MACEDA V.

MACARAIG tax exemption for real estate

taxes.
FACTS:  R.A. No. 1397 was enacted. The
tax exemption provision related to
the payment of this total
 Commonwealth Act No. 120 was
indebtedness was not amended nor
enacted creating the National
deleted.
Power Corporation, a public
 R.A. No. 2055 was enacted
corporation, which shall be exempt
increasing the total amount of
from the payment of all taxes.
foreign loans NPC was authorized
 C.A. No. 344 was enacted. The
to incur to US$100,000,000.00
provision on tax exemption in
from the US$50,000,000.00 ceiling
relation to the issuance of the NPC
in R.A. No. 357. The tax provision
bonds was neither amended nor
related to the repayment of these
deleted.
loans was not amended nor
 C.A. No. 495 was enacted and the
deleted.
provision on tax exemption in
 R.A. No. 2058 was enacting fixing
relation to the issuance of the NPC
the corporate life of NPC to
bonds was neither amended nor
December 31, 2000. All laws or
deleted.
provisions of laws and executive
 Republic Act No. 357 was enacted
orders contrary to said R.A. No.
authorizing the President of the
2058 were expressly repealed.
Philippines to guarantee, absolutely
 R.A. No 2641 was enacted
and unconditionally, as primary
converting the NPC from a
obligor, the payment of any and all
public corporation into a stock
NPC loans. Any such loan or loans
corporation. No tax exemption
shall be exempt from taxes, duties,
was incorporated in said Act.
fees, imposts, charges,
 R.A. No. 3043: No tax provision
contributions and restrictions of the
was incorporated in said Act.
Republic of the Philippines, its
 R.A. No 4897 was enacted. No tax
provinces, cities and
provision was incorporated in said
municipalities.
Act. 22
 R.A. No. 358: The National Power
 R.A. No. 6395: The bonds issued
Corporation shall be exempt from
under the authority of this
all taxes, duties, fees, imposts,
subsection shall be exempt from
charges, and restrictions of the
the payment of all taxes by the
Republic of the Philippines, its
Republic of the Philippines, or by
provinces, cities and
any authority, branch, division or
municipalities.
political subdivision thereof which
 R.A. No. 813 was enacted
facts shall be stated upon the face
amending R.A. No. 357 in that,
of said bonds.
aside from the IBRD, the President
 R.A. No. 6395, which declares the
of the Philippines was authorized to
non-profit character and tax
negotiate, contract and guarantee
exemptions of NPC
loans with the Export-Import Bank
 P.D. No. 395 was issued removing
of of Washigton, D.C., U.S.A., or
certain restrictions in the NPC's
any other international financial
sale of electricity to its different
institution. The tax provision for
customers. No tax exemption
repayment of these loans, as
provision was amended, deleted or
stated in R.A. No. 357, was not
added.
amended.
 Section 13 of R.A. No. 6395:
 R.A. No. 987 was enacted
Corporation shall be declared
specifically to withdraw NPC's
exempt from the payment of all
 forms of taxes, duties, fees,
imposts as well as costs and
service fees including filing fees,
appeal bonds, supersedeas bonds,
in any court or administrative
proceedings.
 P.D. No. 882 was issued
withdrawing the tax exemption
of NPC
 PD No. 1177 has already
expressly repealed the grant of tax
privileges to any government-
owned or controlled corporation
and all other units of government;
and since there was a need for
government-owned or controlled
corporations and all other units of
government enjoying tax privileges
to share in the requirements of
development, fiscal or otherwise,
by paying the duties, taxes and
other charges due from them.
 E.O. No. 93 (S'86) was issued with
a view to correct presidential
restoration or grant of tax
exemption to other government
and private entities without
benefit of review by the Fiscal
Incentives Review Board.
 E.O. No. 93 (S'86) was decreed to
be effective upon the promulgation
of the rules and regulations, to be
issued by the Ministry of Finance.
ISSUES:
(1) What kind of tax exemption privileges
did NPC have?
(2) For what periods in time were these
privileges being enjoyed?
(3) If there are taxes to be paid, who shall
pay for these taxes?
RULING: A chronological review of the
NPC laws will show that it has been the
lawmaker's intention that the NPC was to
be completely tax exempt from all forms
of taxes — direct and indirect.
NPC's tax exemptions at first applied to
the bonds it was authorized to float to
finance its operations upon its creation by
virtue of C.A. No. 120.When the NPC was
authorized to contract with the IBRD for
foreign financing, any loans obtained
were to be completely tax exempt.
After the NPC was authorized to borrow
from other sources of funds — aside
issuance of bonds — it was again
specifically exempted from all types
of taxes "to facilitate payment of its
indebtedness." Even when the ceilings
for domestic and foreign borrowings were
periodically increased, the tax
exemption privileges of the NPC were
maintained. NPC's tax exemption from
real estate taxes was, however,
specifically withdrawn by Rep. Act No.
987, as above stated. The exemption
was, however, restored by R.A. No.
6395.
P.D. No. 380 added phrase "directly or
indirectly. Then came P.D. No. 938 which
amended Sec. 13(a), (b), (c) and (d) into
one very simple paragraph as follows: The
Corporation shall be non-profit and shall
devote all its returns from its capital
investment as well as excess revenues
from its operation, for expansion. To
enable the Corporation to pay its
indebtedness and obligations and in
furtherance and effective implementation
of the policy enunciated in Section one of
this Act, the Corporation, including its
subsidiaries, is hereby declared exempt
from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well
as costs and service fees including filing
fees, appeal bonds, supersedeas bonds, in
any court or administrative proceedings. It
must be borne in mind that Presidential
Decree Nos. 380 and 938 were issued by
one man, acting as such the Executive
and Legislative. Since both presidential
decrees were made by the same person, it
would have been very easy for him to
retain the same or similar language used
in P.D. No. 380 P.D. No. 938 if his
intention were to preserve the indirect tax
exemption of NPC. 54
Actually, P.D. No. 938 attests to the
ingenuousness of then President Marcos
no matter what his fault were. P.D. No.
938 lumped up 13(b), 13(c), and 13(d)
into the phrase "ALL FORMS OF TAXES,
ETC.” included 13(a) under the "as well
as" clause and added PNOC subsidiaries
as qualified for tax exemptions. One
common theme in all these laws is
that the NPC must be enable to pay
its indebtedness which, as of P.D. No.
938, was P12 Billion in total domestic
indebtedness, at any one time, and U$4
Billion in total foreign loans at any one
time. The NPC must be and has to be
exempt from all forms of taxes if this goal
is to be achieved.
The above conclusion that then President
Marcos lumped up Sections 13 (b), 13 (c)
and (d) into the phrase "All FORMS OF"
is supported by the fact that he did
not do the same for the tax
exemption provision for the foreign
loans to be incurred.
The tax exemption on foreign loans found
in Section 8(b), R.A. No. 6395, reads as
follows: The loans, credits and
indebtedness contracted under this
subsection and the payment of the
principal, interest and other charges
thereon, as well as the importation of
machinery, equipment, materials and
supplies by the Corporation, paid from the
proceeds of any loan, credit or
indebtedness incurred under this Act, shall
also be exempt from all taxes, fees,
imposts, other charges and restrictions,
including import restrictions, by the
Republic of the Philippines, or any of its
agencies and political subdivisions.
The same was amended by P.D. No. 380
as follows: The loans, credits and
indebtedness contracted this subsection
and the payment of the principal, interest
and other charges thereon, as well as the
importation of machinery, equipment,
materials, supplies and services, by the
Corporation, paid from the proceeds of
any loan, credit or indebtedness incurred
under this Act, shall also be exempt from
all direct and indirect taxes, fees,
imposts, other charges and
restrictions, including import
restrictions previously and presently
imposed, and to be imposed by the
Republic of the Philippines, or any of its
agencies and political subdivisions.
Since the subject matter of this particular
Section 8 (b) had to do only with loans
and machinery imported, paid for from the
proceeds of these foreign loans, THERE
WAS NO OTHER SUBJECT MATTER TO
LUMP IT UP WITH, and so, the tax
exemption stood as is — with the
express mention of "direct and
indirect" tax exemptions.
And this "direct and indirect" tax
exemption privilege extended to "taxes,
fees, imposts, other charges . . . to be
imposed" in the future” surely, an
indication that the lawmakers wanted
the NPC to be exempt from ALL
FORMS of taxes — direct and indirect.
It is crystal clear, therefore, that NPC
had been granted tax exemption
privileges for both direct and indirect
taxes under P.D. No. 938.
There is reason to believe that NPC
availed of subsidy granted to exempt
GOCC's that suddenly found themselves
having to pay taxes. It will be noted that
Section 23, P.D. No. 1177, mandated that
the Secretary of Finance and the
Commissioner of the Budget had to
establish the necessary procedure to
accomplish the tax payment/tax subsidy
scheme of the Government. In effect,
NPC, did not put any cash to pay any tax
as it got from the General Fund the
amounts necessary to pay different
revenue collectors for the taxes it had to
pay.
The NPC tax privileges withdrawn by
Section 1. P.D. No. 1931, were, therefore,
the same NPC tax exemption privileges
withdrawn by Section 23, P.D. No. 1177.
NPC could no longer obtain a subsidy for
the taxes it had to pay.
FIRB did not create NPC's tax exemption
status but merely restored it. The rule
that under the 1973 Constitution "no law
granting a tax exemption shall be passed
without the concurrence of a majority of
all the members of the Batasang
Pambansa" does not apply as said P.D.
No. 1931 was not passed by the Interim
Batasang Pambansa but by then
President Marcos under His
Amendment No. 6 power. P.D. No.
1931 was, therefore, validly issued by
then President Marcos under his
Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax
exemption privileges were again clipped
by, this time, President Aquino.
FIRB Resolution No. 17-87 was approved
by the President. There is no indication,
however, from the records of the case
whether or not similar approvals were
given by then President Marcos for FIRB
Resolutions Nos. 10-85 and 1- 86. .
In the case of the tax exemption
restoration of NPC, there is no other
comparable entity — not even a single
public or private corporation — whose
rights would be violated if NPC's tax
exemption privileges were to be restored.
Thus, after all has been said, it is clear
that the NPC had its tax exemption
privileges restored from June 11, 1984 up
to the present.
Who pays the tax?
Private respondents-oil companies have to
absorb the taxes they add to the bunker
fuel oil they sell to NPC.
The Court rules and declares that the oil
companies which supply bunker fuel oil to
NPC have to pay the taxes imposed upon
said bunker fuel oil sold to NPC. By the
very nature of indirect taxation, the
economic burden of such taxation is
expected to be passed on through the
channels of commerce to the user or
consumer of the goods sold. Because,
however, the NPC has been exempted
from both direct and indirect taxation, the
NPC must beheld exempted from
absorbing the economic burden of indirect
taxation. This means, on the one hand,
that the oil companies which wish to
sell to NPC absorb all or part of the
economic burden of the taxes
previously paid to BIR, which could
they shift to NPC if NPC did not enjoy
exemption from indirect taxes. This means
also, on the other hand, that the NPC may
refuse to pay the part of the "normal"
purchase price of bunker fuel oil which
represents all or part of the taxes
previously paid by the oil companies to
BIR. If NPC nonetheless purchases such
oil from the oil companies — because to
do so may be more convenient and
ultimately less costly for NPC than NPC
itself importing and hauling and storing
the oil from overseas — NPC is entitled to
be reimbursed by the BIR for that part of
the buying price of NPC which verifiably
represents the tax already paid by the oil
company-vendor to the BIR.
CIR vs. GOTAMCO
FACTS: The World Health Organization
(WHO for short) is an international
organization that enjoys privileges and
immunities which are defined more
specifically in the Host Agreement entered
into between the Republic of the
Philippines and the said Organization. The
Agreement provides that the Organization,
its assets, income and other properties
shall be: (a) exempt from all direct and
indirect taxes. It is understood, however,
that the Organization will not claim
exemption from taxes which are, in fact,
no more than charges for public utility
services. When the WHO decided to
construct a building to house its own
offices, it entered into a further
agreement with the Government of the
Republic of the Philippines: The
Organization may import into the country
materials and fixtures required for the
construction free from all duties and taxes
and agrees not to utilize any portion of
the international reserves of the
Government.
The construction contract was awarded to
respondent John Gotamco & Sons, Inc. for
the stipulated price of P370,000.00, but
when the building was completed the price
reached a total of P452,544.00.
WHO received an opinion from the
Commissioner of the Bureau of Internal
Revenue stating that "as the 3%
contractor's tax is an indirect tax on the
assets and income of the Organization,
the gross receipts derived by contractors
from their contracts with the WHO for the
construction of its new building, are
exempt from tax in accordance with the
Host Agreement. However, the
Commissioner of Internal Revenue
reversed his opinion and stated that "as
the 3% contractor's tax is not a direct nor
an indirect tax on the WHO, but a tax that
is primarily due from the contractor, the
same is not covered by the Host
Agreement.
WHO issued a certification which certifies
that the bid of John Gotamco & Sons,
made under the condition stated above,
should be exempted from any taxes in
connection with the construction of the
World Health Organization office building.
Court of Tax Appeals rendered a
decision in favor of Gotamco and reversed
the Commissioner's decision.
ISSUE: whether respondent John
Gotamco & Sons, Inc. should pay the 3%
contractor's tax.
RULING: NO.
While treaties are required to be ratified
by the Senate under the Constitution,
less formal types of international
agreements may be entered into by
the Chief Executive and become
binding without the concurrence of
the legislative body. It is a valid and
binding international agreement even
without the concurrence of the Philippine
Senate. The privileges and immunities
granted to the WHO under the Host
Agreement have been recognized by this
Court as legally binding on Philippine
authorities.
Direct taxes are those that are demanded
from the very person who, it is intended
or desired, should pay them; while
indirect taxes are those that are
demanded in the first instance from one
person in the expectation and intention
that he can shift the burden to someone
else. The contractor's tax is of course
payable by the contractor but in the last
analysis it is the owner of the building that
shoulders the burden of the tax because
the same is shifted by the contractor to
the owner as a matter of self-
preservation. Thus, it is an indirect tax.
And it is an indirect tax on the WHO
because, although it is payable by the
petitioner, the latter can shift its burden
on the WHO. In the last analysis it is the
WHO that will pay the tax indirectly
through the contractor and it certainly
cannot be said that 'this tax has no
bearing upon the World Health
Organization.
Since the Host Agreement specifically
exempts the WHO from "indirect taxes."
The Host Agreement, in specifically
exempting the WHO from "indirect taxes,"
contemplates taxes which, although not
imposed upon or paid by the Organization
directly, form part of the price paid or to
be paid by it. The 3% contractor's tax
would be within this category and should
be viewed as a form of an "indirect tax"
On the Organization, as the payment
thereof or its inclusion in the bid price
would have meant an increase in the
construction cost of the building.
PHILIPPINE ACETYLENE CO. INC. vs
CIR
FACTS: The petitioner is a corporation
engaged in the manufacture and sale of
oxygen and acetylene gases. It made
various sales of its products to the
National Power Corporation, an agency of
the Philippine Government, and to the
Voice of America an agency of the United
States Government. The sales to the NPC
amounted to P145,866.70, while those to
the VOA amounted to P1,683.00 on
account of which the respondent
Commission of Internal Revenue assessed
against, and demanded from, the
petitioner the payment of P12,910.60 as
deficiency sales tax and surcharge.
The petitioner denied liability for the
payment of the tax on the ground that
both the NPC and the VOA are exempt
from taxation. It asked for a
reconsideration of the assessment and,
failing to secure one, appealed to the
Court of Tax Appeals.
ISSUE: WON petitioner is liable for the
payment of tax on the sales it made to the
NPC and the VOA because both entities
are exempt from taxation.
RULING: Yes. Petitioner is liable.
First, The NPC enjoys tax exemption by
virtue of an act of Congress which
provides as follows:
Sec. 2. To facilitate the payment of
its indebtedness, the National
Power Corporation shall be exempt
from all taxes, except real property
tax, and from all duties, fees,
imposts, charges, and restrictions
of the Republic of the Philippines,
its provinces, cities and
municipalities.
It is contended that the immunity thus
given to the NPC would be impaired by
the imposition of a tax on sales made to it
because while the tax is paid by the
manufacturer or producer, the tax is
ultimately shifted by the latter to the
former. The Code states that the sales tax
"shall be paid by the manufacturer or
producer," who must "make a true and
complete return of the amount of his, her
or its gross monthly sales, receipts or
earnings or gross value of output actually
removed from the factory or mill
warehouse and within twenty days after
the end of each month, pay the tax due
thereon."
But it is argued that a sales tax is
ultimately passed on to the
purchaser, and that, so far as the
purchaser is an entity like the NPC which
is exempt from the payment of "all taxes,
except real property tax," the tax cannot
be collected from sales.
The incidence of the tax ultimately settles
on the purchaser, but it is not for that
reason alone that one may validly argue
that it is a tax on the purchaser. The
exemption granted to the NPC may be
likened to the immunity of the Federal
Government from state taxation and vice
versa in the federal system of government
of the United States. In the early case
of Panhandle Oil Co. v. Mississippi the
doctrine of intergovernment mental tax
immunity was held as prohibiting the
imposition of a tax on sales of gasoline
made to the Federal Government.
Soon it became obvious that to test the
constitutionality of a statute by
determining the party on which the legal
incidence of the tax fell was an
unsatisfactory way of doing things.
In 1941, Alabama v. King & Boozer held
that the constitutional immunity of the
United States from state taxation was not
infringed by the imposition of a state sales
tax with which the seller was chargeable
but which he was required to collect from
the buyer, in respect of materials
purchased by a contractor with the United
States on a cost-plus basis for use in
carrying out its contract, despite the fact
that the economic burden of the tax was
borne by the United States.
Further inroads into the doctrine
of Panhandle were made in 1943 when the
U.S. Supreme Court held that immunity
from state regulation in the performance
of governmental functions by Federal
officers and agencies did not extend to
those who merely contracted to furnish
supplies or render services to the
government even though as a result of an
increase in the price of such supplies or
services attributable to the state
regulation, its ultimate effect may be to
impose an additional economic burden on
the Government.
But if a complete turnabout from the rule
announced in Panhandle was yet to be
made, it was so made in 1952 in Esso
Standard Oil v. Evans11 which held that a
contractor is not exempt from the
payment of a state privilege tax on the
business of storing gasoline simply
because the Federal Government with
which it has a contract for the storage of
gasoline is immune from state taxation.
We have determined the current status of
the doctrine of intergovernmental tax
immunity in the United States, by
showing the drift of the decisions following
announcement of the original rule, to
point up the that fact that even in those
cases where exemption from tax was
sought on the ground of state immunity,
the attempt has not met with success.
It may indeed be that the economic
burden of the tax finally falls on the
purchaser; when it does the tax
becomes a part of the price which the
purchaser must pay. It does not matter
that an additional amount is billed as tax
to the purchaser. The method of listing
the price and the tax separately and
defining taxable gross receipts as the
amount received less the amount of the
tax added, merely avoids payment by the
seller of a tax on the amount of the tax.
But the tax burden may not even be
shifted to the purchaser at all. A
decision to absorb the burden of the tax is
largely a matter of economics. Then it can
no longer be contended that a sales tax is
a tax on the purchaser.
We therefore hold that the tax
imposed by section 186 of the
National Internal Revenue Code is a
tax on the manufacturer or producer
and not a tax on the purchaser except
probably in a very remote and
inconsequential sense. Accordingly its levy
on the sales made to tax-exempt entities
like the NPC is permissible.
Second, only sales made "for exclusive
use in the construction, maintenance,
operation or defense of the bases," in
a word, only sales to the quartermaster,
are exempt under article V from
taxation. Sales of goods to any other
party even if it be an agency of the
United States, such as the VOA, or
even to the quartermaster but for a
different purpose, are not free from
the payment of the tax. On the other
hand, article XVIII exempts from the
payment of the tax sales made within the
base by (not sales to) commissaries and
the like in recognition of the principle that
a sales tax is a tax on the seller and not
on the purchaser.
It is a familiar learning in the American
law of taxation that tax exemption must
be strictly construed and that the
exemption will not be held to be conferred
unless the terms under which it is granted
clearly and distinctly show that such was
the intention of the parties. Hence, in so
far as the circular of the Bureau of
Internal Revenue would give the tax
exemptions in the Agreement an
expansive construction it is void.
We hold, therefore, that sales to the VOA
are subject to the payment of percentage
taxes under section 186 of the Code. The
petitioner is thus liable for P12,910.60.
Accordingly, the decision a quo is modified
by ordering the petitioner to pay to the
respondent Commission the amount of
P12,910.60 as sales tax and surcharge,
with costs against the petitioner.
 TAN TIONG BIO, ET AL VS
COMMISSIONER OF INTERNAL
REVENUE
FACTS: Central Syndicate, a corporation
organized under the laws of the
Philippines purchased from Dee Hong Lue
the entire stock of surplus properties
which the said Dee Hong Lue had bought
from the Foreign Liquidation Commission.
Central Syndicate assumed Dee Hong
Lue's obligation to pay the 3-1/2% sales
tax on said surplus goods. It remitted
P43,750.00 in his behalf as deposit to
answer for the payment of said sales tax
with the understanding that it would later
be adjusted after the determination of the
exact consideration of the sale.
The syndicate again requested the
Collector the refund of P1,103.28
representing alleged excess payment of
sales tax due to the adjustment and
reduction of the purchase price in the
amount of P31,522.18.
The collector decided that the Central
Syndicate was the importer and original
seller of the surplus goods in question
and, therefore, the one liable to pay the
sales tax. Collector assessed against the
syndicate the amount of P33,797.88 and
P300.00 as deficiency sales tax, inclusive
of the 25% surcharge and compromise
penalty, respectively. The collector denied
the request of the syndicate for the refund
of the sum of P1,103.28.
The Central Syndicate elevated the case
to the Court of Tax Appeals questioning
the ruling of the Collector. The syndicate
filed a motion requesting that the issue of
prescription it has raised against the
collection of the tax be first determined as
a preliminary question, but action thereon
was deferred by the Court of Tax Appeals
until after the trial of the case on the
merits. The Collector filed a motion to
dismiss the appeal on the ground of lack
of personality on the part of the syndicate,
which met an opposition on the part of the
latter.
Court of Tax Appeals dismissed the
appeal on the ground that the Central
Syndicate has no personality to maintain
the action then pending before it.
From this order the syndicate appealed to
the Supreme Court wherein it intimated
that the appeal should not be dismissed
because it could be substituted by its
successors-in-interest.
After trial, the Court of Tax Appeals
affirmed the decision of the Collector of
Internal Revenue except with regard to
the imposition of the compromise penalty
of P300.00 the collection of which is
unauthorized and illegal in the absence of
a compromise agreement between the
parties. Petitioners interposed the present
appeal.
ISSUES:(1) whether the importer of the
surplus goods in question the sale of
which is subject to the present tax liability
is Dee Hong Lue or the Central Syndicate
who has been substituted by the present
petitioners;
(2) whether the deficiency sales tax which
is now sought to be collected has already
prescribed; and
(3) whether the Central Syndicate having
already been dissolved because of the
expiration of its corporate existence,
whether the sales tax in question can be
enforced against its successors-in-interest
who are the present petitioners.
RULING:
1.Dee Hong Lue purchased the surplus
goods in question not for himself but for
the Central Syndicate which was then in
the process of incorporation such that the
deed of sale. Dee Hong Lue sold said
goods to the syndicate for a consideration
of P1,250,000.00 (the same amount paid
by Dee Hong Lue to the Foreign
Liquidation Commission) "is but a ruse to
evade payment of a greater amount of
percentage tax."
It cannot be denied that Dee Hong Lue
purchased the goods on behalf of those
who advanced the money for the purchase
thereof who later became the
incorporators and only stockholders of the
syndicate with the understanding that the
amounts they had respectively advanced
would be their investment and would
represent their interest in the corporation.
And this is further evidenced by the fact
that this purchase made by Dee Hong Lue
was later approved and adopted as the act
of the Central Syndicate itself.
The general manager of said syndicate
emphasized that the persons named
therein (from whom Dee Hong Lue
obtained the money) merely acted on
behalf of the syndicate and in fact were
the ones who went to Leyte to take over
the aforesaid surplus goods. In any event,
even if Dee Hong Lue may be deemed as
the purchaser of the surplus goods in his
own right, nevertheless, the corporation
still may be regarded as the importer
of the same goods for the reason that
Dee Hong Lue transferred to it all his
rights and interests in the contract
with the Foreign Liquidation
Commission, and it was said corporation
that took delivery thereof from the place
where they were stored in Leyte. Under
these facts, it is clear that the Central
Syndicate is the importer of the
surplus goods.
2. Since the Central Syndicate, as we
have already pointed out, was the
importer of the surplus goods in question,
it was its duty under Section 183 of the
Internal Revenue Code to file a return of
its gross sales within 20 days after the
end of each quarter in order that the
office of the internal revenue may assess
the sales tax that may be due thereon,
but, as the record shows, the Central
Syndicate failed to file any return of its
quarterly sales on the pretext that it was
Dee Hong Lue who imported the surplus
goods and it merely purchased them from
said importer.
The syndicate failed to file its quarterly
returns as required by Section 183 of the
Tax Code. Since it appears that the
Collector discovered the failure of the
syndicate to file the return only on
September 12, 1951 he has therefore up
to September 18, 1961 (10 years) within
which to assess or collect the deficiency
tax in question. Consequently the
assessment made on January 4, 1952 was
made within the prescribed period.
3. It should be stated at the outset that it
was petitioners themselves who
caused their substitution as parties in
the present case, being the successors-
in-interest of the defunct syndicate,
when they appealed this case to the
Supreme Court for which reason the latter
Court declared that "the respondent Court
of Tax Appeals should have allowed the
substitution of its former officers and
directors is parties-appellants, since they
are proper parties in interest insofar as
they may be (and in fact are) held
personally liable for the unpaid deficiency
assessments made by the Collector of
Internal Revenue against the defunct
Syndicate."
In fact, because of this directive their
substitution was effected. They cannot,
therefore, be now heard to complain if
they are made responsible for the tax
liability of the defunct syndicate whose
representation they assumed and whose
assets were distributed among them.
In the second place, there is good
authority to the effect that the creditor
of a dissolved corporation may follow
its assets once they passed into the
hands of the stockholders. An
indebtedness of a corporation to the
federal government for income and
excess profit taxes is not
extinguished by the dissolution of the
corporation.
Bearing in mind that our corporation law
is of American origin, the foregoing
authorities have persuasive effect in
considering similar cases in this
jurisdiction. This must have been taken
into account when in G.R. No. L-8800 this
Court said that petitioners could be held
personally liable for the taxes in question
as successors-in-interest of the defunct
corporation.
Considering that the Central Syndicate
realized from the sale of the surplus goods
and that the sale of said goods was the
only transaction undertaken by said
syndicate, there being no evidence to the
contrary, the conclusion is that said net
profit remained intact and was
distributed among the stockholders
when the corporation liquidated and
distributed its assets
Petitioners are therefore the
beneficiaries of the defunct
corporation and as such should be
held liable to pay the taxes in
question. However, there being no
express provision requiring the
stockholders of the corporation to be
solidarily liable for its debts which liability
must be express and cannot be presumed,
petitioners should be held to be liable
for the tax in question only in
proportion to their shares in the
distribution of the assets of the
defunct corporation. The decision of the
trial court should be modified accordingly.
Return. CIR informed MEDICARD and
issued a Letter Notice and also issued a
Preliminary Assessment Notice (PAN)
against MEDICARD for deficiency VAT.
MEDICARD received CIR's FAN for alleged
deficiency VAT for taxable year 2006 in
the total amount of Pl 96,614,476.69,10
inclusive of penalties. According to the
CIR, the taxable base of HMOs for VAT
purposes is its gross receipts without any
deduction. CIR argued that since
MEDICARD does not actually provide
medical and/or hospital services, but
merely arranges for the same, its services
are not VAT exempt.
CIR's denied MEDICARD's protest.
MEDICARD filed a petition for review
before the CTA.
CTA Division affirmed with modifications
the CIR's deficiency VAT assessment
covering taxable year 2006. MEDICARD
now seeks recourse to this Court via a
petition for review on certiorari.
ISSUES:
1. Whether the absence of the LOA is
fatal; and
2. Whether the amounts that
medicard earmarked and
eventually paid to the medical
service providers should still form
part of its gross receipts for vat
purposes.
RULING: The petition is meritorious.

RATIONALE:
MEDICARD v CIR

The absence of an LOA violated

FACTS: MEDICARD is a Health MEDICARD's right to due process
Maintenance Organization (HMO) that
provides prepaid health and medical
An LOA is the authority given to the
insurance coverage to its clients.
appropriate revenue officer assigned to
MEDICARD filed its First, Second, and
perform assessment functions. It
Third Quarterly VAT Returns through
empowers or enables said revenue officer
Electronic Filing and Payment System
to examine the books of account and
(EFPS) and its Fourth Quarterly VAT
other accounting records of a taxpayer for
the purpose of collecting the correct
amount of tax. An LOA is premised on the
fact that the examination of a taxpayer
who has already filed his tax returns is a
power that statutorily belongs only to the
CIR himself or his duly authorized
representatives. It is clear that unless
authorized by the CIR himself or by his
duly authorized representative, through
an LOA, an examination of the taxpayer
cannot ordinarily be undertaken. Hence,
unless undertaken by the CIR himself or
his duly authorized representatives, other
tax agents may not validly conduct any of
these kinds of examinations without prior
authority.
"no-contact-audit approach" - Under
this policy, even without conducting a
detailed examination of taxpayer's
books and records, if the
computerized/manual matching of
sales and purchases/expenses
appears to reveal discrepancies, the
same shall be communicated to the
concerned taxpayer through the
issuance of LN. The LN shall serve as
a discrepancy notice to taxpayer similar
to a Notice for Informal Conference to the
concerned taxpayer.
RELIEF System
- a revenue officer may begin an
examination of the taxpayer even
prior to the issuance of an LN or
even in the absence of an LOA with
the aid of a provision. Clearly, there must be a grant
computerized/manual
matching of taxpayers'
documents/records.
- the presumption that the tax
returns are in accordance with law
and are presumed correct since
these are filed under the penalty of
perjury are easily rebutted and the
taxpayer becomes instantly
burdened to explain a purported
discrepancy.
The LN is merely similar to a Notice for
Informal Conference. However, the same
presupposes that the revenue officer who
issued the same is properly authorized in
the first place.
IV. POLICIES AND GUIDELINES
o In the event a taxpayer who has
been issued an LN refutes the
discrepancy shown in the LN, the
concerned taxpayer will be given
an opportunity to reconcile its
records with those of the BIR
within One Hundred and
Twenty (120) days from the
date of the issuance of the LN.
However, the subject taxpayer
shall no longer be entitled to the
abatement of interest and penalties
after the lapse of the sixty (60)-
day period from the LN issuance.
o In case the above discrepancies
remained unresolved at the end
of the One Hundred and Twenty
(120)-day period, the revenue
officer (RO) assigned to handle the
LN shall recommend the
issuance of [LOA) to replace
the LN.
In this case, there is no dispute that no
LOA was issued prior to the issuance
of a PAN and FAN against MEDICARD.
Therefore no LOA was also served on
MEDICARD. The LN that was issued
earlier was also not converted into an
LOA contrary to the above quoted
of authority before any revenue officer
can conduct an examination or
assessment. Equally important is that the
revenue officer so authorized must not go
beyond the authority given. In the
absence of such an authority, the
assessment or examination is a nullity.
The Court cannot convert the LN into the
LOA required under the law even if the
same was issued by the CIR himself.
LN is issued to a person found to have
underreported sales/receipts per data
generated under the RELIEF system.
Upon receipt of the LN, a taxpayer may
avail of the BIR's Voluntary Assessment
and Abatement Program. If a taxpayer
fails or refuses to avail of the said
program, the BIR may avail of
administrative and criminal .remedies,
particularly closure, criminal action, or
audit and investigation. Since the law
specifically requires an LOA and
requires the conversion of the
previously issued LN to an LOA, the
absence thereof cannot be simply
swept under the rug, as the CIR
would have it.
LN is entirely different and serves a
different purpose than an LOA. Due
process demands, as recognized under
RMO No. 32-2005, that after an LN has
serve its purpose, the revenue officer
should have properly secured an LOA
before proceeding with the further
examination and assessment of the
petitioner. Unfortunately, this was not
done in this case.
In fact, apart from being a statutory
requirement, an LOA is equally needed
even under the BIR's RELIEF System
because the rationale of requirement is
the same whether or not the CIR conducts
a physical examination of the taxpayer's
records:
1. to prevent undue harassment
of a taxpayer
2. level the playing field between
the government's vast
resources for tax assessment,
collection and enforcement,
and the solitary taxpayer's dual
need to prosecute its business
while at the same time
responding to the BIR exercise
of its statutory powers.
The balance between these is
achieved by ensuring that any
examination of the taxpayer by the
BIR' s revenue officers is properly
authorized in the first place by those to
whom the discretion to exercise the power
of examination is given by the statute. At
any rate, even if it is assumed that the
absence of an LOA is not fatal, the Court
still partially finds merit in MEDICARD's
substantive arguments.
MEDICARD is principally engaged in
the sale of services. The compensation
for their services representing their
service fee, is presumed to be the total
amount received as enrollment fee from
their members plus other charges
received.
"Gross receipts" refers to the total
amount of money or its equivalent
representing the contract price,
compensation, service fee, rental or
royalty, including the amount charged for
materials supplied with the services and
deposits applied as payments for services
rendered, and advance payments actually
or constructively received during the
taxable period for the services performed
or to be performed for another person,
excluding the VAT.
According to the CTA en banc, the entire
amount of membership fees should form
part of MEDICARD's gross receipts
because the exclusions to the gross
receipts does not apply to MEDICARD. The
CTA en banc overlooked that the definition
of gross receipts. RR No. 16-2005 merely
presumed that the amount received by an
HMO as membership fee is the HMO's
compensation for their services. As a
mere presumption, an HMO is, thus,
allowed to establish that a portion of the
amount it received as membership fee
does NOT actually compensate it but some
other person, which in this case are the
medical service providers themselves.
It is notable in this regard that the term
gross receipts as elsewhere mentioned as
the tax base under the NIRC does not
contain any specific definition. Therefore,
absent a statutory definition, this
Court has construed the term gross
receipts in its plain and ordinary
meaning, that is, gross receipts is
understood as comprising the entire
receipts without any deduction. The
bringing of physician and patient together,
the preventive features, the regularization
of service as well as payment, the
substantial reduction in cost by quantity
purchasing in short, getting the medical
job done and paid for; not, except
incidentally to these features, the
indemnification for cost after .the services
is rendered. Except the last, these are not
distinctive or generally characteristic of
the insurance arrangement.
The VAT is a tax on the value added by
the performance of the service by the
taxpayer. It is, thus, this service and
the value charged thereof by the
taxpayer that is taxable under the
NIRC.
The Court's task however is not to weigh
these policy considerations but to
determine if these considerations in favor
of taxation can even be implied from the
statute where the CIR purports to derive
her authority. This Court rules that they
cannot because the language of the NIRC
is pretty straightforward and clear. As this
Court previously ruled:
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. 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. As
burdens, taxes should not be unduly
exacted nor assumed beyond the plain
meaning of the tax laws
For this Court to subject the entire
amount of MEDICARD's gross receipts
without exclusion, the authority should
have been reasonably founded from the
language of the statute. That language is
wanting in this case. In the scheme of
judicial tax administration, the need for
certainty and predictability in the
implementation of tax laws is crucial. Our
tax authorities fill in the details that
Congress may not have the opportunity or
competence to provide. The regulations
these authorities issue are relied upon by
taxpayers, who are certain that these will
be followed by the courts. Courts,
however, will not uphold these authorities'
interpretations when dearly absurd,
erroneous or improper. The CIR's
interpretation of gross receipts in the
present case is patently erroneous for lack
of both textual and non-textual support.
As to the CIR's argument that the act of
earmarking or allocation is by itself an act
of ownership and management over the
funds, the Court does not agree. On the
contrary, it is MEDICARD's act of
earmarking or allocating 80% of the
amount it received as membership fee at
the time of payment that weakens the
ownership imputed to it. By earmarking or
allocating 80% of the amount,
MEDICARD unequivocally recognizes
that its possession of the funds is not
in the concept of owner but as a mere
administrator of the same.