside the City of Butuan, would be
exempt from the disputed tax.
LIGHT RAIL TRANSIT AUTHORITY v. CENTRAL BOARD OF ASSESSMENT
APPEALS
Facts:
LRTA is a GOCC responsible for the construction and maintenance of light rail
transit system in the Philippines. Assessor of Manila assessed the real properties
of petitioner consisting of lands, carriageways and passenger terminal stations.
The petitioner paid its real property taxes EXCEPT the carriageways and
passenger terminal stations including the ground where it is constructed on the
ground that the same are for public purpose, therefore exempt from realty
taxation.
Ruling:
The carriageways and passenger terminal stations are not public roads. They
were merely elevated and only serve as improvements.
“ XXX it must be emphasized that these structures do not form part of such roads,
since the former have been constructed over the latter in such a way that
the flow of vehicular traffic would not be impeded. These carriageways and
terminal stations serve a function different from that of the public roads. The
former are part and parcel of the light rail transit (LRT) system which, unlike the
latter, are not open to use by the general public. The carriageways are accessible
only to the LRT trains, while the terminal stations have been built for the
convenience of LRTA itself and its customers who pay the required fare.”
Petitioner is a GOCC and is not exempted from real property taxes
“ Though the creation of the LRTA was impelled by public service -- to provide
mass transportation to alleviate the traffic and transportation situation in Metro
Manila -- its operation undeniably partakes of ordinary business. Petitioner
is clothed with corporate status and corporate powers in the furtherance of its
proprietary objectives. Indeed, it operates much like any private corporation
engaged in the mass transport industry. Given that it is engaged in a service-
oriented commercial endeavor, its carriageways and terminal stations are
patrimonial property subject to tax, notwithstanding its claim of being a
government-owned or controlled corporation.”
BASIS OF ASSESSMENT IS THE ACTUAL USE OF PROPERTY
- LRT is only accessible to those who pay the required fare. It is thus apparent
that petitioner does not exist solely for public service, and that the LRT
carriageways and terminal stations are not exclusively for public use.
The Charter does not provide for any real property taxes exemption. Its exemption is
only limited to direct and indirect taxes in connection with the importation of equipment.
Even if the roads are granted by the government, the beneficial use has been granted
to taxable person.
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY v. MARCOS (1996)
Facts:
MCIAA was created by virtue of RA 6958 1990 mandated to undertake mgmt and
supervision of Mactan International Airport and other airports in Cebu. Since the time of
its creation, it enjoyed the privilege of tax exemption. When the LGC took effect on
January 1, 1992, tax exemption privilege has been withdrawn by virtue of Sections 193
and 234 of LGC stating that “tax exemptions granted to GOCCs are withdrawn upon the
effectivity of the Code.”
Ruling:
GOCCs are taxable entities.
Exception: If the charter provides for exemption.
However, the charter of MCIAA was already repealed upon enactment of the Local
Government Code.
While it may be true that under its Charter, the petitioner was exempt from tax
payment, the exemption from the payment of realty taxes was withdrawn by Section
234 of LGC. MCIAA is a GOCC and Section 234 does not distinguish between GOCCs
performing governmental and purely proprietary functions.
Lands were transferred to MCIAA, ownership being retained by RP.
MCIAA case on June 15 2015
This is an SC Decision reversing the ruling in 1996 that MCIAA is a GOCC
(organized as a stock or non-stock corporation).
The MCIAA is an instrumentality of the government; thus, its properties actually, solely
and exclusively used for public purposes, consisting of the airport terminal building,
airfield, runway, taxiway and the lots on which they are situated, which are owned by
the RP, are NOT subject to RPT.
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities and local government units.
MIAA is exempt from real property taxes but not as to those properties leased to
private entities, since these are taxable entities.

MCIAA is no longer a GOCC and is now a government instrumentality.
Instrumentalities of the government are exempted from real property taxes as provided
by the Local Government Code. They are not taxable entities.
In 2006, MIAA case was decided and Supreme Court considered it as an
instrumentality, subject to tax exemption.
MCIAA filed a petition to the Court saying that it has the same functions with the MIAA
and must also be exempted from real property taxes granted
MANILA INTERNATIONAL AIRPORT AUTHORITY v. CA and PARANAQUE (2006)
SEC. 234. Exemptions from Real Property Tax. — The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
Portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has
granted the beneficial use of such land area for a consideration to a taxable person and
therefore such land area is subject to real estate tax.

Facts:
Manila International Airport Authority (MIAA) administers the land, improvements and
equipment within the NAIA Complex. In 1997, the OGCC opined that the LGC withdrew
the exemption from real estate tax granted to MIAA.
MIAA contend that it is exempt from real estate tax because the Airport Lands and
Buildings are owned by the Republic.

The case centers on the issue on whether MIAA is exempted from real estate tax

Ruling:
MIAA is not a government-owned or controlled corporation under Section 2(13) of the
Introductory Provisions of the Administrative Code because it is not organized as a stock
or non-stock corporation. There are no stockholders and has no members.
Likewise, it is not a GOCC because MIAA is not required to meet the test of economic
viability. MIAA renders essential public services.

The fact that MIAA is endowed with corporate powers does not make MIAA a GOCC.

MIAA is a government instrumentality vested with corporate powers. As operator of

the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex.

Airport Lands and Buildings of MIAA, being devoted to public use, are properties of
public dominion and thus owned by the RP. Thus, they are expressly EXEMPT from
the real estate tax.

20% of its income reverts back to the government.

Under Section 133 of the LGC, it is exempt from taxes.

SEC. 133. Common Limitations on the Taxing Powers of Local Government

Units. – Unless otherwise provided herein, the exercise of the taxing powers of
FLEXIBLE TARIFF CLAUSE (f) The power herein delegated may be withdrawn or terminated by Congress through a
joint resoution.
The power to fix tariff rates is significant for the chartering of the economic course of the
Philippines and accordingly for its economic development. It is not only the power to The NEDA shall promulgate rules and regulations necessary to carry out the provisions
control access to the internal market of the country, but also an essential bargaining of this section.
mechanism in negotiations for securing access to the markets of other country for the
exports of the Philippines. LUNG CENTER OF THE PHILIPPINES

Flexible Clause. – (a) In the interest of general welfare and national security, and subject To determine whether an enterprise is a charitable institution/entity or not, the elements
to the limitations prescribed under this Act, the President, upon the recommendation of which should be considered include the statute creating the enterprise, its corporate
the NEDA, is hereby empowered to: purposes, its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.
(1) Increase, reduce, or remove existing rates of import duty including any necessary
change in classification. The existing rates may be increased or decreased to any level, The word "charitable" is not restricted to relief of the poor or sick. The test of a charity
in one or several stages, but in no case shall the increased rate of import duty be higher and a charitable organization are in law the same. The test whether an enterprise is
than a maximum of one hundred percent (100%) ad valorem; charitable or not is whether it exists to carry out a purpose reorganized in law as
charitable or whether it is maintained for gain, profit, or private advantage.
(2) Establish import quotas or ban imports of any commodity, as may be necessary; and
REPUBLIC v. HEIRS OF JALANDONI
(3) Impose an additional duty on all imports not exceeding ten percent (10%) ad Isabel Ledesma died intestate on June 23, 1948 leaving real properties situated in the
valorem whenever necessary: Provided, That upon periodic investigations by the provinces of Negros Occidental and Rizal and in the cities of Manila and Baguio, and
Commission and recommendation of the NEDA, the President may cause a gradual personal properties consisting of shares of stock in various domestic corporations. She
reduction of rates of import duty granted in Section 1611 of this Act, including those left as heirs her husband Bernardino Jalandoni and three children, namely, Cesar,
subsequently granted pursuant to this section. Angeles and Delfin, all surnamed Jalandoni.

(b) Before any recommendation is submitted to the President by the NEDA pursuant to On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an estate and
the provisions of this section, except in the imposition of an additional duty not exceeding inheritance tax return reporting the following: (1) that the real and personal properties
ten percent (10%) ad valorem, the Commission shall conduct an investigation and shall owned by the deceased and her surviving husband had a total market value of
hold public hearings wherein interested parties shall be afforded reasonable opportunity P1,324,555.80; (2) that after deducting therefrom the conjugal share of her husband
to be present, to produce evidence and to be heard. The Commission shall also hear the and some expenses the net estate subject to estate tax was P28,148.04; and (3) that
views and recommendations of any government office, agency, or instrumentality. The the amount subject to inheritance tax was P542,225.83. This return also shows that no
Commission shall submit its findings and recommendations to the NEDA within thirty (30) testamentary or intestate proceedings were instituted.
days after the termination of the public hearings.
CIR v. YUTIVO & SONS
(c) The power of the President to increase or decrease rates of import duty within the
Yutivo Sons Hardware Co. is a domestic corporation, organized under the laws of the
limits fixed in subsection (a) hereof shall include the authority to modify the form of duty.
Philippines. Incorporated in 1916, it was engaged in the importation and sale of hardware
In modifying the form of duty, the corresponding ad valorem or specific equivalents of the
supplies and equipment. After the liberation, it resumed its business and until June of
duty with respect to imports from the principal competing foreign country for the most
1946 bought a number of cars and trucks from General Motors Overseas Corporation,
recent representative period shall be used as basis.
an American corporation licensed to do business in the Philippines. As importer, GM paid
sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its
(d) Any order issued by the President pursuant to the provisions of this section shall take
selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid
effect thirty (30) days after promulgation, except in the imposition of additional duty not
no further sales tax on its sales to the public.
exceeding ten percent (10%) ad valorem which shall take effect at the discretion of the
President. On June 13, 1946, the Southern Motors, Inc. was organized to engaged in the business
of selling cars, trucks and spare parts. Its original authorized capital stock was
(e) The power delegated to the President as provided for in this section shall be exercised P1,000,000 divided into 10,000 shares with a par value of P100 each.
only when Congress is not in session.
After the incorporation of SM and until the withdrawal of GM from the Philippines in the
middle of 1947, the cars and trucks purchased by Yutivo from GM were sold by Yutivo
to SM which, in turn, sold them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and (trucks appointed Yutivo as importer for the Visayas and
Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM.
In the same way that GM used to pay sales taxed based on its sales to Yutivo, the
latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and
since such sales tax, as already stated, is collected only once on original sales, SM
paid no sales tax on its sales to the public.
CIR v. NORTON AND HARRISON
Norton and Harrison is a corporation organized to buy and sell at wholesale and retail all
kinds of goods and merchandise. Jackbilt is also a corporation organized on for producing
concrete blocks. On 1948, the corporations entered into an agreement whereby Norton
was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt.
On 1949, Norton purchased all the outstanding shares of stock of Jackbilt. This prompted
the CIR to investigate and eventually asses Norton and Harrison for deficiency sales tax
and surcharges.
PH ACETYLENE v. CIR
PH Acetylene is a corporation engaged in the manufacture and sale of oxygen and
acetylene gases. During the period from June 2, 1953 to June 30, 1958, it made various
sales of its products to the National Power Corporation, an agency of the Philippine
Government, and to the Voice of America, an agency of the United States
Government. The sales to the NPC amounted to P145,866.70, while those to the VOA
amounted to P1,683, on account of which the respondent Commissioner of Internal
Revenue assessed against, and demanded from, the petitioner the payment of
P12,910.60 as deficiency sales tax and surcharge, pursuant to the following provisions
of the National Internal Revenue Code:
"SEC. 186. Percentage tax on sales of other articles. - There shall be levied, assessed
and collected once only on every original sale, barter, exchange, and similar transaction
either for nominal or valuable considerations, intended to transfer ownership of, or title
to, the articles not enumerated in sections one hundred and eighty-four and one hundred
and eighty-five a tax equivalent to seven percentum of the gross selling price or gross
value in money of the articles so sold, bartered, exchanged, or transferred, such tax to
be paid by the manufacturer or producer: * * *."
"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."
CIR v. PILIPINAS SHELL CORPORATION
Under the basic international law principle of pacta sunt servanda, the state has the duty
to fulfill its treaty obligations in good faith. This entails harmonization of national
legislation with treaty provisions. Section 135 (a) of the National Internal Revenue Code
embodies the country’s compliance with its undertakings under the 1944 Chicago
Convention on International Aviation (Chicago Convention), Article 24 (9) of which has
been interpreted to prohibit taxation of aircraft fuel consumed for international
transport, and various bilateral air service agreements not to impose excise tax on
aviation fuel purchased by international carriers from domestic manufacturers or
suppliers. In the previous decision of the Court in this case, the Court interpreted Section
135 (a) as prohibiting domestic manufacturer or producer to pass on to international
carriers the excise tax it had paid on petroleum products upon their removal from the
place of production. Thus, the Court found that there was no basis to refund the excise
taxes paid on petroleum products sold to tax-exempt international carriers as
“erroneously or illegally paid” tax. The Court maintains that Section 135 (a) prohibits the
passing of the excise tax to international carriers who buys petroleum products from local
manufacturers/sellers such as the respondent taxpayer. However, there is a need to
reexamine the effect of denying the domestic manufactures/sellers’ claim for refund of
the excise taxes they already paid on petroleum products sold to international carriers,
and its serious implications on the Government’s commitment to the goals and objectives
of the Chicago Convention. With the process of declining sales of aviation jet fuel sales
to international carriers on account of major domestic oil companies’ unwillingness to
shoulder the burden of excise tax, or of petroleum products being sold to said carriers by
local manufacturers or sellers at still high prices, the practice of “tankering” (i.e., carriers
filling their aircraft as full as possible whenever they landed outside a jurisdiction that
imposes tax on fuel to avoid paying tax) would not be discouraged. This does not augur
well for the Philippines’ growing economy and the booming tourism industry. Worse, the
Government would be risking retaliatory action under several bilateral agreements with
various countries. Evidently, construction of the tax exemption provision in question
should give primary consideration to its broad implications on the country’s commitment
under international agreements. In view of the foregoing the Court held that respondent,
as the statutory taxpayer who is directly liable to pay the excise tax on its
petroleum products is entitled to a refund or credit of the excise taxes it paid for
petroleum products sold to international carriers, the latter having been granted
exemption from the payment of said excise tax under Section 135 (a) of the
NIRC. Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, G.R.
No. 188497. February 19, 2014.
CIR v. AMERICAN RUBBER
FACTS:
American Rubber Company sold its rubber products locally and as prescribed by the
Commissioner’s regulation, the company declared the same for tax purposes in which
the Commissioner accordingly assessed. The company paid under protest the
corresponding sales taxes thereon, claiming exemption under Section 188b of the Tax
Code, and subsequently claimed refund. With the Commissioner refusing to do so, the
case was brought before the Court of Tax Appeals, which upheld the Commissioner’s
stand that the company is not entitled to recover the sales tax that had been separately
billed to its customers, and paid by the latter.
ISSUE:
Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to
and paid by the buyers of its products
RULING:
Refund is proper. The sales tax is by law imposed directly, not on the thing sold, but on
the act (sale) of the manufacturer, producer or importer who is exclusively made liable
for its time payment. There is no proof that the tax paid by plaintiff is the very money
paid by its customers. Where the tax money paid by the plaintiff came from is really no
concern of the Government. Anyway, once recovered, the plaintiff must hold the refund
taxes in trust for the individual purchasers who advanced payment thereof, and whose
names must appear in plaintiff’s records.
It would need to tend to perpetuate illegal taxation; for the individual customers to
whom the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view
of the small amount paid by each and the high cost of litigation for the reclaiming of an
illegal tax. Insofar, therefore, as it favors the imposition, collection and retention of
illegal taxes, and encourages a multiplicity of suits, the tax court’s ruling under appeal
violates morals and public policy.
CIR v. GOTAMCO
The World Health Organization (WHO), an international organization, entered into a
Host Agreement with the Republic of the Philippines on July 22, 1951. In the
agreement, WHO’S assets, income and other properties shall be exempt from all direct
and indirect taxes. WHO decided to construct a building to house its own offices, as
well as the other United Nations offices stationed in Manila. In inviting bids for the
construction of the building, WHO informed the bidders that the building to be
constructed belonged to an international organization with diplomatic status and thus
exempt from the payment of all fees, licenses, and taxes, and that therefore their bids
“must take this into account and should not include items for such taxes, licenses and
other payments to Government agencies.” The construction contract was awarded to
respondent John Gotamco & Sons, Inc. on February 10, 1958.
MACEDA v. MACARAIG
CIR v. PLDT
PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate
and maintain a telecommunications system throughout the Philippines.
For equipment, machineries and spare parts it imported for its business on different dates
from October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of
₱164,510,953.00, broken down as follows: (a) compensating tax of ₱126,713,037.00;
advance sales tax of ₱12,460,219.00 and other internal revenue taxes of
₱25,337,697.00. For similar importations made between March 1994 to May 31, 1994,
PLDT paid ₱116,041,333.00 value-added tax (VAT).
On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on
its tax exemption privilege under Section 12 of R.A. 7082, which reads:
Sec. 12. The grantee … shall be liable to pay the same taxes on their real estate,
buildings, and personal property, exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law to pay. In addition thereto, the
grantee, … shall pay a franchise tax equivalent to three percent (3%) of all gross receipts
of the telephone or other telecommunications businesses transacted under this franchise
by the grantee, its successors or assigns, and the said percentage shall be in lieu of
all taxes on this franchise or earnings thereof: Provided, That the grantee … shall
continue to be liable for income taxes payable under Title II of the National Internal
Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment
is amended or repealed, in which case the amendment or repeal shall be applicable
thereto. (Emphasis supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94,3 pertinently
reading, as follows:
PLDT shall be subject only to the following taxes, to wit:
xxx xxx xxx
7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise
or earnings thereof.
xxx xxx xxx
The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT
from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of
the same Code on its importations of equipment, machineries and spare parts necessary
in the conduct of its business covered by the franchise, except the aforementioned
enumerated taxes for which PLDT is expressly made liable.
xxx xxx xxx
In view thereof, this Office … hereby holds that PLDT, is exempt from VAT on its
importation of equipment, machineries and spare parts … needed in its franchise
operations.
Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim 4 for tax
credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it
had been paying "in connection with its importation of various equipment, machineries
and spare parts needed for its operations".
SILKAIR SINGAPORE v. CIR
 Petitioner Silkair (Singapore) Pte. Ltd., a foreign corp. which has a Philippine
representative office, is an outline international air carrier
 Dec 19, 2001: Silkair filed with the BIR a written application for the refund of
excise tax it paid on its purchases or jet fuels from Petron Corp. from Jan -
June 2000
  Dec 26, 2001: not having been acted upon by the BIR, it filed a petition for
review before the CTA
 CTA: denied its petition on the ground that the excise tax is imposed on Petron
are manufacturer
 When the burden is shifted to Silkair, it is no longer a tax but added cost of
goods purchased
CONTEX v. CIR
Contex Corp is engaged in manufacturing hospital textiles and garments and other
hospital supplies for export. As an SBMA Subic Bay Metropolitan Authority-registered,
Contex Corp. is exempt from all local and national internal revenue taxes except for the
preferential tax provided for in Section 12 (c) of RA 9227. Contex Corp. also registered
with the BIR as a non-VAT taxpayer.
Contex Corp purchased supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted unto Contex Corp. 10%
VAT on the purchased items, which led the Contex Corp to pay input taxes. Believing it
was exempt from VAT, Contex Corp. filed for tax refund.
CIR v. Phil Asoc Smelting and Refining Corporation
The Philippine Associated Smelting and Refining Corporation (PASAR) is a domestic
corporation engaged in the business of processing, smelting, refining and exporting
refined copper cathodes and other copper products, and a registered Zone Export
Enterprise with the Export Processing Zone Authority (EPZA).3 PASAR uses petroleum
products for its manufacturing and other processes, and purchases it from local
distributors, which import the same and pay the corresponding excise taxes. The excise
taxes paid are then passed on by the local distributors to its purchasers. In this
particular case, Petron passed on to PASAR the excise taxes it paid on the petroleum
products bought by the latter during the period of January 2005 to October 2005,
totalling eleven million six hundred eighty-seven thousand four hundred sixty-seven
62/100 (P11,687,467.62).
In December 2006, PASAR filed a claim for refund and/or tax credit with the Office of
the Regional Director of Region XIV, which denied the same in a letter dated January 3,
2007.
Issue:
1) Whether PASAR is the proper party to claim the tax credit/refund on the excise taxes
paid on the petroleum products purchased from Petron.
2) Whether PASAR has the legal personality to file the claim for the refund of the excise
taxes passed on by Petron
Ruling:
1) Notably, in Commissioner of Customs, the Court squarely interpreted the exemption
granted under Section 17 of P.D. No. 66 as applicable to both customs duties and
internal revenue taxes,
The incentives offered to enterprises duly registered with the PEZA consist,
among others, of tax exemptions, x x x
Section 17 of the EPZA Law particularizes the tax benefits accorded to duly registered
enterprises. It states:
SEC. 17. Tax Treatment of Merchandize in the Zone. - (1) Except as otherwise
provided in this Decree, foreign and domestic merchandise, raw materials, supplies,
articles, equipment, machineries, spare parts and wares of every description, except
those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked,
assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated,
manufactured, mixed with foreign or domestic merchandise or used whether directly or
indirectly in such activity, shall not be subject to customs and internal revenue laws and
regulations nor to local tax ordinances, the following provisions of law to the contrary
notwithstanding.
The cited provision certainly covers petroleum supplies used, directly or indirectly, by
Philphos to facilitate its production of fertilizers, subject to the minimal requirement that
these supplies are brought into the zone. The supplies are not subject to customs
and internal revenue laws and regulations, nor to local tax ordinances. It is clear
that Section 17(1) considers such supplies exempt even if they are used
indirectly, as they had been in this case.20 (Emphasis and underscoring ours)
Thus, the Court affirmed the refund of customs duties granted by the CTA and in
closing, stated that "[t]he grant of exemption under Section 17(1) is clear and
unambiguous, x x x."21cralawred
Philphos, meanwhile, involved Philphos' claim for refund of excise taxes passed on by
Petron. One of the issues identified by the Court in the case was whether the CTA
should have granted the claim for refund. In resolving said issue, the Court ruled that
the CTA erred when it disallowed the petitioner's claim due to its failure to present
invoices as there is nothing in CTA Circular No. 1-95 that requires its presentation. The
issue of whether the petitioner was entitled to exemption from payment of excise taxes
was not lengthily discussed by the Court because it was already undisputed. Thus, the
Court stated:
In this case, there is no dispute that petitioner is entitled to exemption from the
payment of excise taxes by virtue of its being an EPZA registered enterprise. As
stated by the CTA, the only thing left to be determined is whether or not petitioner is
entitled to the amount claimed for refund.
xxxx
Since it is not disputed that petitioner is entitled to tax exemption, it should not be
precluded from presenting evidence to substantiate the amount of refund it is claiming
on mere technicality especially in this case, where the failure to present invoices at the
first instance was adequately explained by petitioner. 22 (Emphasis ours)

Applying the foregoing rulings in this case, it is therefore undeniable that PASAR is
exempted from payment of excise taxes.
2) The rule that it is the statutory taxpayer which has the legal personality to file a claim
for refund23 finds no applicability in this case. In Philippine Airlines, Inc. v.
Commissioner of Internal Revenue,24 the Court distinguished between the kinds of
exemption enjoyed by a claimant in order to determine the propriety of a tax refund
claim. "If the law confers an exemption from both direct or indirect taxes, a
claimant is entitled to a tax refund even if it only bears the economic burden of
the applicable tax. On the other hand, if the exemption conferred only applies to direct
taxes, then the statutory taxpayer is regarded as the proper party to file the refund
claim."25 In PASAR's case, Section 17 of P.D. No. 66, as affirmed in Commissioner of
Customs, specifically declared that supplies, including petroleum products, whether
used directly or indirectly, shall not be subject to internal revenue laws and regulations.
Such exemption includes the payment of excise taxes, which was passed on to PASAR
by Petron. PASAR, therefore, is the proper party to file a claim for refund.
CHEVRON v. CIR
Facts:
Chevron sold and delivered petroleum products to Clark Development Corporation in
the period from August 2007 to December 2007.5Chevron did not pass on to CDC the
excise taxes paid on the importation of the petroleum products sold to CDC in taxable
year 2007;6 hence, on June 26, 2009, it filed an administrative claim for tax refund or
issuance of tax credit certificate in the amount of P6,542,400.00.
Issue:
Whether Chevron was entitled to the tax refund or the tax credit for the excise taxes paid
on the importation of petroleum products that it had sold to CDC in 2007.
Ruling:
YES. Under Section 12917 of the NIRC, as amended, excise taxes are imposed on two
kinds of goods, namely: (a) goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition; and (b) things imported.
Undoubtedly, the excise tax imposed under Section 129 of the NIRC is a tax on
property.18
With respect to imported things, Section 131 of the NIRC declares that excise taxes on
imported things shall be paid by the owner or importer to the Customs officers,
conformably with the regulations of the Department of Finance and before the release of
such articles from the customs house, unless the imported things are exempt from excise
taxes and the person found to be in possession of the same is other than those legally
entitled to such tax exemption. For this purpose, the statutory taxpayer is the importer of
the things subject to excise tax.
Chevron, being the statutory taxpayer, paid the excise taxes on its importation of the
petroleum products.19
Section 135 of the NIRC states:
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or
Agencies. – Petroleum products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption
outside the Philippines: Provided, That the petroleum products sold to these international
carriers shall be stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions and other
international agreement for their use or consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes. (Emphasis supplied.)
Pursuant to Section 135(c), supra, petroleum products sold to entities that are by law
exempt from direct and indirect taxes are exempt from excise tax. The phrase which are
by law exempt from direct and indirect taxes describes the entities to whom the petroleum
products must be sold in order to render the exemption operative. Section 135(c) should
thus be construed as an exemption in favor of the petroleum products on which the excise
tax was levied in the first place. The exemption cannot be granted to the buyers – that is,
the entities that are by law exempt from direct and indirect taxes – because they are not
under any legal duty to pay the excise tax.
CDC was created to be the implementing and operating arm of the Bases Conversion
and Development Authority to manage the Clark Special Economic Zone (CSEZ). 20 As a
duly-registered enterprise in the CSEZ, CDC has been exempt from paying direct and
indirect taxes pursuant to Section 2421 of Republic Act No. 7916 (The Special Economic
Zone Act of 1995), in relation to Section 15 of Republic Act No. 9400 (Amending Republic
Act No. 7227, otherwise known as the Bases Conversion Development Act of 1992).22
Inasmuch as its liability for the payment of the excise taxes accrued immediately upon
importation and prior to the removal of the petroleum products from the customshouse,
Chevron was bound to pay, and actually paid such taxes. But the status of the petroleum
products as exempt from the excise taxes would be confirmed only upon their sale to
CDC in 2007 (or, for that matter, to any of the other entities or agencies listed in Section
135 of the NIRC). Before then, Chevron did not have any legal basis to claim the tax
refund or the tax credit as to the petroleum products.
Consequently, the payment of the excise taxes by Chevron upon its importation of
petroleum products was deemed illegal and erroneous upon the sale of the petroleum
products to CDC. Section 204 of the NIRC explicitly allowed Chevron as the statutory
taxpayer to claim the refund or the credit of the excise taxes thereby paid, viz.:
SEC 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. – The Commissioner may –
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund within two (2) years after payment of
the tax or penalty: Provided, however, That a return filed showing an overpayment shall
be considered as a written claim for credit or refund.
It is noteworthy that excise taxes are considered as a kind of indirect tax, the liability for
the payment of which may fall on a person other than whoever actually bears the burden
of the tax.23 Simply put, the statutory taxpayer may shift the economic burden of the
excise tax payment to another – usually the buyer.
In cases involving excise tax exemptions on petroleum products under Section 135 of
the NIRC, the Court has consistently held that it is the statutory taxpayer, not the party
who only bears the economic burden, who is entitled to claim the tax refund or tax
credit.24 But the Court has also made clear that this rule does not apply where the law
grants the party to whom the economic burden of the tax is shifted by virtue of an
exemption from both direct and indirect taxes. In which case, such party must be allowed
to claim the tax refund or tax credit even if it is not considered as the statutory taxpayer
under the law.25
The general rule applies here because Chevron did not pass on to CDC the excise taxes
paid on the importation of the petroleum products, the latter being exempt from indirect
taxes by virtue of Section 24 of Republic
Act No. 7916, in relation to Section 15 of Republic Act No. 9400, not because Section
135(c) of the NIRC exempted CDC from the payment of excise tax.1âwphi1
Accordingly, conformably with Section 204(C) of the NIRC, supra, and pertinent
jurisprudence, Chevron was entitled to the refund or credit of the excise taxes
erroneously paid on the importation of the petroleum products sold to CDC.
CIR v. SEAGATE TECHNOLOGY
PRINCIPLE:
Business companies registered in and operating from the Special Economic Zone in
Naga, Cebu are entities exempt from all internal revenue taxes and the implementing
rules relevant thereto, including the value-added taxes or VAT. Although export sales
are not deemed exempt transactions, they are nonetheless zero-rated. Hence, the
distinction between exempt entities and exempt transactions has little significance,
because the net result is that the taxpayer is not liable for the VAT. A VAT-registered
enterprise may comply with all requisites to claim a tax refund of or credit for the input
VAT it paid on capital goods it purchased. In short, after compliance with all requisites,
such enterprise is entitled to refund or credit.
FACTS:
A VAT-registered enterprise, STP has principal office address at the new Cebu
Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu. STP
is registered with the Philippine Export Zone Authority (PEZA) and certified to engage in
the manufacture of recording components primarily used in computers for export. VAT
returns were filed for the period 1 April 1998 to 30 June 1999. With supporting
documents, a claim for refund of VAT input taxes in the amount of 28 million pesos
(inclusive of the 12-million VAT input taxes subject of this Petition for Review) was filed
on 4 October 1999.
CIR did not act promptly upon STP's claim so the latter elevated the case to the CTA
for review in order to toll the running of the two-year prescriptive period.
On appeal, CIR asserted that by virtue of the PEZA registration alone of STP, the latter
is not subject to the VAT. According to CIR, STP's sales transactions intended for
export are not exempt.
ISSUE:
[1] Is STP entitled to refund or tax credit for puchases?
HELD:
[1] Yes, STP is entitled to refund or tax credit
As a PEZA-registered enterprise within a special economic zone, STP is entitled to the
fiscal incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover,
enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.
(RA) 7227 and 7844.
CIR v. ESTATE OF BENIGNO TODA
FACTS:
March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr.,
President and Owner of 99.991% of outstanding capital stock, to sell the Cibeles
Building and 2 parcels of land which he sold to Rafael A. Altonaga on August 30, 1987
for P 100M who then sold it on the same day to Royal Match Inc. for P 200M.
CIC included gains from sale of real property of P 75,728.021 in its annual income tax
return while Altonaga paid a 5% capital gains tax of P 10M
July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a
deed of ale of shares of stock which provides that the buyer is free from all income tax
liabilities for 1987, 1988 and 1989.
Toda Jr. died 3 years later.
March 29, 1994: BIR sent an assessment notice and demand letter to CIC for
deficiency of income tax of P 79,099, 999.22
Estate filed a protest which was dismissed - fraudulent sale to evade the 35% corporate
income tax for the additional gain of P 100M and that there is in fact only 1 sale.
Since it is falsity or fraud, the prescription period is 10 years from the discovery of the
falsity or fraud as prescribed under Sec. 223 (a) of the NIRC
ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance
so the period for assessment has not prescribed.
HELD: YES. Estate shall be liable since NOT yet prescribed.
 Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation. ax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a
scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.
 Tax evasion connotes the integration of three factors:
 (1) the end to be achieved, i.e., the payment of less than that known
by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due
 (2) an accompanying state of mind which is described as being evil,
in bad faith, willfull,or deliberate and not accidental; and
 (3) a course of action or failure of action which is unlawful.
 All are present in this case. The trial balance showed that RMI
debited P 40M as "other-inv. Cibeles Building" that indicates RMI
Paid CIC (NOT Altonaga)
 Fraud in its general sense, is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving a breach of
legal or equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable advantage is
taken of another.
 Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax.
 Generally, a sale of or exchange of assets will have an income tax
incidence only when it is consummated but such tax incidence
depends upon the substance of the transaction rather them mere
formalities.
JOHN HAY PEOPLES ALTERNATIVE COALITION v. LIM
FACTS:
R.A. No. 7227 likewise created and grantedthe Subic SEZ incentives ranging from tax a
nd dutyfree importations, exemption of businesses therein from local and national taxes
, to other hallmarks of a liberalized financial and business climate.
And R.A. No. 7227 expressly gave authority to the President to create through executiv
e proclamation, subject to the concurrence of the local government units directly affecte
d, other Special Economic Zones (SEZ) in the areas covered respectively by the Clark
military reservation, the Wallace Air Station in San Fernando, La Union, and Camp Joh
n Hay.
On July 5, 1994 then President Ramos issued Proclamation No. 420 which established
a SEZ on a portion of Camp John Hay.
In maintaining the validity of Proclamation No. 420, respondents contend that by extend
ing to the John Hay SEZ economic incentives similar to those enjoyed by the Subic SE
Z which was established under R.A. No. 7227, the proclamation is merely implementing
the legislative intent of said law to turn the US military bases into hubs of business acti
vity or investment.
Issue:
WON Proclamation No. 420 is constitutional by providing for national and local tax exe
mption within and granting other economic incentives to the John Hay SEZ
Ruling:
NO.Nowhere in RA 7227 is there a grant of tax exemption to SEZs yet to be establishe
d in base areas, unlike the grant under Section 12 which provides for tax exemption to t
he established Subic SEZ. The tax exemption grant to John Hay SEZ contravenes Artic
le VI, Section 28 (4) of the 1987 Constitution which provides that “No law granting any t
ax exemption shall be passed without the concurrence of a majority of all the members
of Congress.
Furthermore, it is the Legislature, unless limited by a provision of the state constitution,
which has the full power to exempt any person or corporation or class of property from t
axation, its power to exempt being as broad as its power to tax. The grant by Proclamat
ion No. 420 of tax exemption and other privileges to the John Hay SEZ is VOID for bein
g violative of the Constitution.
CIR v. CA and ATENEO
The ADMU Institute of Philippine Culture is engaged in social science studies of
Philippine society and culture. It acceps scholarships for its research activities from
international organizations and private foundations. CIR assessed IPC’s tax liability for
unpaid contractor’s tax, claiming that IPC is an independent contractor and therefore,
subject to 3% tax.
CIR v. SM PRIME HOLDINGS INC.
Facts:
Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development
Corporation (First Asia) are engaged in the business of operating cinema houses,
among... others.
In 2003, (BIR) sent SM Prime a Preliminary Assessment Notice (PAN) for value added
tax (VAT) deficiency on cinema ticket sales in the amount of P119,276,047.40 for taxable
year 2000.
A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total
amount of P32,802,912.21 was issued against First Asia by the BIR. In response, First
Asia filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter
of Demand, which... was protested by First Asia on December 14, 2004.[
A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46
for the taxable year 2003 was issued by the BIR against First Asia. In a letter dated
September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was
thereafter issued by the
BIR to First Asia, which the latter protested through a letter dated November 11, 2004.
[24]
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and
7272 with CTA Case No. 7079 on the grounds that the issues raised therein are identical
and that SM Prime is a majority shareholder of First Asia. The motion was granted.
Upon submission of the parties' respective memoranda, the consolidated cases were
submitted for decision on the sole issue of whether gross receipts derived from admission
tickets by cinema/theater operators or proprietors are subject to VAT.
On September 22, 2006, the First Division of the CTA rendered a Decision granting the
Petition for Review.
Issues:
(1) In not finding/holding that the gross receipts derived by operators/proprietors of
cinema houses from admission tickets [are] subject to the 10% VAT because:
(a)
THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE
PAYING PUBLIC IS A SALE OF SERVICE;
Ruling:
The petition is bereft of merit.
The phrase "sale or exchange of services" means the performance of all kinds of services
in the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,...
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators... or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their... transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other domestic common carriers by land, air
and water relative to their transport of goods or cargoes; services of franchise grantees
of telephone and telegraph, radio and television... broadcasting and all other franchise
grantees except those under Section 119 of this Code; services of banks, non-bank
financial intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and... bonding
companies; and similar services regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties.
A cursory reading of the foregoing provision clearly shows that the enumeration of the
"sale or exchange of services" subject to VAT is not exhaustive. The words, "including,"
"similar services," and "shall likewise include," indicate that the enumeration is by way of
example... only
ISSUE:
Are the gross receipts derived by operators or proprietors of cinema/theater houses
from admission tickets subject to VAT?
HELD:
NO. While (1) the enumeration under Section 108 on the VAT-taxable services is not
exhaustive and (2) the said list includes “the lease of motion picture films, films, tapes
and discs”, the said activity however is not the same as showing or exhibition of motion
pictures or films. Thus, since the showing or exhibition of motion pictures or films is not
in the enumeration, the CIR must show that it falls under the phrase “similar services”.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets. The removal of the prohibition (on the national
government to tax certain activities) under the Local Tax Code did not grant nor restore
to the national government the power to impose amusement tax on cinema/theater
operators or proprietors. Neither did it expand the coverage of VAT.
PB COM v. CIR
PB Com reported a net loss in 1986 and thus declared no tax payable. On 1987,
petitioner requested the respondent, among others, for a tax credit representing the
overpayment of taxes in the first and second quarters of 1985. The tax credit is reckoned
from April 15, 1986. So it has until April April 15, 1988 to file but it filed on November 18,
1988.
Thereafter, petitioner filed a claim for refund of creditable taxes withheld by their lessees
from property rentals in 1985 and in 1986. Pending investigation, petitioner instituted a
Petition for Review before the Court of Tax Appeals (CTA).
CTA denied the request of petitioner for a tax refund or credit for 1985 on the ground that
it was filed beyond the two-year reglementary period provided for by law. The petitioner’s
claim for refund in 1986 was likewise denied on the assumption that it was automatically
credited by PBCom against its tax payment in the succeeding year. MR was denied.
CA affirmed the decision in toto hence this petition.
Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals (1981), petitioner claims that rulings or circulars
promulgated by the Commissioner of Internal Revenue have no retroactive effect if it
would be prejudicial to taxpayers.
Respondent argues that the two-year prescriptive period for filing tax cases in court
concerning income tax payments of Corporations is reckoned from the date of filing the
Final Adjusted Income Tax Return, which is generally done on April 15 following the close
of the calendar year. Further, respondent Commissioner stresses that when the petitioner
filed the case before the CTA on November 18, 1988, the same was filed beyond the
time fixed by law, and such failure is fatal to petitioner’s cause of action.
Issue:
Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits
on the ground of prescription
Held:
No. The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax, before any
suit in CTA is commenced. The two-year prescriptive period provided, should be
computed from the time of filing the Adjustment Return and final payment of the tax for
the year.
CIR v. San Roque Power Corporation
On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA")
with the National Power Corporation ("NPC") to develop hydro-potential of the Lower
Agno River and generate additional power and energy for the Luzon Power Grid, by
building the San Roque Multi-Purpose Project located in San Manuel, Pangasinan. The
PPA provides, among others, that [San Roque] shall be responsible for the design,
construction, installation, completion, testing and commissioning of the Power Station
and shall operate and maintain the same, subject... to NPC instructions. During the
cooperation period of twenty-five (25) years commencing from the completion date of the
Power Station, NPC will take and pay for all electricity available from the Power Station.
On the construction and development of the San Roque Multi-Purpose Project which
comprises of the dam, spillway and power plant, [San Roque] allegedly incurred, excess
input VAT in the amount of P559,709,337.54 for taxable year 2001 which it declared in
its Quarterly VAT Returns... filed for the same year. [San Roque] duly filed with the BIR
separate claims for refund, in the total amount of P559,709,337.54, representing
unutilized input taxes as declared in its VAT returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the
year 2001 since it increased its unutilized input VAT to the amount of P560,200,283.14.
Consequently, [San Roque] filed with the BIR on even date, separate amended claims
for refund in the... aggregate amount of P560,200,283.14.
[CIR's] inaction on the subject claims led to the filing by [San Roque] of the Petition for
Review with the Court [of Tax Appeals] in Division on April 10, 2003.
RULING:
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need
not wait for the 120-day period to expire before filing a judicial claim with the CTA. RMC
49-03 merely authorizes the BIR to continue processing the administrative claim even
after the taxpayer has filed its judicial claim, without saying that the taxpayer can file its
judicial claim before the expiration of the 120-day period. RMC 49-03 states: "In cases
where the taxpayer has filed a ‘Petition for Review’ with the Court of Tax Appeals
involving a claim for refund/TCC that is pending at the administrative agency (either the
Bureau of Internal Revenue or the One- Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance), the administrative agency and the court
may act on the case separately." Thus, if the taxpayer files its judicial claim before the
expiration of the 120-day period, the BIR will nevertheless continue to act on the
administrative claim because such premature filing cannot divest the Commissioner of
his statutory power and jurisdiction to decide the administrative claim within the 120-day
period.
On the other hand, if the taxpayer files its judicial claim after the 120- day period, the
Commissioner can still continue to evaluate the administrative claim. There is nothing
new in this because even after the expiration of the 120-day period, the Commissioner
should still evaluate internally the administrative claim for purposes of opposing the
taxpayer’s judicial claim, or even for purposes of determining if the BIR should actually
concede to the taxpayer’s judicial claim. The internal administrative evaluation of the
taxpayer’s claim must necessarily continue to enable the BIR to oppose intelligently the
judicial claim or, if the facts and the law warrant otherwise, for the BIR to concede to the
judicial claim, resulting in the termination of the judicial proceedings.
What is important, as far as the present cases are concerned, is that the mere filing
by a taxpayer of a judicial claim with the CTA before the expiration of the 120-day
period cannot operate to divest the Commissioner of his jurisdiction to decide an
administrative claim within the 120-day mandatory period, unless the
Commissioner has clearly given cause for equitable estoppel to apply as expressly
recognized in Section 246 of the Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under
Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that the
"taxpayer-claimant need not wait for the lapse of the 120-day period before it could
seek judicial relief with the CTA by way of Petition for Review." Prior to this ruling,
the BIR held, as shown by its position in the Court of Appeals,68 that the expiration of the
120-day period is mandatory and jurisdictional before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the
CTA does not acquire jurisdiction over a judicial claim that is filed before the expiration
of the 120-day period. There are, however, two exceptions to this rule. The first exception
is if the Commissioner, through a specific ruling, misleads a particular taxpayer to
prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to
such particular taxpayer. The second exception is where the Commissioner, through a
general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers
into filing prematurely judicial claims with the CTA. In these cases, the Commissioner
cannot be allowed to later on question the CTA’s assumption of jurisdiction over such
claim since equitable estoppel has set in as expressly authorized under Section 246 of
the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to
the Commissioner the power to interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. —
The power to interpret the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary
of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue
is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction to interpret tax laws,
taxpayers acting in good faith should not be made to suffer for adhering to general
interpretative rules of the Commissioner interpreting tax laws, should such interpretation
later turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed,
Section 246 of the Tax Code expressly provides that a reversal of a BIR regulation or
ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR
regulation or ruling prior to its reversal. Section 246 provides as follows:
Sec. 246. Non-Retroactivity of Rulings. — Any revocation, modification or reversal of any
of the rules and regulations promulgated in accordance with the preceding Sections or
any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be prejudicial
to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or
any document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied upon by
taxpayers from the time the rule is issued up to its reversal by the Commissioner or this
Court. Section 246 is not limited to a reversal only by the Commissioner because this
Section expressly states, "Any revocation, modification or reversal" without specifying
who made the revocation, modification or reversal. Hence, a reversal by this Court is
covered under Section 246.
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine
by Mirant and Aichi69 is proof that the reckoning of the prescriptive periods for input VAT
tax refund or credit is a difficult question of law. The abandonment of the Atlas doctrine
did not result in Atlas, or other taxpayers similarly situated, being made to return the tax
refund or credit they received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad
faith or misrepresentation, the reversal by this Court of a general interpretative rule issued
by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should
also apply prospectively. As held by this Court in CIR v. Philippine Health Care Providers,
Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that under
Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is
precluded from adopting a position contrary to one previously taken where
injustice would result to the taxpayer. Hence, where an assessment for deficiency
withholding income taxes was made, three years after a new BIR Circular reversed a
previous one upon which the taxpayer had relied upon, such an assessment was
prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the
tenets of good faith, equity, and fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting
Corp.1âwphi1 in the later cases of Commissioner of Internal Revenue v. Borroughs,
Ltd., Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp., Commissioner of
Internal Revenue v. Telefunken Semiconductor (Phils.) Inc., and Commissioner of
Internal Revenue v. Court of Appeals. The rule is that the BIR rulings have no
retroactive effect where a grossly unfair deal would result to the prejudice of the
taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation, wherein the
taxpayer was entitled to tax refunds or credits based on the BIR’s own issuances but
later was suddenly saddled with deficiency taxes due to its subsequent ruling changing
the category of the taxpayer’s transactions for the purpose of paying its VAT, this Court
ruled that applying such ruling retroactively would be prejudicial to the taxpayer.
(Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to
a query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit
and Drawback Center of the Department of Finance. This government agency is also
the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the administrative claim
of Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development,
Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers
can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December
2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held
that the 120+30 day periods are mandatory and jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four
reasons: first, it is admittedly an erroneous interpretation of the law; second, prior to its
issuance, the BIR held that the 120-day period was mandatory and jurisdictional, which
is the correct interpretation of the law; third, prior to its issuance, no taxpayer can claim
that it was misled by the BIR into filing a judicial claim prematurely; and fourth, a claim
for tax refund or credit, like a claim for tax exemption, is strictly construed against the
taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its
judicial claim prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-
489-03 on 10 December 2003. To repeat, San Roque cannot claim that it was misled by
the BIR into filing its judicial claim prematurely because BIR Ruling No. DA-489-03 was
issued only after San Roque filed its judicial claim. At the time San Roque filed its judicial
claim, the law as applied and administered by the BIR was that the Commissioner had
120 days to act on administrative claims. This was in fact the position of the BIR prior to
the issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the
benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether in this Court, the CTA,
or before the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim
that in filing its judicial claim prematurely without waiting for the 120-day period to expire,
it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR
Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of
prematurity.
Philex’s situation is not a case of premature filing of its judicial claim but of late filing,
indeed very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial
claim, which means non-exhaustion of the 120-day period for the Commissioner to act
on an administrative claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03
because Philex did not file its judicial claim prematurely but filed it long after the lapse of
the 30-day period following the expiration of the 120-day period. In fact, Philex filed
its judicial claim 426 days after the lapse of the 30-day period.
CIR v. SC JOHNSON
"[Respondent], a domestic corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. 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 the products
covered by the Agreement and secure assistance in management, marketing and
production from SC Johnson and
Son, U. S. A.
For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson
and Son, USA royalties based on a percentage of net sales and subjected the same to
25% withholding tax on royalty payments which [respondent] paid for the period covering
July 1992 to May
1993 in the total amount of P1,603,443.00
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson
& Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals
(CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the
overpaid... withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson
and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the
amount of P963,266.00 representing overpaid withholding tax on royalty payments
beginning July, 1992... to May, 1993.[
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not
paid under circumstances similar to those in the RP-West Germany Tax Treaty since
there is no provision for a 20 percent matching credit in the former convention and private
respondent cannot... invoke the concessional tax rate on the strength of the most favored
nation clause in the RP-US Tax Treaty.
Issues:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA
IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON
ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-
WEST GERMANY TAX TREATY.
Ruling:
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by
the Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2)
(b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and
not to... the payment of the tax, for the reason that the phrase "paid under similar
circumstances" is followed by the phrase "to a resident of a third state". The respondent
court held that "Words are to be understood in the context in which they are used", and
since what is paid to a... resident of a third state is not a tax but a royalty "logic instructs"
that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to
take into account the purpose animating the treaty provisions in point. To begin with, we
are not aware of any law or rule pertinent to the payment of royalties, and none has been
brought to... our attention, which provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances of payment thereof are
the same for all the recipients of such royalties and there is no disparity based on
nationality in the... circumstances of such payment.[6] On the other hand, a cursory
reading of the various tax treaties will show that there is no similarity in the provisions on
relief from or avoidance of double taxation[7] as this is a matter of... negotiation between
the contracting parties.[8] As will be shown later, this dissimilarity is true particularly in
the treaties between the Philippines and the United States and between the Philippines
and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines
has entered into for the avoidance of double taxation.[9] The purpose of these
international agreements is to reconcile the national fiscal legislations of the... contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions.[10] More precisely, the tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is... defined as the imposition
of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.[11], citing the Committee on Fiscal Affairs of the
Organization for Economic Co-operation and
Development (OECD).11 The apparent rationale for doing away with double taxation is
to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust
and dynamic... economies.[12] Foreign investments will only thrive in a fairly predictable
and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate
Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to... several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however,... for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited
The second method for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of residence. In this
case, the treaties make it incumbent upon the state of residence to allow relief in order
to avoid... double taxation. There are two methods of relief- the exemption method and
the credit method. In the exemption method, the income or capital which is taxable in the
state of source or situs is exempted in the state of residence, although in some instances
it may be taken into... account in determining the rate of tax applicable to the taxpayer's
remaining income or capital. On the other hand, in the credit method, although the income
or capital which is taxed in the state of source is still taxable in the state of residence, the
tax paid in the former... is credited against the tax levied in the latter. The basic difference
between the two methods is that in the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the tax.[
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country.[16] Thus the... petitioner correctly
opined that the phrase "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are
tax-related".
Furthermore, the method employed to give relief from double taxation is the allowance of
a tax credit to citizens or residents of the United States (in an appropriate amount based
upon the taxes paid or accrued to the Philippines) against the United States tax, but such
amount... shall not exceed the limitations provided by United States law for the taxable
year.[19] Under Article 13 thereof, the Philippines may impose one of three rates- 25
percent of the gross amount of the royalties; 15 percent when the royalties are paid by
a... corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a third state.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on
tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting
against German income and corporation tax of 20% of the gross amount of royalties paid
under the... law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty,
which is the counterpart provision with respect to relief for double taxation, does not
provide for similar crediting of 20% of the gross amount of royalties paid.
DEUTSCHE BANK v. CIR
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of
1997, petitioner withheld and remitted to respondent on 21 October 2003 the amount of
PHP 67,688,553.51, which represented the fifteen percent (15%) branch profit
remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to
Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. 5
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large
Taxpayers Assessment and Investigation Division on 4 October 2005 an administrative
claim for refund or issuance of its tax credit certificate in the total amount of PHP
22,562,851.17. On the same date, petitioner requested from the International Tax
Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of
10% under the RP-Germany Tax Treaty.6
ISSUE:
This Court is now confronted with the issue of whether the failure to strictly comply with
RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty.
RULING:
The BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty
relief must be preceded by an application with ITAD at least 15 days before the
transaction.
At the outset, this Court’s minute resolution on Mirant is not a binding precedent.
Our Constitution provides for adherence to the general principles of international law as
part of the law of the land.15The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the
states that enter into the agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in good faith. 16 More
importantly, treaties have the force and effect of law in this jurisdiction. 17
Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax
conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate."19
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax
treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken."20 Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must not
impose additional requirements that would negate the availment of the reliefs provided
for under international agreements. More so, when the RP-Germany Tax Treaty does
not provide for any pre-requisite for the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would
indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the
15-day period. We recognize the clear intention of the BIR in implementing RMO No. 1-
2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly comply with
the prescribed period is not in harmony with the objectives of the contracting state to
ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons
or corporations.
Bearing in mind the rationale of tax treaties, the period of application for the availment
of tax treaty relief as required by RMO No. 1-2000 should not operate to divest
entitlement to the relief as it would constitute a violation of the duty required by good
faith in complying with a tax treaty. The denial of the availment of tax relief for the
failure of a taxpayer to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the application for a tax
treaty relief from the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000.1âwphi1
AIR CANADA v. CIR
FACTS: Air Canada is an offline air carrier selling passage tickets in the Philippines,
through a general sales agent, Aerotel. 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[.]
Air Canada filed a claim for refund for more than 5 million pesos. It claims that there
was overpayment, saying that the applicable tax rate against it is 2.5% under the law
on tax on Resident Foreign Corporations (RFCs) for international carriers. It argues
that, as an international carrier doing business in the Philippines, it is not subject to tax
at the regular rate of 32%.
Air Canada also claims that it is not taxable because its income is taxable only in
Canada because of the Philippines-Canada Treaty (treaty). According to it, even if
taxable, the rate should not exceed 1.5% as stated in said treaty.
However, the CTA ruled that Air Canada was engaged in business in the Philippines
through a local agent that sells airline tickets on its behalf. As such, it should be taxed
as a resident foreign corporation at the regular rate of 32%.
The CTA also said that Air Canada cannot avail of the lower tax rate under the treaty
because it has a "permanent establishment" in the Philippines. Hence, Air Canada
cannot avail of the tax exemption under the treaty.
ISSUES:
[1] Is Air Canada, an offline international carrier selling passage documents through
Aerotel, a RFC?
[2] As an offline international carrier selling passage documents, is Air Canada subject
to 2.5% tax on Gross Philippine Billings or to the regular 32% tax?
[3] Can Air Canada benefit from the treaty's elimination of double taxation in favor of
Canada or the preferential rate of 1.5%?
[4] Can Air Canada validly refuse to pay its tax deficiency on the ground that there is a
pending tax credit proceeding it has filed?
[5] Is Air Canada entitled to the tax refund claimed at more than 5 million pesos?
HELD:
[1] Yes, Air Canada is a resident foreign corporation. Although there is no one rule in
determining what "doing business in the Philippines" means, the appointment of an
agent or an employee is a good indicator. This is especially true when there is effective
control, similar to that of employer-employee relationship. This is true between Air
Canada and Aerotel. Hence, Air Canada is a RFC.
[2] No, because the 2.5% tax on Gross Philippine Billings applies only to carriers
maintaining flights to and from the Philippines. Air Canada's appointment of a general
sales agent, Aerotel, here is only for the purpose of selling passage documents.
However, this is not the complete answer since the treaty is the latter law that prevails
in this case.

[3] Air Canada cannot avail of the elimination of double taxation in favor of Canada
since the treaty expressly excludes Canadian carriers with "permanent
establishment." Through the appointment of Aerotel as its local sales agent, petitioner
is deemed to have created a "permanent establishment" in the Philippines as defined
under the Republic of the Philippines-Canada Tax Treaty.

This is especially true since Aerotel has no "independent status" beacuse Air Canada
exercises comprehensive control and detailed instructions over the means and results
of the activities of the former.

[4] No, it cannot. Even if Air Canada succeeds in claiming tax refund, the general rule
prevails that there can be not setting off of taxes since the Government and the
taxpayer are not creditors and debtors of each other.

[5] No, Air Canada is not entitled to refund. 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
National Internal Revenue Code [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.