2019 BAR REVIEW TAXATION LAW

PRE-WEEK Handout No. 4

GENERAL PRINCIPLES

The collection of taxes under both Sections 14 and 21 of the Revenue Code of Manila constitutes
double taxation.

While the City of Manila could impose against Cosmos a manufacturer's tax under Section 14 of
Ordinance No. 7794, or the Revenue Code of Manila, it cannot at the same time impose the tax
under Section 21 of the same code; otherwise, an obnoxious double taxation would set in. The
petitioners erroneously argue that double taxation is wanting for the reason that the tax imposed
under Section 21 is imposed on a different object and of a different nature as that in Section 14.
The argument is not novel. In The City of Manila v. Coca-Cola Bottlers, Inc. (2009), the Court
explained –

[T]here is indeed double taxation if respondent is subjected to the taxes under both Sections 14
and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter
— the privilege of doing business in the City of Manila; (2) for the same purpose — to make
persons conducting business within the City of Manila contribute to city revenues; '(3) by the
same taxing authority — petitioner City of Manila; (4) within the same taxing jurisdiction —
within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods per calendar
year; and (6) of the same kind or character — a local business tax imposed on gross sales or
receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the
power of municipalities and cities to impose a local business tax, and to which any local business
tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that
when a municipality or city has already imposed a business tax on manufacturers, etc. of liquors,
distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC,
said municipality or city may no longer subject the same manufacturers, etc. to a business tax
under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that
are subject to excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise
specified in preceding paragraphs." In the same way, businesses such as respondent's, already
subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21
of the same Tax Ordinance [which is based on Section 143(h) of the LGC]. (emphases supplied)

In reality, Cosmos, being a manufacturer of beverages, is similarly situated with Coca-Cola

Bottlers, Inc. in the cited cases, with the difference only in the taxable periods of assessment.
Thus, given that Cosmos is already paying taxes under Section 14 (just like Coca-Cola), it is not
totally misplaced to consider the additional imposition of a tax under Section 21 as constituting

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double taxation, therefore excessive, warranting its refund to Cosmos as the CTA Division has
correctly ordered. City of Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018

The grant of 20% Senior Citizen’s discount is not an exercise of power of eminent domain since
private establishments are not paid the just compensation in the form of tax deductions from
gross income and that tax deduction does not offer full reimbursement to private establishment
of the senior citizen discount. The 20% discount as well as the tax deduction scheme is rather
treated as a valid exercise of the police power of the State.

Petitioners posit that the resolution of this case lies in the determination of whether the legally
mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is
police power, no just compensation is warranted. But if it is eminent domain, the tax deduction
scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount
given to senior citizens. Thus, it constitutes taking of private property without payment of just
compensation.

At the outset, we note that this question has been settled in Carlos Superdrug Corporation case.
In that case, we ruled: xxxxxxxxxxxxxxxx

“Tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded
to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense
that is subtracted from the gross income and results in a lower taxable income. Stated otherwise,
it is an amount that is allowed by law to reduce the income prior to the application of the tax rate
to compute the amount of tax which is due. Being a tax deduction, the discount does not reduce
taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed.

The permanent reduction in their total revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation.

Just compensation is defined as the full and fair equivalent of the property taken from its owner
by the expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is
used to intensify the meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real, substantial, full and ample.

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would
not meet the definition of just compensation.

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Having said that, this raises the question of whether the State, in promoting the health and
welfare. Manila Memorial Park, Inc. vs. Secretary of the Department of Social Welfare and
Development, 711 SCRA 302, G.R. No. 175356 December 3, 2013

Upon the taxpayer's full compliance with the requirements of R.A. No. 9480 as implemented by
Department of Finance (DOF) Department Order No. 29-07, the taxpayer is immediately
entitled to the enjoyment of the immunities and privileges of the tax amnesty program.
However, when: (a) the taxpayer fails to file a SALN and the Tax Amnesty Return; or (b) the net
worth of the taxpayer in the SALN as of December 31, 2005 is proven to be understated to the
extent of 30% or more, the taxpayer shall cease to enjoy these immunities and privileges.

R.A. No. 9480 governs the tax amnesty program for national internal revenue taxes for the
taxable year 2005 and prior years. Subject to certain exceptions, a taxpayer may avail of this
program by complying with the documentary submissions to the Bureau of Internal Revenue
(BIR) and thereafter, paying the applicable amnesty tax.

The implementing rules and regulations of R.A. No. 9480, as embodied in Department of Finance
(DOF) Department Order No. 29-07, laid down the procedure for availing of the tax amnesty:

SEC. 6. Method of Availment of Tax Amnesty. –

1. Forms/Documents to be filed. – To avail of the general tax amnesty, concerned taxpayers shall
file the following documents/requirements (1)Notice of Availment in such forms as may be
prescribed by the BIR; (2)[SALN] as of December 31, 2005 in such forms, as may be prescribed by
the BIR;and (3) Tax Amnesty Return in such form as may be prescribed by the BIR.

2. Place of Filing of Amnesty Tax Return. – The Tax Amnesty Return, together with the other
documents stated in Sec. 6 (1) hereof, shall be filed as follows:
(1) Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of
the BIR which has jurisdiction over the legal residence or principal place of business of the
taxpayer, as the case may be; (2) Non-residents shall file with the office of the Commissioner of
the BIR, or with the RDO; (3)At the option of the taxpayer, the RDO may assist the taxpayer in
accomplishing the forms and computing the taxable base and the amnesty tax payable, but may
not look into, question or examine the veracity of the entries contained in the Tax Amnesty
Return, [SALN], or such other documents submitted by the taxpayer.

3. Payment of Amnesty Tax and Full Compliance. – Upon filing of the Tax Amnesty Return in
accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the authorized agent

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bank or in the absence thereof, the Collection Agents or duly authorized Treasurer of the city or
municipality in which such person has his legal residence or principal place of business.

The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for
the use of-or to be accomplished by – the bank, the collection agent or the Treasurer, showing
the acceptance by the amnesty tax payment. In case of the authorized agent bank, the branch
manager or the assistant branch manager shall sign the acceptance of payment form.

The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty
Return shall be submitted to the RDO, which shall be received only after complete payment. The
completion of these requirements shall be deemed full compliance with the provisions of RA
9480.

4. Time for Filing and Payment of Amnesty Tax. – The filing of the Tax Amnesty Return, together
with the SALN, and the payment of the amnesty tax shall be made within six (6) months from the
effectivity of these Rules. (Emphasis and underscoring Ours)

Upon the taxpayer's full compliance with these requirements, the taxpayer is immediately
entitled to the enjoyment of the immunities and privileges of the tax amnesty program. But
when: (a) the taxpayer fails to file a SALN and the Tax Amnesty Return; or (b) the net worth of
the taxpayer in the SALN as of December 31, 2005 is proven to be understated to the extent of
30% or more, the taxpayer shall cease to enjoy these immunities and privileges.

The underdeclaration of a taxpayer's net worth, as referred in the second instance above, is
proven through: (a) proceedings initiated by parties other than the BIR or its agents, within one
(1) year from the filing of the SALN and the Tax Amnesty Return; or (b) findings or admissions in
congressional hearings or proceedings in administrative agencies, and in courts. Otherwise, the
taxpayer's SALN is presumed true and correct. The tax amnesty law thus places the burden of
overturning this presumption to the parties who claim that there was an underdeclaration of the
taxpayer's net worth. Commissioner of Internal Revenue v. Covanta Energy Philippine Holdings,
G.R. No. 203160, January 24, 2018

INCOME TAXATION

Under RR No. 02-98, the obligation to deduct or withhold tax arises at the time an income is
paid or payable, whichever comes first. The term "payable" refers to the date the obligation
becomes due, demandable or legally enforceable.

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In this case, the CIR insists that EBCC was liable to pay the interest from the date of the execution
of the contract on January 5, 2000, not from the date of the first payment on June 1, 2002.

We are not convinced.

EBCC's loan agreement with Ogden stated that:

“3. Repayment and Interest

3.1 The BORROWER shall repay the Loan to the LENDER (or as it may in writing direct) in sixteen
(16) consecutive semi-annual [installments] of US DOLLARS EIGHT HUNDRED and EIGHTY ONE
THOUSAND and TWO HUNDRED and FIFTY (US$881,250.00) commencing on 1 June 2002 and
thereafter on June 1 and December 1 of each year.”

Clearly, EBCC's liability for interest payment became due and demandable starting June 1, 2002.
And considering that under RR No. 02-98, the obligation of EBCC to deduct or withhold tax arises
at the time an income is paid or payable, whichever comes first, and considering further that
under the said RR, the term "payable" refers to the date the obligation becomes due,
demandable or legally enforceable, we find no error on the part of the CTA En Banc in ruling that
EBCC had no obligation to withhold any taxes on the interest payment for the year 2000 as the
obligation to withhold only commenced on June 1, 2002, and thus cancelling the assessment for
deficiency FWT on interest payments arising from EBCC's loan from Ogden.

Neither do we find any reason for the retroactive application of RR No. 12-01, which provides
that the withholding of final tax commences "at the time an income payment is paid or payable,
or the income payment is accrued or recorded as an expense or asset, whichever is applicable in
the payor's book, whichever comes first." To begin with, this issue was never raised before the
CTA. Thus, we cannot rule on this matter now. It is a settled rule that issues not raised below
cannot be pleaded for the first time on appeal because a party is not allowed to change his theory
on appeal; to do so would be unfair to the other party and offensive to rules of fair play, justice
and due process.

Moreover, as aptly pointed out by EBCC, whether it omitted to state a material fact or acted in
bad faith in failing to present documents on its interest payments to show the exact date of
payment is a factual issue, which is not allowed under Rule 45.

In any case, even if the first payment was due on January 4, 2001 as claimed by the CIR, EBCC
would still not be liable, as the tax assessment pertained to taxable year 2000 and not 2001.
Edison (Bataan) Cogeneration Corporation v. Commissioner of Internal Revenue, G.R. No.
201665, August 30, 2017

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For corporations, the National Internal Revenue Code of 1997 treats the sale of land and
buildings, and the sale of machineries and equipment, differently. Domestic corporations are
imposed a 6% capital gains tax only on the presumed gain realized from the sale of lands and/or
buildings. The National Internal Revenue Code of 1997 does not impose the 6% capital gains
tax on the gains realized from the sale of machineries and equipment.

The properties involved in this case include petitioner’s buildings, equipment, and machineries.
They are not among the exclusions enumerated in Section 39(A)(1) of the National Internal
Revenue Code of 1997. None of the properties were used in petitioner’s trade or ordinary course
of business because petitioner never commenced operations. They were not part of the
inventory. None of them were stocks in trade. Based on the definition of capital assets under
Section 39 of the National Internal Revenue Code of 1997, they are capital assets.

Respondent insists that since petitioner’s machineries and equipment are classified as capital
assets, their sales should be subject to capital gains tax. Respondent is mistaken.

Therefore, only the presumed gain from the sale of petitioner’s land and/or building may be
subjected to the 6% capital gains tax. The income from the sale of petitioner’s machineries and
equipment is subject to the provisions on normal corporate income tax.

To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax for the
sold land and/or building of petitioner and the amount of corporate income tax for the sale of
petitioner’s machineries and equipment should be deducted from the total final tax paid. SMI-
ED Philippines Technology, Inc. vs. Commissioner of Internal Revenue, 739 SCRA 691, G.R. No.
175410 November 12, 2014

The irrevocability rule is limited only to the option of carry-over. There is nothing in the law
which prevents the taxpayer who originally opted for a refund or TCC to shift to the carry-over
of the excess creditable taxes to the taxable quarters of the succeeding taxable years. However,
if the taxpayer decides to shift its option to carry-over, as when it subsequently indicated in its
subsequent year’s short-period FAR that it carried over the prior year excess creditable tax and
applied the same against its 2007 income tax due. indicated it may no longer revert to its
original choice due to the irrevocability rule.

We cannot subscribe to the suggestion that the irrevocability rule enshrined in Section 76 of the
National Internal Revenue Code (NIRC) applies to either of the options of refund or carry-over.
Our reading of the law assumes the interpretation that the irrevocability is limited only to the
option of carry-over such that a taxpayer is still free to change its choice after electing a refund
of its excess tax credit. But once it opts to carry over such excess creditable tax, after electing

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refund or issuance of tax credit certificate, the carry-over option becomes irrevocable.
Accordingly, the previous choice of a claim for refund, even if subsequently pursued, may no
longer be granted.

The irrevocability rule is provided in the last sentence of Section 76. A perfunctory reading of the
law unmistakably discloses that the irrevocable option referred to is the carry-over option only.
There appears nothing therein from which to infer that the other choice, i.e., cash refund or tax
credit certificate, is also irrevocable. If the intention of the lawmakers was to make such option
of cash refund or tax credit certificate also irrevocable, then they would have clearly provided so.

In other words, the law does not prevent a taxpayer who originally opted for a refund or tax
credit certificate from shifting to the carry-over of the excess creditable taxes to the taxable
quarters of the succeeding taxable years. However, in case the taxpayer decides to shift its option
to carry-over, it may no longer revert to its original choice due to the irrevocability rule. As Section
76 unequivocally provides, once the option to carry-over has been made, it shall be irrevocable.
Furthermore, the provision seems to suggest that there are no qualifications or conditions
attached to the rule on irrevocability.

Law and jurisprudence unequivocally support the view that only the option of carry-over is
irrevocable.

Applying the foregoing precepts to the given case, UPSI-MI is barred from recovering its excess
creditable tax through refund or TCC. It is undisputed that despite its initial option to refund its
2006 excess creditable tax, UPSI-MI subsequently indicated in its 2007 short-period FAR that it
carried over the 2006 excess creditable tax and applied the same against its 2007 income tax due.
The CTA was correct in considering UPSI-MI to have constructively chosen the option of carry-
over, for which reason, the irrevocability rule forbade it to revert to its initial choice. It does not
matter that UPSI-MI had not actually benefited from the carry-over on the ground that it did not
have a tax due in its 2007 short period. Neither may it insist that the insertion of the carry-over
in the 2007 FAR was by mere mistake or inadvertence. As we previously laid down, the
irrevocability rule admits of no qualifications or conditions.

In sum, the petitioner is clearly mistaken in its view that the irrevocability rule also applies to the
option of refund or tax credit certificate. In view of the court's finding that it constructively chose
the option of carry-over, it is already barred from recovering its 2006 excess creditable tax
through refund or TCC even if it was its initial choice.

However, the petitioner remains entitled to the benefit of carry-over and thus may apply the
2006 overpaid income tax as tax credit in succeeding taxable years until fully exhausted. This is
because, unlike the remedy of refund or tax credit certificate, the option of carry-over under
Section 76 is not subject to any prescriptive period. UNIVERSITY PHYSICIANS SERVICES INC. –

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MANAGEMENT, INC. vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 205955, March 7,
2018

TRANSFER TAXES

Notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such
settlement effected a distribution of the deceased’s estate to his lawful heirs. Note: Judicial
and Extrajudicial Expenses are no longer deductible from the Gross Estate under the TRAIN Law.

The deductions from the gross estate permitted under Section 79 of the Tax Code basically
reproduced the deductions allowed under Commonwealth Act No. 466 (CA 466), otherwise
known as the National Internal Revenue Code of 1939,16 and which was the first codification of
Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the “judicial
expenses of the testamentary or intestate proceedings” for purposes of determining the value of
the net estate. Philippine tax laws were, in turn, based on the federal tax laws of the United
States. In accord with established rules of statutory construction, the decisions of American
courts construing the federal tax code are entitled to great weight in the interpretation of our
own tax laws.

Judicial expenses are expenses of administration. Administration expenses, as an allowable

deduction from the gross estate of the decedent for purposes of arriving at the value of the net
estate, have been construed by the federal and state courts of the United States to include all
expenses “essential to the collection of the assets, payment of debts or the distribution of the
property to the persons entitled to it.” In other words, the expenses must be essential to the
proper settlement of the estate. Expenditures incurred for the individual benefit of the heirs,
devisees or legatees are not deductible. This distinction has been carried over to our jurisdiction.
Thus, in Lorenzo v. Posadas the Court construed the phrase “judicial expenses of the
testamentary or intestate proceedings” as not including the compensation paid to a trustee of
the decedent’s estate when it appeared that such trustee was appointed for the purpose of
managing the decedent’s real estate for the benefit of the testamentary heir. In another case,
the Court disallowed the premiums paid on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a qualification for the office, and not
necessary in the settlement of the estate. Neither may attorney’s fees incident to litigation
incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross
estate.

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a
deductible expense since such settlement effected a distribution of Pedro Pajonar’s estate to his
lawful heirs. Similarly, the attorney’s fees paid to PNB for acting as the guardian of Pedro

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Pajonar’s property during his lifetime should also be considered as a deductible administration
expense. PNB provided a detailed accounting of decedent’s property and gave advice as to the
proper settlement of the latter’s estate, acts which contributed towards the collection of
decedent’s assets and the subsequent settle-merit of the estate. Commissioner of Internal
Revenue vs. Court of Appeals, 328 SCRA 666, G.R. No. 123206 March 22, 2000

VALUE ADDED TAX

The sale by PSALM of the NPC power plants was an exercise of a governmental function
mandated by law for the primary purpose of privatizing NPC assets in accordance with the
guidelines imposed by the EPIRA law. Thus, the said sale should not be subject to VAT.

In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay), the
Court ruled that the sale of the vessels of the National Development Company (NDC) to
Magsaysay Lines, Inc. is not subject to VAT since it was not in the course of trade or business, as
it was involuntary and made pursuant to the government's policy of privatization. The Court cited
the CT A ruling that the phrase "course of business" or "doing business" connotes regularity of
activity. Thus, since the sale of the vessels was an isolated transaction, made pursuant to the
government's privatization policy, and which transaction could no longer be repeated or carried
on with regularity, such sale was not in the course of trade or business and was not subject to
VAT.

Similarly, the sale of the power plants in this case is not subject to VAT since the sale was made
pursuant to PSALM' s mandate to privatize NPC assets, and was not undertaken in the course of
trade or business. In selling the power plants, PSALM was merely exercising a governmental
function for which it was created under the EPIRA law.

Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary
of Justice in OSJ Case No. 2007-3 that it was erroneous for the BIR to hold PSALM liable for
deficiency VAT in the amount of ₱3,813,080,472 for the sale of the Pantabangan-Masiway and
Magat Power Plants. The ₱3,813,080,472 deficiency VAT remitted by PSALM under protest
should therefore be refunded to PSALM. Power Sector Assets and Liabilities Management
Corporation Vs. Commissionoer of Internal Revenue, G.R. No. 198146, August 8, 2017

To claim a refund of unutilized or excess input VAT, purchase of goods or properties must be
supported by VAT invoices, while purchase of services must be supported by VAT official
receipts.

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Strict compliance with substantiation and invoicing requirements is necessary considering VAT's
nature and VAT system's tax credit method, where tax payments are based on output and input
taxes and where the seller's output tax becomes the buyer's input tax that is available as tax
credit or refund in the same transaction. It ensures the proper collection of taxes at all stages of
distribution, facilitates computation of tax credits, and provides accurate audit trail or evidence
for BIR monitoring purposes.

The Court of Tax Appeals further pointed out that the noninterchangeability between VAT official
receipts and VAT invoices avoids having the government refund a tax that was not even paid.

It should be noted that the seller will only become liable to pay the output VAT upon receipt of
payment from the purchaser. If we are to use sales invoice in the sale of services, an absurd
situation will arise when the purchaser of the service can claim tax credit representing input VAT
even before there is payment of the output VAT by the seller on the sale pertaining to the same
transaction. As a matter of fact, if the seller is not paid on the transaction, the seller of service
would legally not have to pay output tax while the purchaser may legally claim input tax credit
thereon. The government ends up refunding a tax which has not been paid at all. Hence, to avoid
this, VAT official receipt for the sale of services is an absolute requirement.90

In conjunction with this rule, Revenue Memorandum Circular No. 42-03 expressly provides that
an "invoice is the supporting document for the claim of input tax on purchase of goods whereas
official receipt is the supporting document for the claim of input tax on purchase of services." It
further states that a taxpayer's failure to comply with the invoicing requirements will result to
the disallowance of the claim for input tax. Pertinent portions of this circular provide:

“A-13: Failure by the supplier to comply with the invoicing requirements on the documents
supporting the sale of goods and services will result to the disallowance of the claim for input tax
by the purchaser-claimant.”

If the claim for refund/[tax credit certificate] is based on the existence of zero-rated sales by the
taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices
(e.g. failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be
denied considering that the invoice it is issuing to its customers does not depict its being a VAT-
registered taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is
without prejudice to the right of the taxpayer to charge the input taxes to the appropriate
expense account or asset account subject to depreciation, whichever is applicable. Moreover,
the case shall be referred by the processing office to the concerned BIR office for verification of
other tax liabilities of the taxpayer.

Pursuant to Sections 106(D) and 108(C) in relation to Section 110 of the 1997 NIRC, the output
or input tax on the sale or purchase of goods is determined by the total amount indicated in the

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VAT invoice, while the output or input tax on the sale or purchase of services is determined by
the total amount indicated in the VAT official receipt. Team Energy Corporation v. Commissioner
of Internal Revenue, G.R. No. 197663 & G.R. No. 197770, March 14, 2018

A domestic corporation that provided technical, research, management and technical

assistance to its affiliated companies and received payments on a reimbursement-of-cost basis,
without any intention of realizing profit, is subject to VAT on services rendered. In fact, even if
such corporation was organized without any intention of realizing profit, any income or profit
generated by the entity in the course of its business is subject to Valie Added Tax.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the
services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed
out by the Commissioner, the performance of all kinds of services for others for a fee,
remuneration or consideration is considered as sale of services subject to VAT. As the
government agency charged with the enforcement of the law, the opinion of the Commissioner
of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great
weight.Also, it has been the long standing policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of
its functions, is dedicated exclusively to the study and consideration of tax cases and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority. There is no merit to respondent’s contention that the Court of Appeals’
decision in CA-G.R. No. 34042, declaring the COMASERCO as not engaged in business and not
liable for the payment of fixed and percentage taxes, binds petitioner. The issue in CA-G-R. No.
34042 is different from the present case, which involves COMASERCO’s liability for VAT. As
heretofore stated, every person who sells, barters, or exchanges goods and services, in the course
of trade or business, as defined by law, is subject to VAT. Hence, it is immaterial whether the
primary purpose of a corporation indicates that it receives payments for services rendered to its
affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT. Commissioner of
Internal Revenue vs. Court of Appeals, 329 SCRA 237, G.R. No. 125355 March 30, 2000

Tollway fees collected by tollway operators are subject to VAT

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use
of the tollway facilities over which the operator enjoys private proprietary rights that its contract
and the law recognize. In this sense, the tollway operator is no different from the following

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service providers under Section 108 who allow others to use their properties or facilities for a
fee:

“1. Lessors of property, whether personal or real; 2. Warehousing service operators; 3.

Lessors or distributors of cinematographic films; 4. Proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns, resorts; 5. Lending investors (for use of money); 6.
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 relative to their
transport of goods or cargoes; and 7. Common carriers by air and sea relative to their transport
of passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines.”

It does not help petitioners’ cause that Section 108 subjects to VAT “all kinds of services”
rendered for a fee “regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties.” This means that “services” to be subject to VAT need
not fall under the traditional concept of services, the personal or professional kinds that require
the use of human knowledge and skills.

And not only do tollway operators come under the broad term “all kinds of services,” they also
come under the specific class described in Section 108 as “all other franchise grantees” who are
subject to VAT, “except those under Section 119 of this Code.”

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than P10
million and gas and water utilities) that Section 119 spares from the payment of VAT. The word
“franchise” broadly covers government grants of a special right to do an act or series of acts of
public concern. Diaz vs. Secretary of Finance, 654 SCRA 96, G.R. No. 193007 July 19, 2011

JURISDICTION, REMEDIES AND REVISED CTA RULES

The issue on whether the revenue officers who had conducted the examination on Lancaster
exceeded their authority pursuant to LOA No. 00012289 may be considered as covered by the
terms “other matters” under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 9282. The
authority to make an examination or assessment, being a matter provided for by the NIRC, is
well within the exclusive and appellate jurisdiction of the CTA.

Is the question on the authority of revenue officers to examine the books and records of any
person cognizable by the CTA?

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It must be stressed that the assessment of internal revenue taxes is one of the duties of the BIR.
Section 2 of the NIRC states:

Sec. 2. Powers and Duties of the Bureau of Internal Revenue.—The Bureau of Internal Revenue
shall be under the supervision and control of the Department of Finance and its powers and
duties shall comprehend, the assessment and collection of all national internal revenue taxes,
fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all cases decided in its favor by the Court of
Tax Appeals and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers conferred to it
by this Code or other laws. (emphasis supplied)

In connection therewith, the CIR may authorize the examination of any taxpayer and
correspondingly make an assessment whenever necessary.31 Thus, to give more teeth to such
power of the CIR, to make an assessment, the NIRC authorizes the CIR to examine any book,
paper, record, or data of any person.32 The powers granted by law to the CIR are intended,
among other things, to determine the liability of any person for any national internal revenue
tax.

It is pursuant to such pertinent provisions of the NIRC conferring the powers to the CIR that the
petitioner (CIR) had, in this case, authorized its revenue officers to conduct an examination of the
books of account and accounting records of Lancaster, and eventually issue a deficiency
assessment against it.

From the foregoing, it is clear that the issue on whether the revenue officers who had conducted
the examination on Lancaster exceeded their authority pursuant to LOA No. 00012289 may be
considered as covered by the terms “other matters” under Section 7 of R.A. No. 1125 or its
amendment, R.A.No. 9282. The authority to make an examination or assessment, being a matter
provided for by the NIRC, is well within the exclusive and appellate jurisdiction of the CTA.

On whether the CTA can resolve an issue which was not raised by the parties, we rule in the
affirmative.

Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax
Appeals, the CTA is not bound by the issues specifically raised by the parties but may also rule
upon related issues necessary to achieve an orderly disposition of the case. The text of the
provision reads:

“SECTION 1. Rendition of judgment.—x x x

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In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may
also rule upon related issues necessary to achieve an orderly disposition of the case.”

The above section is clearly worded. On the basis thereof, the CTA Division was, therefore, well
within its authority to consider in its decision the question on the scope of authority of the
revenue officers who were named in the LOA even though the parties had not raised the same
in their pleadings or memoranda. The CTA En Banc was likewise correct in sustaining the CTA
Division’s view concerning such matter. Commissioner of Internal Revenue vs. Lancaster
Philippines, Inc., 831 SCRA 1, G.R. No. 183408 July 12, 2017

The Court of Tax Appeals is not limited by the evidence presented in the administrative claim
in the Bureau of Internal Revenue. The claimant may present new and additional evidence to
the Court of Tax Appeals to support its case for tax refund. Section 4 of the National Internal
Revenue Code states that the Commissioner has the power to decide on tax refunds, but his or
her decision is subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

Republic Act No. 9282, amending Republic Act No. 1125, is the governing law on the jurisdiction
of the Court of Tax Appeals. Section 7 provides that the Court of Tax Appeals has exclusive
appellate jurisdiction over tax refund claims in case the Commissioner fails to act on them: x x x
This means that while the Commissioner has the right to hear a refund claim first, if he or she
fails to act on it, it will be treated as a denial of the refund, and the Court of Tax Appeals is the
only entity that may review this ruling. The power of the Court of Tax Appeals to exercise its
appellate jurisdiction does not preclude it from considering evidence that was not presented in
the administrative claim in the Bureau of Internal Revenue. Republic Act No. 1125 states that the
Court of Tax Appeals is a court of record.

No value is given to documentary evidence submitted in the Bureau of Internal Revenue unless
it is formally offered in the Court of Tax Appeals. Thus, the review of the Court of Tax Appeals is
not limited to whether or not the Commissioner committed gross abuse of discretion, fraud, or
error of law, as contended by the Commissioner. As evidence is considered and evaluated again,
the scope of the Court of Tax Appeals’ review covers factual findings. Philippine Airlines, Inc.
(PAL) vs. Commissioner of Internal Revenue, 851 SCRA 518, G.R. Nos. 206079-80, G.R. No.
206309 January 17, 2018

There is no need for the issuance of a Pre Assessment Notice (PAN) when a taxpayer who opted
to claim a refund or tax credit of excess creditable withholding tax for a taxable period was

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determined to have carried over and automatically applied the same amount claimed against
the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year.

Nevertheless, it is incumbent upon petitioner to issue a final assessment notice and demand
letter for the payment of respondent's deficiency tax liability for taxable year 2003. Section 228
of the National Internal Revenue Code provides that:
Section 228. Protesting Assessment. – When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayers of
his findings: Provided, however, That a pre-assessment notice shall not be required in the
following cases:

xxx

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or

xxx

The taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation within thirty (30) days from receipt of the assessment in such form and manner
as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of
the protest, all relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)
days from submission of documents, the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision,
or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Emphasis supplied)

In this case, no pre-assessment notice is required since respondent taxpayer carried over to
taxable year 2003 the prior year's excess credits which have already been fully applied against its

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income tax liability for taxable year 2002. Commissioner of Internal Revenue Vs. Cebu Holdings,
Inc. G.R. No. 189792, June 20, 2018

CTA has jurisdiction over cases asking for the cancellation and withdrawal of a warrant of
distraint and/or levy. This is pursuant to the phrase “other matters arising under the NIRC” as
provided under Section 7 of Republic Act (R.A.) No. 9282

First of all, the CTA did not err in its ruling that it has jurisdiction over cases asking for the
cancellation and withdrawal of a warrant of distraint and/or levy as provided under Section 7 of
Republic Act (R.A.) No. 9282, thus:

Sec. 7 Jurisdiction. – The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided: xxx

2. Inaction by the Commissioner of the Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matter arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial; xxx Commissioner of Internal Revenue v. Bank of the Philippine Islands,
G.R. No. 224327, June 11, 2018

The filing of a motion for reconsideration or new trial to question the decision of a division of
the Court of Tax Appeals (CTA) is mandatory. An appeal brought directly to the CTA En Banc is
dismissible for lack of jurisdiction.

The CTA En Banc was correct in interpreting Section 18 of R.A. No. 1125, as amended by R.A.
9282 and R.A. No. 9503, which states –

Section 18. Appeal to the Court of Tax Appeals En Banc. – No civil proceeding involving matter
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein provided, until and unless an appeal has
been previously filed with the CTA and disposed of this Act.

A party adversely affected by a resolution of a Division of the CTA on motion for reconsideration
or new trial, may file a petition for review with the CTA en banc.

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Corollarily, Section 1, Rule 8 of the CTA Rules provides:

Section 1. Review of cases in the Court en banc. — In cases falling under the exclusive appellate
jurisdiction of the Court en banc, the petition for review of a decision or resolution of the Court
in Division must be preceded by the filing of a timely motion for reconsideration or new trial with
the Division. (emphasis supplied)

Clear it is from the cited rule that the filing of a motion for reconsideration or new trial is
mandatory – not merely directory – as indicated by the word "must."

Thus, in Asiatrust Development Bank, Inc. v. Commissioner of Internal Revenue (Asiatrust), we

declared that a timely motion for reconsideration or new trial must first be filed with the CTA
Division that issued the assailed decision or resolution in order for the CTA En Banc to take
cognizance of an appeal via a petition for review. Failure to do so is a ground for the dismissal of
the appeal as the word "must" indicates that the filing of a prior motion is mandatory, and not
merely directory. In Commissioner of Customs v. Marina Sales, Inc. (Marina Sales), which was
cited in Asiatrust, we held:

The rules are clear. Before the CTA En Banc could take cognizance of the petition for review
concerning a case falling under its exclusive appellate jurisdiction, the litigant must sufficiently
show that it sought prior reconsideration or moved for a new trial with the concerned CTA
division. Procedural rules are not to be trifled with or be excused simply because their
noncompliance may have resulted in prejudicing a party's substantive rights. Rules are meant to
be followed. They may be relaxed only for very exigent and persuasive reasons to relieve a litigant
of an injustice not commensurate to his careless non-observance of the prescribed rules. City of
Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018

Submission of the quarterly returns for the succeeding year by a corporate taxpayer is not a
requirement for the refund of excess withholding taxes. To claim for refund, it is enough that
the following requirements are met: (1)That the claim for refund was filed within the two-year
reglementary period pursuant to Section 22918 of the NIRC; (2)When it is shown on the ITR that
the income payment received is being declared part of the taxpayer’s gross income; and
(3)When the fact of withholding is established by a copy of the withholding tax statement, duly
issued by the payor to the payee, showing the amount paid and income tax withheld from that
amount.

We are likewise unmoved by the assertion of the petitioner that the respondent should have
submitted the quarterly returns of the respondent to show that it did not carry-over the excess
withholding tax to the succeeding quarter. When the respondent was able to establish prima

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facie its right to the refund by testimonial and object evidence, the petitioner should have
presented rebuttal evidence to shift the burden of evidence back to the respondent. Indeed, the
petitioner ought to have its own copies of the respondent’s quarterly returns on file, on the basis
of which it could rebut the respondent’s claim that it did not carry over its unutilized and excess
creditable withholding taxes for the immediately succeeding quarters. The BIR’s failure to
present such vital document during the trial in order to bolster the petitioner’s contention against
the respondent’s claim for the tax refund was fatal. Republic vs. Team (Phils.) Energy
Corporation (formerly Mirant [Phils.] Energy Corporation), 746 SCRA 41, G.R. No. 188016
January 14, 2015

A Letter of Authority (LOA) that was issued authorizing the BIR officers to examine the books
of account of the taxpayer for the taxable year (for the period April 1, 1997 to March 31, 1998)
is null and void if the deficiency tax assessment was based on disallowance of expenses
reported in fiscal year 1999, or for the period April 1, 1998 to March 31, 1999.

Nonetheless, a valid LOA does not necessarily clothe validity to an assessment issued on it, as
when the revenue officers designated in the LOA act in excess or outside of the authority granted
them under said LOA. Recently in CIR v. De La Salle University, Inc.36 we accorded validity to the
LOA authorizing the examination of DLSU for “Fiscal Year Ending 2003 and Unverified Prior Years”
and correspondingly held the assessment for taxable year 2003 as valid because this taxable
period is specified in the LOA. However, we declared void the assessments for taxable years 2001
and 2002 for having been unspecified on separate LOAs as required under RMO No. 43-90.

Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the cancellation of a
deficiency VAT assessment because, while the LOA covered “the period 1997 and unverified prior
years,” the said deficiency was arrived at based on the records of a later year, from January to
March 1998, or using the fiscal year which ended on 31 March 1998. We explained that the CIR
knew which period should be covered by the investigation and that if the CIR wanted or intended
the investigation to include the year 1998, it would have done so by including it in the LOA or by
issuing another LOA.

The present case is no different from Sony in that the subject LOA specified that the examination
should be for the taxable year 1998 only but the subsequent assessment issued against Lancaster
involved disallowed expenses covering the next fiscal year, or the period ending 31 March 1999.

The taxable year covered by the assessment being outside of the period specified in the LOA in
this case, the assessment issued against Lancaster is, therefore, void.

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This point alone would have sufficed to invalidate the subject deficiency income tax assessment,
thus, obviating any further necessity to resolve the issue on whether Lancaster erroneously
claimed the February and March 1998 expenses as deductions against income for FY 1999.
Commissioner of Internal Revenue vs. Lancaster Philippines, Inc., 831 SCRA 1, G.R. No. 183408
July 12, 2017

Well settled is the rule that the Final Decision on Disputed Assessment (FDDA) issued by the CIR
must state the facts, law, jurisprudence and regulations upon which it is based. Failure to do so
would deprive the taxpayer adequate opportunity to prepare an intelligent appeal. It would
have no way of determining what were considered by the CIR in the defenses it had raised in
the protest to the FLD. However, the assessment remains valid notwithstanding the nullity of
the FDDA because the assessment itself differs from a decision on the disputed assessment.

In the given case, although the FDDA issued to the taxpayer is void for failure to state the facts,
law, jurisprudence and regulations upon which it is based, the assessment made by the CIR is
valid for the reason that the assessment itself differs from a decision on the disputed assessment.
There is no showing in the given problem that the PAN or the FAN is void for failure to comply
with the requirements of Section 228 of the NIRC.

As established, an FDDA that does not inform the taxpayer in writing of the facts and law on
which it is based renders the decision void. Therefore, it is as if there was no decision rendered
by the CIR. It is tantamount to a denial by inaction by the CIR, which may still be appealed before
the CTA and the assessment evaluated based on the available evidence and documents. CIR vs.
Liquigaz Philippines Corporation, GR No. 215534, April 18, 2016

If both the taxpayer and the BIR were at fault in rendering the waiver of statute of limitations
defective, then the validity of the waiver must be upheld. The Supreme Court applied the
concept of “in pari delicto”. In that case, the validity of a defective waiver must be upheld.
Apparently, since the defective waiver has been validated by the acts of taxpayer and the RDO
and the same was executed before the expiration of the three-year prescriptive period within
which to assess tax liabilities, such prescriptive period was effectively tolled on the day the
waiver was executed.

Revenue Memorandum Order (RMO) 20-90, as modified by RDAO 05-01, laid down a detailed
procedure for the proper execution of a waiver of defense of prescription. The Supreme Court,
in a catena of cases, consistently held that a waiver of the statute of limitations must faithfully
comply with the provisions of RMO 20-90 and RDAO 05-01 in order to be valid and binding.

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Noncompliance with one of the requisites as stated in said issuances renders the waiver null and
void, which will not toll the prescriptive period within which an assessment should be made.

This notwithstanding, the Supreme Court ruled that if both the taxpayer and the BIR were at fault
in rendering the waiver of statute of limitations defective, then the validity of the waiver must
be upheld. The Supreme Court applied the concept of “in pari delicto”. In that case, the validity
of a defective waiver must be upheld.

Clearly the taxpayer there was no notarized resolution by the board of directors authorizing the
execution of the waivers. Similarly, the BIR violated its own rules and was careless in performing
its functions with respect to the waivers as the RDO did not ensure that the waiver was notarized
by Radius.

Hence, the validity of the defective waiver executed by Next Mobile and BIR must be upheld. CIR
Vs. Next Mobile, G.R. No. 212825, 7 December 2015, CIR Vs. Transitions Optical, G.R. 227544,
November 22, 2017

The “twin prescription rule” under Section 229 of the NIRC states that both the administrative
and judicial claim must be made within 2 years from the date of payment of taxes.

The “twin prescription rule” under Section 229 of the NIRC provides that a claimant for refund
must first file an administrative claim for refund before the CIR, prior to filing a judicial claim
before the CTA and that both the administrative and judicial claims for refund should be filed
within the two (2)-year prescriptive period from the date the taxes are erroneously paid, and that
the claimant is allowed to file the latter even without waiting for the resolution of the former in
order to prevent the forfeiture of its claim through prescription. Metrobank & Trust Company
Vs. CIR, G.R. No. 182582, April 17, 2017

LOCAL GOVERNMENT TAXATION

Under the Local Government Code, only provinces and cities are empowered to levy and collect
Franchise Taxes. A municipality is bereft of power to enact an ordinance imposing franchise tax
notwithstanding its conversion to a city. The fact remains that the ordinance is null and void at
the time it was enacted by a municipality.

By virtue of Section 137 of the Local Government Code, the power to impose franchise tax
belongs to the province. On the other hand, Section 142 of the Code provides that the

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municipalities are prohibited from levying the taxes specifically provided to provinces. Section
151 empowers the cities to levy taxes, fees and charges allowed to both provinces and
municipalities.

In the given case, it is apparent that Section 32 of Municipal Ordinance No. 25 is an act that is
null and void ab initio. It is even of little consequence that Pasig sought to collect only those taxes
after its conversion into a city. A void ordinance, or provision thereof, is what it is - a nullity that
produces no legal effect. It cannot be enforced; and no right could spring forth from it. The
cityhood of Pasig notwithstanding, it has no right to collect franchise tax under the assailed.

Thus, the City of Pasig does not have valid basis for its imposition of franchise tax for the period
1996 to 1999 under Ordinance No. 25. City of Pasig Vs. Manila Electric Company, G.R. No.
181710, March 7, 2018

REAL PROPERTY TAXATION

A Government owned or controlled corporation (GOCC) cannot claim exemption under Section
234(c) from the payment of real property tax if the real properties subject of the assessment
are not actually, directly and exclusively used for generation of electric power. The fact that
another person operates the machineries solely in compliance with the will of the GOCC under
an Energy Conversion Agreement only underscores the fact that NPC does not actually, directly,
and exclusively use them.

At any rate, the NPC’s claim of tax exemptions is completely without merit. To successfully claim
exemption under Section 234(c) of the LGC, the claimant must prove two elements:

a. the machineries and equipment are actually, directly, and exclusively used by local water
districts and government-owned or controlled corporations; and

b. the local water districts and government-owned and controlled corporations claiming
exemption must be engaged in the supply and distribution of water

Such incentives, aside from financial incentives as provided by law, shall include providing a
climate of minimum government regulations and procedures and specific government
undertakings in support of the private sector. [Emphasis supplied.]

As applied to the present case, the government-owned or controlled corporation claiming

exemption must be the entity actually, directly, and exclusively using the real properties, and the
use must be devoted to the generation and transmission of electric power. Neither the NPC nor

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Mirant satisfies both requirements. Although the plant’s machineries are devoted to the
generation of electric power, by the NPC’s own admission and as previously pointed out,
Mirant—a private corporation—uses and operates them. That Mirant operates the machineries
solely in compliance with the will of the NPC only underscores the fact that NPC does not actually,
directly, and exclusively use them. The machineries must be actually, directly, and exclusively
used by the government-owned or controlled corporation for the exemption under Section
234(c) to apply.

Nor will NPC find solace in its claim that it utilizes all the power plant’s generated electricity in
supplying the power needs of its customers. Based on the clear wording of the law, it is the
machineries that are exempted from the payment of real property tax, not the water or electricity
that these machineries generate and distribute.

Even the NPC’s claim of beneficial ownership is unavailing. The test of exemption is the use, not
the ownership of the machineries devoted to generation and transmission of electric power. The
nature of the NPC’s ownership of these machineries only finds materiality in resolving the NPC’s
claim of legal interest in protesting the tax assessment on Mirant. National Power Corporation
vs. Province of Quezon, 593 SCRA 47, G.R. No. 171586 July 15, 2009

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