Doctrines in Taxation

Construction and interpretation of tax laws, rules and regulations

Q: Philippine Bank of Communications (PBCom) filed its quarterly income tax returns for the first and
second quarters of 1985, reported profits, and paid the total income tax of P5,016,953. In 1985 and 1986,
PBCom earned rental income from its leased properties resulting in remittance by the lessees to the BIR
withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. Thereafter, it filed for tax
credit for overpayment of taxes in the first and second quarters of 1985, and refund of creditable taxes
withheld by their lessees for property rentals in 1985 and 1986. On November 18, 1988, and pending
investigation by the Commissioner of Internal Revenue, PBCom instituted a Petition for Review with the
CTA. The CTA outright dismissed the same on the ground that it was filed beyond the two-year
reglementary period provided by law. PBCom argued that it was in good faith when it relied on the
assurances of the BIR in RMC No. 7-85 which provided that the prescriptive period for the refund/tax
credit of excess quarterly income tax payments is not two years but ten. Was PBCom correct? Explain.

A: No. The issuance of RMC 7-85 created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress. Revenue memorandum-circulars are considered administrative rulings which
are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to
great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override,
instead of remaining consistent and in harmony with the law they seek to apply and implement
(Philippine Bank of Communications v. CIR, G.R. No. 112024, January 28, 1999).

Prospectivity of tax laws

Q: X and his wife Y had a net worth of P8,600 on December 8, 1941. During the Japanese occupation the
spouses acquired several real properties, and at the time of his death on February 11, 1945 he had a net
worth of P31,489. The Collector of Internal Revenue assessed a war profits tax on the estate of the
deceased at P7,614.60, which his administratrix refused to pay. The CTA sustained the validity and
legality of the assessment. The administratrix has appealed the decision on the ground that the war profits
tax law was unconstitutional for being applied retroactively. Rule.

A: Appellant’s contention that the law is invalid or unconstitutional because it acts retroactively, thus
violating the due process of law clause, is not supported by reason or authority. The doctrine of
unconstitutionality raised by appellant is based on the prohibition against ex post facto laws. But this
prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or
proceedings which affect or regulate civil or private rights. Retrospective laws, when not of a criminal
nature, do not come in conflict with the Constitution, unless it be so harsh and oppressive in its
application (Republic v. Fernandez, G.R. No. L-9141, September 25, 1956).

Imprescriptibility of taxes
Q: AS Corp. filed an income tax return but did not file a return covering its surplus profits. Thus the
Commissioner of Internal Revenue issued an assessment in the sum of P758,687.04 as 25% surtax on the
corporation’s surplus of P2,758,442.37 for its fiscal year. The Commissioner submits that in the absence
of law requiring taxpayers to file returns of their accumulated surplus, the 5-year period of limitation on
assessment of taxes should not apply. Decide.

A: It is well settled that limitations upon the right of the government to assess and collect taxes will not be
presumed in the absence of clear legislation to the contrary, and where the government has not by express
statutory provision provided a limitation upon its right to assess unpaid taxes, such right is
imprescriptible. There can be no failure or omission to file a return where no return is required to be filed
by law or by regulation. A tax imposed upon unreasonable accumulation of surplus is in the nature of a
penalty. It would not be proper for the law to compel a corporation to report improper accumulation of
surplus. Accordingly, the 5-year period limiting the right to assess internal revenue taxes within five years
from the date the return was filed or was due does not apply (Commissioner of Internal Revenue v. Ayala
Securities Corp., G.R. No. L-29485, November 21, 1980).

Double taxation
Q: The Sangguniang Panlalawigan of Bulacan passed an Ordinance imposing a 10% tax on the fair
market value of stones, sand, gravel, earth, and other quarry resources extracted from public lands and
public waters within its territorial jurisdiction. Pursuant thereto, the Provincial Treasurer of Bulacan
assessed RC Corp. P2,524,692.13 for extracting limestone, shale and silica from several parcels of private
land in the province. Was there double taxation? Explain.

A: Yes. The Local Government Code empowers provinces to tax only those stones, sand, gravel, earth
and other quarry resources extracted from public lands. The National Internal Revenue Code already
provides a tax on all quarry resources, regardless of origin, whether extracted from public or private land.
Taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly
declares, tax statutes being construed in strictissimi juris against the government (Province of Bulacan v.
CA, G.R. No. 126232, November 27, 1998).

Escape from taxation

Shifting of tax burden
Q: PAC, Inc. is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During
the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the National Power
Corporation (NPC) and to the Voice of America (VOA), on account of which, the Commission of Internal
Revenue assessed and demanded from PAC, Inc. the payment of P12,910.60. The corporation denied
liability on the ground that both NPC and VOA are exempt from taxation, and that the immunity thus
given would be impaired by the imposition of a tax on sales made to it because while the tax is paid by
the manufacturer or producer, the tax is ultimately shifted by the latter to the former. Is the contention
correct?

A: No. The tax imposed by Sec. 186 of the National Internal Revenue Code is a tax on the manufacturer
or producer and not a tax on the purchaser. It may indeed be that the economic burden of the tax finally
falls on the purchaser; when it does the tax becomes a part of the price which the purchaser must pay. It
does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price
and the tax separately and defining taxable gross receipts as the amount received less the amount of the
tax added, merely avoids payment by the seller of a tax on the amount of the tax. The effect is still the
same, namely, that the purchaser does not pay the tax. He pays or may pay the seller more for the goods
because of the seller's obligation, but that is all and the amount added because of the tax is paid to get the
goods and for nothing else. Accordingly its levy on the sales made to tax-exempt entities like the NPC is
permissible (Phil. Acetylene Inc v. Commissioner of Internal Revenue, G.R. No. L-19707, August 17,
1967).

Tax avoidance
Q: HTTC Inc. is a corporation engaged in the importation of textiles from abroad. It entered into an
arrangement with Pan-Asiatic Commercial, its sister corporation, whereby the latter withdraws the
imported goods from Customs, and which pays, in the name of HTTC Inc., the corresponding advance
sales tax under the Tax Code. Thereafter the Collector of Internal Revenue assessed against HTTC Inc.
deficiency sales taxes and surcharges in the aggregate sum of P89,123.59 including a penalty of 50% on
the amount of deficiency sales taxes imposed. HTTC Inc. questions this assessment on the ground that the
importation papers were placed in its name only for purposes of accommodation and that it was not in a
financial position to make the subject importations. Was the imposition of the penalty justified? Explain.

A: No. It is a settled principle that a taxpayer may diminish his liability by any means which the law
permits. An attempt to minimize one's tax does not necessarily constitute fraud. The intention to minimize
taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence
amounting to more than mere preponderance, and cannot, be justified by mere speculation. This is
because fraud is never lightly to be presumed. Fraud must therefore be ruled out in this case. Although as
far as the right of the government to collect the taxes is concerned, HTTC Inc. was the real importer, and
hence must shoulder the tax burden (Heng Tong Textiles Co., Inc. v. Commissioner of Internal Revenue,
G.R. No. L-19737, August 26, 1968).

Tax evasion
Q: In March 1989, CI Corp. authorized X, its President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and two parcels of land on which the building
stands for an amount not less than P90 million. In August 1989, X sold the properties to Y for P100
million, who in turn, sold the same to RM Inc. for P200 million. For the sale to RM Inc., Y paid capital
gains tax in the amount of P10 million. Subsequently, CI Corp. filed its corporate annual income tax
return for the year 1989, declaring among others, its gain from the sale of real property in the amount of
P75,728.021, and paying P26,341,207 for its net taxable income of P75,987,725. Before X died, he sold
his entire shares of stocks in CI Corp. to Z for P12.5 million. Years after his death, the Estate of X
received a Notice of Assessment for deficiency income tax for the year 1989 in the amount of
P79,099,999.22. The estate filed a protest. The Commissioner however, dismissed the same, stating that a
fraudulent scheme was deliberately perpetuated by the CI Corp. wholly owned and controlled by X, by
covering up the additional gain of P100 million, resulting in evasion of the higher corporate income tax
rate of 35%. Moreover, it was discovered that as early as May 1989, prior to the purported sale of the
properties to Y, CI Corp. received P40 million from RM Inc., and not from Y; and that in July 1989,
another P40 million was debited and reflected in RM Inc.’s trial balance as “Other-Inv.-Cibeles Bldg.”
Was there tax evasion? Explain.

A: Yes. Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment
of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that
a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith,"
"willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is
unlawful. The three factors in tax evasion are all present in this case. The two transfers were tainted with
fraud since the intermediary transfer was prompted only by the desire to mitigate tax liabilities and not by
a businessbut purpose (Commissioner of Internal Revenue v. Estate of Benigno P. Toda, Jr., G.R. No.
147188, September 14, 2004).

Exemption from taxation

Q: The BIR assessed De La Salle University (DLSU) the following deficiency taxes: (1) income tax on
rental earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added
tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease contracts. Thus,
the BIR demanded payment of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable
years 2001, 2002 and 2003. DLSU protested the assessment and elevated the matter to the CTA Division
through a petition for review, upon the Commissioner’s non-action on the protest. Relying on Art. XIV,
Sec. 4(3) of the Constitution, it contended that as a non-stock, non-profit educational institution, it should
be exempt from taxes and duties. Initially, the CTA Division partially granted the petition for review by
eliminating the DST assessment on the loan transactions but still requiring payment of the deficiency
income tax, VAT and DST on its lease contracts, but later modified its decision in favor of DLSU when
the latter presented supplemental pieces of evidence to prove that its rental income was used actually,
directly and exclusively for educational purposes. The Commissioner appealed the decision to the CTA
En Banc, while DLSU, unsatisfied, filed a separate petition for review for further reduction of its tax
liabilities. The CTA En Banc sustained the findings of the CTA Division and partially granted DLSU’s
petition for review by reducing its tax liabilities to P2,554,825.47.

The Commissioner thus contends that DLSU is exempt only from property tax but not from income tax
on the rentals earned from property; furthermore, it is argued that Art. XIV, Sec. 4(3) of the Constitution
must be harmonized with Sec. 30(H) of the Tax Code, which states among others, that the income of
whatever kind and character of a non-stock and non-profit educational institution from any of its
properties, real or personal, or from any of its activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed by this Code.

On the other hand, DLSU countered that Art. XIV, Sec. 4(3) of the Constitution is clear that all assets
and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties. Rule.

A: The revenues and assets of non-stock, non-profit educational institutions proved to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes. Sec. 30(H)
of the Tax Code did not qualify the tax exemption constitutionally granted to non-stock, non-profit
educational institutions, and is conditioned only on the actual, direct and exclusive use of their assets,
revenues and income for educational purposes. The addition and express use of the word “revenues” in
Art. XIV, Sec. 4(3) of the Constitution is not without significance. Revenues consist of the amounts
earned by a person or entity from the conduct of business operations. Thus, when a non-stock, non-profit
educational institution proves that it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempt from income tax, VAT and local business tax. The crucial point of inquiry is
on the use of the assets or on the use of revenues, and so long as they are used actually, directly and
exclusively for educational purposes, they are exempt from duties and taxes (Commissioner of Internal
Revenue v. De La Salle University, G.R. No. 196596, November 9, 2016).

Equitable recoupment
Q: From January 1, 1948 to June 30, 1950, UST paid P13,590.03 representing 2% tax on its gross receipts
derived from its printing and binding jobs for the public as well as the different departments within the
university. On October 17, UST requested from the Collector of Internal Revenue the refund of the sum
of P8,293.31 on account of overpayment as these allegedly fall under the exception provided for under
Sec. 191 of the Tax Code, and that the payments made to other departments do not legally constitute
gross receipts subject to percentage tax. The Collector however, denied the claim and asserted that the
UST is liable for the amount of P2,452.04 representing deficiency percentage tax and surcharge on the
undeclared receipts derived from the printing and binding of annuals, and further ordered the University
to pay P100 as compromise penalty. Ruling on the dispute, the CTA denied the claim for refund to the
extent of P5,842.27, the same being barred by prescription, but recognized the deficiency tax assessment
of P2,451.04 for percentage taxes and surcharges. It however, considered the latter as deemed paid by
way of recoupment, to the extent of the amount of P2,451.04 which UST erroneously paid for the period
January 1, 1948 to June 30, 1950. Furthermore, the CTA held that the application of the doctrine is
sanctioned by Secs. 306 and 309 of the Tax Code and that such doctrine serves as a cushion to the harsh
and iniquitous effects of the statute of limitations. Was the CTA correct in applying the doctrine of
equitable recoupment? Explain.

A: No. The application of the doctrine of equitable recoupment finds no basis in law. It is a common law
doctrine which allows a claim for refund that is barred by prescription to offset tax liabilities, pertinent to
the taxes arising from the same transaction on which an overpayment is made and an underpayment is
due, and finds no application where the taxes involved are totally unrelated. Secs. 306 and 309 do not
contain any right of a taxpayer to a set-off or credit where, because of the expiration of the period of
prescription, his right to a refund is already barred. It is true that under Sec. 309, it is provided that the
Collector “may” credit or refund taxes erroneously or illegally received, but the word “may” clearly
implies discretion, which, under such circumstances he may not be compelled or ordered by the courts to
exercise. Prescription may be rigorous and at times may be a little harsh, but certainly there could be no
oppression, much less iniquity where the same law is applied equally to the government and the taxpayer.
Therefore, given the foregoing, the doctrine of equitable recoupment is not a valid ground for set-off of
refund claims and tax liabilities (Collector of Internal Revenue v. University of Santo Tomas, G.R. No. L-
11274, November 28, 1958).

Prohibition on compensation and set-off

Q: ABC Lumber Co. was assessed charges in the total amount of P4,802.37. Disclaiming its liability,
ABC Lumber Co. claimed that it paid to the Republic of the Philippines (Republic) the total amount of
P9,127.50 for reforestation charges, and contended that since the Republic has not made use of those
reforestation charges collected from it for reforesting the denuded area of the land covered by its license,
the Republic should refund said amount, or, if it cannot be refunded, at least it should be compensated
with what it owed the Republic for reforestation charges. Is the contention of ABC Lumber Co. correct?

A: No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of
distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as
ordinary obligations; (2) the applicable laws and. principles governing each are peculiar, not necessarily
common, to each; and (3) public policy is better subserved if the integrity and independence of taxes are
maintained (Republic v. Mambulao Lumber Co., G.R. No. L-17725, February 28, 1962).

Compromise and tax amnesty

Q: Through his sworn statement, X informed the BIR that PNB had failed to withhold the 15% final tax
on interest earnings and/or yields from the money placements of PNOC with the said bank, in violation of
P.D. No. 1931 which withdrew all tax exemptions of GOCCs. In a letter dated August 8 1986, the BIR
requested PNOC to settle its liability for taxes on the interests earned by its money placements with PNB
and which PNB did not withhold. PNOC proposed to set-off its tax liability against a claim for tax
refund/credit of the National Power Corporation (NAPOCOR), then pending with the BIR, in the amount
of P335,259,450.21, and which was supposedly a receivable account of PNOC from NAPOCOR. Once
more, BIR requested PNOC to settle its tax liability. On June 9, 1987, PNOC made another offer to the
BIR to settle its tax liability. This time, however, PNOC proposed a compromise by paying
P91,003,129.89, representing 30% of the P303,343,766.29 basic tax, in accordance with the provisions of
E.O. No. 44.

E.O. No. 44 granted the BIR Commissioner or his duly authorized representatives the power to
compromise any disputed assessment or delinquent account pending as of December 31, 1985, upon the
payment of an amount equal to 30% of the basic tax assessed; in which case, the corresponding interests
and penalties shall be condoned. For instances where the BIR had already issued an assessment against
the taxpayer, the tax liability could still be compromised under E.O. No. 44 only if: (1) the assessment
had been final and executory on or before 31 December 1985 and, therefore, considered a delinquent
account as of said date; or (2) the assessment had been disputed or protested on or before 31 December
1985. The BIR Commissioner accepted the compromise after finding that it was indeed accordance with
the provisions of E.O. No. 44. X, after being paid his informer’s reward, questioned the legality of the
decision to compromise the tax liability of PNOC, and claimed that the tax liability should have been
collected in full. May the tax liabilities of PNOC be subject of compromise?
A:Yes, PNOC could apply for a compromise of its tax liabilities not under E.O. No. 44, but under Sec.
246 of the NIRC of 1977, as amended.

PNOC could not apply for a compromise under E.O. No. 44 because its tax liability was not a delinquent
account or a disputed assessment as of 31 December 1985. It cannot be considered a delinquent account
since (1) it was not self-assessed, because the BIR conducted an investigation and assessment of PNOC
and PNB after obtaining information regarding the non-withholding of tax from X; and (2) the demand
letter, issued against it on August 8, 1986, could not have been a deficiency assessment that became final
and executory by 31 December 1985. The demand letter issued on August 8, 1986, could be regarded as
the first assessment notice against PNOC, but such an assessment could not have been final and executory
as of 31 December 1985 so as to constitute a delinquent account. Neither was the assessment against
PNOC an assessment that could have been disputed or protested on or before 31 December 1985, having
been issued at a later date.

Assessments issued between January 1 to August 21, 1986 could still be compromised by payment of
30% of the basic tax assessed, not anymore pursuant to E.O. No. 44, but pursuant to Section 246 of the
NIRC of 1977, as amended. The said provision granted the BIR Commissioner the authority to
compromise the payment of any internal revenue tax under the following circumstances: (1) there exists a
reasonable doubt as to the validity of the claim against the taxpayer; or (2) the financial position of the
taxpayer demonstrates a clear inability to pay the assessed tax (Phil. National Oil Company v. CA, G.R.
No. 109976, April 26, 2005).