TAX1: DOCTRINES IN TAXATION
kelan ba perfected and
February 19, 2020
PROSPECTIVITY
(1) Hydro Resources v. CA, GR 80276 (Dec. 21, 1990)
FACTS: ​This is a case filed by petitioner Hydro Resources Contractors Corporation
(Hydro) against respondents Court of Tax Appeals and Deputy Minister of Finance which
seeks to set aside the decisions of both public respondents holding petitioner liable for a
3% ad valorem duty in the amount of P281,591.00.
The National Irrigation Administration (NIA), a GOCC, entered into an agreement,
sometime in August 1978, with petitioner Hydro, for the construction of the Magat River
Multipurpose Project in Isabela. Under their contract, Hydro was allowed to procure new
construction equipment, spare parts and tools from abroad, the payment for which was
advanced by NIA under a financing plan embodied in the contract
Upon the transfer of the ownership of the said equipment HYDRO was assessed by the
Bureau of Customs the corresponding customs duty and compensating tax. This amount
was paid by HYDRO to the Bureau of Customs. In addition, HYDRO was assessed
additional 3% ad valorem duty in the amount of P281,591.00 prescribed in Executive
Order 860. HYDRO also paid this amount but this time under protest.
Collector of Customs - ruled for Hyrdo’s protest
Commissioner of Customs - affirmed
Deputy Minister of Finance - reversed
CTA - affirmed Minister of Finance
ISSUE: ​W/N Hydro should pay the 3% ad valorem tax - NO
RULING:
Executive Order No. 860 which was the basis for the imposition of the 3% ad valorem
duty upon the said importations, took effect on December 21, 1982. ​The importations
were effected in ​1978​ and ​1979​ by NIA.
The CTA’s ruling was “When NIA transferred the equipment in question supposedly
'after its (HYDRO's) use for a number of years', it cannot be doubted that these
equipment were sold and transferred presumably 'several years' after the equipment's
importation in 1978 and 1979. It is obvious therefore that the sale or transfer of the
ownership of the equipment to petitioner HYDRO were unquestionably made after the
effectivity of PD 882”
The foregoing conclusion is erroneous. The subsequent executions of the Deeds of Sale of
the equipment in question on December 6, 1982 and March 24, 1983 are not relevant
and material in the consideration of the application of Executive Order No. 860 because
said ​Deeds of Sale were mere formalities in the implementation of the Contract executed
on August 1978, which should be reckoned and construed as the ​actual date of sale​. This
must be so because the contract of purchase and sale of the NIA-financed/owned
equipment to Hydro took place in 1978 when the Contract was signed by NIA and
HYDRO wherein the contracting parties provided for their financing, procurement,
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​1
delivery, repayment, transfer of possession and ownership. [​ie.
contract of sale? Meeting of the minds diba. Wag ka tanga CTA​]
It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is
provided. (Art. 4, Civil Code) Except for a statement providing for its immediate
execution, Executive Order No. 860 does not provide for its retroactivity.
Consequently, the importations in question which arrived in 1977 and 1978 are ​not
subject to the 3% additional ad valorem duty​, the same being imposed only on those
whose letter of credit were opened after the promulgation of Executive Order 860.
(2) Hilado v. Collector, 100 Phil 288
FACTS: [March 1952] Hilado filed his income tax return for 1951, claiming 12,837
deductible item from his gross income pursuant to General Circular No. V-123. Hilado
was claiming this deductible expense as part of his “business asset”.
[August 1952] Sec of Finance issued General Circular No. V-139 which not only
revoked and declared void his general Circular No V-123 but laid down the rule that
losses of property which occurred during the period of WWII are deductible in the
year of actual los or destruction of said property. They found out that the previous
circular was wrong and hence a nullity. As a consequence, the claimed deduction of
Hilado was disallowed and demanded from him payment of his tax deficiency.
Hilado contended that the new circular could not be given retroactive effect because that
would affect and obliterate the vested right he acquired under the previous circular.
ISSUE: ​Whether Hilado is entitled of the said deductible expense. ​(No, Hilado is not
entitled of the said deductible expense)
RULING: Regarding Hilado’s contention on the retroactive effect of the said circular,
suffice it to say that General Circular No. V-123, having been issued on a wrong
construction of the law, cannot give rise to a vested right that can be invoked by a
taxpayer. The reason is obvious: a vested right cannot spring from a wrong
interpretation.
"It seems too clear for serious argument that an administrative officer can not change
a law enacted by Congress. A regulation that is merely an interpretation of the statute
when once determined to have been erroneous becomes nullity. An erroneous
construction of the law by the Treasury Department or the collector of internal
revenue does not preclude or estop the government from collecting a tax which is
legally due." (Ben Stocker, et al., 12 B. T. A., 1351.)
"Art. 2254. — No vested or acquired right can arise from acts or omissions
which are against the law or which infringe upon the rights of others." (Article
2254, ​New Civil Code​.)
Wherefore, the decision appealed from is affirmed.
Other issue: the court also held that the said deduction cannot be considered as
a business asset which can be deducted as a loss in contemplation of law
because its collection is not enforceable as a matter of right but is dependent 473-88 was issued to Insular-Yebana Tobacco Corp, allowing the latter to exclude the
merely upon the generosity of the US government. VAT in the determination of the gross selling price for purposes of computing the ​ad
valorem ​tax. In fine, Alhambra paid P3.9 million ​ad valorem ​tax with the VAT-less gross
selling price.
(3) Lorenzo v. Posadas, 64 Phil 353
Petitioner: ​Pablo Lorenzo, administrator of the estate of Thomas Hanley.
Thereafter, on Feb. 11 1991, CIR issued BIR Ruling 017-91 to Insular-Yebana, revoking
Respondent: ​Juan Posadas Jr., Collector of Internal Revenue
the Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It included, again, the
VAT in computing the tax base. CIR sought to apply the revocation to Alhambra’s
FACTS: ​Lorenzo is contesting that the assessed inheritance tax imposed on the estate of
account on the ground that Alhambra acted in bad faith, which is an exception to the rule
Thomas Hanley. He paid the assessed tax but made a claim for a refund. The assessment
on non-retroactivity of BIR rulings.
was made under the provisions of the Revised Administrative Code, as amended by Act
No. 3606. Act No. 3606 was enacted on January 1, 1930, meanwhile, Thomas Hanley died
CA upheld CTA’s ruling, stating that the retroactive application of 017-91 cannot be
on May 27, 1922. Lorenzo contends that there should be no retroactive application of the
allowed since Alhambra did not act in bad faith.
tax statute.
ISSUE: ​Is the deficiency tax assessment valid?​ NO
Posadas contended that some of the provisions of Act No. 3606 works for the benefit of
the tax payer, such as 1) the surcharge of 25 per cent is based on the tax only, instead of
RULING: ​BIR Ruling 473-88 was issued on Oct. 4 1988 while Ruling 017-91 was issued
on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is
on Feb. 11, 1991. Alhambra did not question the correctness of the BIR Ruling. In fact,
allowed twenty days from notice and demand by the Collector of Internal Revenue
upon knowledge of effectivity of BIR Ruling 017-91, Alhambra immediately implemented
within which to pay the tax, instead of ten days only as required by the old law.
the method of computation therein, by restoring the VAT in computing the 15% ​ad
valorem ​tax.
ISSUE: W/N Act No. 3606 should be given retroactive effect? (NO)
Well entrenched is the rule that rulings and circulars by the CIR have no retroactive
RULING: ​The tax statute should not be given retroactive effect. As a rule, inheritance
application if to so apply them would be prejudicial to the taxpayers. Without a doubt,
taxation is governed by the statue in force at the time of the death of the decedent. The
Alhambra would be prejudiced by the retroactive application of the revocation as it
Court also emphasized that a statute should be considered as prospective in its
would be assessed deficiency excise tax.
operation, unless the language of the statute clearly demands or expresses that it shall
have retroactive effect.
Bad faith cannot also be imputed on Alhambra because upon knowledge of the
revocation of the exemption, they reverted back to the old computation, including the
It is of no moment that some provisions of Act 3606 work in favor of the taxpayer,
VAT in their tax base.
similar to the rule on penal statutes provided in Article 22 of the RPC. There is a
difference between penal and revenue statutes. A statute is penal when it imposes
(5) PBCom v. CIR, GR 112024 (Jan. 28, 1999) ​*exception on invalid
punishment for an offense committed against the state. Revenue laws, generally, which
imprescriptibility
impose taxes collected by the means ordinarily resorted to for the collection of taxes are
FACTS: ​Petitioner Philippine Bank of Communications, on August 7, 1987, requested the
not classed as penal laws. Thus, Article 22 of the Revised Penal Code is not applicable to
CIR for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first
the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606
and second quartets of 1985. On July 25, 1988, it filed a claim for refund of creditable
a retroactive effect.
taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in
(4) CIR v. CA, GR 117982 (Feb. 6 1997) ​*rulings matter
cigarettes 1986 for P234,077.69. Pending investigation by the CIR, PBCom instituted a petition for
review on Nov. 18, 1988 before the Court of Tax Appeals (CTA). In 1993, the CTA
FACTS: ​Alhambra Inc. is a corporation engaged in the sale of cigarettes. On May 7 1991,
rendered a decision denying the request for a tax refund or credit in the amount of
they received a letter from the CIR assessing it deficiency ​ad valorem t​ ax worth
P5,299,749.95 on the ground that it was filed beyond the two-year reglementary period.
P488,396, inclusive of increments, on the removals of cigarette products from their place
PBCom claim for refund in 1986 was likewise denied on the assumption that it was
of production from Nov. 1990-Jan 1991. This amount was amended to P520,825.29.
automatically credited by PBCom against its tax payment in the succeeding year. These
Alhambra protested this amount. Before waiting for the result of the protest, Alhambra
pronouncements by the CTA were affirmed in toto by the CA. Hence, this petition. PBCom
filed for a review with the CTA. Alhambra paid under protest the tax in question.
argues that its claim for refund tax credits are not yet barred by prescription relying on
the applicability of Revenue Memorandum Circular No. 7-85 stating that overpaid
The CTA ordered the CIR to refund Alhambra the amount he paid. The CTA explained
income taxes are not covered by the two-year prescriptive period under the Tax Code
that the tax assessment resulted from Alhambra’s use of the computation mandated by
and that taxpayers may claim refund or tax credits within 10 years under the Civil Code.
the BIR Ruling 473-88, dated Oct. 4 ‘88 as basis for computing the 15% ​ad valorem t​ ax
due on its removals of cigarettes for the period Nov. 2 90 - Jan. 22 1991. BIR Ruling
ISSUE: ​WON PBCom’S claim for a tax refund had already prescribed. ​(YES)

Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​2
RULING: ​Claims for refund or tax credit should be exercised within the time fixed by law
because the BIR being an administrative body enforced to collect taxes, its functions
should not be unduly delayed or hampered by incidental matters. Section 230 of the
National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides
for the prescriptive period for filing a court proceeding for the recovery of tax
erroneously or illegally collected. The rule states that the taxpayer may file a claim for
refund or credit with the Commissioner of Internal Revenue, with 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.
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of
the 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress. It bears repeating that Revenue
memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time
by the Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to
great respect by the courts. Nevertheless, such interpretation is not conclusive and will
be ignored if judicially found to be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony
with, the law they seek to apply and implement.
IMPRESCRIPTIBILITY
(6) CIR v. Ayala Securities Corp., GR L-29485 (Nov 1980)
PERTINENT PROVISION: ​NIRC, SEC. 331. ​Period of limitation upon assessment and
collection​. — Except as provided in the succeeding section, internal revenue taxes shall
be assessed within five years after the return was filed, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration of
such period. For the purpose of this section a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day; Provided, That
this limitation shall not apply to cases already investigated prior to the approval of this
Code.
SEC. 332. ​Exceptions as to period of limitation of assessment and collection of taxes​. — (a)
In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud, or omission.
(b) Where before the expiration of the time prescribed in the preceding section for the
assessment of the tax, both the Commissioner of Internal Revenue and the taxpayer have
consented in writing to its assessment after such time, the tax may be assessed at any
time prior to the expiration of the period agreed upon. The period so agreed upon may
be extended by subsequent agreements in writing made before the expiration of the
period previously agreed upon.
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​3
(c) Where the assessment of any internal revenue tax has been made within the period of
limitation above prescribed such tax may be collected by distraint or levy by a
proceeding in court, but only if begun (1) within five years after the assessment of the
tax, or (2) prior to the expiration of any period for collection agreed upon in writing by
the Commissioner of Internal Revenue and the taxpayer before the expiration of such
five-year period. The period so agreed upon may be extended by subsequent agreements
in writing made before the expiration of the period previously agreed upon.
FACTS: ​CIR assessed Php700,000 against Ayala. CTA said that the assessment fell under
the 5-year prescriptive period provided in Sec 331 of the NIRC, and therefore is of no
force and effect.
CIR urged that the sections 331 and 332 of the NIRC for prescriptive periods of five (5)
and ten (10) years after the filing of the return do not apply to the tax on the
taxpayer's unreasonably accumulated surplus under section 25 of the Tax Code since
no return is required to be filed by law or by regulation on such unduly accumulated
surplus on earnings.
CIR argued that based on jurisprudence, “it would not be proper for the law to compel
a corporation to report improper accumulation of surplus. Accordingly, Section 331
limiting the right to assess internal revenue taxes within five years from the date the
return was filed or was due does not apply.” Sec 332 also doesn’t apply because it has
reference to national internal revenue taxes which require the filing of returns.
ISSUE: ​W/N unreasonable accumulations are prescriptible. ​[NO]
CIR WINS
RULING: ​Limitations upon the right of the government to assess and collect taxes (i.e.,
prescription) will not be presumed in the absence of clear legislation to the contrary and
that where the government has not by express statutory provision provided a limitation
upon its right to assess unpaid taxes, such right is imprescriptible.There is no such time
limit on the right of the Commissioner of Internal Revenue to assess the 25% tax on
unreasonably accumulated surplus provided in section 25 of the Tax Code, since there is
no express statutory provision limiting such right or providing for its prescription.
The purpose of the additional tax in question on a corporation's improperly accumulated
profits or surplus is as set forth in the text of section 25 of the Tax Code itself – to avoid
the situation where a corporation unduly retains its surplus earnings instead of declaring
and paying dividends to its shareholders or members who would then have to pay the
income tax due on such dividends received by them. The record amply shows that Ayala
Securities Corporation is a mere holding company of its shareholders through its mother
company, a registered co-partnership then set up by the individual shareholders
belonging to the same family and that the ​prima facie evidence and presumption set up
by the Tax Code, therefore, applied without having been adequately rebutted by the
respondent corporation.
Ayala’s accountant as well as its Secretary and head of the Legal Department testified
that Ayala Securities Corporation is a mere holding company of the Ayala & Company,
by affirming that their employees and business locations are the same. 1
(7) Collector v. Bisaya Land Transport, GR L-12100 (May 29, 1958)
FACTS:
Between June 1845 and January 1957, Bisaya Land Transportation Co acquired
equipment from the United States Commercial Co which it used in the operation of its
buses, without paying the corresponding compensating and specific taxes. On
investigation by revenue agents, Bisaya Land’s gross receipts were not declared for
taxation; it issued freight receipts but the corresponding documentary stamps were not
affixed thereto; a deficiency additional residence tax was also determined. The CIR
assessed Bisaya Land and demanded around P5K consisting of 1) compensating tax, 2)
common carrier’s percentage tax, 3) documentary stamp tax, and 4) additional residence
tax. This was appealed to the CTA and then to the SC.
Bisaya Land Transportation Co Argue:
1. ​CTA erred in not holding that the claim for compensating tax and residence tax has
already prescribed, and
2. ​Compensating tax, documentary stamp tax and common carrier’s percentage tax are
not chargeable.
ISSUE:
W/N the liability of Bisaya Land has prescribed [NO]
RULING:
1. P
​ etitioner's pretense that the period of prescription, in relation to the first assignment
of error, should be computed from the filing of its income tax returns is without
merit. To begin with, said income tax returns have not been introduced in evidence
and therefore, there was no means to determine what data were included in said
return to apprise the Bureau of Internal Revenue that the company should pay the
compensating tax. Secondly, income tax returns contain a statement of the
taxpayer's income for a given year. The taxpayer is not supposed to declare in said
returns that he has purchased or received "from without the Philippines",
commodities or merchandise that are subject to the compensating tax. Generally,
such purchases are not "income," and, hence, have no place in income tax returns.
2. T
​ he company maintains that the equipment and materials it purchased from agencies
of the U.S. Government are not subject to compensating tax because they were
acquired, not for business purposes but "in furtherance of the war efforts". Suffice it
to note that the acquisition of said effects took place between June, 1945 and
January, 1947 while the hostilities in Japan and Europe ended in 1945.
DOUBLE TAXATION
1
​SEC. 20. ​Holding and Investment Companies​. — A corporation having practically no activities
except holding property, and collecting the income therefrom or investing therein shall be
considered a holding company within the meaning of section 25."
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​4
(8) Villanueva v. City of Iloilo, 26 SCRA 578
FACTS: ​Previously, Ordinance 86 was enacted by the City Iloilo imposing license tax on
1) tenement houses (25pesos) 2) tenement houses engaged in business in the streets of
JM Basa, Iznart and Aldeguer (24pesos per apartment) 3) tenement houses engaged in
business in other streets (12 pesos per apartment). Spouses Villanueva (owner of 4
tenement houses) challenged the ordinance to which the SC held that Ordinance 86 of
City of Iloilo is ultra vires because it did not appear that the power to tax owners of
tenement houses were among those clearly and expressly granted by City of Iloilo’s
charter. Ordinance 11
NLRC
After the passage of the Local Autonomy Act (RA 2264) – the City of Iloilo again passed
Ordinance 11 which is similar to that of Ordinance 86 – imposing municipal license tax
on tenement houses. Spouses Villanueva (now owners of 5 tenement houses) are
challenging Ordinance 11 on the grounds that it is beyond the powers of the Municipal
Council of the City of Iloilo to enact and for being violative of the rule on double taxation
since they are already paying real estate tax​, and the rule on uniformity.
ISSUE: ​Whether or not Ordinance 11 illegal because it imposes double taxation – NO
RULING: The imposition by the ordinance of a license/tenement tax on persons engaged
in the business of operating tenement houses finds authority in Local Autonomy Act
which provides that chartered cities have the authority to impose municipal license taxes
or fees upon persons engaged in any occupation or business, or exercising privileges
within their respective territories,
While it is true that the Sps. Villanueva are taxable under the aforesaid provisions of the
National Internal Revenue Code as real estate dealers, and still taxable under the
ordinance in question, ​the argument against double taxation may not be invoked.
"In order to constitute double taxation in the objectionable or prohibited sense the same
property must be taxed twice when it should be taxed but once​; both taxes must be
imposed on the same property or subject-matter, for the same purpose, by the
same State, Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same kind or
character of tax." Real estate taxes and tenement taxes are not of the same
character. The former is a tax on the property; the latter is a tax on the activity in
which the property is used.
At all events, there is no constitutional prohibition against double taxation in the
Philippines. It is something not favored, but is permissible, provided some other
constitutional requirement is not thereby violated, such as the requirement that
taxes. ​Tenement houses constitute a distinct class of property. Taxes are uniform and
equal when imposed upon all property of the same class or character within the taxing
authority. The fact that the owners of the other classes of buildings in Iloilo are not
imposed upon by the ordinance, or that tenement taxes are imposed in other cities do
not is irrelevant. So long as the burden of tax falls equally and impartially on all owners
or operators of tenement houses similarly classified or situated, equality and uniformity
is accomplished.

(9) Commissioner v. Lednickey, 11 SCRA 603
FACTS: ​Respondent Spouses are both American citizens residing in the Philippines, and
have derived all their income from Philippine sources for the taxable years under
question. These are cases praying to grant the claims for refund for various years for
income taxes. (Basically, respondents pay income taxes in the PH and also in the US for
federal income taxes. There are different amounts involved.)
The common issue in all three cases, and one that is of first impression in this
jurisdiction, is whether a citizen of the United States residing in the Philippines, who
derives income wholly from sources within the Republic of the Philippines, may deduct
from his gross income the income taxes he has paid to the United States government for
the taxable year. (Basically claiming for benefit that taxes paid in the US be deducted.)
The Tax Court held that they may be deducted because of the undenied fact that the
respondent spouses did not "signify" in their income tax return a desire to avail
themselves of the benefits of paragraph 3 (B) of the subsection, which reads:
Par. (c) (3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in
his return his desire to have the benefits of this paragraph, the tax imposed by this Title
shall be credited with —
(B) Alien resident of the Philippines. — In the case of an alien resident of the Philippines,
the ​amount of any such taxes paid or accrued during the taxable year to any foreign
country, if the foreign country of which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens of the Philippines residing in such
country​;
ISSUE: ​Whether or not double taxation exists — NO
RULING: ​Much stress is laid on the thesis that if the respondent taxpayers are not
allowed to deduct the income taxes they are required to pay to the government of the
United States in their return for Philippine income tax, they would be subjected to double
taxation. What respondents fail to observe is that ​double taxation becomes obnoxious
only where the taxpayer is taxed twice for the benefit of the same governmental entit​y.
In the present case, although the taxpayer would have to pay two taxes on the same
income but the Philippine government only receives the proceeds of one tax, there is no
obnoxious double taxation.
In the present case, while the taxpayers would have to pay two taxes on the same
income, the Philippine government only receives the proceeds of one tax. As between the
Philippines, where the income was earned and where the taxpayer is domiciled, and the
United States, where that income was not earned and where the taxpayer did not reside,
it is indisputable that justice and equity demand that the tax on the income should accrue
to the benefit of the Philippines. Any relief from the alleged double taxation should come
from the United States, and not from the Philippines, since the former's right to burden
the taxpayer is solely predicated on his citizenship, without contributing to the
production of the wealth that is being taxed.
(10) Pepsi Cola v. Tanauan, 69 SCRA 460
FACTS: ​Pepsi-Cola Company commenced a complaint before CFI Leyte to declare Section
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​5
Local Autonomy Act
Tanauan Ordinance
2 of RA 2264 (Local Autonomy Act) as unconstitutional as undue delegation and to
declare 2 Ordinances by Municipality of Tanauan as null and void. Both parties agree that
both ordinances embrace the same subject matter and production tax rates imposed
therein are practically the same. Acting Municipal Treasurer of Tanauan, in a letter
addressed to the Manager of Pepsi Plant in Tanauan sought to enforce compliance with
said Ordinance. Ordinance 23 levies and collects "from soft drinks producers and
manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink
corked. Ordinance 27 levies and collects "on soft drinks produced or manufactured
within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity. The tax imposed by both
ordinances is denominated as municipal production tax. CFI dismissed the complaint and
upheld constitutionality of the ordinances. On appeal, CA elevated the case to the SC
ISSUE: ​Whether or not RA 2264 constituted undue delegation [NO] and whether the 2
ordinances constitute double taxation [NO]
RULING:
POWER OF TAXATION: The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent government, without
being expressly conferred by the people. Legislative powers may be delegated to local
governments in respect of matters of local concern. This is sanctioned by immemorial
practice. Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extra-territorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a
particular taxpayer, although the purpose of the tax will result in an injury rather than a
benefit to such taxpayer.
DOUBLE TAXATION: the delegating authority specifies the limitations and enumerates
the taxes over which local taxation may not be exercised. The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation, in
general, is not forbidden by our fundamental law, 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 bene t 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.
APPLICATION TO CASE: When it was discovered that the producer or manufacturer
could increase the volume contents of the bottle and still pay the same tax rate, the
Municipality of Tanauan enacted Ordinance No. 27 imposing a tax of one centavo (P0.01)
on each gallon of volume capacity. The difference between the two ordinances clearly
lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a
centavo for every bottle corked; in Ordinance No. 27, it is one centavo on each gallon of
volume capacity. Ordinance 27 is clearly intended as substitute for the prior Ordinance.
The municipality in this case is only seeking compliance with Ordinance 27. Thus, no
double taxation.
NOT SPECIFIC TAX NOR TAX ON SALES: the imposition of "a tax of one centavo on each
gallon of volume capacity" on all soft drinks produced or manufactured under Ordinance
No. 27 does not partake of the nature of a percentage tax on sales, or other taxes in any
form based thereon. The tax is levied on the produce (whether sold or not) and not on
the sales. Nor can the tax levied be treated as a specific tax. Specific taxes are those
imposed on specified articles Soft drink is not one of those specified.
POWER TO TAX POWER TO DESTROY
(11) McCulloch v. Maryland, 51 Am. Jur. 80
FACTS: The Congress of the United States chartered the Second Bank of the United
States. The President, directors and company of the Bank of the United States,
incorporated by the act of Congress, did organize themselves, and go into full operation
in Philadelphia (Pennsylvania) and later, it opened a branch in Baltimore (Maryland). A
law was passed by the General Assembly of Maryland imposing a tax on all banks, or
branches thereof, in the State of Maryland, not chartered by the legislature. At that time,
only the Second Bank of the United States was not chartered under Maryland. James
William McCulloch, the cashier of the Maryland branch issued the said bank notes to
George Williams, in part payment of a promissory note of Williams, discounted by the
said branch or office, which said respective bank notes were not issued on stamped
paper in the manner prescribed by the law of Maryland. The bank has not paid the sum
of $15,000 to the Treasurer of the Western Shore, for the use of the State of Maryland,
before the issuing of the said notes, or any of them. John James, on his behalf and on
behalf of Maryland, sued McCulloch for not paying the taxes. Maryland contends that the
Federal government did not authorize Congress to charter a bank hence the creation of
Second Bank is unconstitutional. The counsel for the bank place its claim to be exempted
from the power of a State to tax its operations.
ISSUE: ​Can the State of Maryland impose the tax on the bank? ​[NO]
RULING: ​As to the argument raised by Maryland. A ​ mong the enumerated powers,
establishing a bank or creating a corporation is not expressly enumerated but there is no
phrase which, like the Articles of Confederation, excludes incidental or implied powers
and which requires that everything granted shall be expressly and minutely described.
The act to incorporate the Bank of the United States is a law made in pursuance of the
Constitution, and is a part of the supreme law of the land.
The power of taxing the people and their property is essential to the very existence of
Government, and may be legitimately exercised on the objects to which it is applicable, to
the utmost extent to which the Government may choose to carry it. ​That the power to
tax involves the power to destroy; that the power to destroy may defeat and
render useless the power to create; there is a plain repugnance in conferring on
one government a power to control the constitutional measures of another, which
other is declared to be supreme over that which exerts control, are propositions
not to be denied. Taxation, it is said, does not necessarily and unavoidably destroy. To
carry it to the excess of destruction would be an abuse, to presume which would banish
that confidence which is essential to all Government.
The States have no power, by taxation or otherwise, to retard, impede, burden, or
in any manner control the operations of the constitutional laws enacted by
Congress to carry into execution the powers vested in the General Government.
This is a tax on the operations of the bank, and is, consequently, a tax on the operation of
an instrument employed by the Government of the Union to carry its powers into
execution. Such a tax must be unconstitutional. When they tax the chartered institutions
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​6
of the States, they tax their constituents, and these taxes must be uniform. But when a
State taxes the operations of the Government of the United States, it acts upon
institutions created not by their own constituents, but by people over whom they claim
no control. It acts upon the measures of a Government created by others as well as
themselves, for the benefit of others in common with themselves.
(12) Panhandle Oil Co. v. Mississippi, 77 US 21
Plaintiff/petitioner: Panhandle Oil Company
Defendant: Mississippi Ex Rel. Knox, Attorney General
FACTS: ​PANHANDLE has been engaged in the business of selling gasoline since
sometime in 1925. The State sued to recover taxes claimed on account of sales made by
PANHANDLE to the US for the use of its Coast Guard Fleet in service in the Gulf of Mexico
and its Veterans' Hospital at Gulfport. Some of the sales were made while the Act of 1924
was in force and some after the rate had been increased by the Act of 1926. The demand
was for 3 cents a gallon on some and 4 cents on the rest (because the tax increased under
different laws. See explanation and table below). PANHANDLE defended on the ground
that these statutes, if construed to impose taxes on such sales, are ​repugnant to the
federal Constitution. The CFI sustained that contention and the State appealed. The SC
held the exaction a valid privilege tax measured by the number of gallons sold; that it
was not a tax upon instrumentalities of the federal government and that the United
States was not entitled to buy such gasoline without payment of the taxes charged
dealers. Hence, this action.
Chapter 116 of the Laws of Mississippi of 1922 provided that "any person engaged in the
business of distributing gasoline, or retail dealer in gasoline, shall pay for the privilege of
engaging in such business an excise tax of 1 ¢ [one cent] per gallon upon the sale of
gasoline...," except that sold in interstate commerce or purchased outside the State and
brought in by the consumer for his own use. Chapter 115, Laws of 1924, increased the
tax to 3 cents per gallon and c. 119, Laws of 1926, made it 4 cents per gallon.
Law Excise Tax on the Sale of Gasoline
Chapter 116 of the Mississippi Laws of 1922 1 cent / gallon
Chapter 115 of the Mississippi Laws of 1924 3 cents / gallon
Chapter 119 of the Mississippi Laws of 1926 4 cents / gallon
ISSUE: W/N the tax imposed on sales of gasoline is repugnant to the federal Constitution
[YES, as per Justice Butler. But Justice Holmes and Justice Reynolds dissented. This is
where the doctrine is found.]
RULING: [JUSTICE BUTLER] ​The US is empowered by the Constitution to maintain and
operate the fleet and hospital. That authorization and laws enacted pursuant thereto are
supreme; and, in case of conflict, they control state enactments. The States may not
burden or interfere with the exertion of national power or make it a source of revenue or
take the funds raised or tax the means used for the performance of federal functions. The
strictness of that rule was emphasized in Gillespie v. Oklahoma. The right of the US to
make such purchases is derived from the Constitution. PANHANDLE’s right to make sales
to the US was not given by the State and does not depend on state laws; it results from
the authority of the national government under the Constitution to choose its own means
and sources of supply. While Mississippi may impose charges upon PANHANDLE for the
privilege of carrying on trade that is subject to the power of the State, it may not lay any
tax upon transactions by which the United States secures the things desired for its
governmental purposes. XXX ​The exactions demanded from PANHANDLE infringe its
right to have the constitutional independence of the US in respect of such purchases
remain untrammeled. PANHANDLE is not liable for the taxes claimed. Judgment
reversed.
DISSENT: ​(For the summary of the dissenting opinions, I lifted the ones from the 2014 ALS
digest kasi tama naman sila and added just a few other.]
[JUSTICE HOLMES] He opinionated that the Government should not be treated any
differently as any other purchaser, since in a sense it avails of the services of the State.
Furthermore, he believes that the decision was due to the Court’s failure to recognize
that distinctions of law are in relation to degree. Through CJ Marshall’s often quoted
dicta that, “​the power to tax is the power to destroy”, ​this Court applies the power to
tax in absolutes. However, Holmes opinionated that the Court may defeat an attempt to
impose a discriminatory tax, without altogether invalidating the imposition, by perhaps
changing the rates. ​After all, “the power to tax is not the power to destroy while this
Court sits”.
[JUSTICE REYNOLDS] He does not believe that every person who sells gasoline to the US
Government then becomes a federal instrumentality, with the privilege of claiming
freedom from taxation of the State. The doctrine of immunity is well established, but it
should not be extended beyond reasons which underlie it. Moreover, the states and the
national government must co-exist. Neither may destroy the other. Thus, the federal
Constitution must receive a practical construction. Its limitations and its implied
prohibitions must not be extended so far as to destroy the necessary powers of the
States, or prevent their efficient exercise.
[JUSTICE HOLMES VERBATIM for reference]: ​In those days it was not recognized as it
is today that most of the distinctions of the law are distinctions of degree. XXX This Court
which so often has defeated the attempt to tax in certain ways can defeat an attempt to
discriminate or otherwise go too far without wholly abolishing the power to tax. ​The
power to tax is not the power to destroy while this Court sits. The power to fix
rates is the power to destroy if unlimited, but this Court while it endeavors to
prevent confiscation does not prevent the fixing of rates. A tax is not an
unconstitutional regulation in every case where an absolute prohibition of sales
would be one. ​XXX ​I do not perceive why it should be entitled to stand differently
from any other purchaser. It avails itself of the machinery furnished by the State
and I do not see why it should not contribute in the same proportion that every
other purchaser contributes for the privileges that it uses. It has no better or other
right to use them than anyone else. The cost of maintaining the State that makes
the business possible is just as necessary an element in the cost of production as
labor or coal. ​XXX I am not aware that xxx because they are instrumentalities of
government and cannot function naked and unfed, hitherto have been held entitled to
have their bills for food and clothing cut down so far as their butchers and tailors have
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​7
been taxed on their sales; and I had not supposed that the butchers and tailors could
omit from their tax returns all receipts from the large class of customers to which I have
referred. The question of interference with Government, I repeat, is one of
reasonableness and degree and it seems to me that the interference in this case is too
remote.
(13) Phil. Health Care Providers v. CIR, GR 167330 (Sept. 18, 2009)
FACTS: ​Philippine Health Care Providers Inc. is a domestic corporation whose primary
purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health
care delivery system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the administrative,
legal, and financial responsibilities of the organization." Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice
health delivery system at a hospital or clinic owned, operated or accredited by it.
Respondent CIR sent petitioner a formal demand letter and the corresponding
assessment notices demanding the payment of deficiency taxes, including surcharges
and interest, for the taxable years 1996 and 1997 in the total amount of
P224,702,641.18. The ​deficiency DST assessment was imposed on petitioner's
health care agreement with the members of its health care program ​pursuant to
Section 185 of the 1997 Tax Code. Petitioner protested the assessment in a letter.
ISSUE: ​W/N health care agreement in the nature of an insurance contract and therefore
subject to the documentary stamp tax (DST) -​ YES
RULING: ​The DST is levied on the exercise by persons of certain privileges conferred by
law for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments. It is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business. In particular, the DST
under Section 185 of the 1997 Tax Code is imposed on the privilege of making or
renewing any policy of insurance (except life, marine, inland and fire insurance), bond or
obligation in the nature of indemnity for loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.
Contrary to petitioner's claim, its health care agreement is not a contract for the
provision of medical services. Petitioner does not actually provide medical or hospital
services but merely arranges for the same 17 and pays for them up to the stipulated
maximum amount of coverage.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
prepaid.
The insurable interest of every member of petitioner's health care program in obtaining
the health care agreement is his own health. Under the agreement, petitioner is bound to
indemnify any member who incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingency to the extent agreed upon under the
contract.
Moreover, DST is not a tax on the business transacted but an excise on the privilege,
opportunity, or facility offered at exchanges for the transaction of the business. It is an
excise on the facilities used in the transaction of the business, separate and apart from
the business itself.
ESCAPE FROM TAXATION
TAX EVASION v. TAX AVOIDANCE
(14) Comm v. Rufino, GR L-33665-68 (Feb. 27, 1987)
FACTS: ​CIR sought to reverse the decision of CTA absolving the private respondents
from liability for capital gains tax on the stocks received by them from the Eastern
Theatrical, Inc.
Private respondents were the majority stockholders of the defunct Eastern Theatrical
Co., Inc. (hereinafter referred to as the Old Corporation) Said corporation was organized
to engage in the business of operating theatres, opera houses, places of amusement and
other related business enterprises, more particularly the Lyric and Capitol Theaters.
Private respondent are also the majority and controlling stockholder of another
corporation, the Eastern Theatrical, Inc. (hereinafter referred to as the New Corporation)
This corporation is engaged in the same kind of business as the Old Corporation.
Later, the two corporations entered into a merger. This is to provide the Old Corporation
the continuation of its business after the end of its corporate life. A Deed of Assignment
was then entered between this two transferring all the business, assets, goodwill, and
liabilities of the Old Corporation to the New Corporation. In exchange the shareholders of
the Old Corporation will be issued 2 share for each share held by them in the said
Corporation.
The new Corporation continued the business of the Lyric and Capitol Theatres and
assumed all the liabilities of the Old Corporation. The New Corporation then registered
its increased capitalization with the SEC and later issued the corresponding share of
stocks, as agreed, to the petitioners.
BIR then examined the said merger. It declared that the merger of the two corporations
was not undertaken for a bona fide purpose but merely to avoid liability for the capital
gains tax on the exchange of the old for the new shares of stock. Basically, BIR said that
the new corporation did not actually issue stocks in exchange for the properties of the
Old Corporation at the time of the supposed merger.
This resolution was reversed by the CTA.
ISSUE: ​Whether the merger was entered to avoid liability for the capital gains tax. ​(NO, it
was for a bona fide purpose)
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​8
RULING: ​Contrary to the claim of the petitioner, there was a valid merger although the
actual transfer of the properties subject of the Deed of Assignment was not made on the
date of the merger. In the nature of things, this was not possible. Obviously, it was
necessary for the Old Corporation to surrender its net assets first to the New Corporation
before the latter could issue its own stock to the shareholders of the Old Corporation
because the New Corporation had to increase its capitalization for this purpose. This
required the adoption of the resolution to this effect, the registration of such issuance
with the SEC, and its approval by that body. All these took place after the date of the
merger but they were deemed part and parcel of, and indispensable to the validity and
enforceability of, the Deed of Assignment.
The basic consideration, of course, is the purpose of the merger, as this would determine
whether the exchange of properties involved therein shall be subject or not to the capital
gains tax. The criterion laid down by the law is that the merger "must be undertaken for
a bona fide business purpose and not solely for the purpose of escaping the burden of
taxation." We must therefore seek and ascertain the intention of the parties in the
light of their conduct contemporaneously with, and especially after, the
questioned merger pursuant to the Deed of Assignment.
It has been suggested that one certain indication of a scheme to evade the capital
gains tax is the subsequent dissolution of the new corporation after the transfer to
it of the properties of the old corporation and the liquidation of the former soon
thereafter. ​This highly suspect development is likely to be a mere subterfuge aimed at
circumventing the requirements of the Tax Code while seeming to be a valid corporate
combination.
We see no such intention in the instant case. It is clear, in fact, that the purpose of the
merger was to continue the business of the Old Corporation, whose corporate life was
about to expire, through the New Corporation to which all the assets and obligations of
the former had been transferred. The New Corporation was not dissolved after the
merger agreement. On the contrary, it continued to operate the places of amusement
originally owned by the Old Corporation. The New Corporation, in fact, continues to do
so today after taking over the business of the Old Corporation twenty-seven years ago.
Also worth noting is that, was that there has been no distribution of the assets of the New
Corporation since then and up to now, when the transfer took place. To date, the private
respondents have not derived any benefit from the merger of the Old Corporation and
the New Corporation almost three decades earlier that will make them subject to the
capital gains tax. They are no more liable now than they were when the merger took
effect in 1959, as the merger, being genuine, exempted them under the law from such
tax.
Our ruling then is that the merger in question involved a pooling of resources aimed at
the continuation and expansion of business and so came under the letter and intendment
of the National Internal Revenue Code, as amended by the above cited law, exempting
from the capital gains tax exchanges of property effected under lawful corporate
combinations.
(15) Delpher Trades Corp. v. IAC, 157 SCRA 349
Petitioner: ​Delpher Trades Corp. and Delfin Palcheco
Respondents: ​Intermediate Appellate Court (IAC) and Hydro Pipes Philippines, Inc.
(Hydro Pipes)
FACTS: ​Delfin and Pelagia Palcheco (Palchecos), owners of a parcel of land in Malinta,
Bulacan, transferred the same to Delpher Trades Corp, a family corporation of the
Palchecos, in exchange of 2,500 no-par value shares.
Hydro Pipes is a lessor of the same parcel of land. It was assailing the transfer of
Pachecos since under its lease agreement, it has a right of first refusal over the leased
property should the Pachecos decided to sell the property. Hydro Pipes contended that
the transfer was in fact a sale and thus it was deprived of its right of first refusal. Also,
the transfer to Delpher Trades Corp. allowed the Pachecos to gain 55% of the
shareholdings of Delpher. The RTC ruled in favor of Hydro Pipes which was affirmed by
the IAC.
Petitioners contends that there was no substantial change in ownership considering that
the transfer was made to their family corporation, and that Delpher is a business conduit
of the Pachecos. What they really did was to invest their properties and change the
nature of their ownership from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their properties and at the same time save
on inheritance taxes.
ISSUE: ​W/N the transfer of the Palchecos to Delpher should be considered a Deed of Sale
(NO, it is not a sale)
RULING: The transfer is not a sale. Note that the exchange involved 2,500 no-par shares
giving the Palchecos 55% ownership, 45% of which also belong to the family. A no-par
value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of
the issuing corporation. The capital stock of a corporation issuing only no-par value
shares is not set forth by a stated amount of money, but instead is expressed to be
divided into a stated number of shares. This indicates that a shareholder of a certain
percentage of such shares is an aliquot sharer in the assets of the corporation to the
extent of their ownership. Thus, by removing the par value of shares, the attention of
persons interested in the financial condition of a corporation is focused upon the value of
assets and the amount of its debts.
Moreover, Delpher is just a mere business conduit of the Pachecos. The transfer was for
the purpose of saving from taxes. As explained, there are certain income tax benefits
from the transfer, such as in Section 35 of the NIRC which provides that no gain or loss
shall also be recognized if a person exchanges his property for stock in a corporation of
which as a result of such exchange said person alone or together with others not
exceeding four persons gains control of said corporation.
Also, to save from inheritance tax, the transfer was made. Since a corporation does not
die it can continue to hold on to the property indefinitely for a period of at least 50 years.
On the other hand, if the property is held by the spouse the property will be tied up in
succession proceedings and the consequential payments of estate and inheritance taxes
when an owner dies.
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​9
These do not point to anything wrong or objectionable about this "estate planning"
scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the
amount of what otherwise could be his taxes or altogether avoid them, by means which
the law permits, cannot be doubted." Thus, the transfer to Delpher by the Pachecos was
not an actual transfer of ownership interest. The Pacheco family merely changed their
ownership from one form to another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of a right of first refusal under
the lease contract.
EQUITABLE RECOUPMENT
(16) Philex Mining v. CIR, GR 125704 (Aug. 28, 1998)
FACTS: ​BIR sent a letter to PHILEX to settle its tax liabilities for the 2nd, 3rd and 4th
quarter of 1991 and 1st and 2nd quarter of 1992, in the total amount of
P123,821,982.52. PHILEX protested the demand, stating that it has pending claims for
VAT input refund in the amount of P119,977,037.02 plus interest. Therefore, these
claims for tax refund should be applied against the tax liabilities.
BIR stated that since these pending claims have not yet been established, it follows that
no legal compensation can take place.
PHILEX raised the issue to the CTA. In the course of the proceedings, BIR issued Tax
Credit Certificate in the amount of P13,144,313.88, which if applied to the tax liability,
would lower the tax obligation to P110,677,688.52. The CTA still ordered PHILEX to pay
the remaining balance, stating that since the claims of PHILEX for VAT Refund is still
pending litigation, and still has to be determined, no legal compensation can take place.
The CTA further ruled that taxes cannot be the subject to set-off on compensation since
taxes is not a debt or a contract.
Thereafter, PHILEX obtained its VAT credit/refund in the amount of ~P205 million.
PHILEX contends that the same should, ​ipso jure, offset its tax liabilities, since both had
already become due and demandable, as well as liquidated.
ISSUE: ​Can compensation apply? NO
RULING: ​In several instances, the SC has already stated that taxes cannot be subject to
compensation for the reason that the government and the taxpayer are not creditors and
debtors.
PHILEX’s reliance on the ​Suyoc c​ ase, which stated that a pending refund may be set off
against an existing tax liability, is no longer supported by statutory law. The said case
was decided using the NIRC of 1939, but upon the enactment of NIRC of 1977, the
provision upon which the ​Suyoc ​case was based was omitted. Hence, ​Suyoc cannot be
invoked.
PHILEX also contends that the imposition of surcharge and interest for the non-payment
of excise taxes within the time prescribed was unjustified. PHILEX states that it had no
obligation to pay the tax within the prescribed period since they had pending claims for
VAT credit/refund with the BIR. This is an outright disregard of the basic principle that
taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance.

PHILEX also claims that BIR violated the NIRC, which states that refunds should be
processed within 60 days, when it took 5 years for the BIR to grant its tax claim. The
Court agrees with PHILEX, stating that the input taxes were paid on 1989-1991 but the
refund was only granted in 1996. Had the BIR been more diligent and judicious with
their duty, it could have granted the refund earlier.
While the Court can never condone BIR’s apparent callousness in its duties, the same
cannot justify PHILEX’s non-payment of its tax liabilities.
(17) Domingo v. Garlitos. GR 18994 (June 29, 1963)
FACTS: ​In a prior case, in order to enforce the claims against the estate of the deceased
Walter Scott Price, the fiscal presented a petition to the court for the execution of the the
order for the payment by the estate of the estate and inheritance taxes, charges and
penalties amounting to P40,058.55, issued by the CFI. The petition was, however, denied
by the court which held that the execution is not justifiable as the Government is
indebted to the estate under administration in the amount of P262,200. Petitioner
Domingo seeks to set aside this judgement of the court and execute the claim of the
government against the estate of the deceased Walter Scott Price for internal revenue
taxes.
ISSUE: ​WON the claim of the government against the estate of the deceased must be
executed. ​(NO)
RULING: ​The ordinary procedure by which to settle claims or indebtedness against the
estate of a deceased person, as an inheritance tax, is for the claimant to present a claim
before the probate court so that said court may order the administrator to pay the
amount thereof. The legal basis for such a procedure is the fact that in the testate or
intestate proceedings to settle the estate of a deceased person, the properties belonging
to the estate are under the jurisdiction of the court and such jurisdiction continues until
said properties have been distributed among the heirs entitled thereto. During the
pendency of the proceedings all the estate is in custodia legis and the proper procedure
is not to allow the sheriff, in case of a court judgment, to seize the properties but to ask
the court for an order to require the administrator to pay the amount due from the estate
and required to be paid.
The fact that the court having jurisdiction of the estate had found that the claim of the
estate against the Government has been appropriated for the purpose by a
corresponding law (Rep Act No. 2700) shows that both the claim of the Government for
inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable as well as fully liquidated. ​Compensation, therefore,
takes place by operation of law​, in accordance with the Provisions of Articles 1279 and
1290 of the Civil Code, and both debts are extinguished to the concurrent amount.
SET-OFF TAXES
(18) Francia v. IAC, GR L-67649 (June 28, 1988)
FACTS: ​Francia owned a lot and a two-story house built upon it. From 1963 to 1977, he
failed to pay his real estate taxes. In October 1977, a portion of Francia's property was
expropriated by the Republic for the sum of P4,116.00 - the estimated amount equivalent
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​10
to the assessed value of the portion. In December 1977, the property was sold at a public
auction by the City Treasurer to satisfy a tax delinquency (php2,400). Ho won the bid.
Francia was in Iligan City during the bid (​helping his uncle ship bananas)​ .
Francia only found out about the sale when he received a notice concerning Ho’s Petition
for Entry of New Certificate of Title. The final bill of sale was annotated at the back of the
TCT by the Register of Deeds. He now opposes that petition.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his
land was expropriated in October 1977. Hence, his tax obligation had been set-off by
operation of law.
ISSUE: ​W/N the tax delinquency can be set-off. ​[NO]
RULING: ​OBLICON. By legal compensation, obligations of persons, who in their own right
are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). But based on Art 1279, the ff are not even present: (1) each of the obligors are
bound principally and that he be at the same time a principal creditor of the other; (3)
the two debts are due.
Government and taxpayer 'are not mutually creditors and debtors of each other' under
Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off."
TAX. There can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government. Based
on jurisprudence, Internal Revenue Taxes cannot be the subject of set-off or
compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes.
The general rule based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of duty to, and are the
positive acts of the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required.
OTHER FACTORS. The tax was due to the city government while the expropriation was
effected by the national government. In addition, the amount of P4,116.00 paid by the
national government for the expropriation was deposited with the PNB long before the
sale at public auction of his remaining property. Notice of the deposit was received by
the petitioner on September 1977. Petitioner admitted in his testimony that he knew
about the deposit but he did not withdraw it. He should have withdrawn and used the
money to pay his tax delinquency thus avoiding the public auction. But he didn’t!
He did receive notice for the auction sale. He said that he pocketed the notice of
auction without reading it (​because he was in such a hurry)​ . During cross-examination,
he admitted he received a letter, signed the receipt, but left it where he usually leave
shis mail.
SALES. Gross inadequacy of price is immaterial when the law gives the owner the right
to redeem as when a sale is made at public auction, upon the theory that the lesser the
price, the easier it is for the owner to effect redemption.
(19) REP v. Mambulao Lumber, GR I-7725 (Feb. 28, 1988)
FACTS:
Mambulao Lumber Company admits that they have a liability for forest charges in the
amount of P4,802.37 (with whom it is joint and severally liable with General Insurance &
Surety by an executed bond). On the other hand, Mambulao paid a total of P9,127.50 for
‘reforestation charges’ pursuant to RA 115 which provides that there shall be collected,
in addition to the regular forest charges, the amount of P0.50 on each cubic meter of
timber cut and removed from any public forest to be collected and expended by the
director of forestry, with approval of the secretary of agriculture and commerce, for
reforestation and afforestation of those areas found to be needing such.
Mambulao argues that since the Republic of the Philippines has not made use of those
reforestation charges collected from it for reforesting the denuded area of the land
covered by its license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao Lumber
Company owed the Republic of the Philippines for reforestation charges. He maintains
that the principle of compensation in Civil Code (Art 1278) is applicable.
ISSUE:
W/N the sum of P9,127.50 paid by Mambulao to the Republic as reforestation charges
may be set off or applied to the payment of the sum of P4,802.37 as forest charges due
and owing from Mambulao [NO]
RULING:
It is quite clear that the amount collected as reforestation charges from a timber licensee
or concessionaire shall constitute a fund to be known as the Reforestation Fund for the
reforestation or afforestation, among others, of denuded areas which, upon investigation,
are found to be needing reforestation or afforestation.
Nothing in the law which requires that the amount collected as reforestation charges
should be used exclusively for the reforestation of the area covered by the license of a
licensee or concessionaire, and that if not so used, the same should be refunded to him.
Licensee's area may or may not be reforested at all, depending on whether the
investigation thereof by the Director of Forestry shows that said area needs
reforestation. Amount paid by a licensee as reforestation charges is in the nature of a tax
which forms a part of the Reforestation Fund, payable by him irrespective of whether the
area covered by his license is reforested or not.
Mambulao and the Republic are not mutually creditors and debtors of each other.
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​11
Consequently, the law on compensation is inapplicable. Compensation should take place
when two persons in their own right are creditors and debtors of each other. With
respect to the forest charges which the Mambulao has paid to the government, they are
in the coffers of the government as taxes collected, and the government does not owe
anything to defendant Mambulao. Republic of the Philippines and the Mambulao Lumber
Company are not creditors and debtors of each other, because compensation refers to
mutual debts. A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued on.
The general rule, based on grounds of public policy is well settled that no set-off is
admissible against demands for taxes levied for general or local governmental purposes.
Taxes are not in the nature of contracts between the party and party but grow out of a
duty to, and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a claim
against the governmental body which is not included in the tax levy, it is plain that some
legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is
disputed, the collection of the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be thrown into great confusion.
TAX PAYERS SUIT
Requisites: (1) Public funds are disbursed
(2) Petitioner directly affected by act
(20) Abaya v. Ebdane, GR 167919 (Feb. 14, 2007)
FACTS: The CPI project is for the improvement /rehabilitation of the Catanduanes
Circumferential Road which is the main highway in Catanduanes Province. Catanduanes
Circumferential Road is part of Arterial Road Links Development Projects funded under
Loan Agreement between Japan Bank for International Cooperation (JBIC) and the
Government of the Philippines. The Loan Agreement was taken in conjunction with the
Exchange of Notes between the Japanese Government and the Philippine Government.
These loans were aimed at promoting our country's economic stabilization and
development efforts.
Petitioners, as taxpayers, mainly seek to nullify DPWH Resolution, which recommended
the award to private respondent China Road & Bridge Corporation of the contract for the
implementation of the civil works of CP I. They allege that the bid of 900 million pesos of
China Road & Bridge is more than the ceiling of the appropriated budget for the contract
of 700million pesos only, thus disqualifying them as bidders .
Petitioner Abaya is a taxpayer, former lawmaker, and a Filipino citizen. Petitioner Garcia
is a taxpayer, former military officer, and a Filipino citizen. Petitioner PMA '59
Foundation, Inc., on the other hand, is a non-stock, non-profit corporation organized
under the existing Philippine laws. It claims that its members are all taxpayers and
alumni of the Philippine Military Academy. It is represented by its President.
Respondents are DPWH, DBM, DOF and their Secretaries, China Road & Bridge
Corporation and Treasurer of the Bureau of Treasury.
ISSUE: ​Whether or not petitioners have locus standi as tax payers - YES
RULING: ​Locus standi is "a right of appearance in a court of justice on a given question."
More particularly, it is a party's personal and substantial interest in a case such that he
has sustained or will sustain direct injury as a result of the governmental act being
challenged. The term "interest" means a material interest, an interest in issue affected by
the decree, as distinguished from mere interest in the question involved, or a mere
incidental interest.
The prevailing doctrine in taxpayer's suits is to allow taxpayers to question contracts
entered into by the national government or government-owned or controlled
corporations allegedly in contravention of law. A taxpayer is allowed to sue where there
is a claim that public funds are illegally disbursed, or that public money is being deflected
to any improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. A taxpayer need not be a party to the
contract to challenge its validity.
In the present case, the petitioners are suing as taxpayers. ​They have sufficiently
demonstrated that, notwithstanding the fact that the CP I project is primarily
financed from loans obtained by the government from the JBIC, nonetheless,
taxpayers' money would be or is being spent on the project considering that the
Philippine Government is required to allocate a peso-counterpart therefor. ​The
public respondents themselves admit that appropriations for these foreign-assisted
projects in the GAA are composed of the loan proceeds and the peso-counterpart.
The counterpart fund refers to the component of the project cost to be financed
from government appropriated funds, as part of the government's commitment in
the implementation of the project. Hence, the petitioners correctly asserted their
standing since a part of the funds being utilized in the implementation of the CP I
project partakes of taxpayers' money.
[OTHER INFO about the Case] The Loan Agreement taken in conjunction with the
Exchange of Notes between the Japanese Government and the Philippine Government is
an executive agreement. Under the fundamental principle of international law of pacta
sunt servanda which is embodied in Government Procurement Reform Act, “any treaty
or international or executive agreement affecting the subject matter of this Act to which
the Philippine government is a signatory, shall be observed”. EO 40 expressly recognizes
as an exception to its scope and application those government commitments with
respect to bidding and award of contracts financed partly or wholly with funds from
international financing institutions as well as from bilateral and other similar foreign
sources.
JBIC is considered an adjunct of the Japanese Government. According to the JBIC
procurement guidelines, it absolutely prohibits the imposition of ceilings and bid. DPWH,
as the executing agency of the projects financed by Loan Agreement, rightfully awarded
the contract for the implementation of civil works for the CP I project to China Road &
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​12
Bridge Corporation. Petition dismissed.
(21) Joya v. PCGG. GR 96541 (Aug. 24, 1993)
FACTS: ​Caparas, then Chairman of PCGG, wrote then President Corazon C. Aquino,
requesting her for authority to sign the proposed Consignment Agreement between the
Republic of the Philippines through PCGG and Christie, Manson and Woods International,
Inc. (Christie's of New York, or CHRISTIE'S) concerning the scheduled sale on 11 January
1991 of eighty-two (82) Old Masters Paintings and antique silverware seized from
Malacañang and the Metropolitan Museum of Manila alleged to be part of the ill-gotten
wealth of the late President Marcos, his relatives and cronies (this was later on
authorized).
COA submitted their audit and recommendation that such will sale will be
disadvantageous to the government. On 15 November 1990, PCGG through its new
Chairman David M. Castro, wrote President Aquino defending the Consignment
Agreement and refuting the allegations of COA Chairman Domingo. Petitioners claim that
as Filipino citizens, taxpayers and artists deeply concerned with the preservation and
protection of the country's artistic wealth, they have the legal personality to restrain
respondents Executive Secretary and PCGG from acting contrary to their public duty to
conserve the artistic creations as mandated by the 1987 Constitution, particularly Art.
XIV, Secs. 14 to 18, on Arts and Culture, and R.A. 4846 known as "The Cultural Properties
Preservation and Protection Act," governing the preservation and disposition of national
and important cultural properties. Petitioners also anchor their case on the premise that
the paintings and silverware are public properties collectively owned by them and by the
people in general to view and enjoy as great works of art.
Sale proceeded as scheduled and proceeds of the sale amounting to more than $13M
were turned over. Hence, this petition as taxpayers.
ISSUE: ​Whether or not petitioners have standing for a taxpayer’s suit — No
RULING: ​This petition cannot be allowed as a taxpayer's suit. Not every action filed by a
taxpayer can qualify to challenge the legality of official acts done by the government. A
taxpayer's suit can prosper only if the governmental acts being questioned involve
disbursement of public funds upon the theory that the expenditure of public funds by an
officer of the state for the purpose of administering an unconstitutional act constitutes a
misapplication of such funds, which may be enjoined at the request of a taxpayer.
Obviously, petitioners are not challenging any expenditure involving public funds but the
disposition of what they allege to be public properties. It is worthy to note that
petitioners admit that the paintings and antique silverware were acquired from private
sources and not with public money. ​(This is the only thing they said re: taxpayer’s suit.)
REMEDIES
GOVERNMENT REMEDIES
TAXPAYER REMEDIES
COMPROMISE
TAX1: ADMINISTRATIVE INTERPRETATION
Date
(1) CIR v. Placer Dome, GR 164365 (June 8, 2007)
*disclaimer: will just use the same facts and ruling from the past digest of this since ako din
naman nag digest nito dun HUHU*
FACTS: ​San Antonio Mines Marinduque was owned by Marcopper Mining Corporation.
At the mines, mine tailing from the Taipan Pit started to escape through the Makulapnit
Tunnel and Boac Rivers, causing the cessation of mining and milling operations and
potential environmental damage to rivers and immediate area. To prevent and contain
the further spread of the tailing leak, Placer Dome Inc., the owner of 39.9% of Marcopper
undertook to perform a clean-up and rehabilitation of the Makaluonit and Boac Rivers,
through a subsidiary. Placer Dome engaged Placer Dome Technical Services Limited
(non-resident foreign corporation with office in Canada, to carry out the project.. Placer
Dome Technical Services (PDTSL) engaged the services of Placer Dome Technical
Services (PH; domestic corporation; respondent) and registered VAT entity to implement
the project in the PH. PDTSL and respondent entered into an Implementation Agreement
and the latter agreed to immediately implement the project due to the urgency of the
matter. The Agreement stipulated that all implementation services rendered by
respondent even prior to signing of the agreement shall be deemed to have been
provided pursuant to the Agreement. ​It further stipulated that PDTSL was to pay
respondent the amount equal to all costs incurred for implementation services, ​in US
funds​, which were performed under the Agreement and a fee of 1% of the cost.
Respondent amended its quarterly VAT return for the last 2 quarters of 1996 and 4
quarters of 1997, where it declared a total input VAT payment of 43M++ and 42M++ as
total excess input VAT for said quarters. ​Then, respondent filed an administrative claim
for the refund of its reported total input VAT payments in relation to the project in had
contracted from PDTSL amounting to 43M++. ​To support this claim, ​respondent argued
that the revenued it derived from services rendered to PDTSL, qualified as zero-rated
sales under S102(b)(2) of the Tax Code, since it was paid in foreign currency inwardly
remitted to the PH. ​CIR did not act on the claim, so respondent filed for Review with CTA
praying for the refund of its total reported excess input VAT. ​CIR merely invoked the
presumption that taxes are collected in accordance with law and claims for refund of
taxes are construed strictly against claimants.
ISSUE: ​Whether the services qualified as zero-rated sales ​[YES] ​and so whether the CIR
decision is correct ​[YES]
RULING:
Relevant provision: S102(b)(2):
Section 102. Value-Added Tax on Sale of Services and Use or Lease of Properties.
xxx
(b) Transactions Subject to Zero Percent (0%) Rate. — The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
Xxx
(2) Services other than those mentioned in the preceding subparagraph, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP.
Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​13
A zero-rated VAT transaction includes services by VAT-registered persons other than
processing, manufacturing or repacking goods for other persons doing business outside
the Philippines, which goods are subsequently exported, the consideration for which is
paid in foreign currency and accounted for in accordance with the rules and regulations
of the BSP. ​CIR argues that following Section 4.102-2 (b) (2) of Revenue Regulation No.
5- 96, there are only two categories of services that are subject to zero percent VAT,
namely: services other than processing, manufacturing or repacking for other persons
doing business outside the Philippines for goods which are subsequently exported; and
services by a resident to a non-resident foreign client, such as project studies,
information services, engineering and architectural designs and other similar services.
Petitioner explains that the services rendered by respondent were not for goods which
were subsequently exported nor were they project studies, info services, etc. designed to
be consumed abroad by non-resident foreign clients. CIR claims that this view was
reiterated in VAT Ruling 040-98. However, the Court spurned these arguments in CIR v
American Express, where the Court concluded that the opinion that service must be
destined for consumption outside of the Philippines to be considered zero-rated was
invalid.
Discussion of issues in ​American​ ​Express​ case:
1. What is VAT: VAT is a tax on consumption "expressed as a percentage of the
value added to goods or services" purchased by the producer or taxpayer. As an
indirect tax on services, its main object is the transaction itself or, more
concretely, the performance of all kinds of services conducted in the course of
trade or business in the Philippines
2. ZERO-RATED VAT: even as services may be subject to VAT, our tax laws extend
the benefit of zero- rating the VAT due on certain services. Thus, under S102(b),
there are 2 categories of transaction (see reference).
3. SEEMINGLY BROAD SECOND CATEGORY EXPLAINED: Under the last paragraph
[of Section 102(b)], services performed by VAT-registered persons in the
Philippines (other than the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines), when paid in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated. Section 102(b) is, in fact, "very clear," the
Court declared that any resort to statutory construction or interpretation was
unnecessary.
4. REVENUE REGULATION 5-96 EXPLAINED: (eto kasi yung ginagamit ni CIR na
justification) RR 5-96 amended RR 7-95, the amendment introduced, by way of
giving sample services, were meant to be illustrative (AKA, di naman daw
sinasabi ng RR na etong services lang dapat yung covered ng 2nd category,
kundi nagbigay lang yung RR ng examples kasi nga ang broad nung 2nd
category). The use of the term "as well as" is not restrictive. As a prepositional
phrase with an adverbial relation to some other word, it simply means "in
addition to, besides, also or too." Neither the law nor any of the implementing
revenue regulations aforequoted categorically de nes or limits the services that
may be sold or exchanged for a fee, remuneration or consideration.
5. INVOKED VAT RULING 040-98 DEBUNKED: When this ruling states that the
service must be "destined for consumption outside of the Philippines" in order
to qualify for zero rating, it contravenes both the law and the regulations issued
pursuant to it. This portion of VAT Ruling No. 040-98 is clearly ultra vires and
invalid {aka wag mo iinvoke si BIR commissioner kasi mali siya)
 6. DESTINATION PRINCIPLE: CIR argues that (since di naman daw consumed
abroad), the onus of taxation of the revenue arising from the service, for VAT
purposes, is within the PH. Court held that as a general rule, the VAT system
uses the destination principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed. Confusion in zero rating
arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. The consumption
contemplated by law, contrary to petitioner's administrative interpretation,
does not imply that the service be done abroad in order to be zero-rated.
However, the law clearly provides for an exception to the destination principle;
that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP].
7. RECORDS OF SENATE DELIBERATIONS: xxx Senator Herrera: What is
important here is that these services are paid in acceptable foreign currency
remitted inwardly to the Philippines. xxx

TAX ON INDIVIDUALS
Republic Act No. 9527 (Expanded Senior Citizens Act of 2003) amending Republic Act
No. 7432

TAX ON CORPORATIONS

NON-RESIDENT
Republic Act 9294 exempting OBU and FCDU

Angela, Bryan, Dominique, Enchong, Faye, Francesca, Gizelle, Grace, Helena, Joy, Karla, Marie, Patrick​ |​14