RR 4-11 prescribes the rules on the proper allocation of costs and expenses amongst

income earnings of banks and other financial institutions, for Income Tax reporting
purposes. Thus, banks may deduct only those costs and expenses attributable to the
operation of the RBU to arrive at its taxable income. Any cost or expense related to or
incurred in the operation of the FCDU/EFCDU or OBU is not allowed as deduction
from the RBU’s taxable income.

I. RR 4-11 violates the following provisions of the NIRC:

1. Section 27 of the NIRC which provides in pertinent part as follows:

“(A) In General. - Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon the
taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable under this Title as
a corporation, organized in, or existing under the laws of the
Philippines: Provided, That effective January 1, 2009, the rate of
income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting

period, the taxable income shall be computed without regard to the
specific date when specific sales, purchases and other transactions
occur.

Their income and expenses for the fiscal year shall be deemed to
have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the

amount computed by multiplying the number of months covered
by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve Provided, further,
That the President, upon the recommendation of the Secretary of
Finance, may effective January 1, 2000, allow corporations the
option to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National

Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax
revenues;
 (3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available

only to firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall
be irrevocable for three (3) consecutive taxable years during which
the corporation is qualified under the scheme.

For purposes of this Section, the term 'gross income' derived from
business shall be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold "Cost of goods
sold" shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location
and use.

In the case of taxpayers engaged in the sale of service, 'gross

income' means gross receipts less sales returns, allowances and
discounts.”

The DOF and BIR, unlawfully exercised legislative or quasi-legislative

power when they issued RR 4-2011 in view of the fact that there is no
provision in the NIRC/TRAIN Law that requires expenses to be allocated.
Further, Section 27 does not provide any basis for the BIR to impose any
particular accounting method to allocate expense. RR 4-2011 cannot
amend nor modify any act of the Congress. Clearly, RR 4-2011 is void for
in contrary with the provisions of the tax laws.

2. Section 50 of the NIRC which provides:

“In the case of two or more organizations, trades or businesses (whether
or not incorporated and whether or not organized in the Philippines)
owned or controlled directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or
business, if he determined that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any such organization, trade or business.”
 RR 4-2011 must be struck down for it expands the allocation of costs and
expenses under Section 50 of the NIRC. Section 50 only applies to corporations
that have to or more separate and distinct organizations, trades or businesses
and is limited only to allocating expense deductions between two or more
organizations, trades or businesses.

3. Section. 34. Deductions from Gross Income. -

“(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional
Expenses. - (a) In General. - There shall be allowed as deduction
from gross income all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on or which are
directly attributable to, the development, management, operation
and/or conduct of the trade, business or exercise of a profession,
including: (i) A reasonable allowance for salaries, wages, and other
forms of compensation for personal services actually rendered,
including the grossed-up monetary value of fringe benefit
furnished or granted by the employer to the employee: Provided,
That the final tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad,
while away from home in the pursuit of trade, business or
profession; (iii) A reasonable allowance for rentals and/or other
payments which are required as a condition for the continued use
or possession, for purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not taking title or
in which he has no equity other than that of a lessee, user or
possessor; (iv) A reasonable allowance for entertainment,
amusement and recreation expenses during the taxable year, that
are directly connected to the development, management and
operation of the trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the conduct of his or
its trade, business or exercise of a profession not to exceed such
ceilings as the Secretary of Finance may, by rules and regulations
prescribe, upon recommendation of the Commissioner, taking into
account the needs as well as the special circumstances, nature and
 character of the industry, trade, business, or profession of the
taxpayer: Provided, That any expense incurred for entertainment,
amusement or recreation that is contrary to law, morals public
policy or public order shall in no case be allowed as a deduction. ”

RR 4-2011 is void for being contrary to the provisions of the NIRC and for being oppressive,
because it deprives the banks of the option to claim ordinary and necessary expenses as tax
deductions, amounting to deprivation of property without due process of law.

II. Whether of nor RTC Makati has jurisdiction to declare null and void a BIR RR.

In British American Tobacco v. Camacho1, the Supreme Court has ruled that the
determination of whether a specific rule or set of rules issued by an administrative
agency contravenes the law or the constitution is within the jurisdiction of the regular
courts, not the CTA. The Court explained that:

“While the above statute confers on the CTA jurisdiction to resolve

tax disputes in general, this does not include cases where the
constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or
regulation issued by the administrative agency in the performance
of its quasi-legislative function, the regular courts have jurisdiction
to pass upon the same. The determination of whether a specific rule
or set of rules issued by an administrative agency contravenes the
law or the constitution is within the jurisdiction of the regular
courts. Indeed, the Constitution vests the power of judicial review
or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. This is
within the scope of judicial power, which includes the authority of
the courts to determine in an appropriate action the validity of the
acts of the political departments. Judicial power includes the duty
of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.”

1
G.R. No. 163583, 20 August 2008
However, in a more recent case, Philippine American Life and General Insurance Company
v. the Secretary of Finance and CIR2, the Court has unequivocally said that it is now
within the power of the CTA, through its power of certiorari, to rule on the validity of
a particular administrative rule or regulation so long as it is within its appellate
jurisdiction.

“Evidently, City of Manila3 can be considered as a departure from

Ursal in that in spite of there being no express grant in law, the
CTA is deemed granted with powers of certiorari by implication.
Moreover, City of Manila diametrically opposes British American
Tobacco4 to the effect that it is now within the power of the CTA,
through its power of certiorari, to rule on the validity of a
particular administrative ruleor regulation so long as it is within
its appellate jurisdiction. Hence, it can now rule not only on the
propriety of an assessment or tax treatment of a certain
transaction, but also on the validity of the revenue regulation or
revenue memorandum circular on which the said assessment is
based.

Guided by the doctrinal teaching in resolving the case at bar, the

fact that the CA petition not only contested the applicability of Sec.
100 of the NIRC over the sales transaction but likewise questioned
the validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not
divest the CTA of its jurisdiction over the controversy, contrary to
petitioner's arguments.”

2
G.R. No. 210987, 24 November 2014
3
City of Manila v. Hon. Grecia-Cuerdo, G.R. 175723, February 4, 2014
4
British American Tobacco v. Camacho, G.R. No. 163583, 20 August 2008