China Bank vs CA, CIR, CTA G.R.
the Hongkong Banking Commissioner
No. 125508
- The Commissioner of Internal Revenue
denied the deduction from gross income
of "securities becoming worthless"
claimed by China Banking Corporation
("CBC"). The Commissioner’s
disallowance was sustained by the CTA.
When the ruling was appealed to the
CA, it upheld the CTA. The case a
Petition for Review on Certiorari.
chanro
FACTS: Sometime in 1980, petitioner
CBC made a 53% equity investment in
the First CBC Capital (Asia) Ltd., a
Hongkong subsidiary engaged in
financing and investment with
"deposit-taking" function. The
investment amounted to
P16,227,851.80, consisting of 106,000
shares with a par value of P100 per
share.
In the examination by Bangko Sentral
in 1986, it was shown that First CBC
Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko
Sentral, petitioner wrote-off as being
worthless its investment in First CBC
Capital (Asia), Ltd., in its 1987 Income
Tax Return and treated it as a bad
debt or as an ordinary loss deductible
from its gross income.
CIR disallowed the deduction and
assessed petitioner for income tax
deficiency in the amount of
P8,533,328.04, inclusive of surcharge,
interest and compromise penalty. The
disallowance of the deduction was
made on the ground that the
investment should not be classified as
being "worthless" and that, although
had revoked the license of First CBC
Capital as a "deposit-taking" company,
the latter could still exercise, however,
its financing and investment activities.
Assuming that the securities had
indeed become worthless, respondent
CIR held the view that they should
then be classified as "capital loss," and
not as a bad debt expense there being
no indebtedness to speak of between
petitioner and its subsidiary. CTA
sustained CIR and ordered petitioner
to pay its deficiency income tax for
1987 of P8,533,328.04 plus 20%
interest per annum until fully paid. CA
upheld the CTA. In its instant petition
for review on certiorari, petitioner
bank assails the CA decision.
ISSUE: WON CA correct.
HELD: Yes. An equity investment is a
capital, not ordinary, asset of the
investor the sale or exchange of which
results in either a capital gain or a
capital loss. The gain or the loss is
ordinary when the property sold or
exchanged is not a capital asset.
Thus, shares of stock, like the other
securities defined in Section 20(t) 4 of
the NIRC, would be ordinary assets
only to a dealer in securities or a
person engaged in the purchase and
sale of, or an active trader (for his
own account) in, securities. Section
20(u) of the NIRC defines a dealer in
securities thus:
"(u) The term ‘dealer in securities’
means a merchant of stocks or
securities, whether an individual,
partnership or corporation, with an
established place of business,
regularly engaged in the purchase of
securities and their resale to
customers; that is, one who as a
merchant buys securities and sells
them to customers with a view to the
gains and profits that may be derived
therefrom."
In the hands, however, of another
who holds the shares of stock by way
of an investment, the shares to him
would be capital assets. When the
shares held by such investor become
worthless, the loss is deemed to be a
loss from the sale or exchange of
capital assets.
The above provision conveys that the
loss sustained by the holder of the
securities, which are capital assets (to
him), is to be treated as a capital loss as
if incurred from a sale or exchange
transaction. A capital gain or a capital
loss normally requires the concurrence
of two conditions for it to result: (1)
There is a sale or exchange; and (2) the
thing sold or exchanged is a capital
asset. When securities become
worthless, there is strictly no sale or
exchange but the law deems the loss
anyway to be "a loss from the sale or
exchange of capital assets." 5 A similar
kind of treatment is given by the NIRC
on the retirement of certificates of
indebtedness with interest coupons or in
registered form, short sales and options
to buy or sell property where no sale or
exchange strictly exists. 6 In these
cases, the NIRC dispenses, in effect,
with the standard requirement of a sale
or exchange for the application of the
capital gain and loss provisions of the
code.
Capital losses are allowed to be
deducted only to the extent of capital
gains, i.e., gains derived from the sale
or exchange of capital assets, and not
from any other income of the taxpayer.
In the case at bar, First CBC Capital
(Asia), Ltd., the investee corporation, is
a subsidiary corporation of petitioner
bank whose shares in said investee
corporation are not intended for
purchase or sale but as an investment.
Unquestionably then, any loss therefrom
would be a capital loss, not an ordinary
loss, to the investor.
TAX ON INDIVIDUALS
Afisco Insurance vs CIR
FACTS: The petitioners are 41 non-life
insurance corporations, organized and
existing under the laws of the
Philippines. Upon issuance by them of
Erection, Machinery Breakdown, Boiler
Explosion and Contractors' All Risk
insurance policies, the petitioners
entered into a Quota Share
Reinsurance Treaty and a Surplus
Reinsurance Treaty with the
Munchener Ruckversicherungs-
Gesselschaft (hereafter called
Munich), a non-resident foreign
insurance corporation. The
reinsurance treaties required
petitioners to form a pool and a pool
composed of petitioners was formed.
The pool of machinery insurers
submitted a financial statement and
filed an "Information Return of
Organization Exempt from Income
Tax" for the year ending in 1975, on
the basis of which it was assessed by
the CIR a deficiency corporate taxes in
the amount of P1,843,273.60, and
withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the
Sec. 24. Rate of tax on corporations.
petitioners, respectively. Petitioners
— (a) Tax on domestic corporations.
protested but CIR denied protest and
— A tax is hereby imposed upon the
ordered petitioners to pay the
taxable net income received during
deficiency income tax.
each taxable year from all sources by
The CA ruled in the main that the pool every corporation organized in, or
of machinery insurers was a existing under the laws of the
partnership taxable as a corporation, Philippines, no matter how created or
and that the latter's collection of organized, but not including duly
premiums on behalf of its members, registered general co-partnership
the ceding companies, was taxable (compañias colectivas), general
income. professional partnerships, private
educational institutions, and building
and loan associations . . . .
ISSUE: WON Clearing House, acting
Ineludibly, the Philippine legislature
as a mere agent and performing
included in the concept of corporations
strictly administrative functions, and
those entities that resembled them
which did not insure or assume any
such as unregistered partnerships and
risk in its own name, was a
associations. Parenthetically, the
partnership or association subject to
NIRC's inclusion of such entities in the
tax as a corporation
tax on corporations was made even
HELD: Yes. Petitioners belie the clearer by the tax Reform Act of 1997,
existence of a partnership in this case, 21 which amended the Tax Code.
because (1) they, the reinsurers, did
Thus, the Court in Evangelista v. CIR
not share the same risk or solidary
held that Section 24 covered these
liability, (2) there was no common
unregistered partnerships and even
fund; (3) the executive board of the
associations or joint accounts, which
pool did not exercise control and
had no legal personalities apart from
management of its funds, unlike the
their individual members. The CA
board of directors of a corporation;
astutely applied Evangelista.
and (4) the pool or clearing house
"was not and could not possibly have
engaged in the business of
. . . Accordingly, a pool of individual
reinsurance from which it could have
real property owners dealing in real
derived income for itself."
estate business was considered a
This Court rules that the Court of corporation for purposes of the tax in
Appeals, in affirming the CTA which sec. 24 of the Tax Code in Evangelista
had previously sustained the internal v. Collector of Internal Revenue,
revenue commissioner, committed no supra. The Supreme Court said:
reversible error. Section 24 of the
NIRC, as worded in the year ending
1975, provides:
The term "partnership" includes a
syndicate, group, pool, joint venture
or other unincorporated organization,
through or by means of which any
business, financial operation, or
venture is carried out.
In the case before us, the ceding
companies entered into a Pool
Agreement or an association 30 that
would handle all the insurance
businesses covered under their quota-
share reinsurance treaty and surplus
reinsurance treaty with Munich. The
following unmistakably indicates a
partnership or an association covered
by Section 24 of the NIRC:
(1) The pool has a common fund,
consisting of money and other
valuables that are deposited in the
name and credit of the pool. This
common fund pays for the
administration and operation expenses
of the pool.
(2) The pool functions through an
executive board, which resembles the
board of directors of a corporation,
composed of one representative for
each of the ceding companies.
(3) True, the pool itself is not a
reinsurer and does not issue any
insurance policy; however, its work is
indispensable, beneficial and
economically useful to the business of
the ceding companies and Munich,
because without it they would not
have received their premiums. The
ceding companies share "in the
business ceded to the pool" and in the
"expenses" according to a "Rules of
Distribution" annexed to the Pool
Agreement. 36 Profit motive or
business is, therefore, the primordial
reason for the pool's formation. As
aptly found by the CTA:
. . . The fact that the pool does not
retain any profit or income does not
obliterate an antecedent fact, that of
the pool being used in the transaction
of business for profit. It is apparent,
and petitioners admit, that their
association or coaction was
indispensable [to] the transaction of
the business, . . . If together they
have conducted business, profit must
have been the object as, indeed, profit
was earned. Though the profit was
apportioned among the members, this
is only a matter of consequence, as it
implies that profit actually resulted
CIR vs Juliane Baier-Nickel
-Petitioner CIR appeals from the
Decision of the CA which granted the
tax refund of respondent Juliane
Baier-Nickel and reversed the CTA
decision.
FACTS: Juliane Baier-Nickel, a non-
resident German citizen, is the
President of JUBANITEX, Inc., a
domestic corporation engaged in
textile products. Through JUBANITEX’s
General Manager, Guzman, the
corporation appointed and engaged
the services of respondent as
commission agent. It was agreed that
respondent will receive 10% sales
commission.
In 1995, respondent received the
amount of P1,707,772.64,
representing her sales commission
income from which JUBANITEX
withheld the corresponding 10%
withholding tax amounting to
P170,777.26, and remitted the same
to the BIR. Respondent filed her 1995
income tax return reporting a taxable
income of P1,707,772.64 and a tax
due of P170,777.26.
Respondent filed a claim to refund the
amount of P170,777.26 alleged to
have been mistakenly withheld and
remitted by JUBANITEX to the BIR.
Respondent contended that her sales
commission income is not taxable in
the Philippines because the same was
a compensation for her services
rendered in Germany and therefore
considered as income from sources
outside the Philippines.
She then filed a petition for review
with the CTA bec of BIR’s inaction.
CTA rendered a decision denying her
claim. It held that the commissions
received by respondent were actually
her remuneration in the performance
of her duties as President of
JUBANITEX and not as a mere sales
agent thereof. The income derived by
respondent is therefore an income
taxable in the Philippines because
JUBANITEX is a domestic corporation.
CA reversed CTA, holding that
respondent received the commissions
as sales agent of JUBANITEX and not
as President thereof. And since the
"source" of income means the activity
or service that produce the income,
the sales commission received by
respondent is not taxable in the
Philippines because it arose from the
marketing activities performed by
respondent in Germany. MFR denied.
Petitioner maintains that the income
earned by respondent is taxable in the
Philippines because the source thereof
is JUBANITEX, a domestic corporation
located in the City of Makati. It thus
implied that source of income means
the physical source where the income
came from. It further argued that
since respondent is the President of
JUBANITEX, any remuneration she
received from said corporation should
be construed as payment of her
overall managerial services to the
company and should not be
interpreted as a compensation for a
distinct and separate service as a
sales commission agent.
Respondent, on the other hand, claims
that the income she received was
payment for her marketing services.
She contended that income of
nonresident aliens like her is subject
to tax only if the source of the income
is within the Philippines. Source,
according to respondent is the situs of
the activity which produced the
income. And since the source of her
income were her marketing activities
in Germany, the income she derived
from said activities is not subject to
Philippine income taxation.
ISSUE: Won respondent’s sales
commission income is taxable in the
Philippines.
HELD: No. Pursuant to Sec 25 of
NIRC, non-resident aliens, whether or
not engaged in trade or business, are
subject to the Philippine income
taxation on their income received from
all sources in the Philippines. In
determining the meaning of “source”,
the Court resorted to origin of Act
2833 (the first Philippine income tax
law), the US Revenue Law of 1916, as
amended in 1917.
US SC has said that income may be
derived from three possible sources
only: (1) capital and/or (2) labor;
and/or (3) the sale of capital assets. If
the income is from labor, the place
where the labor is done should be
decisive; if it is done in this country,
the income should be from “sources
within the United States.” If the
income is from capital, the place
where the capital is employed should
be decisive; if it is employed in this
country, the income should be from
“sources within the United States.” If
the income is from the sale of capital
assets, the place where the sale is
made should be likewise decisive.
“Source” is not a place, it is an activity
or property. As such, it has a situs or
location, and if that situs or location is
within the United States the resulting
income is taxable to nonresident
aliens and foreign corporations.
The source of an income is the
property, activity or service that
produced the income. For the source
of income to be considered as coming
from the Philippines, it is sufficient
that the income is derived from
activity within the Philippines.
The settled rule is that tax refunds are
in the nature of tax exemptions and
are to be construed strictissimi juris
against the taxpayer. To those
therefore, who claim a refund rest the
burden of proving that the transaction
subjected to tax is actually exempt
from taxation.
In the instant case, respondent failed
to give substantial evidence to prove
that she performed the incoming
producing service in Germany, which
would have entitled her to a tax
exemption for income from sources
outside the Philippines.
FACTS:
Mercury Drug Corp v.
Commissioner of Internal
Revenue. July 20, 2011  
- This is a petition for review on
certiorari calling for interpretation of
the term "cost" as used in Sec 4(a) of
RA 7432, otherwise known as "An Act
to Maximize the Contribution of Senior
Citizens to Nation Building, Grant
Benefits and Special Privileges”
- Started when petitioner filed with the
CIR claims for refund
FACTS: Pursuant to RA 7432,
petitioner Mercury Drug granted a
20% sales discount to qualified gave the 20% discount to senior
seniors on their purchases of meds. citizens.
For the taxable year April to Dec 1993
Petitioner moved for partial
and Jan to Dec 1994, the amounts
reconsideration. In a Resolution CTA
representing the 20% sales discount
modified its earlier ruling by
totalled ₱3,719,287.681 and
increasing the creditable tax amount
₱35,500,593.44,2 respectively, which
to ₱18,038,489.71, inclusive of the
petitioner claimed as deductions from
taxable years 1993 and 1994. The
its gross income.
CTA finally granted the claim for
Realizing that RA 7432 allows a tax refund for the taxable year 1994 on
credit for sales discounts granted to the basis of the cash slips submitted
seniors, petitioner filed with the CIR by petitioner, in the sum of
claims for refund in the amount of ₱16,350,311.28.
₱2,417,536.00 for 1993 and
₱23,075,386.00 for 1994.
Petitioner elevated the case to CA via
CIR failed to act so petitioner filed a
a Petition for Review under Rule 43.
petition for review with the CTA. CTA
Petitioner sought a partial modification
ruled as null and void Revenue
raising the basis of the computation of
Regulations No. 2-94 of the CIR
tax credit. Petitioner contended that
insofar as it treats the 20% discount
the actual discount granted to the
given by private establishments as a
senior citizens, rather than the
deduction from gross sales. CIR is
acquisition cost of the item availed by
hereby ORDERED to GRANT A REFUND
senior citizens, should be the basis for
OR ISSUE A TAX CREDIT CERT to
computation of tax credit. CA
Mercury in the reduced amount of
sustained CTA, interpreting the term
₱1,688,178.43 representing the
"cost" as used in Section 4(a) of RA
latter’s overpaid income tax for the
7432 to mean the acquisition cost of
1993. However, the claim for refund
the medicines sold to senior citizens.
for 1994 is denied for lack of merit as
MFPR denied.
it found some discrepancies and
irregularities in the cash slips ISSUE: WON the claim for tax credit
submitted by petitioner as basis for should be based on the full amount of
the tax refund. the 20% senior citizens’ discount or
the acquisition cost of the
"Thus the cost of the 20% discount
merchandise sold.
represents the actual amount spent by
drug corporations in complying with
the mandate of RA 7432. Working on
this premise, it could not have been HELD: In Bicolandia, we construed
the intention of the lawmakers to the term "cost" as referring to the
grant these companies the full amount amount of the 20% discount extended
of the 20% discount as this could be by a private establishment to senior
extending to them more than what citizens in their purchase of medicines.
they actually sacrificed when they We reiterated this ruling in the 2008
case of Cagayan Valley Drug by
holding that petitioner therein is
entitled to a tax credit for the full 20%
sales discounts it extended to qualified
senior citizens. we sustain petitioner’s
argument that the cost of discount
should be computed on the actual
amount of the discount extended to
senior citizens. However, we give full
accord to the factual findings of the
CTA with respect to the actual amount
of the 20% sales discount, i.e., the
sum of ₱3,522,123.25. for 1993 and
₱34,211,769.45 for 1994. Therefore,
petitioner is entitled to a tax credit
equivalent to the actual amounts of
the 20% sales discount as determined
by the CTA A new computation for tax
refund is in order. Respondent
Commissioner of Internal Revenue is
ORDERED to issue tax credit
certificates in favor of petitioner in the
amounts of ₱2,289,381.71 and
₱22,237,650.34.
Soriano, et al. vs. Secretary of
Finance and CIR.
- Before us are consolidated Petitions
for Certiorari, Prohibition and
Mandamus, under Rule 65 seeking to
nullify certain provisions of Revenue
Regulation No. (RR) 10-2008,
implementing the provisions of
RA9504. The law granted, among
others, income tax exemption for
minimum wage earners (MWEs), as
well as an increase in personal and
additional exemptions for individual
taxpayers.
FACTS: On 17 June 2008, R.A. 9504
entitled “An Act Amending Sections
22, 24, 34, 35, 51, and 79 of RA 8424
as Amended, Otherwise Known as the
NIRC” was approved and signed into
law by President Arroyo. The salient
features include:
1. It increased the basic personal
exemption from P20k for a single
individual, P25kfor the head of the
family, and P32kfor a married
individual to P50k for each individual.
2. It increased the additional
exemption for each dependent not
exceeding four from P8k-P25k
3. It raised the Optional Standard
Deduction (OSD) for individual
taxpayers from 10% of gross income
to 40% of the gross receipts or gross
sales.
4. It introduced the OSD to corporate
taxpayers at no more than 40% of
their gross income.
5. It granted MWEs exemption from
payment of income tax on their
minimum wage, holiday pay, overtime
pay, night shift differential pay and
hazard pay On 24 Sep 2008, BIR
issued RR 10-2008, dated 08 July
2008, implementing the provisions of
R.A. 9504.
Petitioners assail the subject RR
implementing RA 9504 as an
unauthorized departure from the
legislative intent of R.A. 9504.
In G.R. No. 184450
Petitioners Soriano et al. primarily
assail Section 3 of RR 10-2008
providing for the prorated application
of the personal and additional
exemptions for taxable year 2008 to
begin only effective 6 July 2008. They
stress that Congress has always
maintained a policy of "full taxable
year treatment".
They further challenge the BIR’s
adoption of the prorated application of
the new set of personal and additional
exemptions for taxable year 2008.
In G.R. No. 184508
On the scope of exemption of MWEs
under R.A. 9504, Senator Roxas argues
that the exemption of MWEs is absolute,
regardless of the amount of the other
benefits they receive. Thus, he posits
that the DOF and the BIR committed
grave abuse of discretion amounting to
lack and/or excess of jurisdiction. They
supposedly did so when they provided in
Section 1 of RR 10-2008 the condition
that an MWE who receives "other
benefits" exceeding the P30,000 limit
would lose the tax exemption.
ISSUES:
1.WON the increased personal and
additional exemptions provided by R.A.
9504 should be applied to the entire
taxable year 2008
2. WON Sections 1 and 3 of RR 10-2008
are consistent with the law in providing
that an MWE who receives other
benefits in excess of the statutory limit
of P30,00019 is no longer entitled to the
exemption provided by R.A. 9504
HELD:
1) Yes. R.A. 9504 as a piece of social
legislation clearly intended to afford
immediate tax relief to individual
taxpayers, particularly low-income
compensation earners. Indeed, if R.A.
9504 was to take effect beginning
taxable year 2009 or half of the year
2008 only, then the intent of Congress
to address the increase in the cost of
living in 2008 would have been negated.
In one case, the test is whether the new
set of personal and additional
exemptions was available at the time of
the filing of the income tax return. In
other words, while the status of the
individual taxpayers is determined at
the close of the taxable year, their
personal and additional exemptions –
and consequently the computation of
their taxable income – are reckoned
when the tax becomes due, and not
while the income is being earned or
received.
In the present case, the increased
exemptions were already available much
earlier than the required time of filing of
the return on 15 April 2009. R.A. 9504
came into law on 6 July 2008, more
than nine months before the deadline
for the filing of the income tax return for
taxable year 2008. Hence, individual
taxpayers were entitled to claim the
increased amounts for the entire year
2008. This was true despite the fact that
incomes were already earned or
received prior to the law’s effectivity on
6 July 2008.
2) Yes. To be exempt, one must be an
MWE, a term that is clearly defined.
Section 22(HH) of Republic Act No. 8424
says he/she must be one who is paid
the statutory minimum wage if he/she
works in the private sector, or not more
than the statutory minimum wage in the
non-agricultural sector where he/she is
assigned, if he/she is a government
employee. R.A. 9504 is explicit as to the
coverage of the exemption: the wages
that are not in excess of the minimum
wage as determined by the wage
boards, including the corresponding
holiday, overtime, night differential and
hazard pays. In other words, the law
exempts from income taxation the most
basic compensation an employee
receives – the amount afforded to the
lowest paid employees by the mandate
of law. In a way, the legislature grants
to these lowest paid employees
additional income by no longer
demanding from them a contribution for
the operations of government.
An administrative agency may not
enlarge, alter or restrict a provision of
law. The Court is not persuaded that RR
10-2008 merely clarifies the law. The
treatment of bonuses and other benefits
that an employee receives from the
employer in excess of the P30,000
ceiling cannot but be the same as the
prevailing treatment prior to R.A. 9504
– anything in excess of P30,000 is
taxable; no more, no less.
The treatment of this excess cannot
operate to disenfranchise the MWE from
enjoying the exemption explicitly
granted by R.A. 9504. Moreover, RR 10-
2008 does not withdraw the MWE
exemption from those who are earning
other income outside of their employer
employee relationship. Section 2.78.1
(B) of RR 10-2008 provides that: MWEs
receiving other income, such as income
from the conduct of trade, business, or
practice of profession, except income
subject to final tax, in addition to
compensation income are not exempted
from income tax on their entire income
earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday
pay, overtime pay, night shift
differential pay and hazard pay shall still
be exempt from withholding tax.
In sum, the proper interpretation of R.A.
9504 is that it imposes taxes only on
the taxable income received in excess of
the minimum wage, but the MWEs will
not lose their exemption as such.
Workers who receive the statutory
minimum wage their basic pay remain
MWEs. The receipt of any other income
during the year does not disqualify them
as MWEs. They remain MWEs, entitled
to exemption as such, but the taxable
income they receive other than as MWEs
may be subjected to appropriate taxes.
TAX ON CORPORATIONS
CIR vs PAL. 2009
FACTS: For its fiscal year ending 31
March 2001 (FY 2000-2001), PAL
allegedly incurred zero taxable
income, which left it with unapplied
creditable withholding tax in the
amount of ₱2,334,377.95. PAL did not
pay any MCIT for the period.
In a letter dated 12 July 2002,
addressed to petitioner CIR PAL
requested for the refund of its
unapplied creditable withholding tax
for FY 2000-2001. PAL attached to its
letter the following: (1) Schedule of
Creditable Tax Withheld at Source for
FY 2000-2001; (2) Certificates of
Creditable Taxes Withheld; and (3)
Audited Financial Statements.
Acting on the aforementioned letter of
PAL, the Large Taxpayers Audit and
Investigation Division 1 (LTAID 1) of
the BIR Large Taxpayers Service
(LTS), authorizing RO Cueto to verify
the supporting documents and
pertinent records relative to the claim
of PAL for refund.
BIR subsequently denied the claim for
refund of PAL and, instead, was
assessing PAL for deficiency MCIT for
FY 2000-2001. The PAL
representatives argued that PAL was
not liable for MCIT under its franchise.
The LTAID 1 issued a PAN No. INC FY-
3-31-01-000094. LTAID 1 assessed
PAL for ₱262,474,732.54,
representing deficiency MCIT for FY
2000-2001, plus interest and
compromise penalty. PAL protested
PAN No. INC FY-3-31-01-000094
through a letter to the BIR LTS. LTAID
1 sent PAL a Formal Letter of Demand
for deficiency MCIT for FY 2000-2001
in the amount of ₱271,421,88658. PAL
filed a formal written protest.
Invoking Revenue Memorandum
Circular (RMC) No. 66-2003, the BIR
LTS denied with finality the protest of
PAL and reiterated the request that
PAL immediately pay its deficiency
MCIT for FY 2000-2001, inclusive of
penalties incident to delinquency. PAL
filed a Petition for Review with the
CTA, which was docketed as C.T.A.
Case No. 7010 and raffled to the CTA
Second Division. The CTA Second
Division promulgated its Decision on
31 July 2006, ruling in favor of PAL.
CIR’s MFR denied.
It was then the turn of the CIR to file
a Petition for Review with the CTA en
banc, docketed as C.T.A. E.B. No.
246. The CTA en banc found that the
Court in Division correctly ruled in
favor of PAL. The CTA en banc likewise
denied the MFR of the CIR in a
Resolution. Hence, the CIR comes
before this Court via the instant
Petition for Review on Certiorari.
ISSUE: WON PAL is liable for
deficiency MCIT for FY 2000-2001
HELD: No. According to the afore-
quoted provisions, the taxation of PAL,
during the lifetime of its franchise,
shall be governed by two fundamental
rules, particularly: (1) PAL shall pay
the Government either basic corporate
income tax or franchise tax, whichever
is lower; and (2) the tax paid by PAL,
under either of these alternatives,
shall be in lieu of all other taxes,
duties, royalties, registration, license,
and other fees and charges, except
only real property tax.
The basic corporate income tax of PAL
shall be based on its annual net
taxable income, computed in
accordance with the National Internal
Revenue Code (NIRC). Presidential
Decree No. 1590 also explicitly
authorizes PAL, in the computation of
its basic corporate income tax, to (1)
depreciate its assets twice as fast the
normal rate of depreciation;14 and (2)
carry over as a deduction from taxable
income any net loss incurred in any
year up to five years following the
year of such loss.15
Franchise tax, on the other hand, shall
be two per cent (2%) of the gross
revenues derived by PAL from all
sources, whether transport or
nontransport operations. However,
with respect to international air-
transport service, the franchise tax
shall only be imposed on the gross
passenger, mail, and freight revenues
of PAL from its outgoing flights.
In its income tax return for FY 2000-
2001, filed with the BIR, PAL reported
no net taxable income for the period,
resulting in zero basic corporate
income tax, which would necessarily
be lower than any franchise tax due
from PAL for the same period.
CIR vs. BRITISH OVERSEAS
AIRWAYS CORPORATION and CTA.
April 30, 1987
- BOAC protested the deficiency
income taxes assessed by CIR. BOAC
paid under protest the second
assessment and filed for refund but
CIR denied. BOAC filed petition for
review.
FACTS: BOAC is a 100% British
Government-owned corporation
organized and existing under the laws
of the UK engaged in the international
airline business. As such it operates
air transportation service and sells
transportation tickets. During the
periods covered by the disputed
assessments, it is admitted that BOAC
had no landing rights for traffic
purposes in the Philippines, and was
not granted a Certificate of public
convenience and necessity to operate
in the Philippines except for a nine-
month period, partly in 1961 and
partly in 1962, when it was granted a
temporary landing permit by the CAB.
Consequently, it did not carry
passengers and/or cargo to or from
the Philippines, although during the
period covered by the assessments, it
maintained a general sales agent in
the Philippines — Wamer Barnes and
Company, Ltd., and later Qantas
Airways — which was responsible for
selling BOAC tickets covering
passengers and cargoes.
G.R. No. 65773 (CTA Case No. 2373,
the First Case)
CIR assessed BOAC the aggregate
amount of P2,498,358.56 for
deficiency income taxes for 1959-
1963. This was protested by BOAC.
Subsequent investigation resulted in
the issuance of a new assessment for
the years 1959 to 1967 in the amount
of P858,307.79. BOAC paid this new
assessment under protest. BOAC filed
a claim for refund of the amount of
P858,307.79, which claim was denied
by the CIR. But before said denial,
BOAC had already filed a petition for
review with the Tax Court on assailing
the assessment and praying for the
refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561,
the Second Case)
On 17 November 1971, BOAC was
assessed deficiency income taxes,
interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the
aggregate amount of P549,327.43,
and the additional amounts of
P1,000.00 and P1,800.00 as
compromise penalties. BOAC
requested that the assessment be
countermanded and set aside but CIR
not only denied the BOAC request for
refund in the First Case but also re-
issued in the Second Case the
deficiency income tax assessment for
P534,132.08 for the years 1969 to
1970-71 plus P1,000.00 as
compromise penalty under Section 74
of the Tax Code. BOAC's request for
reconsideration was denied by the CIR
This prompted BOAC to file the
Second Case before the Tax Court
praying that it be absolved of liability
for deficiency income tax for the years
1969 to 1971.
This case was subsequently tried
jointly with the First Case.
Tax Court rendered the assailed joint
Decision reversing the CIR. The Tax
Court held that the proceeds of sales
of BOAC passage tickets in the
Philippines by Warner Barnes and
Company, Ltd., and later by Qantas
Airways, during the period in question,
do not constitute BOAC income from
Philippine sources "since no service of
carriage of passengers or freight was
performed by BOAC within the
Philippines" and, therefore, said
income is not subject to Philippine
income tax. The CTA position was that
income from transportation is income
from services so that the place where
services are rendered determines the
source. Thus, in the dispositive portion
of its Decision, the Tax Court ordered
petitioner to credit BOAC with the sum
of P858,307.79, and to cancel the
deficiency income tax assessments
against BOAC in the amount of
P534,132.08 for the fiscal years 1968-
69 to 1970-71. Hence, this Petition for
Review on certiorari of the Decision of
the Tax Court.
ISSUES:
1. WON the revenue derived by
private respondent BOAC from sales of
tickets in the Philippines for air
transportation, while having no
landing rights here, constitute income
of BOAC from Philippine sources, and,
accordingly, taxable.
2. WON during the fiscal years in
question BOAC s a resident foreign
corporation doing business in the
Philippines or has an office or place of
business in the Philippines.
HELD: BOAC is a resident foreign
corporation. There is no specific
criterion as to what constitutes
"doing" or "engaging in" or
"transacting" business. Each case
must be judged in the light of its
peculiar environmental circumstances.
The term implies a continuity of
commercial dealings and
arrangements, and contemplates, to
that extent, the performance of acts
or works or the exercise of some of
the functions normally incident to, and
in progressive prosecution of
commercial gain or for the purpose
and object of the business
organization.  "In order that a foreign
corporation may be regarded as doing
business within a State, there must be
continuity of conduct and intention to
establish a continuous business, such
as the appointment of a local agent,
and not one of a temporary character.
BOAC, during the periods covered by
the subject - assessments, maintained
a general sales agent in the
Philippines, That general sales agent,
from 1959 to 1971, "was engaged in
(1) selling and issuing tickets; (2)
breaking down the whole trip into
series of trips — each trip in the series
corresponding to a different airline
company; (3) receiving the fare from
the whole trip; and (4) consequently
allocating to the various airline
companies on the basis of their
participation in the services rendered
through the mode of interline
settlement as prescribed by Article VI
of the Resolution No. 850 of the IATA
Agreement." Those activities were in
exercise of the functions which are
normally incident to, and are in
progressive pursuit of, the purpose
and object of its organization as an
international air carrier. There should
be no doubt then that BOAC was
"engaged in" business in the
Philippines through a local agent
during the period covered by the
assessments. Accordingly, it is a
resident foreign corporation subject to
tax upon its total net income received
in the preceding taxable year from all
sources within the Philippines.
The records show that the Philippine
gross income of BOAC for the fiscal
years 1968-69 to 1970-71 amounted
to P10,428,368 .00. Did such "flow of
wealth" come from "sources within the
Philippines". The source of an income
is the property, activity or service that
produced the income. For the source
of income to be considered as coming
from the Philippines, it is sufficient
that the income is derived from
activity within the Philippines. In
BOAC's case, the sale of tickets in the
Philippines is the activity that
produces the income. The tickets
exchanged hands here and payments
for fares were also made here in
Philippine currency. The site of the
source of payments is the Philippines.
The flow of wealth proceeded from,
and occurred within, Philippine
territory, enjoying the protection
accorded by the Philippine
government. In consideration of such
protection, the flow of wealth should
share the burden of supporting the
government.
INTERCONTINENTAL
BROADCASTING CORPORATION
(IBC) v Amarilla
- Before us is a Petition for Review on
Certiorari filed by petitioner BC
assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 72414,
which in turn affirmed the Decision2 of
the NLRC in NLRC Case No. V-000660-
2000.
FACTS: On various dates, petitioner
employed the following persons at its
Cebu station: Quiñones, Jr.; on
Lagahit, as Studio Technician, Otadoy,
as Collector, Amarilla, as Traffic Clerk.
On March 1, 1986, the government
sequestered the station, including its
properties, funds and other assets,
and took over its management and
operations from its owner, Roberto
Benedicto. However, in December
1986, the government and Benedicto
entered into a temporary agreement
under which the latter would retain its
management and operation. On
November 3, 1990, PCGG and
Benedicto executed a Compromise
Agreement, where Benedicto
transferred and assigned all his rights,
shares and interests in petitioner
station to the government.
In the meantime, 4 employees retired
from the company and received, on
staggered basis, their retirement
benefits under the 1993 cba between
petitioner and the bargaining unit of
its employees.
A P1.5k salary increase was given to
all employees of the company, current
and retired, effective July 1994.
However, when the four retirees
demanded theirs, petitioner refused
and instead informed them via a letter
that their differentials would be used
to offset the tax due on their
retirement benefits in accordance with
the NIRC
Since no tax liability was withheld
from his retirement benefits, he even
owed the company P17,727.26 after
the offsetting. Quiñones was informed
that he should have retired
compulsorily in 1992 at age 55 as
provided in the CBA, and that since he
was already 58 when he retired, he
was no longer entitled to receive
salary increases from 1992 to 1995.
Consequently, he was overpaid by
P137,932.22 for the "extension" of his
employment from 1992 to 1995,
which amount he was obliged to
return to the company. In any event,
his claim for salary differentials had
expired pursuant to Article 291 of the
Labor Code of the Philippines.
Lagahit’s claim for salary differential of
P73,165.23 was rejected by petitioner
in a letter dated July 6, 1999, on the
ground that he had a tax liability of
P396,619.03; since the amount would
be used as partial payment for his tax
liability, he still owed the company
P323,453.80.12.
The 4 filed separate complaints
against IBC TV-13 Cebu and Station
Manager Louella F. Cabañero for ULP
and non-payment of backwages
before the NLRC. The complainants
averred that their retirement benefits
are exempt from income tax under
Article 32 of the NIRC. Sections 28
and 72 of the NIRC, which petitioner
relied upon in withholding their
differentials, do not apply to them
since these provisions deal with the
applicable income tax rates on foreign
corporations and suits to recover
taxes based on false or fraudulent
returns. They pointed out that, under
Article VIII of the CBA, only those
employees who reached the age of 60
were considered retired, and those
under 60 had the option to retire, like
Quiñones and Otadoy who retired at
ages 58 and 51, respectively. They
prayed that they be paid their salary
differentials
For its part, petitioner averred that in
NIRC the retirement benefits received
by employees from their employers
constitute taxable income. While
retirement benefits are exempt from
taxes under Section 28(b) of said
Code, the law requires that such
benefits received should be in accord
with a reasonable retirement plan duly
registered with BIR after compliance
with the requirements therein
enumerated. Since its retirement plan
in the 1993 CBA was not approved by
the BIR, complainants were liable for
income tax on their retirement
benefits. Petitioner claimed that it was
mandated to withhold the income tax
due from the retirement benefits of
said complainants. It was not
estopped from correcting the mistakes
of its former officers.
Labor Arbiter rendered judgment in
favor of the retirees. However, the
NLRC held that the benefits of the
retirement plan under the CBAs
between petitioner and its union
members were subject to tax as the
scheme was not approved by the BIR.
However, it had also been the practice
of petitioner to give retiring
employees their retirement pay
without tax deductions and there was
no justifiable reason for the
respondent to deviate from such
practice. The NLRC concluded that the
petitioner was deemed to have
assumed the tax liabilities of the
complainants on their retirement
benefits, hence, had no right to deduct
taxes from their salary differentials.
Petitioner elevated the case to the CA
however it was dismissed for lack of
merit.
ISSUE: WON retirement benefits of
respondents are part of their gross
income
HELD: Yes. Thus, for the retirement
benefits to be exempt from the
withholding tax, the taxpayer is
burdened to prove the concurrence of
the following elements: (1) a
reasonable private benefit plan is
maintained by the employer; (2) the
retiring official or employee has been
in the service of the same employer
for at least 10 years; (3) the retiring
official or employee is not less than 50
years of age at the time of his
retirement; and (4) the benefit had
been availed of only once.
Respondents were qualified to retire
optionally from their employment with
petitioner. However, there is no
evidence on record that the 1993 CBA
had been approved or was ever
presented to the BIR; hence, the
retirement benefits of respondents are
taxable. However, we agree with
respondents’ contention that petitioner
did not withhold the taxes due on their
retirement benefits because it had
obliged itself to pay the taxes due
thereon. This was done to induce
respondents to agree to avail of the
optional retirement scheme.
United Airlines vs. Commissioner
of Internal Revenue. September
29, 2010
- This is a petition for review on
certiorari under Rule 45 of the CTA En
Banc Decision dated July 5, 2007
denying petitioner's claim for tax
refund of P5.03 million. Petitioner filed
with respondent Commissioner a claim
for income tax refund, pursuant to
Section 28(A)(3)(a)[4] of the NIRC in
relation to Article 4(7)[5] of the RP-US
Tax Treaty. No reso was made on the
refund claim so petitioner filed petition
for review with the CTA and First
Division ruled against refund. MFR
denied. CTA En Banc affirmed First
Division.
FACTS: Petitioner United Airlines
used to be an online international
carrier of passenger and cargo, i.e., it
used to operate passenger and cargo
flights originating in the Philippines.
Upon cessation of its passenger flights
in and out of the Philippines beginning
February 21, 1998, petitioner
appointed a sales agent in the
Philippines -- Aerotel Ltd. Corp., an
independent general sales agent,
Petitioner continued operating cargo
flights from the Philippines until
January 31, 2001.
Petitioner filed with respondent
Commissioner a claim for income tax
refund. Petitioner sought to refund the
total amount of P15,916,680.69
pertaining to income taxes paid on
gross passenger and cargo revenues
for 1999 to 2001, which included the
amount of P5,028,813.23 allegedly
representing income taxes paid in
1999 on passenger revenue from
tickets sold in the Philippines, the
uplifts of which did not originate in the
Philippines. Citing the change in
definition of Gross Philippine Billings
(GPB) in the NIRC, petitioner argued
that since it no longer operated
passenger flights originating from the
Philippines beginning February 21,
1998, its passenger revenue for 1999,
2000 and 2001 cannot be considered
as income from sources within the
Philippines, and hence should not be
subject to Philippine income tax under
Article 9 of the RP-US Tax Treaty. As
no resolution on its claim for refund
had yet been made, petitioner filed a
petition for review with the CTA.
Petitioner asserted that under the new
definition of GPB under the 1997 NIRC
and Article 4(7) of the RP-US Tax
Treaty, Philippine tax authorities have
jurisdiction to tax only the gross
revenue derived by US air and
shipping carriers from outgoing traffic
in the Philippines. Since the BIR
erroneously imposed and collected
income tax in 1999 based on
petitioner's gross passenger revenue,
as beginning 1998 petitioner no longer
flew passenger flights to and from the
Philippines, petitioner is entitled to a
refund of such erroneously collected
income tax in the amount of
P5,028,813.23. CTA First Division
ruled that no excess or erroneously
paid tax may be refunded to petitioner
because the income tax on GPB under
Section 28(A)(3)(a) of the NIRC
applies as well to gross revenue from
carriage of cargoes originating from
the Philippines and further noted that
petitioner even underpaid its taxes on
cargo revenue.
ISSUE: WON petitioner is entitled to a
refund of the amount of
P5,028,813.23 it paid as income tax
on its passenger revenues in 1999
HELD: No. Here, the subject of claim
for tax refund is the tax paid on
passenger revenue for taxable year
1999 at the time when petitioner was
still operating cargo flights originating
from the Philippines although it had
ceased passenger flight operations.
The CTA found that petitioner had
underpaid its GPB tax for 1999
because petitioner had made
deductions from its gross cargo
revenues in the income tax return it
filed for the taxable year 1999, the
amount of underpayment even greater
than the refund sought for erroneously
paid GPB tax on passenger revenues
for the same taxable period. Hence,
the CTA ruled petitioner is not entitled
to a tax refund.
Petitioner's arguments regarding the
propriety of such determination by the
CTA are misplaced.
Under Section 72 of the NIRC, the CTA
can make a valid finding that
petitioner made erroneous deductions
on its gross cargo revenue; that
because of the erroneous deductions,
petitioner reported a lower cargo
revenue and paid a lower income tax
thereon; and that petitioner's
underpayment of the income tax on
cargo revenue is even higher than the
income tax it paid on passenger
revenue subject of the claim for
refund, such that the refund cannot be
granted.
In the case at bar, the CTA explained
that it merely determined whether
petitioner is entitled to a refund based
on the facts. On the assumption that
petitioner filed a correct return, it had
the right to file a claim for refund of
GPB tax on passenger revenues it paid
in 1999 when it was not operating
passenger flights to and from the
Philippines. However, upon
examination by the CTA, petitioner's
return was found erroneous as it
understated its gross cargo revenue
for the same taxable year due to
deductions of two (2) items consisting
of commission and other incentives of
its agent. Having underpaid the GPB
tax due on its cargo revenues for
1999, petitioner is not entitled to a
refund of its GPB tax on its passenger
revenue, the amount of the former
being even much higher (P31.43
million) than the tax refund sought
(P5.2 million). The CTA therefore
correctly denied the claim for tax
refund after determining the proper
assessment and the tax due.
Obviously, the matter of prescription
raised by petitioner is a non-issue.
The prescriptive periods under
Sections 203 and 222 of the NIRC find
no application in this case.
CIR vs WANDER Philippines, Inc.,
and CTA. April 15, 1988
- This is a petition for review on
certiorari of the January 19, 1984
Decision of the CTA which held that
Wander Philippines, Inc. is entitled to
the preferential rate of 15%
withholding tax. The genesis is
Wander filed with the Appellate
Division of the Internal Revenue a
claim for refund and/or tax credit the
latter failing to act, petitioner filed w
the CTA and the latter granted.
Petitioner filed MFR but denied.
FACTS: Private respondents Wander
Philippines, Inc. (wander) is a
domestic corporation organized under
Philippine laws. It is wholly-owned
subsidiary of the Glaro S.A. Ltd.
(Glaro), a Swiss corporation not
engaged in trade for business in the
Philippines.
Wander filed it's witholding tax return
for 1975 and 1976 and remitted to its
parent company Glaro dividends from
which 35% withholding tax was
withheld and paid to the BIR.
In 1977, Wander filed with the
Appellate Division of the Internal
Revenue a claim for reimbursement,
contending that it is liable only to 15%
withholding tax in accordance with
sec. 24 (b) (1) of the Tax code, as
amended by PD nos. 369 and 778,
and not on the basis of 35% which
was withheld ad paid to and collected
by the government. Petitioner failed to
act on the said claim for refund, hence
Wander filed a petition with CTA who
in turn ordered to grant a refund
and/or tax credit. CIR's petition for
reconsideration was denied hence the
instant petition to the Supreme Court.
ISSUE: WON Wander is entitled to the
preferential rate of 15% withholding
tax on dividends declared and to
remitted to its parent corporation.
HELD: Section 24 (b) (1) of the Tax
code, as amended by PD 369 and 778,
the law involved in this case, reads:
sec. 1. The first paragraph of
subsection (b) of section 24 of the
NIRC, as amended is hereby further
amended to read as follows:
(b) Tax on foreign corporations - (1)
Non resident corporation -- A foreign
corporation not engaged in trade or
business in the Philippines, including a
foreign life insurance company not
engaged in life insurance business in
the Philippines, shall pay a tax equal
to 35% of the gross income received
during its taxable year from all
sources within the Philippines, as
interest (except interest on a foreign
loans which shall be subject to 15%
tax), dividends, premiums, annuities,
compensation, remuneration for
technical services or otherwise
emolument, or other fixed
determinable annual, periodical ot
casual gains, profits and income, and
capital gains: xxx Provided, still
further that on dividends received
from a domestic corporation liable to
tax under this chapter, the tax shall
be 15% of the dividends received,
which shall be collected and paid as
provided in sec 53 (d) of this code,
subject to the condition that the
country in which the non-resident
foreign corporation is domiciled shall
allow a credit against tax due from the
non-resident foreign corporation taxes
deemed to have been paid in the
Philippines equivalent to 20% which
represents the difference between the
regular tax (35%) on corporation and
the tax (15%) dividends as provided
in this section: xxx."
From the above-quoted provision, the
dividends received from a domestic
corporation liable to tax, the tax shall
be 15% of the dividends received,
subject to the condition that the
country in which the non-resident
foreign corporation is domiciled shall
allow a credit against the tax due from
the non-resident foreign corporation
taxes deemed to have been paid in
the Philippines equivalent to 20%
which represents the difference
between the regular tax (35%) on
corporations and the tax (15%) on
dividends.
While it may be true that claims for
refund construed strictly against the
claimant, nevertheless, the fact that
Switzerland did not impose any tax on
the dividends received by Glaro from
the Philippines should be considered
as a full satisfaction if the given
condition. For, as aptly stated by
respondent Court, to deny private
respondent the privilege to withhold
only 15% tax provided for under PD
No. 369 amending section 24 (b) (1)
of the Tax Code, would run counter to
the very spirit and intent of said law
and definitely will adversely affect
foreign corporations interest here and
discourage them for investing capital
in our country.
Cyanamid Philippines, Inc. v. CA
January 20, 2000
Cyanamid was ordered to pay CIR the
sum of P3,774,867.50 representing
25% surtax on improper accumulation
of profits for 1981, plus 10%
surcharge and 20% annual interest
from January 30, 1985 to January 30,
1987. CA affirmed.
FACTS: Petitioner, Cyanamid
Philippines, Inc., a corporation
organized under Philippine laws, is a
wholly owned subsidiary of American
Cyanamid Co. based in Maine, USA. It
is engaged in the manufacture of
pharmaceutical products and
chemicals, a wholesaler of imported
finished goods, and an
importer/indenter.
February 7, 1985, the CIR sent an
assessment letter to petitioner and
demanded the payment of deficiency
in come tax of P119,817 for taxable
year 1981 which the petitioner on
March 4, 1985, protested particularly
(1) 25% surtax assessment of
P3,774,867.50; (2) 1981 deficiency
income tax assessment of P119,817;
(3) 1981 deficiency percentage
assessment of P3,346.72. CIR refused
to allow the cancellation of the
assessment notices.

- CIR sent an assessment letter to

petitioner and demanded the payment During the pendency of the case on
of deficiency income tax which appeal to the CTA, both parties agreed
petitioner protested. CIR said it to compromise the 1981 deficiency
couldn’t cancel assessments even w income assessment of P119,817 and
amnesty availed. CTA held said reduced to P26,577 as compromise
availment does not result in settlement. But the surtax on
cancellation of assessments issued improperly accumulated profits
before August 21, 1986 remained unresolved. Petitioner
claimed that the assessment
representing the 25% surtax had no
legal basis for the following reasons:
(a) petitioner accumulated its earnings
and profits for reasonable business
requirements to meet working capital
needs and retirement of indebtedness,
(b) petitioner is wholly owned
subsidiary of American Cyanamid Co.,
a corporation organized under the
laws of the State of Maine, in the USA,
whose shares of stock are listed and
traded in New York Stock Exchange.
This being the case, no individual
shareholder of petitioner could have
evaded or prevented the imposition of
individual income taxes by petitioner’s
accumulation of earnings and profits,
instead contribution of the same. CTA
denied said petition
ISSUE: WON petitioner is liable for
the accumulated earnings tax for the
year 1981.
HELD: Yep. The amendatory provision
of Sec. 25 of the 1977 NIRC, which
was PD1739, enumerated the
corporations exempt from the
imposition of improperly accumulated
tax: (a) banks, (b) non-bank financial
intermediaries; (c) insurance
companies; and (d) corporations
organized primarily and authorized by
the Central Bank to hold shares of
stocks of banks. Petitioner does not
fall among those exempt classes.
Besides, the laws granting exemption
form tax are construed strictissimi
juris against the taxpayer and liberally
in favor of the taxing power. Taxation
is the rule and exemption is the
exception. The burden of proof rests
upon the party claiming the exemption
to prove that it is, in fact, covered by
the exemption so claimed; a burden
which petitioner here has failed to
discharge.
Unless rebutted, all presumptions
generally are indulged in favor of the
correctness of the CIR’s assessment
against the taxpayer. With petitioner’s
failure to prove the CIR incorrect,
clearly and conclusively, this court is
constrained to uphold the correctness
of tax court’s ruling as affirmed by the
CA.
Deutsche Bank v. Commissioner of
Internal Revenue. August 19,
2013
- This is a Petition for Review filed by
Deutsche Bank under Rule assailing
the CTA En Banc decision. Petitioner’s
claim for refund or issuance of its tax
credit was unacted upon so it
appealed to CTA. CTA 2nd division
denied.
FACTS: In accordance with Section
28(A)(5)4 of the NIRC, petitioner
withheld and remitted to respondent
on 21 October 2003 the amount of
PHP 67,688,553.51, which
represented the 15% branch profit
remittance tax (BPRT) on its regular
banking unit (RBU) net income
remitted to Deutsche Bank Germany
for 2002 and prior taxable years.
Believing that it made an
overpayment of the BPRT, petitioner
filed with the BIR Large Taxpayers
Assessment and Investigation Division
an administrative claim for refund or
issuance of its tax credit certificate in
the total amount of PHP
22,562,851.17. On the same date,
petitioner requested from the
International Tax Affairs Division
(ITAD) a confirmation of its
entitlement to the preferential tax rate
of 10% under the RP-Germany Tax
Treaty.
Because of inaction, petitioner filed a
Petition for Review with the CTA.
Petitioner reiterated its claim for the
refund or issuance of its tax credit
certificate for the amount of PHP
22,562,851.17 representing the
alleged excess BPRT paid on branch
profits remittance to DB Germany.
CTA Second Division, regarding the
claim of petitioner for a refund was
denied on the ground that the
application for a tax treaty relief was
not filed with ITAD prior to the
payment by the former of its BPRT
and actual remittance of its branch
profits to DB Germany, or prior to its
availment of the preferential rate 10%
under the RP-Germany Tax Treaty
provision. The court a quo held that
petitioner violated the 15 day period
mandated under Section III paragraph
(2) of Revenue Memorandum Order
(RMO) No. 1-2000. CTA En banc
affirmed.
ISSUE: WON the the failure to strictly
comply with RMO No. 1-2000 will
deprive persons or corporations of the
benefit of a tax treaty.
HELD: Yes. The BIR issued RMO No.
1-2000, which requires that any
availment of the tax treaty relief must
be preceded by an application with
ITAD at least 15 days before the
transaction. The Order was issued to
streamline the processing of the
application of tax treaty relief in order
to improve efficiency and service to
the taxpayers. Further, it also aims to
prevent the consequences of an
erroneous interpretation and/or
application of the treaty provisions
(i.e., filing a claim for a tax
refund/credit for the overpayment of
taxes or for deficiency tax liabilities for
underpayment).
The laws and issuances must ensure
that the reliefs granted under tax
treaties are accorded to the parties
entitled thereto. The BIR must not
impose additional requirements that
would negate the availment of the
reliefs provided for under international
agreements. More so, when the RP-
Germany Tax Treaty does not provide
for any pre-requisite for the availment
of the benefits under said agreement.
Bearing in mind the rationale of tax
treaties, the period of application for
the availment of tax treaty relief as
required by RMO No. 1-2000 should
not operate to divest entitlement to
the relief as it would constitute a
violation of the duty required by good
faith in complying with a tax treaty.
The denial of the availment of tax
relief for the failure of a taxpayer to
apply within the prescribed period
under the administrative issuance
would impair the value of the tax
treaty. At most, the application for a
tax treaty relief from the BIR should to petitioner in the amount of
merely operate to confirm the P179,394,000.00 and agreed to pay
entitlement of the taxpayer to the the same in three segments.
relief.
Later, the parties executed an
"Amendment to Compromise with
Dation in Payment" where the parties
Philex Mining v. CIR. April 16,
determined that Baguio Gold’s
2008
indebtedness to petitioner actually
- This is a petition for review on amounted to P259,137,245.00, which
certiorari of the CA decision which sum included liabilities of Baguio Gold
affirmed the CTA decision. to other creditors that petitioner had
assumed as guarantor. These
FACTS: liabilities pertained to long-term loans
Petitioner Philex Mining Corporation amounting to US$11m contracted by
entered into an agreement with Baguio Gold from the Bank of America
Baguio Gold Mining Company for the NT & SA and Citibank N.A. This time,
former to manage and operate the Baguio Gold undertook to pay
latter’s mining claim, known as the petitioner in two segments by first
Sto. Nino mine. assigning its tangible assets for
P127,838,051.00 and then
transferring its equitable title in its
In the course of managing and Philodrill assets for P16,302,426.00.
operating the project, Philex Mining The parties then ascertained that
made advances of cash and property Baguio Gold had a remaining
in accordance with paragraph 5 (5. outstanding indebtedness to petitioner
Whenever the MANAGERS shall deem in the amount of P114,996,768.00.
it necessary and convenient in
connection with the MANAGEMENT of
the STO. NINO MINE, they may Subsequently, petitioner wrote off in
transfer their own funds or property to its 1982 books of account the
the Sto. Nino PROJECT) of the remaining outstanding indebtedness of
agreement. However, the mine Baguio Gold by charging
suffered continuing losses over the P112,136,000.00 to allowances and
years which resulted to petitioner’s reserves that were set up in 1981 and
withdrawal as manager of the mine on P2,860,768.00 to the 1982 operations.
January 28, 1982 and in the eventual
cessation of mine operations on
February 20, 1982 In its 1982 annual income tax return,
petitioner deducted from its gross
income the amount of
Thereafter, on September 27, 1982, P112,136,000.00 as "loss on
the parties executed a "Compromise settlement of receivables from Baguio
with Dation in Payment" wherein Gold against reserves and
Baguio Gold admitted an indebtedness allowances." However, BIR disallowed
the amount as deduction for bad debt creditor-debtor relationship. It should
and assessed petitioner a deficiency be pointed out that in a contract of
income tax of P62,811,161.39. loan, a person who receives a loan or
money or any fungible thing acquires
BIR denied petitioner’s protest for lack
ownership thereof and is bound to pay
of legal and factual basis. It held that
the creditor an equal amount of the
the alleged debt was not ascertained
same kind and quality. In this case,
to be worthless since Baguio Gold
however, there was no stipulation for
remained existing and had not filed a
Baguio Gold to actually repay
petition for bankruptcy; and that the
petitioner the cash and property that
deduction did not consist of a valid
it had advanced, but only the return of
and subsisting debt considering that,
an amount pegged at a ratio which the
under the management contract,
manager’s account had to the owner’s
petitioner was to be paid 50% of the
account.
project’s net profit. CTA affirmed,
saying it was an investment and not a
loan. The CTA likewise held that the
amount paid by petitioner for the
long-term loan obligations of Baguio
Gold could not be allowed as a bad
debt deduction. At the time the
payments were made, Baguio Gold
was not in default since its loans were
not yet due and demandable. What
petitioner did was to pre-pay the loans
as evidenced by the notice sent by
Bank of America showing that it was
merely demanding payment of the
installment and interests due.
Moreover, Citibank imposed and
collected a "pre-termination penalty"
for the pre-payment. CA affirmed.

HELD: The totality of the

circumstances and the stipulations in
the parties’ agreement indubitably
lead to the conclusion that a
partnership was formed between
petitioner and Baguio Gold. The tax
court correctly concluded that the
agreement provided for a distribution
of assets of the Sto. Niño mine upon
termination, a provision that is more
consistent with a partnership than a