AIR CANADA vs.

COMMISSIONER OF INTERNAL REVENUE

G.R. No. 169507, January 11, 2016
LEONEN, J.:

Facts: Air Canada is an offline air carrier selling passage tickets in the Philippines, through a
general sales agent, Aerotel. As an off-line carrier, [Air Canada] does not have flights originating
from or coming to the Philippines [and does not] operate any airplane [in] the Philippines[.]

Air Canada filed a claim for refund for more than 5 million pesos. It claims that there was
overpayment, saying that the applicable tax rate against it is 2.5% under the law on tax on Resident
Foreign Corporations (RFCs) for international carriers. It argues that, as an international carrier
doing business in the Philippines, it is not subject to tax at the regular rate of 32%.

Air Canada also claims that it is not taxable because its income is taxable only in Canada because
of the Philippines-Canada Treaty (treaty). According to it, even if taxable, the rate should not exceed
1.5% as stated in said treaty.

However, the CTA ruled that Air Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign
corporation at the regular rate of 32%.

The CTA also said that Air Canada cannot avail of the lower tax rate under the treaty because it has
a "permanent establishment" in the Philippines. Hence, Air Canada cannot avail of the tax exemption
under the treaty.

ISSUES:
[1] Is Air Canada, an offline international carrier selling passage documents through Aerotel, a RFC?
[2] As an offline international carrier selling passage documents, is Air Canada subject to 2.5% tax
on Gross Philippine Billings or to the regular 32% tax?
[3] Can Air Canada benefit from the treaty's elimination of double taxation in favor of Canada or the
preferential rate of 1.5%?
[4] Can Air Canada validly refuse to pay its tax deficiency on the ground that there is a pending tax
credit proceeding it has filed?
[5] Is Air Canada entitled to the tax refund claimed at more than 5 million pesos?

HELD:
[1] Yes, Air Canada is a resident foreign corporation. Although there is no one rule in determining
what "doing business in the Philippines" means, the appointment of an agent or an employee is a
good indicator. This is especially true when there is effective control, similar to that of employer-
employee relationship. This is true between Air Canada and Aerotel. Hence, Air Canada is a RFC.
[2] No, because the 2.5% tax on Gross Philippine Billings applies only to carriers maintaining flights
to and from the Philippines. Air Canada's appointment of a general sales agent, Aerotel, here is only
for the purpose of selling passage documents. However, this is not the complete answer since the
treaty is the latter law that prevails in this case.
NATIONAL DEVELOPMENT COMPANY vs. COMMISSIONER OF INTERNAL REVENUE
June 30, 1987 G.R. No. L-53961
CRUZ, J.:

FACTS:The National Development Company (NDC) entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of 12 ocean-going vessels. The purchase
price was to come from the proceeds of bonds issued by Cental Bank. Initial payments were made in
cash and through irrevocable letters of credit. 14 promissory notes were signed for the balance by
NDC and , as required by the shipbuilders, guaranteed by the Republic of The Phils. When the
vessels were completed and delivered to the NDC in Tokyo, the latter remitted to the shipbuilders
the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax was
withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74.
Negotiations followed but failed. NDC went to CTA. BIR was sustained by CTA. BIR was sustained
by CTA. Hence, this petition for certiorari.

ISSUE: Is NDC liable for tax?

RULING: Yes.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the
Tax Code. , thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the
Philippines. — The following items of gross income shall be treated as gross income from sources
within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes,
orother interest-bearing obligations of residents, corporate or otherwise;
NDC is not the one taxed but the Japanese shipbuilders who were liable on the interest
remitted to them under Section 37 of the Tax Code. The imposition of the deficiency taxes on
NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is
imposed by Section 53c of the Tax Code.
NDC was remiss in the discharge of its obligation as the withholding agent of the government and so
should be liable for the omission.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that. There is nothing in the PN guaranteed by the state exempting the
interests from taxes. Petitioner has not established a clear waiver therein of the right to tax
interests. Tax exemptions cannot be merely implied but must be categorically and
unmistakably expressed. Any doubt concerning this question must be resolved in favor of the
taxing power.

BUREAU OF INTERNAL REVENUE (BIR), AS HEREIN REPRESENTED BY ITS COMMISSIONER

KIM S. JACINTO-HENARES vs. FIRST E-BANK TOWER CONDOMINIUM CORP./FIRST E-BANK
TOWER CONDOMINIUM CORP. VS. BUREAU OF INTERNAL REVENUE (BIR), AS HEREIN
REPRESENTED BY ITS COMMISSIONER KIM S. JACINTO-HENARES
G.R. No. 215801/G.R. No. 218924 January 15, 2020
LAZARO-JAVIER, J.:

February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.

ARTHUR HENDERSON, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Padilla, J.:

SUMMARY: Expat Company president and his wife were assessed deficiency income tax on various allowances
allegedly paid to them by the husband’s employer – among them country club membership, luxury apartment rentals
and utility bills, and travelling expense. Spouses argued that the expenses were necessary and incidental to the
husband’s job as President of the company since they were part of alta sociedad and had to entertain guests and
business associates; that the travelling expense was for a trip made at the behest of the husband’s boss, hence it
was a business trip; and that the allowances did not pass thru them but were instead paid direct to the landlord etc.;
therefore it did not redound to their benefit. SC agreed with them and held them liable only for the ratable value of the
benefits they received, i.e., the actual amount they would have spent for living expenses if the husband was not
required to entertain guests in his apartment; the rest being regarded as expenses of the corporation.

DOCTRINE: Old NIRC: “Gross income includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations,
trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership
or use of or interest, in such property; also from interest, rents, dividend, securities, or the transactions of any
business carried on for gain or profit, or gains, profits, an income derived; from any source whatever.”
(akin lang naman): Only expenses/payments which redounded to the benefit of the taxpayer should be included in the
computation of taxable income.

NATURE: Petition for review of a CTA decision. Original action for tax refund before the BIR.

FACTS

 The spouses ARTHUR and MARIE Henderson are expats living in the Philippines.
o Arthur is the President of the American International Underwriters for the Philippines, Inc. (AIU), a
domestic corporation engaged in non-life insurance.
o He receives an annual basic salary of P30,000/month, plus allowances for living expenses, travel
expenses and utility bills.
o From 1948-1950, the spouses Henderson lived in the Embassy Apartments on Dakota St., Malate,
Manila, where they had a 3-bedroom suite, with a large sala, 2 bathrooms, kitchen and porch
o From 1950-1952, they lived in the Rosaria Apartments (also on Dakota St.), where they had
similarly palatial living quarters.
o The Sps. Henderson are childless, but regularly host society events and parties for company
officials, customers and guests, as part of Arthur’s job as President.
 TAX RETURNS filed by the Sps. Henderson for the years 1948-1952
Net Personal Taxable
Income Exemption Income
194 29,573.79 2,500 27,073.79
8
194 31,817.66 2,500 29,317.66
9
195 34,815.74 3,000 31,815.74
0
195 32,605.83 3,000 29,605.33
1
195 36,780.11 3,000 33,780.11
2
 TAX ASSESSED BY BIR AND PAID by the Sps. Henderson for the period 1948-1952
1948 Paid on May 14, 1949 2,068,12
Paid on Sep. 12, 1949 2,068.11
TOTAL 4,136.23
1949 Paid on May 13, 1950 2,314.95
Paid on Sep. 15, 1950 2,314.94
TOTAL 4,629.89
1950 Paid on Apr. 27, 1951 7,273.00
1951 Withheld from salary 5,780.40
Paid on May 15, 1952 360.50
Paid on Aug. 15, 1952 361.20
1952 Withheld from salary 5,660.40
Paid on May 18, 1953 1,160.30
Paid on Aug. 18, 1953 1,160.00
TOTAL PAID 7,981.00

 Nov. 28, 1953 – the BIR reassessed the Sps. Henderson’s income for the same period, as follows:
1948
Net income per return P29,573.79
Add:
Rent expense 7,200.00
Additional bonus for 1947 received May 13, 1948 6,500.00
Other income:
Manager's residential expense (2|29|48a|c 4.51) 1,400.00
Manager's residential expense (refer to 1948 P & 1,849.32
L)
Entrance fee—Marikina Gun & Country Club 200.00
Net income per investigation 46,723.11
Less: Personal exemption 2,500.00
Net taxable income P44,223.11
Tax due thereon
Less: Amount of tax already paid per OR 52991 & 4,136.23
160473

Deficiency tax still due & assessable P4,426.24

1949
Net income per return P31,817.66
Add disallowances— Capital loss (no capital gain) P3,248.84
Undeclared bonus 3,857.75
Rental allowance from A.I.U. 1,800.00
Subsistence allowance from A.I.U. 6,051.60 P14,958.09
Net income per investigation P46,775.75
Less Personal exemption 2,500.00
Amount of income subject to tax P43,275.75
Tax due thereon P8,292.21
Less tax already assessed paid per OR Nos. 232366 4,629.89
& 247918
Deficiency tax due P3,662.32

1950
Net Income per return P34,815.74
Add:
Rent, electricity, water allowances 8,373.73
Net income per investigation P43,189.47
Less: Personal exemption 3,000.00
Net taxable income P40,189.47
Tax due thereon P10,296.00
Less: Tax already paid per O.R. No. 323173 7,273.00
Deficiency tax still due & assessable P3,023.00
1951
Net income per return P32,605.83
Add house rental allowance from AIU 5,782.91
Net income per investigation P38,388.74
Less personal exemptions 3,000.00
Amount of income subject to tax P35,388.00
Tax due thereon P8,560.00
Less tax already assessed and paid per OR Nos. 6,502.00
A33250 & 383318
Deficiency tax due P2,058.00

1952
Net income per return P36,780.11
Add:
Withholding tax paid by company 600.00
Traveling allowances 3,247.40
Allowances for rent, telephone, water, electricity, 7,044.67
etc.
Net income per investigation 47,672.18
Less: Personal exemption 3,000.00
Net taxable income P44,672.18
Tax due thereon P12,089.00
Less: Tax already withheld P5,660.40

Tax already paid per O.R. Nos. 438026, 13484 2,320.00 7,981.00
Deficiency tax still due & collectible P4,108.00
 The BIR added to the Sps. Henderson’s taxable income their expenses for rent, utility bills, Marikina
Country Club membership and Marie’s travels to New York.
 Jan. 26 & 27, 1954 – Sps. Henderson moved for the reconsideration of the revised assessments.
They argued that:
o They did not receive said allowances because these were paid by AIU directly to the landlord,
utility. etc.
o They had no choice but to live in the apartments provided by AIU, since the entertainment functions
were part of Arthur’s functions as President.
o If ever the utility bills were to be added to taxable income, only the amount of P3,900 should be
added since this is the amount which the Sps. Henderson would have spent on rent and utility had
it been up to them to choose their living arrangements, since they were childless and needed less
living space than was provided to them by AIU
o The expense for Marikina Country Club membership is incidental to Arthur’s functions as President
o Marie’s traveling expense should not be added because she only went to New York at the behest
of the AIU Chairman to study the details of the plans and decorations of the building which AIU
planned to build on its Dewey (now Roxas) Boulevard property, because Arthur could not come
and the chairman felt that Marie was more “closer to those problems”.
 May 27, 1955 – The BIR Conference Staff recommended the affirmance of the assessments to the CIR,
with the exception of the P200 membership fee for the Marikina Country Club.
 The CIR adopted the recommendation of the Conference Staff and demanded the payment of deficiency
taxes for the years 1948-1952, plus 5% surcharge and 1% monthly interest from Mar. 1, 1954, on top of P80
late payment penalty, to be paid to the Manila City Treasurer not later than July 31, 1955.
 Jan. 30, 1956 – Sps. Henderson filed another request for reconsideration, proposing that the BIR add
P4,800 to their taxable income, representing the “value to [Arthur] of the benefits he derived therefrom
measured by what he had saved on account thereof in the ordinary course of his life * * * for which he would
have spent in any case.” (i.e., yung natira sa “ibinigay” ng AIU kung hindi sila required mamuhay nang
marangya); and reiterating the arguments in their 1st request for reconsideration.
 Feb. 10, 1956 – The Sps. filed a refund request with the BIR for overpayment of income tax for the years
1948-52. The BIR (as usual) did not act on the request.
 Feb. 15, 1956 – Sps. Henderson filed with the CTA a petition for review of the BIR decision.
 June 26, 1957 – CTA DECISION
o Inherent nature of Arthur’s job did not require him to live in such luxurious apartments
o Upheld the spouses’ contention with respect to the P4,800 ratable value of the benefits
 o The travelling expense should not be added to taxable income (it was merely at the behest of
Arthur’s boss and is deductible in any case)
o CIR ordered to refund P5,109.33 to the Sps. Henderson
 Both parties filed motions for reconsideration.
o Sps. Henderson argue that the proper amount of refund is P5,986.,61 because the residential
expense for 1948 [see facts] should not be included in taxable income since it is of the same nature
as rentals (both paid directly by AIU and do not pass into the Sps.’ hands)
o CIR argues that the revised assessment should be upheld.
o Both motions denied.
 Both parties filed petitions for review before the SC.

ISSUES (HELD)
1) W/N the nature of Arthur’s job mandated the use of luxurious living quarters (YES)
2) W/N only the ratable value of the benefits to the spouses should be added to taxable income (YES)
3) W/N the traveling expense should be added to taxable income (NO)
4) W/N the 1948 manager’s residential expense should be added to taxable income (NO)

RATIO
PRELIMINARY: Sec. 29 of the then-prevailing NIRC (CA 466), defines “gross income”: “’Gross income’ includes
gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and
in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest, in such property; also from interest,
rents, dividend, securities, or the transactions of any business carried on for gain or profit, or gains, profits, an income
derived; from any source whatever.”

1) HIGH EXECUTIVE POSITION AND SOCIAL STANDING OF ARTHUR “ DEMANDED AND COMPELLED [THE
SPOUSES] TO LIVE IN MORE SPACIOUS AND PRETENTIOUS QUARTERS LIKE THE ONES THEY HAD
OCCUPIED”
 CTA made the following factual findings:
o The two apartments rented by the Sps. Henderson were grand and spacious
o The Sps. regularly entertained houseguests such as the Chairman of AIU (who lived there for a
month, a Washington, D.C. lawyer, and Manuel Elizalde (an AIU stockholder).
o Marie testified that :
 they hosted parties at their apartment every Friday night, there were 18-20 people at
every party and these included officials of AIU and other corporations.
 movies were shown after these parties for the entertainment of the guests
 they also entertained during luncheons and breakfasts (wow naman)
o Were he not required to live in the apartments provided by AIU, they would have chosen an
apartment large enough only for the two of them, and would have spent only P300-400 a month.
o The following facts establish that “[Arthur’s] high executive position, not to mention social standing,
demanded and compelled [the spouses] to live in a more spacious and pretentious quarters like the
ones they had occupied.”
o It is for this reason that AIU shouldered the expense of rentals and utility bills, since it was
necessary for Arthur to host these parties as President of AIU, although that is not his primary
occupation.
o Ergo, no part of the residential allowance was retained by or redounded to the personal
benefit of the spouses, since these were paid by the corporation directly to the landlord and the
public utilities. The issue of whether or not the Sps. were required to live in the apartments chosen
by AIU is of no moment.

2) It therefore follows that the Sps. are entitled only to a ratable value of the allowances in question. SC upheld the
spouses’ contention that if they were not required to live the “high life”, they would only have taken a 300-to-400-
peso-a-month apartment. Therefore they would only have spent at most P4,800 a year for rentals and utilities. The
rest should be considered expenses of the corporation.

3) MARIE’S TRAVELLING EXPENSE DID NOT REDOUND TO THE BENEFIT OF THE SPOUSES
 CTA made the following factual findings:
o The trip to New York, undertaken in 1952, was made at the behest of the AIU Chairman, for Marie
to assist the architect to assist in the preparation of the plans and procurement of materials and
supplies for a proposed building in Manila.
 o Marie was sent because Arthur could not make it; and because the AIU Chairman believed that a
woman would be more suited to the task
o Marie was given a travelling expense allowance of P3,247.40 for the trip.
 These are substantiated by the correspondence between Arthur and Marie while the latter was in New York,
as well as the letter written by Arthur addressed to the AIU Chairman.
 No part of the allowance was retained by Marie or Arthur, nor did it redound to their benefit.
 Marie’s tumor operation was a mere incidence of the trip. She simply took advantage of her presence in the
city.

4) CLAIM FOR DEDUCTION OF MANAGER’S RESIDENTIAL EXPENSE IS SUPPORTED BY EVIDENCE

 Testimony of BIR Examiner Ramos: P3,249.32 was placed in the books of AIU as “living expenses of Mar
and Mrs. Henderson in the quarters they occupied in 1948” and that the amount of P1,400 was included
as manager’s residential expense while P1,849.32 was entered as profit and loss.
 Testimony of Buenaventura Lobriza, acting head of AIU accounting department: rentals, utility, water, and
telephone bills of corporate executives were entered in the books as “subsistence allowances and
expenses” and salaries of employees and officers were kept in another separate account. The rental and
utility bills were not charged to salary accounts.
 Such evidence supports the Sps. Henderson’s claim that the 1948 entry for manager’s residential
expense should be treated as rentals and utilities expense and hence not part of the ratable value subject
to tax.

COMPUTATION OF THE SC

1948

Net income per return P29,573.79

ADD: Additional bonus for 1947 6,500.00
received May 13, 1948
Ratable value of benefits 4,800
Net income 40,873.79
Less: Personal exemption 2,500.00
Net taxable income P38,373.79
Tax due thereon 6.957.19

Less: Amount of tax already paid 8,562.47

Refundable amount 1,605.28

Add: Refundable amount for 1949 569.33
Refundable amount for 1950 1,294.00
Refundable amount for 1951 354.00
Refundable amount for 1952 2,164.00
TOTAL REFUNDABLE AMOUNT 5,986.61

DISPOSITION: Judgment modified. CIR ordered to refund P5,986.61 to the Sps. Henderson.

G.R. No. 213446 July 3, 2018

CONFEDERATION FOR UNITY, RECOGNITION AND ADVANCEMENT OF GOVERNMENT

EMPLOYEES, Petitioner VS. COMMISSIONER, BUREAU OF INTERNAL REVENUE, Respondent

Taxation; National Internal Revenue Code; RR No. 2-98; Sec 2.78; Who may be subject to withholding
tax on compensation. Withholding tax on compensation applies to all employed individuals whether
citizens or aliens, deriving income from compensation for services rendered in the Philippines. The
employer is constituted as the withholding agent. The term employee covers all employees, including
officers and employees, whether elected or appointed, of the Government of the Philippines, or any
political subdivision thereof or any agency or instrumentality while an employer embraces not only an
individual and an organization engaged in trade or business, but also includes an organization exempt
from income tax, such as charitable and religious organizations, clubs, social organizations and societies,
as well as the Government of the Philippines, including its agencies, instrumentalities, and political
subdivisions. The law is therefore clear that withholding tax on compensation applies to the Government
of the Philippines, including its agencies, instrumentalities, and political subdivisions.

Same; same; Exemption to taxable compensation income. However, not all income payments to
employees are subject to withholding tax. These are the allowance, bonuses or benefits, excluded by the
NIRC. While Section III enumerates certain allowances which may be subject to withholding tax, it does
not exclude the possibility that these allowances may fall under the exemptions identified under Section
IV, thus, the phrase, "subject to the exemptions enumerated herein."

CAGUIOA, J.:

FACTS: The petitioners in the present case assail the validity of the provisions of RMO No. 23-2014,
specifically Secs. III and IV, for subjecting to withholding taxes non-taxable allowances, bonuses and
benefits received by government employees. The respondent, on the other hand, argues that RMO No.
23-2014 that allowance, bonuses or benefits listed under Sec. III of the assailed RMO are not fringe
benefits within the purview of the Tax Code, hence, it may not be subjected to withholding tax. The Court
issued a Resolution directing the Fiscal Management and Budget Office of the Court to maintain the
status quo by the non-withholding of taxes from the benefits authorized to be granted to judiciary officials
and personnel until such time that a decision is rendered in the instant consolidated cases. Hence, the
present petition.

ISSUE: Whether or not Sec. III of the RMO is valid.

HELD: AFFIRMATIVE. Under the NIRC of 1997, every form of compensation for services, whether paid
in cash or in kind, is generally subject to income tax and consequently to withholding tax. Sec 2.78 of RR
No. 2-98 provides that withholding tax on compensation applies to all employed individuals whether
citizens or aliens, deriving income from compensation for services rendered in the Philippines. The
employer is constituted as the withholding agent. It further provides that the term employee covers all
employees, including officers and employees, whether elected or appointed, of the Government of the
Philippines, or any political subdivision thereof or any agency or instrumentality while an employer
embraces not only an individual and an organization engaged in trade or business, but also includes an
organization exempt from income tax, such as charitable and religious organizations, clubs, social
organizations and societies, as well as the Government of the Philippines, including its agencies,
instrumentalities, and political subdivisions. The law is therefore clear that withholding tax on
compensation applies to the Government of the Philippines, including its agencies, instrumentalities, and
political subdivisions. The Government, as an employer, is constituted as the withholding agent,
mandated to deduct, withhold and remit the corresponding tax on compensation income paid to all its
employees.

However, not all income payments to employees are subject to withholding tax. These are the
allowance, bonuses or benefits, excluded by the NIRC. While Section III enumerates certain allowances
which may be subject to withholding tax, it does not exclude the possibility that these allowances may fall
under the exemptions identified under Section IV, thus, the phrase, "subject to the exemptions
enumerated herein." In other words, Sections III and IV articulate in a general and broad language the
provisions of the NIRC on the forms of compensation income deemed subject to withholding tax and the
allowances, bonuses and benefits exempted therefrom. Thus, Sections III and IV cannot be said to have
been issued contrary with the provisions of the NIRC of 1997, as amended, and its implementing rules.
 PLDT vs. CIR
GR 157264 January 31, 2008
Carpio Morales;J.:

FACTS:

PLDT terminated and compensated affected employees in compliance with labor law requirements. It
deducted from separation pay withholding taxes and remitted the same to BIR. In 1997, it filed a claim for
tax refund and CTA contended that petitioner failed to show proof of payment of separation pay and
remittance of the alleged with held taxes. CA dismissed the same and PLDT^ assailed the decision
arguing against the need for proof that the employees received their separation pay and proffers actually
received by terminated employees.

ISSUE:

Whether or not the withholding taxes remitted to the BIR should be refunded for having been erroneously
withheld and paid to the latter.

RULING:

Tax refunds, like tax exemptions, are considered strictly against the taxpayer and liberally in favor of the
taxing authority, and the taxpayer bears the burden of establishing the factual basis of his claim for a
refund.

A taxpayer must do two things to be able to successfully make a claim for tax refund: a) declare the
income payments it received as part of its gross income and b) establish the fact of withholding.

At all events, the alleged newly discovered evidence that PLDT seeks to offer does not suffice to
established its claim for refund as it would still have to comply with Revenue Regulation 6-85 by
proving that the redundant employees on whose behalf it filed the claim for refund, declared the
separation pay received as part of their gross income. The same Revenue Regulation required that
the facts of withholding is established by a copy of the statement duly issued by the payor to the payee
showing the amount paid and the amount of tax withhold therefrom.

A taxpayer must do two (2) things to be able to be able to successfully make a claim for the tax refund:
1. Declare the income payment it received as part of its gross income.
2. Establish the fact of withholding.

On this score, the relevant revenue regulations provides as follows:

Sec. 10. Claims for tax credit or refund - claims for tax credit or refund of income tax deducted and
withheld on income payments shall be given due course only when it is shown on the return that the
income payment received was declared as part of the gross income and the fact of withholding is
established by a copy of the statement duly issued by the payer to the payee showing the amount paid
and the amount of tax withheld therefrom.

G.R. No. 184450

JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES, MARAH SHARYN M. DE
CASTRO and CRIS P. TENORIO, Petitioners,

vs.

SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE, Respondents.

FACTS:

On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.) 2293. On 21 May
2008, former President Gloria M. Arroyo certified the passage of the bill as urgent through a letter addressed to then
Senate President Manuel Villar. On the same day, the bill was passed on second reading IN the Senate and, on 27
May 2008, on third reading. The following day, 28 May 2008, the Senate sent S.B. 2293 to the House of
Representatives for the latter's concurrence.

On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an amendment to House Bill No. (H.B.)
3971.

On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424,
as Amended, Otherwise Known as the National Internal Revenue Code of 1997," was approved and signed into law by
President Arroyo. The following are the salient features of the new law:

1. It increased the basic personal exemption from ₱20,000 for a single individual, ₱25,000 for the
head of the family, and ₱32,000 for a married individual to P50,000 for each individual.

2. It increased the additional exemption for each dependent not exceeding four from ₱8,000 to
₱25,000.

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.

Section 9 of the law provides that it shall take effect 15 days following its publication in the Official Gazette or in at
least two newspapers of general circulation. Accordingly, R.A. 9504 was published in the Manila Bulletin and Malaya
on 21 June 2008. On 6 July 2008, the end of the 15-day period, the law took effect.

RR 10-2008

On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing the provisions of R.A. 9504.
The relevant portions of the said RR read as follows:

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income.

xxxx

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be considered in determining
the ₱30,000.00 ceiling of 'other benefits' excluded from gross income under Section 32 (b) (7) (e) of the Code.
Provided that, the excess of the 'de minimis' benefits over their respective ceilings prescribed by these regulations
shall be considered as part of 'other benefits' and the employee receiving it will be subject to tax only on the excess
over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the ₱30,000.00 limit
shall be taxable on the excess benefits, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW.

(B) Exemptions from Withholding Tax on Compensation. - The following income payments are exempted from the
requirements of withholding tax on compensation:

xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the Statutory Minimum Wage
(SMW), as fixed by Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where he/she is assigned.
Comment of the OSG

The Office of the Solicitor General (OSG) filed a Consolidated Comment and took the position that the application of
R.A. 9504 was intended to be prospective, and not retroactive. This was supposedly the general rule under the rules of
statutory construction: law will only be applied retroactively if it clearly provides for retroactivity, which is not provided in
this instance.

Petitioners Jaime N. 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 for being contrary to
Section 4 of Republic Act No. 9504.2

Petitioners argue that the prorated application of the personal and additional exemptions under RR 10-2008 is not "the
legislative intendment in this jurisdiction."3 They stress that Congress has always maintained a policy of "full taxable
year treatment"4 as regards the application of tax exemption laws. They allege further that R.A. 9504 did not provide
for a prorated application of the new set of personal and additional exemptions.

ISSUES:

Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be distilled into three major
ones:

First, whether the increased personal and additional exemptions provided by R.A. 9504 should be applied to the entire
taxable year 2008 or prorated, considering that R.A. 9504 took effect only on 6 July 2008.

Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only.

Third, whether 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 ₱30,000 19 is no longer entitled to the exemption provided by R.A.
9504.
HELD:

I.

Whether the increased personal and additional exemptions provided by R.A. 9504 should be applied to the
entire taxable year 2008 or prorated, considering that the law took effect only on 6 July 2008

The personal and additional exemptions established by R.A. 9504 should be applied to the entire taxable year 2008.

Umali is applicable.

Umali v. Estanislao supports this Comi's stance that R.A. 9504 should be applied on a full-year basis for the entire
taxable year 2008. In Umali, Congress enacted R.A. 7167 amending the 1977 National Internal Revenue Code
(NIRC). The amounts of basic personal and additional exemptions given to individual income taxpayers were adjusted
to the poverty threshold level. R.A. 7167 came into law on 30 January 1992. Controversy arose when the Commission
of Internal Revenue (CIR) promulgated RR 1-92 stating that the regulation shall take effect on compensation income
earned beginning 1 January 1992. The issue posed was whether the increased personal and additional exemptions
could be applied to compensation income earned or received during calendar year 1991, given that R.A. 7167 came
into law only on 30 January 1992, when taxable year 1991 had already closed.

This Court ruled in the affirmative, considering that the increased exemptions were already available on or before 15
April 1992, the date for the filing of individual income tax returns. Further, the law itself provided that the new set of
personal and additional exemptions would be immediately available upon its effectivity. While R.A. 7167 had not yet
become effective during calendar year 1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that purpose, the new law provided for
adjustments "to the poverty threshold level" prevailing at the time of the enactment of the law.

We now arrive at this important point: the policy of full taxable year treatment is established, not by the amendments
introduced by R.A. 9504, but by the provisions of the 1997 Tax Code, which adopted the policy from as early as 1969.

There is, of course, nothing to prevent Congress from again adopting a policy that prorates the effectivity of basic
personal and additional exemptions. This policy, however, must be explicitly provided for by law - to amend the
prevailing law, which provides for full-year treatment. As already pointed out, R.A. 9504 is totally silent on the matter.
This silence cannot be presumed by the BIR as providing for a half-year application of the new exemption levels. Such
presumption is unjust, as incomes do not remain the same from month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal and additional
exemptions. In so doing, respondents overstepped the bounds of their rule-making power. It is an established rule that
administrative regulations are valid only when these are consistent with the law. Respondents cannot amend, by mere
regulation, the laws they administer. To do so would violate the principle of non-delegability of legislative powers.

The prorated application of the new set of personal and additional exemptions for the year 2008, which was introduced
by respondents, cannot even be justified under the exception to the canon of non-delegability; that is, when Congress
makes a delegation to the executive branch. The delegation would fail the two accepted tests for a valid delegation of
legislative power; the completeness test and the sufficient standard test. The first test requires the law to be complete
in all its terms and conditions, such that the only thing the delegate will have to do is to enforce it. The sufficient
standard test requires adequate guidelines or limitations in the law that map out the boundaries of the delegate's
authority and canalize the delegation.

In this case, respondents went beyond enforcement of the law, given the absence of a provision in R.A. 9504
mandating the prorated application of the new amounts of personal and additional exemptions for 2008. Further, even
assuming that the law intended a prorated application, there are no parameters set forth in R.A. 9504 that would
delimit the legislative power surrendered by Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax Code
authorized not only the prorating of the exemptions in case of change of status of the taxpayer, but also authorized the
Secretary of Finance to prescribe the corresponding rules and regulations.

II.

Whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only

The MWE is exempt for the entire taxable year 2008.

As in the case of the adjusted personal and additional exemptions, the MWE exemption should apply to the entire
taxable year 2008, and not only from 6 July 2008 onwards. We see no reason why Umali cannot be made applicable
to the MWE exemption, which is undoubtedly a piece of social legislation. It was intended to alleviate the plight of the
working class, especially the low-income earners. In concrete terms, the exemption translates to a ₱34 per day benefit,
as pointed out by Senator Escudero in his sponsorship speech.50

As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer. Therefore, RR 10-2008
cannot declare the income earned by a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable and
those earned by him for the rest of that year to be tax-exempt. To do so would be to contradict the NIRC and
jurisprudence, as taxable income would then cease to be determined on a yearly basis.
III.

Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in declaring that an MWE who receives
other benefits in excess of the statutory limit of ₱30,000 is no longer entitled to the exemption provided by
R.A. 9504, is consistent with the law.

Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring that an MWE who
receives other benefits in excess of the statutory limit of ₱30,000 is no longer entitled to the exemption provided by
R.A. 9504

Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by the assailed provisions
of RR 10-2008. The provisions of the law are clear and precise; they leave no room for interpretation - they do not
provide or require any other qualification as to who are MWEs.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) 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. Thus, one is either an MWE
or he/she is not. Simply put, MWE is the status acquired upon passing the litmus test - whether one receives wages
not exceeding the prescribed minimum wage.

CONCLUSION

The foregoing considered, we find that respondents committed grave abuse of discretion in promulgating Sections 1
and 3 of RR 10-2008, insofar as they provide for (a) the prorated application of the personal and additional exemptions
for taxable year 2008 and for the period of applicability of the MWE exemption for taxable year 2008 to begin only on 6
July 2008; and (b) the disqualification of MWEs who earn purely compensation income, whether in the private or public
sector, from the privilege of availing themselves of the MWE exemption in case they receive compensation-related
benefits exceeding the statutory ceiling of ₱30,000.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and

(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-2008:

(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation income from the privilege of the
MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory ceiling
of ₱30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and additional exemptions under R.A.
9504 for taxable year 2008, and for the period of applicability of the MWE exemption to begin only on 6 July 2008.

(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to grant a refund, or allow the
application of the refund by way of withholding tax adjustments, or allow a claim for tax credits by (i) all individual
taxpayers whose incomes for taxable year 2008 were the subject of the prorated increase in personal and additional
tax exemption; and (ii) all MWEs whose minimum wage incomes were subjected to tax for their receipt of the 13th
month pay and other bonuses and benefits exceeding the threshold amount under Section 32(B)(7)(e) of the 1997 Tax
Code.