Gr 178788G.R. No.

178788
United Airlines vs. Commissioner of Internal Revenue
September 29, 2009
Facts:
International airline, petitioner United Airlines, filed a claim for income tax refund. Petitioner sought to be refunded the erroneously
collected income tax from in the amount of P5,028,813.23 on passenger revenue from tickets sold in the Philippines, the uplifts of which
did not originate in the Philippines. The airlines ceased operation originating form the Philippines since February 21, 1998.
Court of tAx appeals ruled the petitioner is not entitled to a refund because under the NIRC, income tax on GPB also includes gross
revenue from carriage of cargoes from the Philippines. And upon assessment by the CTA, it was found out that petitioner deducted
items from its cargo revenues which should have entitled the government to an amount of P 31.43 million, which is obviously higher
than the amount the petitioner prayed to be refunded.
Petitioner argued that the petitioners supposed underpayment cannot offset his claim to a refund as established by well-settled
jurisprudence.
Issue:
Whether or not petitioner is entitled to a refund?
HELd:
Petitioner was correct in averring that his claim to a refund cannot be subject to offsetting or, as it claimed the offsetting to be, a legal
compensation under Sec. 28(A)(3)(a)
Petitioners (similar) tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA
that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the
return filed by petitioner is now put in doubt. As such, we(the court) cannot grant the prayer for a refund.
The court held that the petitioner is not entitled to a refund, Having underpaid the GPB tax due on its cargo revenues for 1999, the
amount of the former being even much higher (P31.43 million) than the tax refund sought (P5.2 million).
Relevant note:
The Court have consistently ruled that there can be no off-setting [or compensation] of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.(francia vs
Intermediate appellate court)

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct.
The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of
the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
(CIR vs CTA)
National Internal Revenue Code; international air carriers; Gross Philippine Billings; regular income tax. Inasmuch as the taxpayer has
ceased operating passenger flights to or from the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of the National Internal
Revenue Code (NIRC), or on 2 1/2% of its Gross Philippine Billings (GPB). The correct interpretation of said provisions is that, if an
international air carrier maintains flights to and from the Philippines then it shall be taxed at the rate of 2 1/2 % of its GPB, while
international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the
country will be taxed at the rate of 32% [now 30%] of such income. United Airlines, Inc. vs Commissioner of Internal Revenue, G.R. No.
178788, September 29, 2010.
National Internal Revenue Code; claims for refunds. Under Section 72 [Suit to Recover Tax Based on False or Fraudulent Returns] of
the National Internal Revenue Code, the Court of Tax Appeals can make a valid finding that taxpayer made erroneous deductions on
its gross cargo revenue; that because of the erroneous deductions, taxpayer reported a lower cargo revenue and paid a lower income
tax thereon; and that taxpayers underpayment of the income tax on cargo revenue is even higher than the income tax it paid on
passenger revenue subject of the claim for refund, such that the refund cannot be granted. On the assumption that taxpayer filed a
correct return, it had the right to file a claim for refund of the Gross Philippine Billings (GPB) tax on passenger revenues it paid in 1999
when it was not operating passenger flights to and from the Philippines. However, upon examination by the CTA, taxpayers return
was found erroneous as it understated its gross cargo revenue for the same taxable year due to deductions of two items. Having
underpaid the GPB tax due on its cargo revenues for 1999, taxpayer is not entitled to a refund of its GPB tax on its passenger revenue,
the amount of the former being even much higher than the tax refund sought.United Airlines, Inc. vs Commissioner of Internal
Revenue, G.R. No. 178788, September 29, 2010.

National Internal Revenue Code; withdrawal of PAGCOR income tax exemption; equal protection of the laws. Under Section 1 of
Republic Act (RA) No. 9337, amending Section 27(c) of the National Internal Revenue Code of 1997, Philippine Amusement and
Gaming Corporation (PAGCOR) is no longer exempt from corporate income tax as it has been omitted from the list of the government
owned and controlled corporations (GOCCs) that are exempt from it. PAGCOR argues that such omission is unconstitutional as it
violates the right to equal protection under the Constitution. A perusal of the legislative records of the Bicameral Conference Meeting
of the Committee on Ways and Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of Committee on Ways and Means to the request of PAGCOR that it be exempt from
such tax. Thus, the previous exemption of PAGCOR from paying corporate income tax was not based on a classification showing
substantial distinctions which make for real differences but was granted upon PAGCORs request. With the subsequent enactment of
RA No. 9337, PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying corporate income tax. The
records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No.

Page 1 of 16

1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate income tax. The
express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being excepted, PAGCOR
must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the
maxim- exceptio firmat regulam in casibus non exceptis. PAGCOR cannot find support in the equal protection clause of the Constitution, as
the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that
PAGCORs previous exemption from payment of corporate income tax was not made pursuant to a valid classification based on
substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may operate only
on some, and not all, without violating the equal protection clause but was made upon PAGCORs own request to be exempted.
Philippine Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, G.R. No. 172087, March 15, 2011.
National Internal Revenue Code; withdrawal of PAGCOR income tax exemption; non-impairment of contracts.PAGCOR contends that
Section 1 (c) of Republic Act (RA) No. 9337 is null and void ab initiofor violating the non-impairment clause of the Constitution.
PAGCOR avers that laws form part of, and is read into, the contract even without the parties expressly saying so. PAGCOR states that
the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration
and indumenta for their decision to transact or invest with it. PAGCOR argues that the withdrawal of its exemption from corporate
income tax by RA No. 9337 has the effect of changing the main consideration and inducement for the transactions of private parties
with it and thus violative of the non-impairment clause. This contention lacks merit. The non-impairment clause, which provides that
no law impairing the obligations of contracts shall be passed, is limited in application to laws that derogate from prior acts or contracts
by enlarging, abridging or in any manner changing the intention of the parties. There is impairment of a subsequent law changes the
terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties. As regards franchises, Section 11, Article XII of the Constitution provides that no franchise or
right shall be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the
common good so requires. In the case of Manila Electric Company vs Province of Laguna, the Court held that a franchise partakes the
nature of a grant, which is beyond the purview of the non-impairment clause of the Constitution. In this case, PAGCOR was granted a
franchise to operate and maintain gambling casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e.,
basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines. Under
Section 11, Article XII of the Constitution, PAGCORs franchise is subject to amendment, alteration or repeal by Congress such as the
amendment under Section 1 of RA No. 9377. Hence, the provision in said section withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits to PAGCORs transactions with private parties, is not violative of the nonimpairment clause of the Constitution. Philippine Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, , G.R.
No. 172087, March 15, 2011.
National Internal Revenue Code; PAGCOR value added tax exemption; Revenue Regulation No. 16-2005. The provision in Revenue
Regulation (RR) No. 16-2005 subjecting PAGCOR to 10% value-added tax (VAT) is invalid for being contrary to Republic Act (RA) No.
9337. Nowhere in RA No. 9337 is it provided that PAGCOR can be subjected to VAT. RA No. 9337 is clear only as to the removal of
PAGCORs exemption from the payment of corporate income tax. RA No. 9337 itself exempts PAGCOR from VAT pursuant to Section
7 (k) thereof which provides among the transaction exempt from VAT, transactions which are exempt under special laws. PAGCORs
charter, Presidential Decree No. 1869, is a special law that grants it exemption from taxes. Moreover, PAGCORs exemption from VAT
is supported by Section 6 of RA No. 9337, which retained Section 108 (B)(3) of RA No. 8424. Under this Section 108 (B)(3), among
transactions subject to zero percent (0%) rate are services rendered to persons or entities whose exemption under special laws
effectively subject the supply of such services of zero percent (0%) rate. PAGCORs exemption from VAT has been discussed in the case
of Commissioner of Internal Revenue vs Acesite (Philippines) Hotel Corporation, where the Court held that Section 13 of PAGCORs charter
clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. Philippine
Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, G.R. No. 172087, March 15, 2011.

(Sec.
4)
CIR
vs.
CA
,
G.R.
No.
95022
207
Scra
487
Petitioner, seeks a reversal of the Decision of respondent CA, dated Aug. 27, 1990, in CA-G.R. SP No. 20426, entitled "Commissioner of
Internal Revenue vs. GCL Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals," which affirmed the
Decision of the latter Court, dated 15 December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the GCL
Retirement Plan representing the withholding tax on income from money market placements and purchase of treasury bills, imposed
pursuant
to
Presidential
Decree
No.
1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust
maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with
Rep.
Act
No.
4917.
ISSUE:
Are
schools
retained
earnings
tax-exempt?
RULING:
Yes. GCL Plan was qualified as exempt from income tax by the CIR in accordance with Rep. Act. 4917. The tax-exemption privilege of
employees' trusts, as distinguished from any other kind of property held in trust, springs from Section 56(b) (now 53[b]) of the Tax
Code, The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some or all of his employees . . . And rightly so, by virtue of the raison de'etre behind the
creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon the
occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain
hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group.
What
is
more,
it
is
established
for
their
exclusive
benefit
and
for
no
other
purpose.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings
would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This
would run afoul of the very intendment of the law. There can be no denying either that the final withholding tax is collected from
income in respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the
collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from
income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place.
http://karissafaye.blogspot.com/2010/05/sec.html
SECOND DIVISION
G.R. No. 195909

Page 2 of 16

September 26, 2012

COMMISSIONER
OF
INTERNAL
REVENUE, PETITIONER,
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST.
LUKE'S
MEDICAL
CENTER,
INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of 19 November
2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this
case on a pure question of law, which involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal
Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its articles of
incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and scientific hospital
which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled persons; provided that purely
medical and surgical services shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the community through organized clinics
in such specialties as the facilities and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion of health as well as provide facilities for
scientific and medical researches which, in the opinion of the Board of Trustees, may be justified by the facilities, personnel,
funds, or other requirements that are available;
(d) To cooperate with organized medical societies, agencies of both government and private sector; establish rules and
regulations consistent with the highest professional ethics;
xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting toP76,063,116.06 for 1998,
comprised of deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR
reduced the amount to P63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did not act
on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary
non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision
intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under
Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general exemption on income tax granted
under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from charitable
purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits and assets. St. Luke's had
total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients wasP218,187,498 or 65.20%
of its 1998 operating income (i.e., total revenues less operating expenses) ofP334,642,615. 8 St. Luke's also claimed that its income does
not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and
(G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B) applies to St.
Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals out of the
income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR
prays that St. Luke's be ordered to payP57,659,981.19 as deficiency income and expanded withholding tax for 1998 with surcharges and
interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its income, 9 as well as
the payment of surcharge and delinquency interest. There is no ground for this Court to undertake such a factual review. Under the
Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency
VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN.
However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable year
1998 in the respective amounts of P5,496,963.54 andP778,406.84 or in the sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of P6,275,370.38
counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's to prove that
part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the remainder of
the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc
held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the NIRC. This
ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or non-paying. The CTA reiterated
its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of
St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable institution.

Page 3 of 16

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable institution does not lose
its charitable character and its consequent exemption from taxation merely because recipients of its benefits who are able to pay are
required to do so, where funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The generation
of income from paying patients does not per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC
(Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or associations which, otherwise,
would be subject thereto, because of the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on
charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net income, the
Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at least insure its existence, by operating
within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have
a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to apply the 10%
preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand, Congress specifically used the word "nonstock" to qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax. Section 27(B) does not require that
the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively for charitable purpose
are exempt from income tax on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as
amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a
preferential tax rate of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual issues. Under
Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which must be distinctly set forth." St. Luke's
cites Martinez v. Court of Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the testimony of [its]
witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is not a case of
overlooking or failing to consider relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence aside from the self-serving affidavit
executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section 248(A)(3) of the
NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's
is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount
of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only deficiency interest under Section 249(A) and
(B) of the NIRC and not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of 1997 vis--vis
Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10% income tax rate under Section
27(B) specifically pertains to proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is now
substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-profit shall
pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income
from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the
conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary
purpose or function. A 'proprietary educational institution' is any private school maintained and administered by private individuals
or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance
with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and an
organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting from income tax
non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income
received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and
(G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions 36 and

Page 4 of 16

proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead
of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and
(2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary"
means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered
by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for
profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 37 this Court
considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf
course. 38 The club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making
enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in Lung Center
of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government." 41 A non-profit club for the benefit of its members fails this
test. An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung
Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private
entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by
the government is compensated by its relief from doing public works which would have been funded by appropriations from the
Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by
the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to
the constitutional provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the taxpayer 44 because an exemption
restricts the collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption from
real property taxes. This ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart College 46 which says that
receiving income from paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives
income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property. The
Constitution provides that "[c]haritable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." 48The test of exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that
the Lung Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The
effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to
charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption
to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of
the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution "actually, directly
and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes. The
organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members, trustees, or officers" 49 and that any
profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized." 50 However, under Lung Center, any profit by a charitable institution must not
only be plowed back "whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is
intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific requirement that "no part of [the] net income or asset shall belong to or inure
to the benefit of any member, organizer, officer or any specific person." The use of lands, buildings and improvements of the institution
is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be
exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated

Page 5 of 16

exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution
be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section
30(E) that the "[n]on-stock corporation or association [must be] organized and operated exclusively for x x x charitable x x x purposes x
x x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated exclusively" for the promotion
of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed
to engage in "activities conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is
that the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from
for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which
receives approximately P1.73 billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly,
revenues from paying patients are income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free
Services" expenditure ofP218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to support its
claim that 65.20% of its "income after expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients

P1,016,608,394.00

Administrative

287,319,334.00

Household and Property

91,797,622.00
P1,395,725,350.00

INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00

34.80%

OTHER INCOME

17,482,304.00

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous
with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying patients are
activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of
services. 55 The P1.73 billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498
for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the
remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable "regardless of the disposition
made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity conducted for profit."
However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate,
which introduced the phrase "or from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una actividad esencial dicho hospital
para el funcionamiento del colegio de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el hospital tiene cuartos de
pago, y a los mismos generalmente van enfermos de buena posicin social econmica, lo que se paga por estos enfermos debe estar
sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for
profit.' 57
The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of
Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing,
then it should be subject to income tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted
for profit."

Page 6 of 16

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable institutions
because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for profit should not
escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax
exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section
30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under
the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the
expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to
institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit
this subsidy to the detriment of the government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income.
However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits
to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has good reasons to
rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare
purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said
that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to
implement the tax law, are sufficient justification to delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the
Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED.
St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate
under Section 27(B) of the National Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and Resolution of the
Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.
Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.
Minimum corporate income tax. Under its charter, Philippine Airlines is exempt from the minimum corporate income tax. Commissioner
of Internal Revenue vs.. Philippine Airlines, Inc., G.R. No. 180066, July 7, 2009.
THIRD DIVISION
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,

G.R. No. 180066

Present:

- versus -

PHILIPPINE AIRLINES, INC.,

Respondent.

YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.
Promulgated:
_____________________

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, seeking the reversal and
setting aside of the Decision[1] dated 9 August 2007 and Resolution[2] dated 11 October 2007 of the Court of Tax Appeals (CTA) en
banc in CTA E.B. No. 246. The CTA en banc affirmed the Decision[3] dated 31 July 2006 of the CTA Second Division in C.T.A. Case No.
7010, ordering the cancellation and withdrawal of Preliminary Assessment Notice (PAN) No. INC FY-3-31-01-000094 dated 3
September 2003 and Formal Letter of Demand dated 12 January 2004, issued by the Bureau of Internal Revenue (BIR) against
respondent Philippine Airlines, Inc. (PAL), for the payment of Minimum Corporate Income Tax (MCIT) in the amount
of P272,421,886.58.

Page 7 of 16

There is no dispute as to the antecedent facts of this case.

PAL is a domestic corporation organized under the corporate laws of the Republic of the Philippines; declared the national flag
carrier of the country; and the grantee under Presidential Decree No. 1590 [4] of a franchise to establish, operate, and maintain transport
services for the carriage of passengers, mail, and property by air, in and between any and all points and places throughout the
Philippines, and between the Philippines and other countries. [5]
For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxable income,[6] which left it with
unapplied creditable withholding tax[7] in the amount of P2,334,377.95. PAL did not pay any MCIT for the period.
In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR), PAL requested for the refund of its
unapplied creditable withholding tax for FY 2000-2001. PAL attached to its letter the following: (1) Schedule of Creditable Tax
Withheld at Source for FY 2000-2001; (2) Certificates of Creditable Taxes Withheld; and (3) Audited Financial Statements.
Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and Investigation Division 1 (LTAID 1) of the BIR
Large Taxpayers Service (LTS), issued on 16 August 2002, Tax Verification Notice No. 00201448, authorizing Revenue Officer Jacinto
Cueto, Jr. (Cueto) to verify the supporting documents and pertinent records relative to the claim of PAL for refund of its unapplied
creditable withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID 1 Chief Armit S. Linsangan invited PAL to an
informal conference at the BIR National Office in Diliman, Quezon City, on 27 August 2003, at 10:00 a.m., to discuss the results of the
investigation conducted by Revenue Officer Cueto, supervised by Revenue Officer Madelyn T. Sacluti.
BIR officers and PAL representatives attended the scheduled informal conference, during which the former relayed to the
latter that the BIR was denying the claim for refund of PAL and, instead, was assessing PAL for deficiency MCIT for FY 2000-2001. The
PAL representatives argued that PAL was not liable for MCIT under its franchise. The BIR officers then informed the PAL
representatives that the matter would be referred to the BIR Legal Service for opinion.
The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094, which was received by PAL on 23 October
2003. LTAID 1 assessed PAL for P262,474,732.54, representing deficiency MCIT for FY 2000-2001, plus interest and compromise
penalty, computed as follows:
Sales/Revenues from Operation
Less: Cost of Services
Gross Income from Operation
Add: Non-operating income
Total Gross Income for MCIT purposes
Rate of Tax
Tax Due
Add: 20% interest (8-16-00 to 10-31-03)
Compromise Penalty
Total Amount Due

P 38,798,721,685.00
30,316,679,013.00
8,482,042,672.00
465,111,368.00
9,947,154,040.00[8]
2%
178,943,080.80
83,506,651.74
25,000.00
P
262,474,732.54[9]

PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated 4 November 2003 to the BIR LTS.
On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand for deficiency MCIT for FY 2000-2001 in the amount
ofP271,421,88658, based on the following calculation:
Sales/Revenues from Operation
Less: Cost of Services
Direct Costs P 30,749,761,017.00
Less: Non-deductible
interest expense
433,082,004.00
Gross Income from Operation
P 8,482,042,672.00
Add: Non-operating Income
465,111,368.00
Total Gross Income for MCIT purposes
MCIT tax due
Interest 20% per annum 7/16/01 to 02/15/04
Compromise Penalty
Total MCIT due and demandable

P 38,798,721,685.00

30,316,679,013.00

P 9,947,154,040.00
P
178,943,080.80
92,453,805.78
25,000.00
P
271,421,886.58[10]

PAL received the foregoing Formal Letter of Demand on 12 February 2004, prompting it to file with the BIR LTS a formal
written protest dated 13 February 2004.
The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed Assessment, which was received by PAL on 26 May
2004. Invoking Revenue Memorandum Circular (RMC) No. 66-2003, the BIR LTS denied with finality the protest of PAL and reiterated
the request that PAL immediately pay its deficiency MCIT for FY 2000-2001, inclusive of penalties incident to delinquency.
PAL filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No. 7010 and raffled to the CTA Second
Division. The CTA Second Division promulgated its Decision on 31 July 2006, ruling in favor of PAL. The dispositive portion of the
judgment of the CTA Second Division reads:
WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly,
Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the payment of deficiency
Minimum Corporate Income Tax in the amount of P272,421,886.58 are herebyCANCELLED and WITHDRAWN.[11]

Page 8 of 16

In a Resolution dated 2 January 2007, the CTA Second Division denied the Motion for Reconsideration of the CIR.
It was then the turn of the CIR to file a Petition for Review with the CTA en banc, docketed as C.T.A. E.B. No. 246. The CTA en
banc found that the cited legal provisions and jurisprudence are teeming with life with respect to the grant of tax exemption too vivid
to pass unnoticed, and that the Court in Division correctly ruled in favor of the respondent [PAL] granting its petition for the
cancellation of Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the deficiency MCIT in the amount
of P272,421,886.58.[12] Consequently, the CTA en bancdenied the Petition of the CIR for lack of merit. The CTA en banc likewise denied
the Motion for Reconsideration of the CIR in a Resolution dated11 October 2007.
Hence, the CIR comes before this Court via the instant Petition for Review on Certiorari, based on the grounds stated hereunder:
THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS ASSAILED DECISION BECAUSE:
(1)
[PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX PROVISION OF THE NATIONAL
INTERNAL REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE, IT IS COVERED BY THE
MCIT PROVISION OF THE SAME CODE.
(2)
THE MCIT DOES NOT BELONG TO THE CATEGORY OF OTHER TAXES WHICH WOULD ENABLE
RESPONDENT TO AVAIL ITSELF OF THE IN LIEU (sic) OF ALL OTHER TAXES CLAUSE UNDER SECTION
13 OF P.D. NO. 1590 (CHARTER).
(3)

THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT OF [PALS] CHARTER.

(4)
PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT WILL GIVE IT THE BENEFIT
OF A LOWER TAX, BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE TAX BURDEN, AS IS
EVIDENT IN SECTION 22 OF RA NO. 9337.
(5)
A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED; [PAL] IS LIABLE FOR THE
DEFICIENCY MCIT.[13]

There is only one vital issue that the Court must resolve in the Petition at bar, i.e., whether PAL is liable for deficiency MCIT for
FY 2000-2001.
The Court answers in the negative.
Presidential Decree No. 1590, the franchise of PAL, contains provisions specifically governing the taxation of said corporation, to
wit:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result
in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources,
without distinction as to transport or nontransport operations; provided, that with respect to international airtransport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this
tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties,
royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or national authority or government agency,
now or in the future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and
oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly due from
or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but
are billed or passed on to the grantee either as part of the price or cost thereof or by mutual agreement or other
arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall
be for exclusive use in its transport and nontransport operations and other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the
grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies,
aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials; provided, that
such articles or supplies or materials are imported for the use of the grantee in its transport and nontransport
operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether foreign or domestic,
of aircraft, engines, equipment, machinery, spare parts, and other property rented, leased, or chartered by the grantee
where the payment of such taxes is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by
the grantee where the payment of such taxes is assumed by the grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition, and transfer of aircraft,
equipment, motor vehicles, and all other personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with existing law.
For purposes of computing the basic corporate income tax as provided herein, the grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of depreciation; and

Page 9 of 16

(b) To carry over as a deduction from taxable income any net loss incurred in any year up to five years
following the year of such loss.
Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly basis
to the Commissioner of Internal Revenue. Within sixty (60) days after the end of each of the first three quarters of the
taxable calendar or fiscal year, the quarterly franchise or income-tax return shall be filed and payment of either the
franchise or income tax shall be made by the grantee.
A final or an adjustment return covering the operation of the grantee for the preceding calendar or fiscal
year shall be filed on or before the fifteenth day of the fourth month following the close of the calendar or fiscal year.
The amount of the final franchise or income tax to be paid by the grantee shall be the balance of the total franchise or
income tax shown in the final or adjustment return after deducting therefrom the total quarterly franchise or income
taxes already paid during the preceding first three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual annual franchise of income tax due as shown in
the final or adjustment franchise or income-tax return shall either be refunded to the grantee or credited against the
grantee's quarterly franchise or income-tax liability for the succeeding taxable year or years at the option of the
grantee.
The term "gross revenues" is herein defined as the total gross income earned by the grantee from; (a)
transport, nontransport, and other services; (b) earnings realized from investments in money-market placements,
bank deposits, investments in shares of stock and other securities, and other investments; (c) total gains net of total
losses realized from the disposition of assets and foreign-exchange transactions; and (d) gross income from other
sources. (Emphases ours.)

According to the afore-quoted provisions, the taxation of PAL, during the lifetime of its franchise, shall be governed by two
fundamental rules, particularly: (1) PAL shall pay the Government either basic corporate income tax or franchise tax, whichever is
lower; and (2) the tax paid by PAL, under either of these alternatives, shall be in lieu of all other taxes, duties, royalties, registration,
license, and other fees and charges, except only real property tax.
The basic corporate income tax of PAL shall be based on its annual net taxable income, computed in accordance with the
National Internal Revenue Code (NIRC). Presidential Decree No. 1590 also explicitly authorizes PAL, in the computation of its basic
corporate income tax, to (1) depreciate its assets twice as fast the normal rate of depreciation;[14] and (2) carry over as a deduction from
taxable income any net loss incurred in any year up to five years following the year of such loss. [15]
Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues derived by PAL from all sources, whether
transport or nontransport operations. However, with respect to international air-transport service, the franchise tax shall only be
imposed on the gross passenger, mail, and freight revenues of PAL from its outgoing flights.
In its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net taxable income for the period, resulting in zero
basic corporate income tax, which would necessarily be lower than any franchise tax due from PAL for the same period.
The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the MCIT is income tax for which
PAL is liable. The CIR reasons that Section 13(a) of Presidential Decree No. 1590 provides that the corporate income tax of PAL shall be
computed in accordance with the NIRC. And, since the NIRC of 1997 imposes MCIT, and PAL has not applied for relief from the said
tax, then PAL is subject to the same.
The Court is not persuaded. The arguments of the CIR are contrary to the plain meaning and obvious intent of Presidential
Decree No. 1590, the franchise of PAL.
Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997, [16] pertinent provisions of which are
reproduced below for easy reference:
SEC. 27. Rates of Income Tax on Domestic Corporations.
(A) In General Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable incomederived during each taxable year from all sources within and without the
Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the
rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent
(33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
xxxx
(E) Minimum Corporate Income Tax on Domestic Corporations.
(1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of the gross income as of the
end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on
the fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for
the taxable year.

Page 10 of 16

Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under Section 27(A) of the NIRC of 1997,
computed by applying the tax rate therein to the taxable income of the corporation; or (2) the MCIT under Section 27(E), also of the
NIRC of 1997, equivalent to 2% of the gross income of the corporation. Although this may be the general rule in determining the
income tax due from a domestic corporation under the NIRC of 1997, it can only be applied to PAL to the extent allowed by the
provisions in the franchise of PAL specifically governing its taxation.
After a conscientious study of Section 13 of Presidential Decree No. 1590, in relation to Sections 27(A) and 27(E) of the NIRC of
1997, the Court, like the CTA en banc and Second Division, concludes that PAL cannot be subjected to MCIT for FY 2000-2001.
First, Section 13(a) of Presidential Decree No. 1590 refers to basic corporate income tax. In Commissioner of Internal Revenue v.
Philippine Airlines, Inc.,[17] the Court already settled that the basic corporate income tax, under Section 13(a) of Presidential Decree No.
1590, relates to the general rate of 35% (reduced to 32% by the year 2000) as stipulated in Section 27(A) of the NIRC of 1997.
Section 13(a) of Presidential Decree No. 1590 requires that the basic corporate income tax be computed in accordance with the
NIRC. This means that PAL shall compute its basic corporate income tax using the rate and basis prescribed by the NIRC of 1997 for
the said tax. There is nothing in Section 13(a) of Presidential Decree No. 1590 to support the contention of the CIR that PAL is subject to
the entire Title II of the NIRC of 1997, entitled Tax on Income.
Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporate income tax of PAL shall be based on
its annual net taxable income. This is consistent with Section 27(A) of the NIRC of 1997, which provides that the rate of basic corporate
income tax, which is 32% beginning 1 January 2000, shall be imposed on the taxable income of the domestic corporation.
Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross income specified in the said
Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the same Code
or other special laws. The gross income, referred to in Section 31, is described in Section 32 of the NIRC of 1997 as income from
whatever source, including compensation for services; the conduct of trade or business or the exercise of profession; dealings in
property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partners distributive share in the net
income of a general professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by subtracting from gross income
deductions authorized, not just by the NIRC of 1997,[18] but also by special laws. Presidential Decree No. 1590 may be considered as
one of such special laws authorizing PAL, in computing its annual net taxable income, on which its basic corporate income tax shall be
based, to deduct from its gross income the following: (1) depreciation of assets at twice the normal rate; and (2) net loss carry-over up to
five years following the year of such loss.
In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based on the gross income of the domestic
corporation. The Court notes that gross income, as the basis for MCIT, is given a special definition under Section 27(E)(4) of the NIRC
of 1997, different from the general one under Section 34 of the same Code.
According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of a domestic corporation engaged in the
sale of service means gross receipts, less sales returns, allowances, discounts and cost of services. Cost of services refers to
all direct costs and expensesnecessarily incurred to provide the services required by the customers and clients including (a) salaries
and employee benefits of personnel, consultants, and specialists directly rendering the service; and (b) cost of facilities directly utilized
in providing the service, such as depreciation or rental of equipment used and cost of supplies. [19] Noticeably, inclusions in and
exclusions/deductions from gross income for MCIT purposes are limited to those directly arising from the conduct of the taxpayers
business. It is, thus, more limited than the gross income used in the computation of basic corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable income, which is the basis for
basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under Section 27(E). The two terms
have their respective technical meanings, and cannot be used interchangeably. The same reasons prevent this Court from declaring
that the basic corporate income tax, for which PAL is liable under Section 13(a) of Presidential Decree No. 1590, also covers MCIT under
Section 27(E) of the NIRC of 1997, since the basis for the first is the annual net taxable income, while the basis for the second is gross
income.
Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of 1997, and one is
paid in place of the other, the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[20] wherein it held that income tax on the passive
income[21] of a domestic corporation, under Section 27(D) of the NIRC of 1997, is different from the basic corporate income tax on the
taxable income of a domestic corporation, imposed by Section 27(A), also of the NIRC of 1997. Section 13 of Presidential Decree No.
1590 gives PAL the option to pay basic corporate income tax or franchise tax, whichever is lower; and the tax so paid shall be in lieu of
all other taxes, except real property tax. The income tax on the passive income of PAL falls within the category of all other taxes from
which PAL is exempted, and which, if already collected, should be refunded to PAL.
The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT is different from the basic
corporate income tax, not just in the rates, but also in the bases for their computation. Not being covered by Section 13(a) of
Presidential Decree No. 1590, which makes PAL liable only for basic corporate income tax, then MCIT is included in all other taxes
from which PAL is exempted.
That, under general circumstances, the MCIT is paid in place of the basic corporate income tax, when the former is higher than
the latter, does not mean that these two income taxes are one and the same. The said taxes are merely paid in the alternative, giving the
Government the opportunity to collect the higher amount between the two. The situation is not much different from Section 13 of
Presidential Decree No. 1590, which reversely allows PAL to pay, whichever is lower of the basic corporate income tax or the franchise
tax. It does not make the basic corporate income tax indistinguishable from the franchise tax.

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Given the fundamental differences between the basic corporate income tax and the MCIT, presented in the preceding discussion,
it is not baseless for this Court to rule that, pursuant to the franchise of PAL, said corporation is subject to the first tax, yet exempted
from the second.
Fourth, the evident intent of Section 13 of Presidential Decree No. 1520 is to extend to PAL tax concessions not ordinarily available
to other domestic corporations. Section 13 of Presidential Decree No. 1520 permits PAL to pay whichever is lower of the basic
corporate income tax or the franchise tax; and the tax so paid shall be in lieu of all other taxes, except only real property tax. Hence,
under its franchise, PAL is to pay the least amount of tax possible.
Section 13 of Presidential Decree No. 1520 is not unusual. A public utility is granted special tax treatment (including tax
exceptions/exemptions) under its franchise, as an inducement for the acceptance of the franchise and the rendition of public service by
the said public utility.[22] In this case, in addition to being a public utility providing air-transport service, PAL is also the official flag
carrier of the country.
The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes the objective of Section 13 of
Presidential Decree No. 1590. In effect, PAL would not just have two, but three tax alternatives, namely, the basic corporate income tax,
MCIT, or franchise tax. More troublesome is the fact that, as between the basic corporate income tax and the MCIT, PAL shall be made
to pay whichever is higher, irrefragably, in violation of the avowed intention of Section 13 of Presidential Decree No. 1590 to make
PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the in lieu of all other taxes clause in Section 13 of Presidential
Decree No. 1520, if it did not pay anything at all as basic corporate income tax or franchise tax. As a result, PAL should be made liable
for other taxes such as MCIT. This line of reasoning has been dubbed as the Substitution Theory, and this is not the first time the CIR
raised the same. The Court already rejected the Substitution Theory in Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[23] to
wit:
Substitution Theory
of the CIR Untenable
A careful reading of Section 13 rebuts the argument of the CIR that the in lieu of all other taxes proviso
is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give
respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes
the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the
option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the
exercise of its option.
Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as earlier
discussed) is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax
rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may
result in a negative amount and thus translate into a zero tax liability.
Notably, PAL was owned and operated by the government at the time the franchise was last amended. It
can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form
of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instances, it has a
lower tax liability than that provided by Subsection (b).
The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one peso
would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is
no substantial distinction between a zero tax and a one-peso tax liability. (Emphasis ours.)

Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in the present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind the Substitution Theory. Section 22 of
Republic Act No. 9337, more popularly known as the Expanded Value Added Tax (E-VAT) Law, abolished the franchise tax imposed
by the charters of particularly identified public utilities, including Presidential Decree No. 1590 of PAL. PAL may no longer exercise its
options or alternatives under Section 13 of Presidential Decree No. 1590, and is now liable for both corporate income tax and the 12%
VAT on its sale of services. The CIR alleges that Republic Act No. 9337 reveals the intention of the Legislature to make PAL share the
tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves the liability of PAL for MCIT for the fiscal year ending 31
March 2001. Republic Act No. 9337, which took effect on 1 July 2005, cannot be applied retroactively[24] and any amendment
introduced by said statute affecting the taxation of PAL is immaterial in the present case.
And sixth, Presidential Decree No. 1590 explicitly allows PAL, in computing its basic corporate income tax, to carry over as
deduction any net loss incurred in any year, up to five years following the year of such loss. Therefore, Presidential Decree No. 1590
does not only consider the possibility that, at the end of a taxable period, PAL shall end up with zero annual net taxable income (when
its deductions exactly equal its gross income), as what happened in the case at bar, but also the likelihood that PAL shall incur net
loss (when its deductions exceed its gross income). If PAL is subjected to MCIT, the provision in Presidential Decree No. 1590 on net
loss carry-over will be rendered nugatory. Net loss carry-over is material only in computing the annual net taxable income to be used
as basis for the basic corporate income tax of PAL; but PAL will never be able to avail itself of the basic corporate income tax option
when it is in a net loss position, because it will always then be compelled to pay the necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without contravening Presidential Decree No.
1520.

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Between Presidential Decree No. 1520, on one hand, which is a special law specifically governing the franchise of PAL, issued
on 11 June 1978; and the NIRC of 1997, on the other, which is a general law on national internal revenue taxes, that took effect on 1
January 1998, the former prevails. The rule is that on a specific matter, the special law shall prevail over the general law, which shall be
resorted to only to supply deficiencies in the former. In addition, where there are two statutes, the earlier special and the later general
the terms of the general broad enough to include the matter provided for in the special the fact that one is special and the other is
general creates a presumption that the special is to be considered as remaining an exception to the general, one as a general law of the
land, the other as the law of a particular case. It is a canon of statutory construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute. [25]
Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590.
While Section 16 of Presidential Decree No. 1590 provides that the franchise is granted to PAL with the understanding that it shall
be subject to amendment, alteration, or repeal by competent authority when the public interest so requires, Section 24 of the same
Decree also states that the franchise or any portion thereof may only be modified, amended, or repealed expressly by a special law or
decree that shall specifically modify, amend, or repeal said franchise or any portion thereof. No such special law or decree exists
herein.
The CIR cannot rely on Section 7(B) of Republic Act No. 8424, which amended the NIRC in 1997 and reads as follows:
Section 7. Repealing Clauses.
xxxx
(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including
charters of government-owned or controlled corporations, decrees, orders, or regulations or parts thereof, that are
inconsistent with this Act are hereby repealed or amended accordingly.

The CIR reasons that PAL was a government-owned and controlled corporation when Presidential Decree No. 1590, its franchise or
charter, was issued in 1978. Since PAL was still operating under the very same charter when Republic Act No. 8424 took effect in 1998,
then the latter can repeal or amend the former by virtue of Section 7(B).
The Court disagrees.
A brief recount of the history of PAL is in order. PAL was established as a private corporation under the general law of the
Republic of thePhilippines in February 1941. In November 1977, the government, through the Government Service Insurance System
(GSIS), acquired the majority shares in PAL. PAL was privatized in January 1992 when the local consortium PR Holdings acquired a
67% stake therein.[26]
It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a government-owned and controlled
corporation; but when Republic Act No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was already a private
corporation for six years. The repealing clause under Section 7(B) of Republic Act No. 8424 simply refers to charters of governmentowned and controlled corporations, which would simply and plainly mean corporations under the ownership and control of the
government at the time of effectivity of said statute. It is already a stretch for the Court to read into said provision charters, issued to
what were then government-owned and controlled corporations that are now private, but still operating under the same charters.
That the Legislature chose not to amend or repeal Presidential Decree No. 1590, even after PAL was privatized, reveals the intent
of the Legislature to let PAL continue enjoying, as a private corporation, the very same rights and privileges under the terms and
conditions stated in said charter. From the moment PAL was privatized, it had to be treated as a private corporation, and its charter
became that of a private corporation. It would be completely illogical to say that PAL is a private corporation still operating under a
charter of a government-owned and controlled corporation.
The alternative argument of the CIR that the imposition of the MCIT is pursuant to the amendment of the NIRC, and not of
Presidential Decree No. 1590 is just as specious. As has already been settled by this Court, the basic corporate income tax under
Section 13(a) of Presidential Decree No. 1590 relates to the general tax rate under Section 27(A) of the NIRC of 1997, which is 32% by the
year 2000, imposed on taxable income. Thus, only provisions of the NIRC of 1997 necessary for the computation of the basic corporate
income tax apply to PAL. And even though Republic Act No. 8424 amended the NIRC by introducing the MCIT, in what is now
Section 27(E) of the said Code, this amendment is actually irrelevant and should not affect the taxation of PAL, since the MCIT is clearly
distinct from the basic corporate income tax referred to in Section 13(a) of Presidential Decree No. 1590, and from which PAL is
consequently exempt under the in lieu of all other taxes clause of its charter.
The CIR calls the attention of the Court to RMC No. 66-2003, on Clarifying the Taxability of Philippine Airlines (PAL) for Income
Tax Purposes As Well As Other Franchise Grantees Similarly Situated. According to RMC No. 66-2003:
Section 27(E) of the Code, as implemented by Revenue Regulations No. 9-98, provides that MCIT of two
percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the
accounting period employed) is imposed upon any domestic corporation beginning the 4th taxable year immediately
following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the
normal income tax due from such corporation.
With the advent of such provision beginning January 1, 1998, it is certain that domestic corporations subject
to normal income tax as well as those choose to be subject thereto, such as PAL, are bound to pay income tax
regardless of whether they are operating at a profit or loss.

Page 13 of 16

Thus, in case of operating loss, PAL may either opt to subject itself to minimum corporate income tax or to
the 2% franchise tax, whichever is lower. On the other hand, if PAL is operating at a profit, the income tax liability
shall be the lower amount between:
(1) normal income tax or MCIT whichever is higher; and
(2) 2% franchise tax.

The CIR attempts to sway this Court to adopt RMC No. 66-2003 since the [c]onstruction by an executive branch of government of
a particular law although not binding upon the courts must be given weight as the construction comes from the branch of the
government called upon to implement the law.[27]
But the Court is unconvinced.
It is significant to note that RMC No. 66-2003 was issued only on 14 October 2003, more than two years after FY 2000-2001 of PAL
ended on31 March 2001. This violates the well-entrenched principle that statutes, including administrative rules and regulations,
operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication.[28]
Moreover, despite the claims of the CIR that RMC No. 66-2003 is just a clarificatory and internal issuance, the Court observes that
RMC No. 66-2003 does more than just clarify a previous regulation and goes beyond mere internal administration. It effectively
increases the tax burden of PAL and other taxpayers who are similarly situated, making them liable for a tax for which they were not
liable before. Therefore, RMC No. 66-2003 cannot be given effect without previous notice or publication to those who will be affected
thereby. In Commissioner of Internal Revenue v. Court of Appeals,[29] the Court ratiocinated that:
It should be understandable that when an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law
itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing
for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds
to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a
chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of
law.
A reading of RMC 37-93, particularly considering the circumstances under which it has been issued,
convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous
holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact
and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the
classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA
7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes
which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the
questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the
enactment of RA 7654, would have had no new tax rate consequence on private respondent's products. Evidently, in
order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law
and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not
simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the
requirements of notice, of hearing, and of publication should not have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
"RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations "It has been observed that one of the
problem areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or
insufficiency of due notice to the tax paying public. Unless there is due notice, due compliance
therewith may not be reasonably expected. And most importantly, their strict enforcement could
possibly suffer from legal infirmity in the light of the constitutional provision on 'due process of
law' and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice
is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).
"In order that there shall be a just enforcement of rules and regulations, in conformity
with the basic element of due process, the following procedures are hereby prescribed for the
drafting, issuance and implementation of the said Revenue Tax Issuances:
"(1). This Circular shall apply only
to (a)
Revenue Regulations; (b) Revenue
Audit Memorandum Orders; and (c)Revenue Memorandum Circulars and Revenue
Memorandum Orders bearing on internal revenue tax rules and regulations.
"(2). Except when the law otherwise expressly provides, the aforesaid internal revenue tax
issuances shall not begin to be operative until after due notice thereof may be fairly presumed.
"Due notice of the said issuances may be fairly presumed only after the following
procedures have been taken:
"xxx xxx xxx "(5). Strict compliance with the foregoing procedures is enjoined.13

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Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and
comply with the above requirements before giving effect to its questioned circular. (Emphases ours.)

The Court, however, stops short of ruling on the validity of RMC No. 66-2003, for it is not among the issues raised in the instant
Petition. It only wishes to stress the requirement of prior notice to PAL before RMC No. 66-2003 could have become effective. Only
after RMC No. 66-2003 was issued on 14 October 2003 could PAL have been given notice of said circular, and only following such
notice to PAL would RMC No. 66-2003 have taken effect. Given this sequence, it is not possible to say that RMC No. 66-2003 was
already in effect and should have been strictly complied with by PAL for its fiscal year which ended on 31 March 2001.
Even conceding that the construction of a statute by the CIR is to be given great weight, the courts, which include the CTA, are
not bound thereby if such construction is erroneous or is clearly shown to be in conflict with the governing statute or the Constitution
or other laws. "It is the role of the Judiciary to refine and, when necessary, correct constitutional (and/or statutory) interpretation, in
the context of the interactions of the three branches of the government."[30] It is furthermore the rule of long standing that this Court
will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has, accordingly, developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority.[31] In the Petition at bar, the CTA en banc and in division both adjudged that PAL is not liable for MCIT under
Presidential Decree No. 1590, and this Court has no sufficient basis to reverse them.
As to the assertions of the CIR that exemption from tax is not presumed, and the one claiming it must be able to show that it
indubitably exists, the Court recalls its pronouncements in Commissioner of Internal Revenue v. Court of Appeals[32]:
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption
without first applying the well-settleddoctrine of strict interpretation in the imposition of taxes. It is obviously
both illogical and impractical to determine who are exempted without first determining who are covered by the
aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section
205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before
asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in
the interpretation of tax laws that (a) statute will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously. x x x (A) tax cannot be imposed without clear and express words for that
purpose. Accordingly,the general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. Parenthetically, in answering the question of who is subject to tax statutes, it is basic that in case
of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and
clearly import. (Emphases ours.)

For two decades following the grant of its franchise by Presidential Decree No. 1590 in 1978, PAL was only being held liable for
the basic corporate income tax or franchise tax, whichever was lower; and its payment of either tax was in lieu of all other taxes, except
real property tax, in accordance with the plain language of Section 13 of the charter of PAL. Therefore, the exemption of PAL from all
other taxes was not just a presumption, but a previously established, accepted, and respected fact, even for the BIR.
The MCIT was a new tax introduced by Republic Act No. 8424. Under the doctrine of strict interpretation, the burden is upon
the CIR to primarily prove that the new MCIT provisions of the NIRC of 1997, clearly, expressly, and unambiguously extend and apply
to PAL, despite the latters existing tax exemption. To do this, the CIR must convince the Court that the MCIT is a basic corporate
income tax,[33] and is not covered by the in lieu of all other taxes clause of Presidential Decree No. 1590. Since the CIR failed in this
regard, the Court is left with no choice but to consider the MCIT as one of all other taxes, from which PAL is exempt under the
explicit provisions of its charter.
Not being liable for MCIT in FY 2000-2001, it necessarily follows that PAL need not apply for relief from said tax as the CIR
maintains.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED, and the Decision dated 9 August
2007 and Resolution dated 11 October 2007 of the Court of Tax Appeals en banc in CTA E.B. No. 246 is hereby AFFIRMED. No costs.
SO ORDERED.

Page 15 of 16

THE MANILA BANKING CORPORATION, petitioner vs. COMMISSIONER OF INTERNAL REVENUE, respondent, G.R. No.
168118, August 28, 2006; Sandoval-Gutierrez, J.
Manila bank was incorporated in 1961 and since had engaged in the commercial banking business until it was ordered closed
by the BSP in 1987 due to insolvency. On June 23, 1999, the BSP authorized it to operate as a Thrift bank. The following years,
specifically on April 7, 2000, it filed its annual corporate income tax return and paid P33, 816,164.00 as MCIT for taxable year 1999. It
filed a claim for refund maintaining the position that since it CTA denied the claim for refund (which was affirmed by the CA) on the
ground that petitioner is not a new corporation hence not entitled to the grace period of four years.
Issue: What is the reckoning date for the MCIT in so far as thrift banks are concerned?
Under the law (R.A. 8424), MCIT is imposed beginning on the fourth year following the commencement of business
operations. Revenue Regulations No. 9-98 provides that For purpose of the MCIT, the taxable year in which business operations
commenced shall be the year in which the domestic corporation registered with the BIR. Petitioner registered as a commercial bank
with the BIR in 1961 and again registered on January 21, 1999 as a thrift bank.
However, with respect to thrift banks, the date of commencement of business operations is the date the particular thrift bank
was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP,
whichever comes later (RR No. 4-95 implementing R.A. No. 7906). The SC ruled that what applied to petitioner is RR No. 4-95 and not
RR No. 9-98. It is, therefore, entitled to a grace period of four years counted from June 23, 1999 when it was authorized by the BSP to
operate as a thrift bank (it having been registered with SEC at an earlier date). Consequently, it should only pay it MCIT after four (4)
years from 1999.
A thrift bank is a different taxpayer from that of the commercial bank, hence, for purposes of the MCIT, the thrift bank will be
considered as an entirely new entity although it continued to use the same corporate name used by it as a commercial bank. arellano
law

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