CIR vs.

ALGUE
Doctrine of Symbiotic Relationship
G.R. No. Ponente Date
G.R. No. L-28896 CRUZ, J. February 17, 1988
Petitioners Respondents
COMMISSIONER OF INTERNAL REVENUE ALGUE, INC. and THE COURT OF TAX
(CIR) APPEALS (CTA)

DOCTRINE:
Every person who is able to must contribute his share in the running of the government. The
government, for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values.

I. Facts:
➢ On Januarty 14, 1965, Algue Inc., a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the CIR assessing it
with delinquency income taxes amounting to P83,183.85 for years 1958 and 1959.

➢ On January 18, 1965, Algue filed a letter of protest or request for reconsideration which
was stamp-received on the same day in the office of the CIR.

➢ On March 12, 1965, a warrant of distraint and levy was presented to Algue, through its
counsel Atty. Alberto Guevarra, Jr., who refused to receive it on the ground of pending
protest. Atty. Guevarra later produced his file copy and gave a photostat to BIR agent
Ramon Reyes, who deferred service of the warrant.

➢ On April 7, 1965, Atty Gueverra was finally informed that the BIR was not taking any action
on the protest and it was only then that he accepted the warrant of distraint and levy.

➢ Algue, then, sought to claim a P75,000 deduction, but was denied by the CIR
contending that the claimed deduction was properly disallowed because it was not an
ordinary, reasonable or business expense.

➢ On April 23, 1965, Algue filed a petition for review of the decision of the CIR with the
CTA which ruled in its favor and allowed the said deduction, it held that the amount
of P75,000 had been legitimately paid by the Algue for actual services rendered. The
payment was in the form of promotional fees. These were collected by the payees for their
work in the creation of the Vegetable Oil Investment Corporation of the Philippines
(VOICP) and its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company. (PSEDC)
II. Issues:
Whether or not the CIR correctly disallowed the P75,000.00 deduction claimed by Algue as
legitimate business expenses in its income tax returns. (NO)

III. Ratio/Legal Basis:

The Supreme Court upheld the ruling of the CTA and allowed the P75,000.00 deductions claimed
by Algue. The claimed deduction by Algue is in accord with the following provision of the Tax
Code. (see notes)
In addition, it has been established that the PSEDC had earlier appointed Algue as its agent,
authorizing it to sell its land. factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., and other individuals worked for the formation of the VOICP, inducing other
persons to invest in it. Ultimately, after its incorporation largely through the promotion of the said
persons, this new corporation purchased the PSEDC properties. For this sale, Algue received
as agent a commission of P125,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals.
Further, Algue, Inc has proved that the payment of the fees was necessary and reasonable
in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
In conclusion, it is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of one's hard-earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation and should dispel
the erroneous notion that it is an arbitrary method of exaction by those in the seat of power

IV. Dispositive Portion:

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs

V. Notes:
➢ Provision of the Tax Code:
"SEC. 30. Deductions from gross income. — In computing net income there shall be
allowed as deductions —
a.) Expenses:
 (1) In general. — All the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually
rendered; x x x" and
And Revenue Regulations No. 2, Section 70 (1), reading as follows:
"SEC. 70. Compensation for personal services. — Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or business may be
included a reasonable allowance for salaries or other compensation for personal
services actually rendered.”

➢ Procedural Issue: Whether or not the appeal of Algue, Inc from the decision of the CIR
Revenue was made on time and in accordance with law. (Yes)
Appeal from a decision of the CIR with the Court of Tax Appeals is 30 days from
receipt thereof.—The above chronology shows that the petition was filed
seasonably. According to Rep. Act No. 1125, the appeal may be made within
thirty days after receipt of the decision or ruling challenged.
As the Court of Tax Appeals correctly noted, the protest filed by Algue was not
pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period
which started on the date the assessment was received, viz., January 14,
1965. The period started running again only on April 7, 1965, when Algue was
definitely informed of the implied rejection of the said protest and the warrant was
finally served on it. Hence, when the appeal was filed on April 23, 1965, only
20 days of the reglementary period had been consumed.

➢ Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good, may be
achieved.
BPI Family Savings Bank v. CA
Doctrine of Unjust Enrichment as Applied to Government
G.R. No. Ponente Date
L-122480 PANGANIBAN, J. April 12, 2000
Petitioners Respondents
BPI-FAMILY SAVINGS BANK, Inc. COURT OF APPEALS, COURT OF TAX APPEALS
and the COMMISSIONER OF INTERNAL REVENUE

DOCTRINE: “If the State expects its taxpayers to observe fairness and honesty in paying their
taxes, so must it apply the same standard against itself in refunding excess payments. When it
is undisputed that a taxpayer is entitled to a refund the State should not invoke technicalities to
keep money not belonging to it. No one, not even the State, should enrich oneself at the expense
of another.”

I. Facts of the case

• This case involves a claim for tax refund in the amount of P112,491.00 representing BPI
Family Savings Bank (BPI)’s tax withheld for the year 1989. As appearing in its 1989
Income Tax Return (ITR), BPI has a total of P297,492 refundable taxes inclusive of the
P112,491.00 being claimed as tax refund in the present case.
• BPI declared in its 1989 ITR that it would apply the excess withholding tax as a tax credit
for the year 1990.
• Subsequently, however, BPI claimed for a tax refund with the Commission of Internal
Revenue since in the year 1990 it suffered losses, thus, could not have applied said
amount as tax credit.
• Without waiting for respondent CIR’s action in its claim for refund, BPI filed a petition for
review with the Court of Tax Appeals (CTA), seeking the refund of the amount of
P112,491.00
• CTA dismissed the petition on the ground that BPI failed to present as evidence its 1990
annual income tax return to prove that it had not yet credited the amount of P297,422,
inclusive of P112,491 which is the subject of the present controversy to its 1990 tax
liability.
• BPI filed a motion for reconsideration in the respondent court, however, Court of Appeals
affirmed the CTA. Hence, this Petition.

II. Issue/s

Whether or not BPI Family Savings Bank is entitled to a tax refund of P112,491.00
representing excess creditable withholding tax paid for the taxable year 1989.

III. Ratio/Legal Basis

Yes. BPI is entitled to refund. It is indubitable that petitioner had excess withholding taxes
for the year 1989 and was thus entitled to a refund amounting to P112,491.00. Under the
1986 Tax Code, corporation entitled to a refund may opt either (1) to obtain such refund
or (2) to credit said amount for the succeeding taxable year.
 The undisputed fact is that BPI suffered a net loss in 1990; accordingly, it incurred no tax
liability to which the tax credit could be applied. Consequently, there is no reason for the
BIR and this Court to withhold the tax refund which rightfully belongs to BPI.

Substantial justice, equity and fair play are on the side of BPI. Technicalities and
legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding
citizens. If the State expects its taxpayers to observe fairness and honesty in paying
their taxes, so must it apply the same standard against itself in refunding excess payments
of such taxes. Indeed, the State must lead by its own example of honor, dignity and
uprightness.

IV. Disposition

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and
Resolution of the Court of Appeals REVERSED and SET ASIDE. The Commissioner of
Internal Revenue is ordered to refund to BPI the amount of P112,491 as excess creditable
taxes paid in 1989. No costs.

V. Notes

Section 69. Final Adjustment Return. — Every corporation liable to tax under Section 24
shall file a final adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total due on the entire taxable net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year.
Lutz v Araneta
Purpose of Taxation, Promotion of General Welfare
G.R. No. Ponente Date
G.R. No. L-7859 REYES, J.B L., J December 22, 1955
Petitioners Respondents
WALTER LUTZ, Judicial Administrator of the JUDGE ANTONIO ARANETA, Collector of
Intestate Estate of the deceased Antonio Internal Revenue
Jayme Ledesma

DOCTRINE:
The State has the power to levy taxes in aid and support of protection and promotion of matters
of public concern.
I. Facts:
The Sugar Adjustment Act was enacted due to the threat to the sugar industry brought by the
imposition of export taxes upon sugar as provided in the Tydings-Mcduffie Law. The Sugar
Adjustment Act levies on owners or persons in control of lands devoted to the cultivation of
sugarcane. Lutz, the judicial administrator of the estate of Ledesma, at the time seeks to recover
from the Collector of Internal Revenue the estate taxes paid as he alleged that such tax is
unconstitutional and void, being levied for the aid and support of the sugar industry exclusively. It
is his opinion that it is not of public purpose for which a tax may be constitutionally levied. The
action was initially dismissed by the Court of First Instance and his appeal elevated the same to
the Supreme Court.
II. Issue/s:
Whether or not the estate taxes collected from the estate of Ledesma is not of public purpose.
(NO)
III. Ratio/Legal Basis:
The estate taxes collected from the estate of Ledesma, pursuant to the Sugar Adjustment Act, is
of public purpose. The tax is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry. The law was passed for the
protection and promotion of the sugar industry, and such is a matter of public concern. The act is
primarily an exercise of the police power. General welfare demanded that the sugar industry
should be stabilized. The Legislature is clothed with authority to determine within reasonable
bounds what is necessary for the protection of the industry. It cannot be said that the devotion of
tax money to experimental stations to seek increased efficiency in sugar production and the
improvement of living and working conditions in sugar mills are not a matter of public concern,
even if the funds collected are channeled directly to private persons.
IV. Dispositive Portion:
The decision appealed from is affirmed, with costs against appellant.
V. Notes:
The state has the power to select the subject of taxation. The law was passed for the benefit of
sugar producers and it is only rational that the tax be obtained from those who are to be benefited
from the expenditure of the funds derived from it. It is inherent in the power to tax that a state be
free to select the subjects of taxation, and it has been repeatedly held that "inequalities which
result from a singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.
 Osmeña v. Orbos
Promotion of General Welfare
G.R. No. Ponente Date
99886 NARVASA, J. 17 February 1998
Petitioners Respondents
JOHN H. OSMEÑA OSCAR ORBOS, in his capacity as Executive Secretary; JESUS
ESTANISLAO, in his capacity as Secretary of Finance; WENCESLAO
DELA PAZ, in his capacity as Head of the Office of Energy Affairs; REX
V. TANTIONGCO, and the ENERGY REGULATORY BOARD

DOCTRINE: “All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purposes only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general
funds of the Government.” – Article VI of the 1987 Constitution, Sec. 29(3)

I. Facts of the case

• October 10, 1984 – Pres. Ferdinand Marcos issued P.D. 1956 creating a Special
Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF).
• The OPSF was designated to reimburse oil companies for cost increases in crude oil
and imported petroleum products resulting from exchange rate adjustments and from
increases in the world market prices of crude oil.
• Subsequently, the OPSF was reclassified into a “trust liability account”, in virtue of
the E.O. 1024. The same Executive Order also authorized the investment of the fund in
government securities, with the earning from such placements accruing to the fund.
• February 27, 1987 – Pres. Cory Aquino, amended P.D. 1956 and promulgated E.O. No.
137, expanding the grounds for reimbursement to oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of
petroleum products, the amount of the underrecovery being left for determination
by the Ministry of Finance.

• Osmeña avers that the creation of the trust fund violates Article VI, Sec. 29(3) of
the Constitution and he argues that:

1) the monies collected pursuant to P.D. 1956, as amended, must be treated as a

“SPECIAL FUND”, not as a ‘trust account’ or a ‘trust fund,’ and that “if a special
tax is collected for a specific purpose, the revenue generated therefrom shall ‘be
treated as a special fund’ to be used only for the purpose indicated, and not
channeled to another government objective;
2) since “a ‘special fund’ consists of monies collected through the taxing power of a
State, such amounts belong to the State, although the use thereof is limited to
the special purpose/objective for which it was created.”
• Osmeña does not suggest that a “trust account” is illegal, however, he maintains that the
monies collected, which form part of the OPSF, should be maintained in a special
account of the general fund as provided in the Constitution, and because they are,
supposedly, taxes levied for a special purpose. He assumes that the Fund is formed from
a tax undoubtedly because a portion thereof is taken from collections of ad valorem taxes1
and the increases thereon.

II. Issue/s

Whether or not the creation of the trust fund violates Article VI, Sec. 29 (3) of the
Constitution. NO.

III. Ratio/Legal Basis

• The OPSF is a “Trust Account” which was established “for the purpose of minimizing the
frequent price changes brought about by exchange rate adjustment and/or changes in
world market prices of crude oil and imported petroleum products.”

1
ad valorem taxes – refers to the excise tax which is based on selling price or other specified value of the goods/articles.
excise tax – a tax on the production, sale or consumption of a commodity in a country.
 • The OPSF was established precisely to protect local consumers from the adverse
consequences that such frequent oil price adjustments may have upon the
economy.
• The stabilization, and subsidy of domestic prices of petroleum products and fuel oil —
clearly critical in importance considering, among other things, the continuing high level of
dependence of the country on imported crude oil — are appropriately regarded as public
purposes.
• OPSF is levied with a regulatory purpose, which, in this case, is to provide a means for
the stabilization of the oil industry.
• Hence, it seems clear that while the funds collected may be referred to as taxes, they are
exacted in the exercise of the police power of the State. Moreover, that the OPSF is a
special fund is plain from the special treatment given it by E.O. 137. It is segregated from
the general fund; and while it is placed in what the law refers to as a “trust liability
account,” the fund nonetheless remains subject to the scrutiny and review of the
COA. The Court is satisfied that these measures comply with the constitutional
description of a “special fund.”
• It seems obvious that what the law intended was to permit the additional imposts for as
long as there exists a need to protect the general public and the petroleum industry from
the adverse consequences of pump rate fluctuations.

IV. Disposition

WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the
reimbursement of financing charges, paid pursuant to E.O. 137, and DISMISSED in all other
respects.

V. Notes

Under P.D. No. 1956, as amended by Executive Order No. 137 dated 27 February 1987, this Trust
Account (OPSF) may be funded from any of the following sources:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on
petroleum products subject to tax under this Decree arising from exchange rate
adjustment, as may be determined by the Minister of Finance in consultation with the
Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy:

c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the Board
of Energy requiring payment of persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the peso
costs computed using the reference foreign exchange rate as fixed by the Board of
Energy.
 1

05 ABAKADA Guro v. Ermita

Fiscal Adequacy/Uniformity
G.R. No. Ponente Date
168056 Austria-Martinez, J. 01 September 2005
Petitioners Respondents
ABAKADA Guro Partylist Officers Samson S. Executive Secretary Eduardo Ermita, Secretary
Alcantara and Vincent S. Albano of Finance Cesar V. Purisima, and CIR
Guillermo Parayno, Jr.

DOCTRINE/S: Fiscal adequacy denotes that the sources of revenues must be adequate to meet
government expenditures.

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation. [Art. VI, Sec. 28(1) of the 1987 Constitution]

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall
be taxed at the same rate. Different articles may be taxed at different amounts provided that the
rate is uniform on the same class everywhere with all people at all times.

I. Facts of the case

● This case is a consolidation of 5 petitions assailing the constitutionality of RA 9337

amending certain provisions of the National Internal Revenue Code.
● ABAKADA Guro Partylist et.al. question the validity of said law, specifically Section 4
imposing a 10% VAT on sale of goods and properties, Section 5 imposing a 10% VAT
importation of goods, and Section 6 imposing a 10% VAT on sale of services and use or
lease of properties. Said sections contain a common proviso authorizing the President,
upon recommendation of the Secretary of Finance, to raise the VAT rate to 12% after
any of the following conditions have been satisfied: (i) VAT collection as a percentage of
Gross Domestic Product of the previous year exceeds 2 ⅘%; or (ii) National government
deficit as a percentage of GDP of the previous year exceeds 1½%.
● Pimentel et.al. contend that the increase in the VAT rate, which was allegedly an
incentive to the President to raise the VAT collection to at least 2⅘ of the GDP of the
previous year, should be based on fiscal adequacy.
● Association of Pilipinas Shell Dealers, Inc. et.al., assail Sections 8 and 12 of RA 9337
as having violated the equal protection clause1, as the limitation on the creditable input
tax if: (1) the entity has a high ratio of input tax2; or (2) invests in capital equipment; or
(3) has several transactions with the government, is not based on real and substantial
differences to meet a valid classification. They also assailed the authorization given to
any government agency to deduct a 5% final withholding tax3 on gross payments of
goods and services.
● Ermita et.al. manifest that RA 9337 is the answer to the government’s fiscal reform,
especially in the value-added system of taxation. To do this, government expenditures
must be strictly monitored and controlled and revenues must be significantly increased.

II. Issue/s

W/N the increase in VAT rate to 12%, the 70% limitation on creditable input tax, the 60- month
amortization on the purchase or importation of capital goods exceeding P1,000,000.00, and
the 5% final withholding tax are unconstitutional. NO

1 No person or class of persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in similar circumstances.
2 Input tax is the value-added tax due from or paid by a VAT-registered person on the importation of goods
or local purchase of goods and services, including lease or use of property, in the course of trade or
business, from a VAT-registered person, and Output Tax is the value-added tax due on the sale or lease
of taxable goods or properties or services by any person registered or required to register under the law.
3 The amount of income tax withheld by the withholding agent is constituted as full and final payment of the
income tax due from the payee on the said income. The liability for payment of the tax rests primarily on
the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the payor/withholding agent.
 2

III. Ratio/Legal Basis

FISCAL ADEQUACY

As to the increase in VAT rate to 12%

● The Court held that RA 9337 does not provide for a return to the 10% rate nor does it
empower the President to revert if, after the rate is increased to 12%, the VAT collection
goes below the 2⅘% of the GDP of the previous year or that the national government
deficit as a percentage of GDP of the previous year does not exceed 1½%. The incentive
to the President to increase the VAT collection does not render it unconstitutional
so long as there is a public purpose, which is to raise revenue to attain fiscal
adequacy.
● Ermita et.al. explained the reasoning behind the two conditions:

VAT/GDP Ratio > 2.8%: If VAT/GDP is less than 2.8%, it means that the
government has no capability of implementing the VAT therefore, there is no value to
increase it to 12% because such action will be ineffectual.

National Government Deficit/GDP > 1.5%: The condition set for increasing VAT
when deficit/GDP is 1.5% or less means the fiscal condition of the government has
reached a relatively sound position or is towards the direction of a balanced budget
position. Therefore, there is no need to increase the VAT rate. However, if the ratio is more
than 1.5%, there is a need to increase the VAT rate.

As to the 70% limitation on creditable input tax

● The Court ruled that the right to credit input tax as against the output tax is clearly a
privilege created by law that can be removed or limited. In this case, the value-added taxes
that a person/taxpayer paid and passed on to him by a seller can only be credited up to
70% of the value-added taxes that are due to him on a taxable transaction. What only
needs to be done is for the person/taxpayer to apply or credit these input taxes, as
evidenced by receipts, against his output taxes.

As to the 60-month amortization on the purchase or importation of capital goods exceeding

₱1,000,000.00

● The Court explained that the input tax on goods purchased or imported in a calendar
month for use in trade or business for which deduction for depreciation is allowed under
the NIRC, shall be spread evenly over the month of acquisition and the 59 succeeding
months if the aggregate acquisition cost for such goods, excluding the VAT component
thereof, exceeds ₱1,000,000.00: Provided, however, that if the estimated useful life of the
capital good is less than 5 years, as used for depreciation purposes, then the input VAT
shall be spread over such shorter period.

FISCAL UNIFORMITY

As to the 5% final withholding tax by government agencies:

● The Court sustained that a uniform rate of 5% is applied. Sec. 12 provides a more
simplified VAT withholding system and the government in this case is constituted as a
withholding agent.
● The Court observes, however, that the law used the word “final” which means full in tax
usage, as opposed to creditable. This means that taxable transactions with the
government are subject to a 5% rate, which constitutes as full payment of the tax payable
on the transaction. The use of the word final and the deletion of the word creditable exhibits
Congress’s intention to treat transactions with the government differently. Since it has
not been shown that the class subject to the 5% final withholding tax has been
 3

unreasonably narrowed, there is no reason to invalidate the provision. The

Association of Pilipinas Shell Dealers, Inc. et.al., as petroleum dealers, are not the
only ones subjected to the 5% final withholding tax. It applies to all those who deal
with the government.

Summary: The Court held in this case that the increase in VAT collection to 12%, should any of
the two conditions be met, does not render it unconstitutional so long as there is a public purpose,
which is to raise revenue to attain fiscal adequacy. The Court also emphasized that the tax law is
uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections
4, 5, and 6 provide for a rate of 10% (or 12%) on sale of goods and properties, importation of
goods, and sale of services and use or lease of properties. These sections also provide for a 0%
rate on certain sales and transactions.

Neither does RA 9337 make any distinction as to the type of industry that will bear the 70%
limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the government. It must be stressed that the rule on
uniform taxation does not deprive Congress of the power to classify subjects of taxation,
and only demands uniformity within the particular class.

IV. Disposition

WHEREFORE, R.A. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056,
168207, 168461, 168463, and 168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of

R.A. 9337, the TRO issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.
 Reyes vs. Almanzor
Equitability and Progressability
G.R. No. Ponente Date
L-49839-46 PARAS, J. 17 February 1998
Petitioners Respondents
JOSE B.L. REYES PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in
& EDMUNDO their capacities as appointed and Acting Members of the CENTRAL
REYES BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS,
ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their capacities
as appointed and Acting Members of the BOARD OF ASSESSMENT
APPEALS of Manila; and NICOLAS CATIIL in his capacity as City
Assessor of Manila, respondents.

DOCTRINE: Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation
must not only be uniform, but must also be equitable and progressive. Taxation is said to be equitable
when its burden falls on those better able to pay. Taxation is progressive when its rate goes up
depending on the resources of the person affected

I. Facts of the case

 J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Manila,
which are leased & entirely occupied by tenants, as dwelling sites who paid monthly rentals
not exceeding Php 300 on July 1971.
 On July 14, 1971, RA No. 6359 was enacted, it prohibited a year from its effectivity, an increase
in monthly rentals of dwelling units/of lands on which another's dwelling is located, where such
rentals do not exceed P300.00 a month but allowing an increase in rent by not more than 10%
thereafter.
 The Act also suspended paragraph (1) of Article 1673 (ejectment of lessees) of the Civil Code
for two years from its effectivity. On October 12, 1972, PD No. 20 amended R.A. No. 6359,
the latter effectively suspended the operation of Art. 1673 of the NCC indefinitely. Thus the
Reyeses, were precluded from raising the rentals and from ejecting the tenants.
 In 1973, the City Assessor of Manila re-classified and reassessed the value of the subject
properties based on the schedule of market values duly reviewed by the Finance Secretary.
The revision, entailed an increase in the corresponding tax rates prompting the petitioners to
file a Memorandum of Disagreement with the Board of Tax Assessment Appeals.
 They averred that the reassessments made were "excessive, unwarranted, inequitable,
confiscatory and unconstitutional" considering that the taxes imposed upon them greatly
exceeded the annual income derived from their properties. They argued that the income
approach should have been used in determining the land values instead of the comparable
sales approach which the City Assessor used.
 The Board of Tax Assessment Appeals, however, considered the assessments valid. Thus the
Reyeses appealed to the Central Board of Assessment Appeals. Who upheld the decision of
the former with modification. The Reyeses filed a Motion for Reconsideration, but it was
denied, hence the present recourse to the Court.

II. Issue/s

Whether or not the values assigned to their properties of the petitioners as revised and
increased are arbitrarily excessive, unwarranted, inequitable, confiscatory and
unconstitutional?

III. Ratio/Legal Basis

● YES, the values assigned to their properties of the petitioners as revised and increased are
arbitrarily excessive, unwarranted, inequitable, confiscatory and unconstitutional.
● Taxing power is the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very
least discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different both in the privileges conferred
and the liabilities imposed
● UAnder the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation
purposes is that the property must be "appraised at its current and fair market value."
● Petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No.
6359 and P.D. 20) under the principle of social justice should not now be penalized by the
 same government by the imposition of excessive taxes petitioners can ill afford and eventually
result in the forfeiture of their properties.

IV. Disposition

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of
public respondents are REVERSED and SET ASIDE; and (e) the respondent Board of
Assessment Appeals of Manila and the City Assessor of Manila are ordered to make a
new assessment by the income approach method to guarantee a fairer and more realistic
basis of computation

V. Notes

 Collection of taxes should be made in accordance with law as any arbitrariness will
negate the very reason for government itself.—Verily, taxes are the lifeblood of the
government and so should be collected without unnecessary hindrance. However,
such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxations, which is the promotion of the common good, may be
achieved (Commissioner of Internal Revenue v. Algue, Inc., et al., 158 SCRA 9
[1988]). Consequently, it stands to reason that petitioners who are burdened by
the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20)
under the principle of social justice should not now be penalized by the same
government by the imposition of excessive taxes petitioners can ill afford and
eventually result in the forfeiture of their properties
 The power to tax is the strongest of all the powers of the government.—The
power to tax “is an attribute of sovereignty”. In fact, it is the strongest of all the
powers of government. But for all its plenitude, the power to tax is not unconfined
as there are restrictions. Adversely effecting as it does property rights, both the
due process and equal protection clauses of the Constitution may properly be
invoked to invalidate in appropriate cases a revenue measure. If it were otherwise,
there would be truth to the 1903 dictum of Chief Justice Marshall that “the power
to tax involves the power to destroy.” The web or unreality spun from Marshall’s
famous dictum was brushed away by one stroke of Mr. Justice Holmes’ pen, thus:
“The power to tax is not the power to destroy while this Court sits.” “So it is in the
Philippines.” (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
PAL v. Sec. of Finance
Equitability and Progressivity
G.R. No. Ponente Date
G.R. No. 115852 MENDOZA, J. 25 August 1994
Petitioners Respondents
PHILIPPINE AIRLINES, INC. THE SECRETARY OF FINANCE, and
COMMISSIONER OF INTERNAL REVENUE

DOCTRINE:

1. The Contract Clause has never been thought as a limitation on the exercise of the
State's power of taxation save only where a tax exemption has been granted for a
valid consideration.
2. Regressivity is not a negative standard for courts to enforce. What Congress is required
by the Constitution to do is to "evolve a progressive system of taxation." This is a
directive to Congress, just like the directive to it to give priority to the enactment of laws
for the enhancement of human dignity and the reduction of social, economic and political
inequalities (Art. XIII, Sec. 1), or for the promotion of the right to "quality education" (Art.
XIV, Sec. 1). These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.
a. The legislature is not required to adhere to a policy of "all or none" in choosing
the subject of taxation.

I. Facts of the case

• The value-added tax (VAT) is levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services. It is equivalent to 10% of the
gross selling price or gross value in money of goods or properties sold, bartered or
exchanged or of the gross receipts from the sale or exchange of services. Republic Act
No. 7716 or the Expanded Value-Added Tax Law seeks to widen the tax base of the
existing VAT system and enhance its administration by amending the National Internal
Revenue Code (NIRC).
• These are various suits for certiorari and prohibition, challenging the constitutionality of
Republic Act No. 7716 on various grounds.
1. The effect of the amendment in Sec. 103 of the NIRC is to remove the exemption granted
to PAL, as far as the VAT is concerned.
a. PAL further contended that amendment of petitioner's franchise may only be
made by special law, in view of Sec. 24 of P.D. No. 1590 which provides:
This franchise, as amended, or any section or provision hereof may only
be modified, amended, or repealed expressly by a special law or decree
that shall specifically modify, amend, or repeal this franchise or any
section or provision thereof.
This provision is evidently intended to prevent the amendment of the franchise
by mere implication resulting from the enactment of a later inconsistent statute,
in consideration of the fact that a franchise is a contract which can be altered
only by consent of the parties.
2. The broad argument against the VAT is that it is regressive and that it violates the
requirement that "The rule of taxation shall be uniform and equitable [and] Congress
shall evolve a progressive system of taxation. [Art. VI, Sec. 28 (1) of the Constitution]
a. Petitioners in G.R. No. 115781 (Kilosbayan, Inc., et. al. vs. The Executive
Secretary, The Secretary of Finance, The Commissioner of Internal Revenue and
The Commissioner of Customs) contend that as a result of the uniform 10% VAT,
the tax on consumption goods of those who are in the higher-income bracket,
which before were taxed at a rate higher than 10%, has been reduced, while
basic commodities, which before were taxed at rates ranging from 3% to 5%, are
now taxed at a higher rate.
b. The Sec. of Finance claimed that in fact it distributes the tax burden to as many
goods and services as possible particularly to those which are within the reach
of higher-income groups, even as the law exempts basic goods and services. It
is thus equitable. The goods and properties subject to the VAT are those used or
consumed by higher-income groups.

II. Issue/s

Digest Maker: Leah Faith U. Toledo

 1. Whether or not R.A. No. 7716 can amend PAL’s franchise (P.D. No. 1590)
2. Whether or not R.A. No. 7716 violates Art. VI, Sec. 28 (1) of the Constitution

III. Ratio/Legal Basis

1. YES. It is enough to say that the parties to a contract cannot, through the exercise of
prophetic discernment, fetter the exercise of the taxing power of the State. For not only
are existing laws read into contracts in order to fix obligations as between parties, but the
reservation of essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to secure
the peace and good order of society.
a. Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by
specifically excepting from the grant of exemptions from the VAT PAL's exemption
under P.D. No. 1590. This is within the power of Congress to do under Art. XII,
Sec. 11 of the Constitution, which provides that the grant of a franchise for the
operation of a public utility is subject to amendment, alteration or repeal by
Congress when the common good so requires.
2. NO. Lacking empirical data on which to base any conclusion regarding these arguments,
any discussion whether the VAT is regressive in the sense that it will hit the "poor" and
middle-income group in society harder than it will the "rich," is largely an academic
exercise.
a. As Republic Act No. 7716 merely expands the base of the VAT system and its
coverage as provided in the original VAT Law, further debate on the desirability
and wisdom of the law should have shifted to Congress.
b. The Cooperative Union of the Philippines (CUP)'s contention that Congress'
withdrawal of exemption of producers cooperatives, marketing cooperatives, and
service cooperatives, while maintaining that granted to electric cooperatives, not
only goes against the constitutional policy to promote cooperatives as instruments
of social justice (Art. XII, Sec. 15) but also denies such cooperatives the equal
protection of the law is actually a policy argument. The legislature is not required
to adhere to a policy of "all or none" in choosing the subject of taxation.

IV. Disposition

That, in view of the absence of a factual foundation of record, claims that the law is
regressive, oppressive and confiscatory and that it violates vested rights protected under the
Contract Clause are prematurely raised and do not justify the grant of prospective relief by writ of
prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.

V. Notes

• Among the provisions of the NIRC amended is § 103, which originally read:
Sec. 103. Exempt transactions. — The following shall be exempt from the value-added
tax:
....
(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory. Among the transactions exempted from the VAT
were those of PAL because it was exempted under its franchise (P.D. No. 1590) from
the payment of all "other taxes . . . now or in the near future," in consideration of the
payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, § 103 of the NIRC now provides:
Sec. 103. Exempt transactions. — The following shall be exempt from the value-added
tax:
....
(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

Digest Maker: Leah Faith U. Toledo

TOLENTINO vs. SECRETARY OF FINANCE & CIR
Regressivity
G.R. No. Ponente Date
G.R. No. 115455 MENDOZA, J. August 25, 1994; and
October 30, 1995 (motion
seeking reconsideration)
Petitioners Respondents
ARTURO M. TOLENTINO THE SECRETARY OF FINANCE AND THE
COMMISSIONER OF INTERNAL REVENUE
(CIR)

DOCTRINE:
“Regressivity is not a negative standard for courts to enforce since what Congress is
required by the Constitution to do is to “evolve a progressive system of taxation.”— This
is a directive to Congress, just like the directive to it to give priority to the enactment of laws for
the enhancement of human dignity and the reduction of social, economic and political inequalities
(Art. XIII, Section 1), or for the promotion of the right to “quality education” (Art. XIV, Section 1).
These provisions are put in the Constitution as moral incentives to legislation, not as judicially
enforceable rights.

I. Facts:
➢ The value-added tax (VAT) is levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services. It is equivalent to 10% of the
gross selling price or gross value in money of goods or properties sold, bartered or
exchanged or of the gross receipts from the sale or exchange of services.

➢ Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the National Internal Revenue Code.

➢ Various suits were filed (NOTE: this case is a consolidation of various petitions)
for certiorari and prohibition, challenging the constitutionality of Republic Act No. 7716 on
various grounds, one of which is its alleged violation of Article VI, Section 28(1) of the
1987 Constitution which states that “The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of taxation.”

Some of the petitioners’ arguments regarding regressivity: (Note: This case is a

consolidation of various petitions)

➢ Petitioners (too many to mention) in G.R. No. 115781 quote from a paper, entitled "VAT
Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A. Tait of the
International Monetary Fund, that:
 o "VAT payment by low-income households will be a higher proportion of their
incomes (and expenditures) than payments by higher-income households. That is,
the VAT will be regressive." Petitioners contend that as a result of the uniform
10% VAT, the tax on consumption goods of those who are in the higher-income
bracket, which before were taxed at a rate higher than 10%, has been reduced,
while basic commodities, which before were taxed at rates ranging from 3% to 5%,
are now taxed at a higher rate.

➢ In G.R. No. 115873, Cooperative Union of the Philippines (CUP) claims that:

o the VAT is regressive in the sense that it will hit the “poor” and middle-income
group in society harder than it will the “rich”.

➢ The Chamber of Real Estate and Builders Association (CREBA) claims that the VAT is
regressive. A similar claim is made by the Cooperative Union of the Philippines, Inc.
(CUP), while Juan T. David argues that

o the law contravenes the mandate of Congress to provide for a progressive system
of taxation because the law imposes a flat rate of 10% and thus places the tax
burden on all taxpayers without regard to their ability to pay.

Respondents’ arguments:

➢ The opposite claim is pressed by respondents (too many to mention) that in fact it
distributes the tax burden to as many goods and services as possible particularly
to those which are within the reach of higher-income groups, even as the law
exempts basic goods and services. It is thus equitable.

o The goods and properties subject to the VAT are those used or consumed by
higher-income groups. These include real properties held primarily for sale to
customers or held for lease in the ordinary course of business, the right or privilege
to use industrial, commercial or scientific equipment, hotels, restaurants and
similar places, tourist buses, and the like.

o On the other hand, small business establishments, with annual gross sales of less
than P500,000, are exempted. This, according to respondents, removes from the
coverage of the law some 30,000 business establishments.

II. Issues:
Whether or not R.A. No 7716 violates Article VI, Section 28(1) of the 1987 Constitution. Otherwise
stated, does the Constitution prohibit regressive taxes. (NO.)

III. Ratio/Legal Basis:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are
to be preferred and as much as possible, indirect taxes should be minimized.” The mandate of
Congress is not to prescribe but to evolve a progressive tax system. This is a mere directive upon
Congress, not a justiciable right or a legally enforceable one. We cannot avoid regressive taxes
but only minimize them.
The law minimizes the regressive effects of this imposition by providing for zero rating of certain
transactions while granting exemptions to other transactions. The transactions which are subject
to VAT are those which involve goods and services which are used or availed of mainly by higher
income groups.

IV. Dispositive Portion:

WHEREFORE, the petitions in these cases are DISMISSED. (August 25, 1994 case)
WHEREFORE, the motions for reconsideration are denied with finality and the temporary
restraining order previously issued is hereby lifted. (October 30, 1995 case)

V. Notes:
As to graduation:
1. Progressive – A tax rate which increases as the tax base or bracket increases. (e.g. income
tax, estate tax and donor’s tax)
2. Regressive – The tax rate decreases as the tax base or bracket increases.
3. Proportionate – A tax of a fixed percentage of amounts of the base (value of the property, or
amount of gross receipts etc.). (e.g. VAT and other percentage taxes)
CIR v. Cebu Portland Cement
Lifeblood Theory
G.R. No. Ponente Date
L-29059 CRUZ, J. December 15, 1987
Petitioners Respondents
COMMISSIONER OF INTERNAL CEBU PORTLAND CEMENT COMPANY and COURT
REVENUE OF TAX APPEALS

DOCTRINE:

§ Taxes are what we pay for a civilized society. If the payment of taxes could be postponed
by simply questioning their validity, the State would be paralyzed.

§ Injunction generally does not lie against the collection of taxes.

Facts of the case

• By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified
on appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal
Revenue was ordered to refund to the Cebu Portland Cement Company the amount
of P359,408.98, representing overpayments of ad valorem taxes on cement produced
and sold by it after October 1957.
• On March 28, 1968, following denial of motions for reconsideration filed by both the CIR
and Cebu Portland, the latter moved for a writ of execution to enforce the said judgment.
• The motion was opposed by CIR on the ground that the Cebu Portland had an outstanding
sales tax liability to which the judgment debt had already been credited. In fact, it
was stressed, there was still a balance owing on the sales taxes in the amount of
P4,789,279.85 plus 28% surcharge.
• On April 22, 1968, the Court of Tax Appeals granted the motion, holding that the alleged
sales tax liability of the Cebu Portland was still being questioned and therefore could not
be set-off against the refund.
• In his petition to review the said resolution, the CIR claims that the refund should
be charged against the deficiency of the Cebu Portland on the sales of cement under
Sec. 186 of the Tax Code, which is a manufactured and not a mineral product and
therefore not exempt from sales tax.
• CIR also denies that the sale tax assessments have already prescribed because the
prescriptive period should be counted from the filing of the sales tax returns, which had
not yet been done by the private respondent.

I. Issue/s
Whether or not the claims for refund could be set-off against the deficiency sales tax
of Cebu Portland.

II. Ratio/Legal Basis

YES. It has been ruled that even if a tax being collected by the CIR is being contested
by the tax payer, the same can be enforced by the set-off or by applying it against the
 refundable tax that may be due the tax payer. Of course, it is assumed here that both the
collection and the right to the refund of taxes has not yet prescribed and that the refund claim
has already been approved. The set-off is justified because taxes must be collected
inasmuch as they are the lifeblood of the government and that it is a settled principle
that the government is not duty bound to resolve a pending tax protest before it can
collect the unpaid tax liability. The argument that the assessment cannot as yet be
enforced because it is still being contested loses sight of the urgency of the need to
collect taxes as "the lifeblood of the government”. If the payment of taxes could be postponed
by simply questioning their validity, the machinery of the state would grind to a halt and all
government functions would be paralyzed.

The Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax. No court shall have
authority to grant an injunction to restrain the collection of any national internal revenue
tax, fee or charge imposed by this Code.

It goes without saying that this injunction is available not only when the assessment
is already being questioned in a court of justice but more so if, as in the instant case, the
challenge to the assessment is still-and only-on the administrative level. There is all the more
reason to apply the rule here because it appears that even after crediting of the refund against
the tax deficiency, a balance of more than P4 million is still due from the Cebu Portland.

III. Disposition

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case
No. 786 is SET ASIDE, without any pronouncement as to costs.

IV. Notes

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal
Revenue or the Collector of Customs shall suspend the payment, levy, distraint and/or sale
of any property of the taxpayer for the satisfaction of his tax liability as provided by existing
law: Provided, however, That when in the opinion of the Court the collection by the Bureau of
Internal Revenue or the Commissioner of Customs may jeopardize the interest of the
Government and/or the taxpayer the Court at any stage of the proceeding may suspend the
said collection and require the taxpayer either to deposit the amount claimed or to file a surety
bond for not more than double the amount with the Court.
Bull v US
Theory and Basis of Taxation, Lifeblood Theory
G.R. No. Ponente Date
295 U.S. 247 JUSTICE ROBERTS April 29, 1935
Petitioners Respondents
BULL, Executor of Archibald H Bull UNITED STATES

DOCTRINE:
Taxes are the lifeblood of government, and their prompt and certain availability an imperious
need.
I. Facts:
Archibald H. Bull died. He had been a member of a partnership engaged in the business of ship-
brokers. The partners had agreed that in the event a partner died, the survivors should continue
the business for one year subsequent to his death or the estate of the deceased partner shall
have the option of withdrawing his interest from the firm. The estate's representative did not
exercise the option to withdraw. When filing an estate tax return, the executor included the
decedents of Bull, interest in the partnership at a value which represented the decedent's share
of the earnings accrued to the date of death. Bull filed an income tax return for the estate of
Archibald, which did not include the amount of $200,117.09 as income from the partnership from
Archibald’s death. The estate employed the cash receipts and disbursement method of
accounting. The Commissioner of Tax determined that said amount should have been included
and notified Bull of the deficiency in income tax. Bull filed a suit alleging that if the $200,117.99
was a taxable income, the United States should have credited against the income tax and
attributed the same to estate tax since the amount is property of Archibald, the deceased.
II. Issue:
Whether or not the profits accruing to the estate for the period from the decedent's death is subject
to estate tax. (NO)
III. Ratio/Legal Basis:
No, the amount received from the partnership as profits earned after Bull's death was income
earned by the executor. The partnership agreement is that the deceased partner's estate shall
leave his interest in the business and the surviving partners. It results that the surviving partners
are taxable upon firm profits and the estate is not. The portion of the profits paid his estate was
therefore income and not corpus; and this is so whether we consider the executor a member of
the old firm for the remainder of the year, or hold that the estate became a partner in a new
association formed upon the decedent's demise.
IV. Notes:
The power of taxation is essential because the government can neither exist nor endure without
taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need. The sovereign must therefore resort to drastic means of collection. The
assessment is given the force of a judgment, and if the amount assessed is not paid when due,
administrative officials may seize the debtor's property to satisfy the debt. (There was no issue
relating to the lifeblood doctrine. It was only mentioned in the case)
CIR v. Juliane Baier-Nickel
Jurisdiction over subject and objects
G.R. No. Ponente Date
153793 YNARES-SANTIAGO, J. 29 August 2006
Petitioners Respondents
COMMISSIONER OF INTERNAL JULIANE BAIER-NICKEL, as represented by Marina Q.
REVENUE Guzman (Attorney-in-fact)

DOCTRINE: The important factor which determines the source of income of personal services is
not the residence of the payor, or the place where the contract for service is entered into, or the
place of payment, but the place where the services were actually rendered.

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.

I. Facts of the case:

• Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc.,
a domestic corporation engaged in “manufacturing, marketing on wholesale only, buying
or otherwise acquiring, holding, importing and exporting, selling and disposing
embroidered textile products.”
• Through JUBANITEX’s General Manager, Marina Q. Guzman, the corporation appointed
and engaged the services of Juliane as commission agent. It was agreed that Juliane will
receive 10% sales commission on all sales actually concluded and collected through her
efforts.
• 1995: Juliane 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.
• April 14, 1998: Juliane filed a claim to refund the amount of P170,777.26 alleged to
have been mistakenly withheld and remitted by JUBANITEX to the BIR. She 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.
• Juliane filed a petition for review before the CTA for alleged BIR’s inaction on her claim
for refund.
• June 28, 2000: CTA denied her claim. It held that 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 the CTA decision which grants the Juliane’s tax refund. It held that Juliane
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 Juliane is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in Germany.

• CIR filed an MR, but was denied. Hence, this petition.

• CIR’s contention:
- 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.

• Juliane 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 Juliane is the situs1 of the activity which
produced the income. And since the source of her income were her marketing activities in

1
The situs of taxation has been defined as the place where an authority has the right to impose and collect taxes.
 Germany, the income she derived from said activities is not subject to Philippine income
taxation.

II. Issue

Whether or not Juliane’s sales commission income is taxable in the Philippines. YES

III. Ratio/Legal Basis

• Juliane’s income is subject to tax, hence, she cannot claim a refund.

• Pursuant to Sec. 25 of NIRC, non-resident aliens, whether or not engaged in trade or
business, are subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the taxability of non-
resident aliens is the income’s “source.”
• In determining the meaning of “source”, the Court resorted to origin of Act 2833 (the first
Philippine income tax law), and 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 important factor therefore which determines the source of income of personal
services is not the residence of the payor, or the place where the contract for
service is entered into, or the place of payment, but the place where the services
were actually rendered.
• 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 juris2 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.
• Juliane failed to produce substantial evidence to prove that she performed the income
producing service in Germany, which would have entitled her to a tax exemption for
income from sources outside the Philippines. Hence, the claim for tax refund should be
denied.

IV. Disposition

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8,
2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET
ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which
denied respondent’s claim for refund of income tax paid for the year 1995 is REINSTATED.

2
The most strict right or law. In general, when a person receives an advantage, as the grant of a license, he is bound to conform
strictly to the exercise of the rights given him by it, and in case of a dispute, it will be strictly construed.
IV. Notes (OPTIONAL)

Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual. –

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. –

(1) In General. – A nonresident alien individual engaged in trade or business in the

Philippines shall be subject to an income tax in the same manner as an individual citizen
and a resident alien individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for
an aggregate period of more than one hundred eighty (180) days during any calendar year shall
be deemed a ‘nonresident alien doing business in the Philippines,’ Section 22(G) of this Code
notwithstanding.

xxxx

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. – There
shall be levied, collected and paid for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual not engaged in trade or
business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x
x

• The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833,
which took effect on January 1, 1920. Under Section 1 thereof, nonresident aliens are likewise
subject to tax on income “from all sources within the Philippine Islands,” thus –

SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the
entire net income received in the preceding calendar year from all sources by every
individual, a citizen or resident of the Philippine Islands, a tax of two per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid annually upon the
entire net income received in the preceding calendar year from all sources within the
Philippine Islands by every individual, a nonresident alien, including interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise.