Pre Trial

SUPREME COURT
Manila
EN BANC
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.
MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases
Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's assessment of deficiency income taxes against respondent British Overseas
Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international
airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC
had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary
landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways — which was
responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of P2,498,358.56 for deficiency
income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment,
dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR on 16 February 1972. But before
said denial, BOAC had already filed a petition for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of
the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the
aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46
(requiring the filing of corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16 February 1972, however, the CIR
not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for
reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court praying that it be
absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the
place where services are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit
BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal
years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines
for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in the Philippines or has an office or
place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation but a non-resident foreign corporation, then it
is liable to Philippine income tax at the rate of thirty-five per cent (35%) of its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the Philippines and not
having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. 2 "In order that a foreign
corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from
1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series
corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies
on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850
of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its
total net income received in the preceding taxable year from all sources within the Philippines. 5
Sec. 24. Rates of tax on corporations. — ...
(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes income from
Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever
form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the
ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain
or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words 'income from any source whatever'
disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws." Income means "cash
received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it means something distinct from principal or capital.
For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by
the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the
carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its
terms all the elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends,
(3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not
intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the
Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may
be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with the result that the place where the
services are rendered determines the source; and since BOAC's service of transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under
review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly,
BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that
activity ... which produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The
word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax
assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November,
1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger, excess baggage or mail provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2-½ % tax on gross Philippine billings
is an income tax. If it had been intended as an excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on
Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal in JAL vs. Commissioner of Internal
Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax Court in that case was to the effect that the
mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject to the common
carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the activity of transporting, conveying
or removing passengers and cargo from one place to another. It purports to tax the business of transportation. 14 Being an excise tax, the same can be
levied by the State only when the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines. The subject matter of
the case under consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived
from any source." Since the two cases treat of a different subject matter, the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the British Overseas Airways
Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5%
surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for
refund in the amount of P858,307.79 is hereby denied. Without costs.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 180356 February 16, 2010
SOUTH AFRICAN AIRWAYS, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007 Decision1 and October 30, 2007 Resolution2 of the Court of
Tax Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of Internal Revenue. The assailed decision
affirmed the Decision dated May 10, 20063 and Resolution dated August 11, 20064 rendered by the CTA First Division.
The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa. Its
principal office is located at Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the Philippines, it is an internal air carrier
having no landing rights in the country. Petitioner has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells
passage documents for compensation or commission for petitioner’s off-line flights for the carriage of passengers and cargo between ports or points
outside the territorial jurisdiction of the Philippines. Petitioner is not registered with the Securities and Exchange Commission as a corporation, branch
office, or partnership. It is not licensed to do business in the Philippines.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights, summarized as follows:
Period Date Filed 2.5% Gross

Phil. Billings
For Passenger 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000 PhP 222,531.25
424,046.95
422,466.00
453,182.91
Sub-total PhP 1,522,227.11
For Cargo 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000 PhP 81,531.00
50,169.65
36,383.74
37,454.88
Sub-total PhP 205,539.27
TOTAL 1,727,766.38
Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District Office No. 47, a claim for the refund of the
amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable year 2000. Such claim was unheeded. Thus, on
April 14, 2003, petitioner filed a Petition for Review with the CTA for the refund of the abovementioned amount. The case was docketed as CTA Case
No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA ruled that petitioner is a resident foreign
corporation engaged in trade or business in the Philippines. It further ruled that petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a)
of the National Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its income derived from
the sales of passage documents in the Philippines. On this ground, the CTA denied petitioner’s claim for a refund.
Petitioner’s Motion for Reconsideration of the above decision was denied by the CTA First Division in a Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax payment on its GPB. This was denied by
the CTA in its assailed decision. A subsequent Motion for Reconsideration by petitioner was also denied in the assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues
Whether or not petitioner, as an off-line international carrier selling passage documents through an independent sales agent in the Philippines, is
engaged in trade or business in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of passage documents covering petitioner’s off-line flights is Philippine-source income
subject to Philippine income tax.
Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine Billings for the taxable year 2000 in the
amount of P1,727,766.38.5
The Court’s Ruling
This petition must be denied.
Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income
Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale of passage documents in the Philippines.
Petitioner, however, failed to sufficiently prove such contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,6 we held, "Since an action for a tax refund partakes of the nature of an
exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must
discharge such burden convincingly."
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is
petitioner’s contention that, with the new definition of GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2
1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax.
Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. – A corporation organized, authorized, or existing under the laws of a foreign country, engaged in trade or business within
the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all
sources within the Philippines: Provided, however, that international carriers shall pay a tax of two and one-half percent on their gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:
"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines
of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:
"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the world and excess baggage, cargo and mail
originating from the Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the passage documents were sold in the
Philippines. Legislature departed from such concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the
1997 NIRC. This much was also found by the CTA. But petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is
precluded from paying any other income tax for its sale of passage documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways),7 which was decided under similar factual
circumstances, this Court ruled that off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines
and that their income from sales of passage documents here is income from within the Philippines. Thus, in that case, we held the off-line air carrier
liable for the 32% tax on its taxable income.
Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it does not apply to the instant case, which must
be decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations, such as itself, on all income from sources
within the Philippines. Petitioner’s interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does not maintain
flights to or from the Philippines, thereby having no GPB as defined, it is exempt from paying any income tax at all. In other words, the existence of
Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of off-line air carriers is more apparent than real.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Sec.
28(A)(1) of the 1997 NIRC. Certainly, had legislature’s intentions been to completely exclude all international air carriers from the application of the
general rule under Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not. Thus, the logical interpretation of
such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec.
28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner claims that the former case does not apply. Thus,
British Overseas Airways applies to the instant case. The findings therein that an off-line air carrier is doing business in the Philippines and that income
from the sale of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the definition of GPB is to exempt off-line air carriers from income
tax by citing the pronouncements made by Senator Juan Ponce Enrile during the deliberations on the provisions of the 1997 NIRC. Such
pronouncements, however, are not controlling on this Court. We said in Espino v. Cleofe:8
A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making body must be sought, first of all, in the words of the
statute itself, read and considered in their natural, ordinary, commonly-accepted and most obvious significations, according to good and approved usage
and without resorting to forced or subtle construction. Courts, therefore, as a rule, cannot presume that the law-making body does not know the
meaning of words and rules of grammar. Consequently, the grammatical reading of a statute must be presumed to yield its correct sense. x x x It is also
a well-settled doctrine in this jurisdiction that statements made by individual members of Congress in the consideration of a bill do not necessarily reflect
the sense of that body and are, consequently, not controlling in the interpretation of law. (Emphasis supplied.)
Moreover, an examination of the subject provisions of the law would show that petitioner’s interpretation of those provisions is erroneous.
Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within 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
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross
Philippine Billings’ as defined hereunder:
(a) International Air Carrier. – ‘Gross Philippine Billings’ refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources within the
Philippines. Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as "that which would otherwise be included in the provision from which it is excepted. It is a clause which exempts something
from the operation of a statue by express words."9 Further, "an exception need not be introduced by the words ‘except’ or ‘unless.’ An exception will be
construed as such if it removes something from the operation of a provision of law."10
In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income tax on their income from within the
Philippines, except for resident foreign corporations that are international carriers that derive income "from carriage of persons, excess baggage, cargo
and mail originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with
no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule. This principle is
embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming
within the purview of the general rule.11
To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall
be taxed at the rate of 2 1/2% of its Gross Philippine Billings, 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% of such income.
As to the denial of petitioner’s claim for refund, the CTA denied the claim on the basis that petitioner is liable for income tax under Sec. 28(A)(1) of the
1997 NIRC. Thus, petitioner raises the issue of whether the existence of such liability would preclude their claim for a refund of tax paid on the basis of
Sec. 28(A)(3)(a). In answer to petitioner’s motion for reconsideration, the CTA First Division ruled in its Resolution dated August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way, disqualify a taxpayer from claiming a tax refund since a
refund claim can proceed independently of a tax assessment and that the assessment cannot be offset by its claim for refund.
Petitioner’s argument is erroneous. Petitioner premises its argument on the existence of an assessment. In the assailed Decision, this Court did not, in
any way, assess petitioner of any deficiency corporate income tax. The power to make assessments against taxpayers is lodged with the respondent.
For an assessment to be made, respondent must observe the formalities provided in Revenue Regulations No. 12-99. This Court merely pointed out that
petitioner is liable for the regular corporate income tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to speak of.12
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that
there has not yet been any assessment of their obligation under the latter provision. Petitioner argues that such offsetting is in the nature of legal
compensation, which cannot be applied under the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,13 thus:
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to
deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be subject to set-off or compensation,
thus:
We have consistently ruled that there can be no off-setting 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.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off.
Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,14 however, granted the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental motion for reconsideration alleging bringing to
said court’s attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the same year.
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.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that
"(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is
proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or
suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of
erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved.This would necessarily require and entail additional efforts and expenses on the part of the Government, impose
a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations.1avvphi1
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true
and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded,it would be only just and fair that the taxpayer and the Government alike be given
equal opportunities to avail of remedies under the law to defeat each other’s claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to
determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily
involved therein. (Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore, still applicable
today.
Here, petitioner’s 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 cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright denial of petitioner’s claim for a
refund. Even though petitioner is not entitled to a refund due to the question on the propriety of petitioner’s tax return subject of the instant
controversy, it would not be proper to deny such claim without making a determination of petitioner’s liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is, gross income less
deductions and exemptions, if any. It cannot be assumed that petitioner’s liabilities under the two provisions would be the same. There is a need to
make a determination of petitioner’s liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. The
assailed decision fails to mention having computed for the tax due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish
petitioner’s taxable income. There is a necessity to receive evidence to establish such amount vis-à-vis the claim for refund. It is only after such amount
is established that a tax refund or deficiency may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The
instant case is REMANDED to the CTA En Banc for further proceedings and appropriate action, more particularly, the reception of evidence for both
parties and the corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in this Decision.
SO ORDERED.
SECOND DIVISION
January 11, 2016
G.R. No. 169507
AIR CANADA, Petitioner,

vs.
DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation doing
business in the Philippines. As such, it is taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject
to any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada
may only be imposed a maximum tax of 1 ½% of its gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc, which in turn affirmed the December 22,
2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division denying Air Canada’s claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On April 24, 2000, it was granted an authority to operate as
an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which authority would expire on April 24, 2005.6 "As an off-line carrier,
[Air Canada] does not have flights originating from or coming to the Philippines [and does not] operate any airplane [in] the Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines.8 Aerotel "sells [Air
Canada’s] passage documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly and annual income tax
returns and paid the income tax on Gross Philippine Billings in the total amount of ₱5,185,676.77,10 detailed as follows:
1âwphi1
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
TOTAL P 5,185,676.77 11
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes amounting to ₱5,185,676.77 before the
Bureau of Internal Revenue,12 Revenue District Office No. 47-East Makati.13 It found basis from the revised definition14 of Gross Philippine Billings
under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its ‘Gross
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo
ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax Appeals on November 29, 2002.15 The
case was docketed as C.T.A. Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for Review and, hence, the claim for refund.17
It found that Air Canada was engaged in business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it should be
taxed as a resident foreign corporation at the regular rate of 32%.18 Further, according to the Court of Tax Appeals First Division, Air Canada was
deemed to have established a "permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an outlet where sales of [airline] tickets are
made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax Appeals First Division’s Resolution dated April
8, 2005 for lack of merit.22 The First Division held that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it
was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline tickets within the Philippines pursuant to Section
28(A)(1).23
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The appeal was docketed as CTA EB No. 86.25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the First Division.26 The En Banc ruled that Air
Canada is subject to tax as a resident foreign corporation doing business in the Philippines since it sold airline tickets in the Philippines.27 The Court of
Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and accordingly, DISMISSED for lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a general sales agent in the Philippines, is a
resident foreign corporation within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section 28(A)(3). If not, whether an offline
international carrier selling passage documents through a general sales agent can be subject to the regular corporate income tax of 32%30 on taxable
income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of "permanent establishment" under Article V(2)(i)
of the Republic of the Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining allegedly to erroneously paid tax on Gross Philippine Billings
from the third quarter of 2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign corporations provided under Section 28(A)(1)
of the 1997 National Internal Revenue Code does not apply to "international carriers,"31 which are especially classified and taxed under Section
28(A)(3).32 It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does
not render it ipso facto subject to 32% income tax on taxable income as a resident foreign corporation."33 Petitioner argues that to impose the 32%
regular corporate income tax on its income would violate the Philippine government’s covenant under Article VIII of the Republic of the Philippines-
Canada Tax Treaty not to impose a tax higher than 1½% of the carrier’s gross revenue derived from sources within the Philippines.34 It would also
allegedly result in "inequitable tax treatment of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income from services and not income from sales of
personal property.36 Petitioner cites the deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually became the
1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile’s statement,37 to reveal the "legislative intent to treat the revenue
derived from air carriage as income from services, and that the carriage of passenger or cargo as the activity that generates the income."38
Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner claims that its income derived "from services rendered
outside the Philippines [was] not subject to Philippine income taxation."39
Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be considered to have a "permanent
establishment"40 in the Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.41 It points out that Aerotel is an
"independent general sales agent that acts as such for . . . other international airline companies in the ordinary course of its business."42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission for its services.43 Petitioner states that even the Bureau of Internal Revenue—
through VAT Ruling No. 003-04 dated February 14, 2004—has conceded that an offline international air carrier, having no flight operations to and from
the Philippines, is not deemed engaged in business in the Philippines by merely appointing a general sales agent.44 Finally, petitioner maintains that its
"claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax under Section 28 (A)
(1)"45 since it has not been assessed at all by the Bureau of Internal Revenue for any income tax liability.46
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a resident foreign corporation doing business in
the Philippines. Petitioner’s total payment of ₱5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its plane
tickets within the Philippines during the relevant period.47 Respondent further points out that this court in Commissioner of Internal Revenue v.
American Airlines, Inc.,48 which in turn cited the cases involving the British Overseas Airways Corporation and Air India, had already settled that
"foreign airline companies which sold tickets in the Philippines through their local agents . . . [are] considered resident foreign corporations engaged in
trade or business in the country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines by offline international airlines either by themselves or through their agents."50
Respondent further contends that petitioner is not entitled to its claim for refund because the amount of ₱5,185,676.77 it paid as tax from the third
quarter of 2000 to the second quarter of 2001 was still short of the 32% income tax due for the period.51 Petitioner cannot allegedly claim good faith in
its failure to pay the right amount of tax since the National Internal Revenue Code became operative on January 1, 1998 and by 2000, petitioner should
have already been aware of the implications of Section 28(A)(3) and the decided cases of this court’s ruling on the taxability of offline international
carriers selling passage tickets in the Philippines.52
At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline international carrier with no landing rights in the Philippines, is not
liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo
ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the Philippines in a
continuous and uninterrupted flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the definition of resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32%53 tax on its taxable income:
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within 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%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the amendments of the National Internal Revenue Code. All
versions refer to "a foreign corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15, 1939, defined "resident foreign corporation" as
applying to "a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign life insurance
company, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines.56 (Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National Internal Revenue Code. Section 24(b)(2) on
foreign resident corporations was amended, but it still provides that "[a] corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation58 declared British Overseas Airways
Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines
through its local sales agent that sold and issued tickets for the airline company.59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its
peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary
character.["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959
to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to
a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of
their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object
of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a
local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of "doing business" with regard to foreign
corporations. Section 3(d) of the law enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred
eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines which transacts business in its own name
and for its own account" is not considered as "doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that "doing
business" includes "appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office or who has designated or appointed
agents or employees in the Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate
for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board for such authority."64 Each offline carrier
must file with the Civil Aeronautics Board a monthly report containing information on the tickets sold, such as the origin and destination of the
passengers, carriers involved, and commissions received.65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioner’s business. The activities of Aerotel
bring direct receipts or profits to petitioner.66 There is nothing on record to show that Aerotel solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without
the express written consent of [the latter,]"67 and it must perform its functions according to the standards required by petitioner.68 Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period of five years, or
from April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the Philippines. Petitioner’s income from
sale of airline tickets, through Aerotel, is income realized from the pursuit of its business activities in the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal Revenue Code must consider the existence of
an effective tax treaty between the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that Section 28(A)(3)(a) does not categorically
exempt all international air carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule
under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax under
Section 28(A)(1).71
This court in South African Airways declared that the correct interpretation of these provisions is that: "international air carrier[s] maintain[ing] flights to
and from the Philippines . . . shall be taxed at the rate of 2½% of its Gross Philippine Billings[;] while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in the country [like sale of airline tickets] will be taxed at the rate of 32% of
such [taxable] income."72
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double taxation on income and capital, preventing fiscal
evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals."73 Commissioner of
Internal Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate.75
(Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional provision that the Philippines
"adopts the generally accepted principles of international law as part of the law of the land[.]"76 Pacta sunt servanda is a fundamental international law
principle that requires agreeing parties to comply with their treaty obligations in good faith.77
Hence, the application of the provisions of the National Internal Revenue Code must be subject to the provisions of tax treaties entered into by the
Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the binding effects of tax treaties. It dealt with the
issue of "whether the failure to strictly comply with [Revenue Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of the
benefit of a tax treaty."80 Upholding the tax treaty over the administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international
principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties
have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow
of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the
fulfillment of the obligations undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international
agreements. More so, when the RPGermany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not
operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial
of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value
of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the
relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No.
1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and for the government of Canada signed the
Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment" as a "fixed place of business in which the business
of the enterprise is wholly or partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent establishment in the other
Contracting State if under certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person acting in a Contracting State on behalf of an
enterprise of the other Contracting State (other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually exercises in that State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 186885 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be deemed to have a permanent establishment in the
other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the term "dependent" would imply a relationship between the
principal and the agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises comprehensive control and detailed instructions over the
means and results of the activities of the agent.87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines, defines a general sales agent as "a person,
not a bonafide employee of an air carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any air
transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one who sells, provides, furnishes, contracts or
arranges for, such air transportation."88 General sales agents and their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board.89 A permit or authorization issued by the Civil Aeronautics Board is required before a general sales
agent may engage in such an activity.90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the Philippines as
defined under the Republic of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on petitioner and handle reservations,
appointment, and supervision of International Air Transport Associationapproved and petitioner-approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA [Philippines], of traffic documents issued by AC
outside the said territory of the GSA [Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity material provided by AC in accordance with the
reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or public relations inquiries to AC;
....
o) Submission for AC’s approval, of an annual written sales plan on or before a date to be determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a reasonable time in advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise stated in the guidelines, refer all such claims
and complaints to AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own expense and acceptable to [petitioner Air Canada],
adequate and suitable premises, qualified staff, equipment, documentation, facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency."92 "[I]t is the sole employer of its employees and . . . is
responsible for [their] actions . . . or those of any subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner a commission
on sales of transportation plus override commission on flown revenues.94 Aerotel would also be reimbursed "for all authorized expenses supported by
original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting documents, regarding all transactions at, through or in any way
connected with [petitioner Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way."97 Aerotel cannot "accept additional appointments as
General Sales Agent of any other carrier without the prior written consent of [petitioner Air Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without cause upon [no] less than 60 days’ prior notice in
writing[.]"99 In case of breach of any provisions of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which
[petitioner Air Canada] may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control of another entity or merges with or is acquired
or controlled by another person or entity[.]"101 Except with the written consent of petitioner, Aerotel must not acquire a substantial interest in the
ownership, management, or profits of a passenger sales agent affiliated with the International Air Transport Association or a non-affiliated passenger
sales agent nor shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its commercial policy and/or
management decisions.102 Aerotel must also provide petitioner "with a report on any interests held by [it], its owners, directors, officers, employees
and their immediate families in companies and other entities in the aviation industry or . . . industries related to it[.]"103 Petitioner may require that any
interest be divested within a set period of time.104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner without the express written consent of the latter;105
it must act according to the standards required by petitioner;106 "follow the terms and provisions of the [petitioner Air Canada] GSA Manual [and all]
written instructions of [petitioner Air Canada;]"107 and "[i]n the absence of an applicable provision in the Manual or instructions, [Aerotel must] carry
out its functions in accordance with [its own] standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all transportation over [its] services[.]"109 All use of
petitioner’s name, logo, and marks must be with the written consent of petitioner and according to petitioner’s corporate standards and guidelines set
out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by Aerotel are for the account of petitioner,
except in the case of negligence of Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement executed between the parties. It
has the authority or power to conclude contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third party is enforceable against petitioner. While Aerotel maintains a
certain independence and its activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it
must carry out its functions solely for the benefit of petitioner and according to the latter’s Manual and written instructions. Aerotel is required to submit
its annual sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through which petitioner’s airline tickets
are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the "business profits" of an enterprise of a Contracting State is
"taxable only in that State[,] unless the enterprise carries on business in the other Contracting State through a permanent establishment[.]"113 Thus,
income attributable to Aerotel or from business activities effected by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to
the last paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same Treaty, the tax imposed on income derived
from the operation of ships or aircraft in international traffic should not exceed 1½% of gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code on its taxable
income116 from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article VIII of the
Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and existing under the laws of
Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction principle that specific laws prevail over
general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid and effective on that date. On the other hand,
the applicable provisions120 relating to the taxability of resident foreign corporations and the rate of such tax found in the National Internal Revenue
Code became effective on January 1, 1998.121 Ordinarily, the later provision governs over the earlier one.122 In this case, however, the provisions of
the Republic of the Philippines-Canada Tax Treaty are more specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the
Senate.
This provision states the second of two ways through which international obligations become binding. Article II, Section 2 of the Constitution deals with
international obligations that are incorporated, while Article VII, Section 21 deals with international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite prestations have effects equivalent to a statute. Thus,
these specific treaty provisions may amend statutory provisions. Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga omnes. We are also not required to rule in this case
on the effect of international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived by an enterprise of the other Contracting State
from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the
lesser of a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such
profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government of Canada on Air Transport, entered into on January 14,
1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the Philippines and Canada for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft in international traffic.123
Petitioner’s income from sale of ticket for international carriage of passenger is income derived from international operation of aircraft. The sale of
tickets is closely related to the international operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain extent[.]"124 Thus, we are bound
to extend to a Canadian air carrier doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1½% on
business profits derived from sale of international air transportation.
Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its claim for refund of erroneously paid Gross Philippine Billings
tax on the ground that it is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed at
all by the Bureau of Internal Revenue for any income tax liability;125 and (b) internal revenue taxes cannot be the subject of set-off or
compensation,126 citing Republic v. Mambulao Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled that "[i]n an action for the refund of taxes allegedly
erroneously paid, the Court of Tax Appeals may determine whether there are taxes that should have been paid in lieu of the taxes paid."130 The
determination of the proper category of tax that should have been paid is incidental and necessary to resolve the issue of whether a refund should be
granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or other taxes at the first instance. The Court of
Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner’s transactions are subject to capital gains tax,
however, the Court of Tax Appeals was not making an assessment. It was merely determining the proper category of tax that petitioner should have
paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter necessary for the resolution of the principal
issue, which is whether petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are due from petitioner. A claim for tax refund carries
the assumption that the tax returns filed were correct. If the tax return filed was not proper, the correctness of the amount paid and, therefore, the
claim for refund become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid taxes is more properly
liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of its erroneously paid 2½% taxes on its gross
Philippine billings. This court did not immediately grant South African’s claim for refund. This is because although this court found that South African
Airways was not subject to the 2½% tax on its gross Philippine billings, this court also found that it was subject to 32% tax on its taxable income.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the quarterly tax return it filed in 2000 was improper.
Hence, to determine if petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed
not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South African Airways, petitioner’s request for refund can
neither be granted nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the taxpayer’s liability should be computed and
deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the issue of the taxpayer’s entitlement to
refund. The question of tax deficiency is distinct and unrelated to the question of petitioner’s entitlement to refund. Tax deficiencies should be subject to
assessment procedures and the rules of prescription. The court cannot be expected to perform the BIR’s duties whenever it fails to do so either through
neglect or oversight. Neither can court processes be used as a tool to circumvent laws protecting the rights of taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly erroneously paid tax on its Gross Philippine Billings, on the
ground that it was liable instead for the regular 32% tax on its taxable income received from sources within the Philippines. Its determination of
petitioner’s liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner’s entitlement to a tax refund and not for
imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on different circumstances. In both cited
cases,133 the taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the amounts it paid to the government as reforestation
charges from 1947 to 1956, not having been used in the reforestation of the area covered by its license, may be set off or applied to the payment of
forest charges still due and owing from it.134 Rejecting Mambulao’s claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the
trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other. With respect to
the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything to defendant Mambulao Lumber Company. So, it is crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can not be the subject of set-off or
compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. * * *.
(80 C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but
grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers
is not required. * * * If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer’s
claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government will be
thrown into great confusion. (47 Am. Jur. 766–767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation provided under Article 1279 were present.136 In
that case, a portion of Francia’s property in Pasay was expropriated by the national government,137 which did not immediately pay Francia. In the
meantime, he failed to pay the real property tax due on his remaining property to the local government of Pasay, which later on would auction the
property on account of such delinquency.138 He then moved to set aside the auction sale and argued, among others, that his real property tax
delinquency was extinguished by legal compensation on account of his unpaid claim against the national government.139 This court ruled against
Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of
each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting 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.
....
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by
the national government. Moreover, the amount of ₱4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited
with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was
received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the ₱4,116.00 deposited with the bank
but he did not withdraw it. It would have been an easy matter to withdraw ₱2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on Audit141 and Philex Mining Corporation v.
Commissioner of Internal Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because
the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity."144 Rejecting Philex Mining’s assertion that the imposition of surcharge and interest was
unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still had pending claims for VAT
input credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against
the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it
filed against the government. Moreover, Philex’s theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give
rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.145
(Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground that the tax liabilities were off-set
against any alleged claim the taxpayer may have against the government. Such would merely be in keeping with the basic policy on prompt collection of
taxes as the lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax Appeals’ finding of its liability for another tax in lieu of the
Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental motion for reconsideration alleging bringing to
said court’s attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the same year.
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.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that
"(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is
proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or
suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of
erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved. This would necessarily require and entail additional efforts and expenses on the part of the Government, impose
a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true
and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike be given
equal opportunities to avail of remedies under the law to defeat each other’s claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to
determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily
involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore, still applicable
today.
Here, petitioner's 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)(l), the correctness of the return filed by petitioner is now put in
doubt. As such, we cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this court upheld the denial of the claim for refund based on
the Court of Tax Appeals' finding that the taxpayer had, through erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought for erroneously paid Gross Philippine Billings tax
on passenger revenues for the same taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 ½% of its gross revenues amounting to
P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of
the 1997 National Internal Revenue Code [32% of t.axable income, that is, gross income less deductions] will exceed the maximum ceiling of 1 ½% of
gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are
AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. 215427 December 10, 2014
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of the Bureau of Internal Revenue, and
JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority of respondent, Respondents.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and Gaming Corporation (PAGCOR) on September
13, 2013 in the case entitled Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et al.,1 which was
promulgated on March 15, 2011. The Motion for Clarification essentially prays for the clarification of our Decision in the aforesaid case, as well the
issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their employees, agents
and any other persons or entities acting or claiming any right on BIR’s behalf, in the implementation of BIR Revenue Memorandum Circular (RMC) No.
33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a "Motion for Clarification," in the session of the Court En Bancheld on
November 25, 2014, the members thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of Court, given that
petitioner essentially alleges grave abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction in issuing RMC No. 33-2013.
Consequently, a new docket number has been assigned thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant to the
Resolution dated November 25,2014, the pertinent portion of which reads:
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et al.). – The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or Preliminary Injunction Application dated September 6,
2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to payment of the appropriate docket fees; and
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five (5) days from notice hereof. Brion, J., no part
and on leave. Perlas-Bernabe, J., on official leave.
Considering that the parties havefiled their respective pleadings relative to the instant petition, and the appropriate docket fees have been duly paid by
petitioner, this Court considers the instant petition submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition (With Prayer for the Issuance of a Temporary
Restraining Order and/or Preliminary Injunction) seeking the declaration of nullity of Section 12 of Republic Act (R.A.)No. 93373 insofar as it amends
Section 27(C)4 of R.A. No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding petitioner from the enumeration of
government-owned or controlled corporations (GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by petitioner. Its fallo reads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27(c) of the National Internal Revenue Code of
1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations
exempted from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT
is null and void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial reconsideration, but the samewere denied by this Court in a Resolution8 dated
May 31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March 15, 2011 and the Resolution dated May 31,
2011, which clarifies the "Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR), its Contractees and
Licensees." Relevant portions thereof state:
II. INCOME TAX
Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is no longer exempt from corporate income tax as it has
been effectively omitted from the list of government-owned or controlled corporations (GOCCs) that are exempt from income tax. Accordingly,
PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools,
and other related operations, are subject to corporate income tax under the NIRC, as amended. This includes, among others:
a) Income from its casino operations;
b) Income from dollar pit operations;
c) Income from regular bingo operations; and
d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents’ commission income shall
be subject to regular income tax, and consequently, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private operators;
c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCOR’s other income that is not connected with the foregoing operations are likewise subject to corporate income tax under the NIRC, as amended.
PAGCOR’s contractees and licensees are entities duly authorized and licensed by PAGCOR to perform gambling casinos, gaming clubs and other similar
recreation or amusement places, and gaming pools. These contractees and licensees are subject to income tax under the NIRC, as amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent (5%) of the gross revenue or earnings it derives
from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other related
operations as described above.
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax treatment of its income from gaming operations and
other related operations under RMC No. 33-2013. The request was, however, denied by the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, recorded in the Book of Entries of
Judgment.10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation and application of the aforesaid
Decision, and seeking clarification with respect to the following:
1. Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits gaming income, pursuant to its Charter – P.D.
1869, as amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.
2. If it is deemed repealed or amended, whether PAGCOR’s gaming income is subject to both 5% franchise tax and income tax.
3. Whether PAGCOR’s income from operation of related services is subject to both income tax and 5% franchise tax.
4. Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit of third parties with contractual relationship with PAGCOR in
connection with the operation of casinos.11
In our Decision dated March 15, 2011, we have already declared petitioner’s income tax liability in view of the withdrawal of its tax privilege under R.A.
No. 9337. However, we made no distinction as to which income is subject to corporate income tax, considering that the issue raised therein was only
the constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is classified into two: (1) income from its operations conducted
under its Franchise, pursuant to Section 13(2) (b) thereof (income from gaming operations); and (2) income from its operation of necessary and related
services under Section 14(5) thereof (income from other related services). In RMC No. 33-2013, respondent further classified the aforesaid income as
follows:
1. PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming
pools, includes, among others:
(a) Income from its casino operations;
(b) Income from dollar pit operations;
(c) Income from regular bingo operations; and
(d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents’ commission income shall
be subject to regular income tax, and consequently, to withholding tax under existing regulations.
2. Income from "other related operations"includes, but is not limited to:
(a) Income from licensed private casinos covered by authorities to operate issued to private operators;
(b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private operators;
(c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
(d) Income from private poker operations;

(e) Income from junket operations;
(f) Income from SM demo units; and
(g) Income from other necessary and related services, shows and entertainment.12
After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we sustain
petitioner’s contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as amended, while its
income from other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This is
demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation of related services. Accordingly, the income tax
exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to petitioner’sincome from operation of related services. Such income tax
exemption could not have been applicable to petitioner’s income from gaming operations as it is already exempt therefrom under P.D. 1869, as
amended, to wit: SECTION 13. Exemptions. –
xxxx
(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever
nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach
in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation
from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government
authority.13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most sound and
logical interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first place. This is clear
from the wordings of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner from
its operation under the Franchise in lieuof all taxes of any kind or form, as well as fees, charges or leviesof whatever nature, which necessarily include
corporate income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the same is
already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent
(5%) franchise tax. The exemption attached to the income from gaming operations exists independently from the enactment of R.A. No. 8424. To adopt
an assumption otherwise would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted
(then withdrawn) than when it was not granted at all in the first place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated October
27, 1997, the exemption of petitioner from the payment of corporate income tax was due to the acquiescence of the Committee on Ways and Means to
the request of petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax
on its gaming operations when under its Charter, it is already exempted from paying the same.
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be reconciled in
that manner.14
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable upon petitioner, as
follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted under the Franchise, which shall
be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial or national government authority;15 (2) income tax for income realized from other necessary and related services, shows and
entertainment of petitioner.16 With the enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424, petitioner’s tax
liability on income from other related services was merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity oroperation. There is no inconsistency
between the statutes; and in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the tax treatment of petitioner’s income prevails
over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a general law — regardless of their
dates of passage — and the special is to be considered as remaining an exception to the general.17 The rationale is:
Why a special law prevails over a general law has been put by the Court as follows: x x x x
x x x The Legislature consider and make provision for all the circumstances of the particular case. The Legislature having specially considered all of the
facts and circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting a general law
containing provisions repugnant to the provisions of the charter, and without making any mention of its intention to amend or modify the charter,
intended to amend, repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.)18
Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and privileges
already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law.19 However, if no provision or
amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the lawmakers, for
repeal of laws by implication is not favored.20
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioner’s tax exemption of its gaming income, then Section
13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least, should have been mentioned in the
repealing clause of R.A. No. 9337.21 However, the repealing clause never mentioned petitioner’s Charter as one of the laws being repealed. On the
other hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically
provided under Section 24 (a) (b) of R.A. No. 9337, to wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made
subject to the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are contrary to and inconsistent with any
provisions of this Act are hereby repealed, amended or modified accordingly.22
When petitioner’s franchise was extended on June 20, 2007 without revoking or withdrawing itstax exemption, it effectively reinstated and reiterated all
of petitioner’s rights, privileges and authority granted under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and
privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person. Thus, the extension of petitioner’s
franchise under the sameterms and conditions means a continuation of its tax exempt status with respect to its income from gaming operations.
Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the provisions ofP.D. 1869, as amended, a special law, are
considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts thereof, which
are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial construction
which will render the provision thereof operative and effective, as well as harmonious with each other.23
Given that petitioner’s Charter is notdeemed repealed or amended by R.A. No. 9337, petitioner’s income derived from gaming operations is subject only
to the five percent (5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to petitioner’s income from operation of other related
services, the same is subject to income tax only. The five percent (5%) franchise tax finds no application with respect to petitioner’s income from other
related services, inview of the express provision of Section 14(5) of P.D. 1869, as amended, to wit:
Section 14. Other Conditions.
xxxx
(5) Operation of related services. — The Corporation is authorized to operate such necessary and related services, shows and entertainment. Any
income that may be realized from these related services shall not be included as part of the income of the Corporation for the purpose of applying the
franchise tax, but the same shall be considered as a separate income of the Corporation and shall be subject to income tax.24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis therefor.
For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from its operations and licensing of gambling
casinos, gaming clubs and other similar recreation or amusement places, gambling pools) should be interpreted in relation to Section 13(2) of P.D.
1869, which pertains to the income derived from issuing and/or granting the license to operate casinos to PAGCOR’s contractees and licensees, as well
as earnings derived by PAGCOR from its own operations under the Franchise. On the other hand, the second classification of PAGCOR’s income under
RMC No. 33-2013 (i.e., income from other related operations) should be interpreted in relation to Section 14(5) of P.D. 1869, which pertains to income
received by PAGCOR from its contractees and licensees in the latter’s operation of casinos, as well as PAGCOR’s own income from operating necessary
and related services, shows and entertainment.
As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the benefit of third parties with contractual relationship with
petitioner in connection with the operation of casinos, we find no reason to rule upon the same. The resolution of the instant petition is limited to
clarifying the tax treatment of petitioner’s income vis-à-visour Decision dated March 15, 2011. This Decision is not meant to expand our original Decision
by delving into new issues involving petitioner’s contractees and licensees. For one, the latter are not parties to the instant case, and may not therefore
stand to benefit or bear the consequences of this resolution. For another, to answer the fourth issue raised by petitioner relative to its contractees and
licensees would be downright premature and iniquitous as the same would effectively countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of jurisdiction when it issued RMC
No. 33-2013 subjecting both income from gaming operations and other related services to corporate income tax and five percent (5%) franchise
tax.1âwphi1 This unduly expands our Decision dated March 15, 2011 without due process since the imposition creates additional burden upon
petitioner. Such act constitutes an overreach on the part of the respondent, which should be immediately struck down, lest grave injustice results. More,
it is settled that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the
said rule or regulation cannot go beyond the terms and provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No. 8424, by excluding petitioner from the
enumeration of GOCCs exempted from corporate income tax, is valid and constitutional. In addition, we hold that:
1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming operations,
pursuant to P.D. 1869, as amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;
2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and
3. Petitioner's income from other related services is subject to corporate income tax only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013 insofar as it
imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income from other
related services.
WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and desist the implementation of RMC No. 33-2013
insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income
from other related services.
SO ORDERED.
THIRD DIVISION
G.R. No. 212530, August 10, 2016
BLOOMBERRY RESORTS AND HOTELS, INC., Petitioner, v. BUREAU OF INTERNAL REVENUE, REPRESENTED BY COMMISSIONER KIM S. JACINTO-
HENARES, Respondent.
DECISION
PEREZ, J.:
This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules on Court seeking: (a) to annul the issuance by the Commissioner of Internal
Revenue (CIR) of an alleged unlawful governmental regulation, specifically the provision of Revenue Memorandum Circular (RMC) No. 33-20131 dated
17 April 2013 subjectingcontractees and licensees of the Philippine Amusement and Gaming Corporation (PAGCOR) to income tax under the National
Internal Revenue Code (NIRC) of 1997, as amended; and (b) to enjoin respondent CIR from implementing the assailed provision of RMC No. 33-
2013.2chanrobleslaw
The Facts
As narrated in the present petition, the factual antecedents of the case reveal that, on 8 April 2009, PAGCOR granted to petitioner a provisional license
to establish and operate an integrated resort and casino complex at the Entertainment City project site of PAGCOR. Petitioner and its parent company,
Sureste Properties, Inc., own and operate Solaire Resort & Casino. Thus, being one of its licensees, petitioner only pays PAGCOR license fees, in lieu of
all taxes, as contained in its provisional license and consistent with the PAGCOR Charter or Presidential Decree (PD) No. 1869,3 which provides the
exemption from taxes of persons or entities contracting with PAGCOR in casino operations.
However, when Republic Act (R.A.) No. 9337 took effect4, it amended Section 27(C) of the NIRC of 1997, which excluded PAGCOR from the
enumeration of government-owned or controlled corporations (GOCCs) exempt from paying corporate income tax. The enactment of the law led to the
case of PAGCOR v. The Bureau of Internal Revenue, et al.,5 where PAGCOR questioned the validity or constitutionality of R.A. No. 9337 removing its
exemption from paying corporate income tax, and therefore alleging the same to be void for being repugnant to the equal protection and the non-
impairment clauses embodied in the 1987 Philippine Constitution. Subsequently, the Court articulated that Section 1 of RA No. 9337, amending Section
27(C) of the NIRC of 1997, which removed PAGCOR's exemption from corporate income tax, was indeed valid and constitutional.
Consequently, in implementing the aforesaid amendments made by R.A. No. 9337, respondent issued RMC No. 33-2013 dated 17 April 2013 declaring
that PAGCOR, in addition to the five percent (5%) franchise tax of its gross revenue under Section 13(2)(a) of PD No. 1869, is now subject to corporate
income tax under the NIRC of 1997, as amended. In addition, a provision therein states that PAGCOR's contractees and licensees, being entities duly
authorized and licensed by it to perform gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools, are
likewise subject to income tax under the NIRC of 1997, as amended.
Aggrieved, as it is now being considered liable to pay corporate income tax in addition to the 5% franchise tax, petitioner immediately elevated the
matter through a petition for certiorari and prohibition before this Court asserting the following arguments: (i) PD No. 1869, as amended by R.A. No.
9487, is an existing valid law, and expressly and clearly exempts the contractees and licensees of PAGCOR from the payment of all kinds of taxes except
the 5% franchise tax on its gross gaming revenue; (ii) This clear exemption from taxes of PAGCOR's contracting parties under Section 13(2)(b) of PD
No. 1869, as amended by R.A. No. 9487, was not repealed by the deletion of PAGCOR in the list of tax-exempt entities under the NIRC; (iii) Respondent
CIR acted without or in excess of its jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction when she issued the
assailed provision in RMC No. 33-2013 which, in effect, repealed or amended PD No. 1869; and (iv) Respondent CIR, in issuing the assailed provision in
RMC No. 33-2013, will adversely affect an industry which seeks to create income for the government, promote tourism and generate jobs for the Filipino
people.6chanrobleslaw
To rationalize its direct recourse before this Court, petitioner submits the following justification:
chanRoblesvirtualLawlibrary
� (a) What is involved is a pure question of law, i.e. whether or not petitioner is exempted from payment of all taxes, national or local,
except the 5% franchise tax by virtue of Section 13(2)(b) of PD No. 1869, as amended;
� � �
� (b) The rule on exhaustion of administrative remedies is disregarded, among others, when: (i) the administrative action is patently
illegal amounting to lack or excess of jurisdiction; (ii) to require exhaustion of administrative remedies would be unreasonable; and (iii) it would amount
to nullification of a claim;
� � �
� (c) The gaming business funded by private investors under license by PAGCOR is a new industry which involves national interest.
Hence, the inclusion of the assailed provision in RMC No. 33-2013 which implements income taxes on PAGCOR's licensees and operators when an
exemption for such is specifically provided for by PD No. 1869, as amended, being unlawful and unwarranted legislation by the respondent, seriously
affects national interest as it effectively curtails the basis for the investments in the industry and resulting tourist interest and jobs generated by the
industry; and
� � �
� (d) The assailed provision of RMC No. 33-2013 affects not only petitioner or other locators and PAGCOR licensees in Entertainment City,
Para�aque City, but also the rest of private casinos licensed by PAGCOR operating in economic zones. Thus, in order to prevent multiplicity of suits and
to avoid a situation when different local courts issue differing opinions on one question of law, direct recourse to this Court is likewise sought.7
It is the contention of petitioner that although Section 4 of the NIRC of 1997, as amended, gives respondent CIR the power to interpret the provisions
of tax laws through administrative issuances, she cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the
law sought to be applied since administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they
intend to carry out. Since the assailed provision in RMC No. 33-2013 subjecting the contractees and licensees of PAGCOR to income tax under the NIRC
of 1997, as amended, contravenes the provision of the PAGCOR Charter granting tax exemptions to corporations, associations, agencies, or individuals
with whom PAGCOR has any contractual relationship in connection with the operations of the casinos authorized to be conducted under the PAGCOR
Charter, it is petitioner's position that the assailed provision was issued by respondent CIR with grave abuse of discretion amounting to lack or excess of
jurisdiction.
Respondent, in her Comment filed on 18 December 2014,8 counters that there was no grave abuse of discretion on her part when she issued the
subject revenue memorandum circular since it did not alter, modify or amend the intent and meaning of Section 13(2)(b) of PD No. 1869, as amended,
insofar as the imposition is concerned, considering that it merely clarified the taxability of PAGCOR and its contractees and licensees for income tax
purposes as well as other franchise grantees similarly situated under prevailing laws; that prohibition will not lie to restrain a purely administrative act,
nor enjoin acts already done, being a preventive remedy; and that tax exemptions are strictly construed against the taxpayer.
The Issues
Hence, we are now presented with the following issues for our consideration and resolution: (i) whether or not the assailed provision of RMC No. 33-
2013 subjecting the contractees and licensees of PAGCOR to income tax under the NIRC of 1997, as amended, was issued by respondent CIR with
grave abuse of discretion amounting to lack or excess of jurisdiction; and (ii) whether or not said provision is valid or constitutional considering that
Section 13(2)(b) of PD No. 1869, as amended (PAGCOR Charter), grants tax exemptions to such contractees and licensees.
Our Ruling
At the outset, although it is true that direct recourse before this Court is occasionally allowed in exceptional cases without strict observance of the rules
on hierarchy of courts and on exhaustion of administrative remedies, we find the imperious need to first determine whether or not this case falls within
the said exceptions, before we delve into the merits of the instant petition.
We thus find the need to look back at the dispositions rendered in Asia International Auctioneers, Inc., et al. v. Parayno, Jr.,9 wherein we ruled that
revenue memorandum circulars10 are considered administrative rulings issued from time to time by the CIR. It has been explained that these are
actually rulings or opinions of the CIR issued pursuant to her power under Section 411 of the NIRC of 1997, as amended, to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar
purposes. Therefore, it was held that under R.A. No. 1125,12 which was thereafter amended by RA No. 9282,13 such rulings of the CIR (including
revenue memorandum circulars) are appealable to the Court of Tax Appeals (CTA), and not to any other courts.
In the same case, we further declared that "failure to ask the CIR for a reconsideration of the assailed revenue regulations and RMCs is another reason
why a case directly filed before us should be dismissed. It is settled that the premature invocation of the court's intervention is fatal to one's cause of
action. If a remedy within the administrative machinery can still be resorted to by giving the administrative officer every opportunity to decide on a
matter that comes within his jurisdiction, then such remedy must first be exhausted before the court's power of judicial review can be sought. The party
with an administrative remedy must not only initiate the prescribed administrative procedure to obtain relief but also to pursue it to its appropriate
conclusion before seeking judicial intervention in order to give the administrative agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to the court."14chanrobleslaw
Then, in The Philippine American Life and General Insurance Company v. Secretary of Finance,15 we had the occasion to elucidate that the CIR's power
to interpret the provisions of the Tax Code and other tax laws is subject to the review by the Secretary of Finance; and thereafter, the latter's ruling
may be appealed to the CTA, having the technical knowledge over the subject controversies. Also, the Court held that "the power of the CTA includes
that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the [regional trial
court] in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these cases."16 Stated differently, the CTA "can now rule not only on the
propriety of an assessment or tax treatment of a certain transaction, but also on the validity of the revenue regulation or revenue memorandum circular
on which the said assessment is based."17 From the foregoing jurisprudential pronouncements, it would appear that in questioning the validity of the
subject revenue memorandum circular, petitioner should not have resorted directly before this Court considering that it appears to have failed to comply
with the doctrine of exhaustion of administrative remedies and the rule on hierarchy of courts, a clear indication that the case was not yet ripe for
judicial remedy. Notably, however, in addition to the justifiable grounds relied upon by petitioner for its immediate recourse (i.e. pure question of law,
patently illegal act by the BIR, national interest, and prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in order not to
further delay the disposition of the issues at hand, and also to promote the vital interest of substantial justice. To add, in recent years, this Court has
consistently acted on direct actions assailing the validity of various revenue regulations, revenue memorandum circulars, and the likes, issued by the
CIR. The position we now take is more in accord with latest jurisprudence. Upon the exercise of this prerogative, we are ushered into the merits of the
case.
The determination of the submissions of petitioner will have to follow the pilot case of PAGCOR v. The Bureau of Internal Revenue, et al.,18 where this
Court clarified its earlier ruling in G.R. No. 17208719 involving the same parties, and expressed that: (i) Section 1 of RA No. 9337, amending Section
27(C) of the NIRC of 1997, as amended, which excluded PAGCOR from the enumeration of GOCCs exempted from corporate income tax, is valid and
constitutional; (ii) PAGCOR's tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming
operations is not repealed or amended by Section l(c) of R.A. No. 9337; (iii) PAGCOR's income from gaming operations is subject to the 5% franchise
tax only; and (iv) PAGCOR's income from other related services is subject to corporate income tax only.
The Court sitting En Banc expounded on the matter in this wise:
After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we sustain
[PAGCOR's] contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. No. 1869, as amended,
while its income from other related services is subject to corporate income tax pursuant to P.D. No. 1869, as amended, as well as R.A. No. 9337. This is
demonstrable.
First. Under P.D. No. 1869, as amended, [PAGCOR] is subject to income tax only with respect to its operation of related services. Accordingly, the
income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to [PAGCOR's] income from operation of related services.
Such income tax exemption could not have been applicable to [PAGCOR's] income from gaming operations as it is already exempt therefrom under P.D.
No. 1869, as amended, to wit:
SECTION 13. Exemptions. �
XXXX
(2) Income and other taxes. � (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever
authority.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most sound and
logical interpretation because [PAGCOR] could not have been exempted from paying taxes which it was not liable to pay in the first place. This is clear
from the wordings of P.D. No. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by [PAGCOR]
from its operation under the Franchise in lieu of all taxes of any kind or form, as well as fees, charges or levies of whatever nature, which necessarily
include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to [PAGCOR] with respect to its income from gaming operations as the same is
already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent
(5%) franchise tax. The exemption attached to the income from gaming operations exists independently from the enactment of R.A. No. 8424. To adopt
an assumption otherwise would be downright ridiculous, if not deleterious, since [PAGCOR] would be in a worse position if the exemption was granted
(then withdrawn) than when it was not granted at all in the first place.20 (Emphasis supplied)
Furthermore,
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be reconciled in
the manner.
As we see it, there is no conflict between P.D. No. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable upon [PAGCOR],
as follows: (1) a five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted under the Franchise, which
shall be due and payable in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by
any municipal, provincial or national government authority; and (2) income tax for income realized from other necessary and related services, shows
and entertainment of [PAGCOR]. With the enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424, [PAGCOR's] tax
liability on income from other related services was merely reinstated.
It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for each kind of activity or operation. There is no inconsistency
between the statutes; and in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. No. 1869, as amended, which expressly provides the tax treatment of [PAGCOR's] income
prevails over R.A. No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a general law � regardless of
their dates of passage � and the special is to be considered as remaining an exception to the general. x x x
x x x x Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and
privileges already mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law. However, if no provision
or amendment is stated in the franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the lawmakers, for
repeal of laws by implication is not favored.
In this regard, we agree with [PAGCOR] that if the lawmakers had intended to withdraw [PAGCOR's] tax exemption of its gaming income, then Section
13(2)(a) of P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least, should have been mentioned in the
repealing clause of R.A. No. 9337. However, the repealing clause never mentioned [PAGCOR's] Charter as one of the laws being repealed. On the other
hand, the repeal of other special laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically
provided under Section 24(a) (b) of R.A. No. 9337, x x x.
xxxx
When [PAGCOR's] franchise was extended on June 20, 2007 without revoking or withdrawing its tax exemption, it effectively reinstated and reiterated
all of [PAGCOR's] rights, privileges and authority granted under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and
privileges that it wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person. Thus, the extension of [PAGCOR's]
franchise under the same terms and conditions means a continuation of its tax exempt status with respect to its income from gaming operations.
Moreover, all laws, rules and regulations, or parts thereof, which are inconsistent with the provisions of P.D. 1869, as amended, a special law, are
considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. � All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts thereof, which
are inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial construction
which will render the provision thereof operative and effective, as well as harmonious with each other.
Given that [PAGCOR's] Charter is not deemed repealed or amended by R.A. No. 9337, [PAGCOR's] income derived from gaming operations is subject
only to the five percent (5%) franchise tax, in accordance with P.D. 1869, as amended. With respect to [PAGCOR's] income from operation of other
related services, the same is subject to income tax only. The five percent (5%) franchise tax finds no application with respect to [PAGCOR's] income
from other related services, in view of the express provision of Section 14(5) of P.D. No. 1869, as amended, x x x.21 (Emphasis supplied)
The Court through Justice Diosdado M. Peralta, categorically followed what was simply provided under the PAGCOR Charter (PD No. 1869, as amended
by RA No. 9487), by proclaiming that despite amendments to the NIRC of 1997, the said Charter remains in effect. Thus, income derived by PAGCOR
from its gaming operations such as the operation and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places,
gaming pools and related operations is subject only to 5% franchise tax, in lieu of all other taxes, including corporate income tax. The Court concluded
that the CIR committed grave abuse of discretion amounting to lack or excess of jurisdiction when it issued RMC No. 33-2013 subjecting both income
from gaming operations and other related services to corporate income tax and 5% franchise tax considering that it unduly expands the Court's Decision
dated 15 March 2011 without due process, which creates additional burden upon PAGCOR.
Noticeably, however, the High Court in the abovementioned case intentionally did not rule on the issue of whether or not PAGCOR's tax privilege of
paying only the 5% franchise tax in lieu of all other taxes inures to the benefit of third parties with contractual relationship with it in connection with the
operation of casinos, such as petitioner herein. The Court sitting En Bane simply stated that:
The resolution of the instant petition is limited to clarifying the tax treatment of [PAGCOR's] income vis-a-vis our Decision dated March 15, 2011. This
Decision (dated 10 December 2014) is not meant to expand our original Decision (dated 15 March 2011) by delving into new issues involving
[PAGCOR's] contractees and licensees. For one, the latter are not parties to the instant case, and may not therefore stand to benefit or bear the
consequences if this resolution. For another, to answer the fourth issue raised by [PAGCOR] relative to its contractees and licensees would be downright
premature and iniquitous as the same would effectively countenance sidesteps to judicial process.22
Bearing in mind the parties involved and the similarities of the issues submitted in the present case, we are now presented with the prospect of finally
resolving the confusion caused by the amendments introduced by RA No. 9337 to the NIRC of 1997, and the subsequent issuance of RMC No. 33-2013,
affecting the tax regime not only of PAGCOR but also its contractees and licensees under the existing laws and prevailing jurisprudence.
Section 13 of PD No. 1869 evidently states that payment of the 5% franchise tax by PAGCOR and its contractees and licensees exempts them from
payment of any other taxes, including corporate income tax, quoted hereunder for ready reference:
Sec. 13. Exemptions. �
xxxx
(2) Income and other taxes. � (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever
authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any
tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s)
authorized to be conducted under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a
result of essential facilities furnished and/or technical services rendered to the Corporation or operator. (Emphasis and underlining supplied)
As previously recognized, the above-quoted provision providing for the said exemption was neither amended nor repealed by any subsequent laws (i.e.
Section 1 of R.A. No. 9337 which amended Section 27(C) of the NIRC of 1997); thus, it is still in effect. Guided by the doctrinal teachings in resolving
the case at bench, it is without a doubt that, like PAGCOR, its contractees and licensees remain exempted from the payment of corporate income tax
and other taxes since the law is clear that said exemption inures to their benefit.
We adhere to the cardinal rule in statutory construction that when the law is clear and free from any doubt or ambiguity, there is no room for
construction or interpretation. As has been our consistent ruling, where the law speaks in clear and categorical language, there is no occasion for
interpretation; there is only room for application.23chanrobleslaw
As the PAGCOR Charter states in unequivocal terms that exemptions granted for earnings derived from the operations conducted under the franchise
specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom the PAGCOR or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise, so it must be that all contractees and licensees of PAGCOR, upon payment
of the 5% franchise tax, shall likewise be exempted from all other taxes, including corporate income tax realized from the operation of casinos.
For the same reasons that made us conclude in the 10 December 2014 Decision of the Court sitting En Banc in G.R. No. 215427 that PAGCOR is subject
to corporate income tax for "other related services", we find it logical that its contractees and licensees shall likewise pay corporate income tax for
income derived from such "related services."
Simply then, in this case, we adhere to the principle that since the statute is clear and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation. This is the plain meaning rule or verba legis, as expressed in the maxim index animi sermo or speech is the
index of intention.24chanrobleslaw
Plainly, too, upon payment of the 5% franchise tax, petitioner's income from its gaming operations of gambling casinos, gaming clubs and other similar
recreation or amusement places, and gaming pools, defined within the purview of the aforesaid section, is not subject to corporate income tax.
WHEREFORE, the petition is GRANTED. Accordingly, respondent Bureau of Internal Revenue, represented by Commissioner Kim S. Jacinto-Henares is
hereby ORDERED to CEASE AND DESIST from implementing Revenue Memorandum Circular No. 33-2013 insofar as it imposes corporate income tax on
petitioner Bloomberry Resorts and Hotels, Inc.'s income derived from its gaming operations.
SO ORDERED.chanRoblesvirtualLawlibrary
EN BANC
[G.R. No. L-9276. October 23, 1956.]
THE COLLECTOR OF INTERNAL REVENUE, Petitioner, vs. V. G. SINCO EDUCATIONAL CORPORATION, Respondent.
DECISION
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of Tax Appeals which orders the Collector of Internal Revenue to refund to Respondent-Appellee the sum
of P5,364.77 representing income tax paid by said Appellee for the years 1950 and 1951.
In June, 1949, Vicente G. Sinco established and operated an educational institution known as Foundation College of Dumaguete. Sinco would have
continued operating said college were it not for the requirement of the Department of Education that as far as practicable schools and colleges
recognized by the government should be incorporated, and so on September 21, 1951, the V. G. Sinco Educational Institution was organized. This
corporation was non-stock and was capitalized by V. G. Sinco and members of his immediate family. This corporation continued the operations of
Foundation College of Dumaguete. Since its operation, this college derived, by way of tuition fees, the following yearly gross
profits:chanroblesvirtuallawlibrary
Year Gross Receipt
1949 P32,684.70
1950 88,341.80
1951 114,499.35
1952 83,259.04
1953 97,907.18
The investigation conducted by an income tax examiner of the Bureau of Internal Revenue revealed that the college realized a taxable net income for
the year 1949 in the sum of P3,098.06 and for the year 1950 in the sum of P17,038.59. For the years 1951 to 1953, inclusive, the income tax returns of
the college have not as yet been verified but it reported a taxable net profit of P26,868.60 for the year 1951; chan roblesvirtualawlibrarya loss of
P9,129.80 for the year 1952 and a profit of P223.56 for the year 1953. The Collector of Internal Revenue assessed against the college an income tax for
the years 1950 and 1951 in the aggregate sum of P5,364.77, which was paid by the college. Two years thereafter, the corporation commenced an
action in the Court of First Instance of Negros Oriental for the refund of this amount alleging that it is exempt from income tax under section 27 (e) of
the National Internal Revenue Code. Pursuant to the provisions of Republic Act 1125, the case was remanded to the Court of Tax Appeals which, after
due trial, decided the case in favor of the corporation.
Invoking section 27 (e) of the National Internal Revenue Code, the Appellee claims that it is exempt from the payment of the income tax because it is
organized and maintained exclusively for the educational purposes and no part of its net income inures to the benefit of any private individual. On the
other hand, the Appellant maintains that part of the net income accumulated by the Appellee inured to the benefit of V. G. Sinco, president and founder
of the corporation, and therefore the Appellee is not entitled to the exemption prescribed by the law.
In support of his stand, Appellant invokes the yearly statements of operation or balance sheets submitted by the corporation. Thus, in the balance
sheets for the years 1951, 1952 and 1953, there appear the following entries:chanroblesvirtuallawlibrary
1951
LIABILITIES
ACCOUNTS PAYABLE:chanroblesvirtuallawlibrary
Community Publishers, Inc. P20,751.95
Vicente G. Sinco, Personal 7,435.83
TOTAL LIABILITIES P28,187.78
1952
LIABILITIES.
Vicente G. Sinco, Personal 12,669.07
Community Publishers, Inc. 32,135.50

1953
LIABILITIES
Vicente G. Sinco, Personal
Cash Advanced P9,716.36
Accrued Salaries 7,599.71 P17,316.07
Community Publishers, Inc.
Cash Advanced P18,762.68
Printing Account 13,262.72 P32,025.40
Considering the above quoted entries, Appellant claims that a great portion of the net profits realized by the corporation was channeled and redounded
to the personal benefit of V. G. Sinco, who was its founder and president. Another benefit that accrued to Sinco according to Appellant is represented by
the several amounts which appear payable to the Community Publishers, Inc. because, being the biggest stockholder of this entity, the money to be
paid by the Appellee to that entity as appearing in the above quoted entries would redound to the personal benefit of Sinco.
Is it really correct to say that the Appellee is an educational institution in which part of its income inures to the benefit of one of its stockholders as
maintained by Appellant? Considering that this claim is mainly predicated on certain entries appearing in the balance sheets of the corporation for the
years 1950 and 1951, there is need to clarify the purposes for which said entries were made, particularly those referring to the accounts payable to V.
G. Sinco and the Community Publishers Inc.
With regard to this accounts, Dean Sinco made the following clarification:chanroblesvirtuallawlibrary He acted as president of the Foundation College
and as chairman of its Board of Directors; chan roblesvirtualawlibraryin 1949 he served as its teacher for a time; chan roblesvirtualawlibrarythe
accountant of the college suggested that a certain amount be set aside as his salary for purposes of orderly and practical accounting; chan
roblesvirtualawlibrarybut notwithstanding this suggestion, he never collected his salary for which reason it was carried in the books as accrued
expenses. With regard to the account of the Community Publishers, Inc., Sinco said that this is a distinct and separate corporation although he is one of
its stockholders. The account represents payment for services rendered by this entity to the college. These are two different entities and whatever
relation there is between the two is that the former merely extends help to the latter to enable it to comply with the requirements of the law and to fill
its needs for educational purposes. This clarification made by Sinco stand undisputed.
Considering this explanation, it is indeed too sweeping if not unfair to conclude that part of the income of the Appellee as an institution inured to the
benefit of one of its stockholders simply because part of the income was carried in its books as accumulated salaries of its president and teacher. Much
less can it be said that the payments made by the college to the Community Publishers, Inc. redounded to the personal benefit of Sinco simply because
he is one of its stockholders. The fact is that, as it has been established, the Appellee is a non-profit institution and since its organization it has never
distributed any dividend or profit to its stockholders. Of course, part of its income went to the payment of its teachers or professors and to the other
expenses of the college incident to an educational institution but none of the income has ever been channeled to the benefit of any individual
stockholder. The authorities are clear to the effect that whatever payment is made to those who work for a school or college as a remuneration for their
services is not considered as distribution of profit as would make the school one conducted for profit. Thus, in the case of Mayor and Common Council
of Borough of Princeton vs. State Board of Taxes & Assessments, et al., 115 Atl., 342, wherein the principal officer of the school was formerly its owner
and principal and such principal he was given a salary for his services, the court held that school is not conducted for profit merely because moderate
salaries were paid to the principal and to the teachers.
Of course, it is not denied that the Appellee charges tuition fees and other fees for the different services it renders to the students and in fact it is its
only source of income, but such fact does not in itself make the school a profit-making enterprise that would place it beyond the purview of the law. In
this connection, this Court made the following comment:chanroblesvirtuallawlibrary
“Needless to say, every responsible organization must be so run as 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. Upon the other hand, Appellant’s pretense
would limit the benefits of the exemption, under said section 27 (e), to institutions which do not hope, or propose, to have such surplus. Under this
view, the exemption would apply only to schools which are on the verge of bankruptcy, for — unlike the United States, where a substantial number of
institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such as Harvard, the trust fund of which has been
steadily increasing with the years — there are, and there have always been, very few educational enterprises in the Philippines which are supported by
donations, and these organizations usually have a very precarious existence. The final result of Appellant’s contention, if adopted, would be to
discourage the establishment of colleges in the Philippines, which is precisely the opposite of the objective consistently sought by our laws.
“Again, the amount of fees charged by a school, college or university depends, ultimately, upon the policy and a given administration, at a particular
time. It is not conclusive of the purposes of the institution. Otherwise, such purpose would vary with the particular persons in charge of the
administration of the organization.” (Jesus Sacred Heart College vs. Collector of Internal Revenue, 95 Phil., 16)
Another point raised by Appellant to show that Appellee is not entitled to the exemption of the law refers to the use made by it of part of its income in
acquiring additional buildings and equipment which, it is claimed would in the end redound to the benefit of its stockholders. Appellant claims that “By
capitalizing its earnings in the aforementioned manners, the value of the properties of the corporation was enhanced and, therefore, such profits inured
to the benefit of the stockholders or members. The property of the corporation may be sold at any time and the profits thereof divided among the
stockholders or members.”
This claim is too speculative. While the acquisition of additional facilities, may redound to the benefit of the institution itself, it cannot be positively
asserted that the same will redound to the benefit of its stockholders, for no one can predict the financial condition of the institution upon its
dissolution. At any rate, it has been held by several authorities that the mere provision for the distribution of its assets to the stockholders upon
dissolution does not remove the right of an educational institution from tax exemption. Thus, in the case of U. S. vs. Picwick Electric Membership Corp.,
158 F. 2d 272, 277, it was held — “The fact that the members may receive some benefit on dissolution upon distribution of the assets is a contingency
too remote to have any material bearing upon the question where the association is admittedly not a scheme to avoid taxation and its good faith and
honesty or purpose is not challenged.”
With regard to the claim of Appellant that Appellee is not entitled to exemption because it has not complied with the requirement of section 24,
Regulation No. 2 of the Department of Finance, we find correct the following observation of the Court of Tax Appeals:chanroblesvirtuallawlibrary
“And regarding the proof of exemption required by section 24, Regulation No. 2, Department of Finance which, according to the Defendant, is a
condition precedent before an educational institution can avail itself of the exemption under consideration, we understand that it was probably
promulgated for the effective enforcement of the provisions of the Tax Code pursuant to Section 338 of the National Internal Revenue Code. Intended
to relieve the taxpayer of the duty of filing returns and paying the tax, it cannot be said that the failure to observe the requirement called for therein
constitutes a waiver of the right to enjoy the exemption. To hold otherwise would be tantamount to incorporating into our tax laws some legislative
matter by administrative regulation.”
Wherefore, the decision appealed from is affirmed, without pronouncement as to costs.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 195909 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-à-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 to ₱76,063,116.06 for 1998, comprised of
deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 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 ₱1,730,367,965 or
approximately ₱1.73 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 was ₱218,187,498 or 65.20% of its 1998
operating income (i.e., total revenues less operating expenses) of ₱334,642,615. 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 pay
₱57,659,981.19 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 ₱110,000.00 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 ₱5,496,963.54 and
₱778,406.84 or in the sum of ₱6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of ₱6,275,370.38 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 ₱5,496,963.54, 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 ₱63,113,952.79 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.
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 "non-stock" 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 ₱6,275,370.38 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-à-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 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." 48
The 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 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:
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 ₱1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives
approximately ₱1.73 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 ₱1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. 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 ₱1,730,367,965.00
OPERATING EXPENSES
Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00
Household and Property 91,797,622.00
₱1,395,725,350.00
INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00
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 ₱1.73
billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 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 Tomás 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 contestación seria afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los
mismos generalmente van enfermos de buena posición social económica, 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."
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.1âwphi1
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.
SECOND DIVISION
November 9, 2016
G.R. No. 196596
COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent
x-----------------------x
G.R. No. 198841
DE LA SALLE UNIVERSITY INC., Petitioner,

vs.
x-----------------------x
G.R. No. 198941
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.
DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:1
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case
No. 671;3 and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA
En Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case
No. 671 filed by DLSU to also challenge CTA Case No. 7303.
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue officers to examine
the latter's books of accounts and other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior
Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus; (2) value-added tax (VAI) on business income; and (3) documentary
stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment of ₱17,303,001.12, inclusive of surcharge, interest and penalty for
taxable years 2001, 2002 and 2003.7
DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005 a petition for review with the CTA
Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4 (3) of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan transactions of [DLSU] in the amount of
₱1,1681,774.00 is hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from September 30, 2004 until full
payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise agreement between the parties.
SO ORDERED.9
Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision.10 On April 6, 2010, the CTA Division denied the
Commissioner's motion for reconsideration while it held in abeyance the resolution on DLSU's motion for reconsideration.11
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its revenues and assets for
non-educational or commercial purposes removed these items from the exemption coverage under the Constitution.12
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to prove that its rental income was used
actually, directly and exclusively for educational purposes.13 The Commissioner did not promptly object to the formal offer of supplemental evidence
despite notice.14
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of DLSU's tax deficiencies. The dispositive
portion of the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income
tax, VAT and DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic deficiency taxes ... until full payment thereof
pursuant to Section 249(B) of the [National Internal Revenue Code] ... xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge and deficiency interest which have
accrued ... from September 30, 2004 until fully paid.15
Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA Division erred in admitting DLSU's additional
evidence.16
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) on
the following grounds: (1) the entire assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the LOA was valid,
the CTA Division should still have cancelled the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo De Manila
University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA Division erred in finding that a portion of
DLSU's rental income was not proved to have been used actually, directly and exclusively for educational purposes.18
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA Division.19
Tax on rental income
Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA), the CTA En Banc found that DLSU was
able to prove that a portion of the assessed rental income was used actually, directly and exclusively for educational purposes; hence, exempt from
tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence confirming that part of its rental income had indeed been used to pay the loan it
obtained to build the university's Physical Education – Sports Complex.21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by supporting documents to have been
actually, directly and exclusively used for educational purposes, must be subjected to income tax and VAT.22
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan and mortgage documents.23 The CTA En Banc found
that DLSU's DST payments had been remitted to the BIR, evidenced by the stamp on the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU formally offered them only when it moved
for reconsideration of the CTA Division's original decision. Notably, the law creating the CTA provides that proceedings before it shall not be governed
strictly by the technical rules of evidence.26
The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010 decision.27 Thus, she came to this court for
relief through a petition for review on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities to ₱2,554,825.47 inclusive of surcharge.28
On the validity of the Letter of Authority
The issue of the LOA' s validity was raised during trial;29 hence, the issue was deemed properly submitted for decision and reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice of issuing a LOA covering audit of
unverified prior years is prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if the audit
includes more than one taxable period, the other periods or years shall be specifically indicated in the LOA.31
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the assessments for deficiency income
tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid.32
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties, factual settings, bases of assessments, sets of
evidence, and defenses.33
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while DLSU successfully proved that a portion of its rental
income was transmitted and used to pay the loan obtained to fund the construction of the Sports Complex, the rental income from other sources were
not shown to have been actually, directly and exclusively used for educational purposes.34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No. 198941) came to this Court for relief.
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.35 DLSU's operations of canteens and bookstores
within its campus even though exclusively serving the university community do not negate income tax liability.36
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax Code, which states
among others, that the income of whatever kind and character of [a non-stock and non-profit educational institution] from any of [its] properties, real
or personal, or from any of [its] activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed by this
Code.37
The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal Revenue v. YMCA38 to support its
conclusion that revenues however generated are covered by the constitutional exemption, provided that, the revenues will be used for educational
purposes or will be held in reserve for such purposes.39
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but not from income tax on the
rentals earned from property.40 Thus, DLSU's income from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes.41
Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it is not qualified to use the On-Line Electronic DST
Imprinting Machine, which is available only to certain classes of taxpayers under RR No. 9-2000.43
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated submission of supplemental evidence
reopened the case for trial, and worse, DLSU offered the supplemental evidence only after it received the unfavorable CTA Division's original decision.44
In any case, DLSU's submission of supplemental documentary evidence was unnecessary since its rental income was taxable regardless of its
disposition.45
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA issued contrary to RMO No. 43-90 is
void, thus, an assessment issued based on such defective LOA must also be void.46
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the basis of this defective LOA, the
Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and 2003.47 DLSU objects to the CTA En Banc's
conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU follows this format, then any assessment
arising from it must be entirely voided.48
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties, the same set of evidence should be
appreciated and weighed in the same manner.49 The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it did to the pieces of
evidence submitted by Ateneo, also a non-stock, non-profit educational institution.50
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those she raised in her: (1) petition docketed
as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.51
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the petition.52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties.53
On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational institutions is novel to the 1987 Constitution and that
Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax Code is almost an exact replica of Section
26 of the 1977 Tax Code -with the addition of non-stock, non-profit educational institutions to the list of tax-exempt entities; and (3) that the 1977 Tax
Code was promulgated when the 1973 Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational institution under the 1973 Constitution was only for real property tax. Back
then, the special tax treatment on income of private educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes, was expressly and categorically enshrined.55
DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to the Constitution void and without any
force and effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition
made of such income, should be declared without force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes."57
DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption to be granted under Article XIV,
Section 4 (3) of the Constitution, the taxpayer must prove that: (1) it falls under the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes.58 Unlike YMCA, which is not an
educational institution, DLSU is undisputedly a non-stock, non-profit educational institution. It had also submitted evidence to prove that it actually,
directly and exclusively used its income for educational purposes.59
DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax exemption was granted "to incentivize
private educational institutions to share with the State the responsibility of educating the youth."60
Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU' s loan and mortgage transactions had remitted
to the BIR the DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In any case, DLSU argues that it cannot be held liable
for DST owing to the exemption granted under the Constitution.62
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental evidence. Because of the
Commissioner's failure to timely object, she became bound by the results of the submission of such supplemental evidence.63
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this issue in both the administrative and
judicial proceedings.64 That it was asked on cross-examination during the trial does not make it an issue that the CTA could resolve.65 The
Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational institution is only exempt from property tax but not
from tax on the income earned from the property.66
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above.67 In addition, DLSU prays that the Court award attorney's fees in its favor because it
was constrained to unnecessarily retain the services of counsel in this separate petition.68
Issues
Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize as follows:
I. Whether DLSU' s income and revenues proved to have been used actually, directly and exclusively for educational purposes are exempt from duties
and taxes;
II. Whether the entire assessment should be voided because of the defective LOA;
III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and
IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
I. The income, revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and
IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly overlooked certain relevant facts not disputed by the
parties and which, if properly considered, would justify a different conclusion.
The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.
I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the
manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided
by law including restrictions on dividends and provisions for reinvestment. [underscoring and emphasis supplied]
Before fully discussing the merits of the case, we observe that:
First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit educational institutions and (2) proprietary
educational institutions.69
Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock, non-profit educational institution.70
Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the same provision, also imposes certain
conditions to avail of the exemption. We discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.
Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational institutions and proprietary educational institutions.
The tax exemption granted to non-stock, non-profit educational institutions is conditioned only on the actual, direct and exclusive use of their revenues
and assets for educational purposes. While tax exemptions may also be granted to proprietary educational institutions, these exemptions may be
subject to limitations imposed by Congress.
As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational institution is crucial in determining the
nature and extent of the tax exemption granted to non-stock, non-profit educational institutions.
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The relevant text reads:
The following organizations shall not be taxed under this Title [Tax on
Income] in respect to income received by them as such:
xxxx
(H) A non-stock and non-profit educational institution
xxxx
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. [underscoring and emphasis supplied]
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit educational institutions such that the
revenues and income they derived from their assets, or from any of their activities conducted for profit, are taxable even if these revenues and income
are used for educational purposes.
Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit educational institutions?
We answer in the negative.
While the present petition appears to be a case of first impression,71 the Court in the YMCA case had in fact already analyzed and explained the
meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established as a "welfare, educational and
charitable non-profit corporation," was subject to income tax under the Tax Code and the Constitution.72
The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article VI, Section 28 (3) of the Constitution,73
the YMCA is not tax-exempt per se; " what is exempted is not the institution itself... those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational purposes."74
The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of then Section 27 (now Section 30) of the Tax
Code, which mandates that the income of exempt organizations from any of their properties, real or personal, are subject to the same tax imposed by
the Tax Code, regardless of how that income is used. The Court ruled that the last paragraph of Section 27 unequivocally subjects to tax the rent
income of the YMCA from its property.75
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted under Article XIV, Section 4 (3) of the
Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding that the term educational institution, when used
in laws granting tax exemptions, refers to the school system (synonymous with formal education); it includes a college or an educational establishment;
it refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system.76
The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under
the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.77
We now adopt YMCA as precedent and hold that:
1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock, non-profit educational institutions, provided,
that the non-stock, non-profit educational institutions prove that its assets and revenues are used actually, directly and exclusively for educational
purposes.
2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not subject to limitations imposed by law.
The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches, parsonages or convents, mosques, and
non-profit cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll revenues and assets ... used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986 Constitutional Commission79 to provide
broader tax privilege to non-stock, non-profit educational institutions as recognition of their role in assisting the State provide a public good. The tax
exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended to all
revenues and assets of non-stock, non-profit educational institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues and income must have also
been sourced from educational activities or activities related to the purposes of an educational institution. The phrase all revenues is unqualified by any
reference to the source of revenues. Thus, so long as the revenues and income are used actually, directly and exclusively for educational purposes, then
said revenues and income shall be exempt from taxes and duties.81
We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.
Revenues consist of the amounts earned by a person or entity from the conduct of business operations.82 It may refer to the sale of goods, rendition of
services, or the return of an investment. Revenue is a component of the tax base in income tax,83 VAT,84 and local business tax (LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.86 It may refer to real estate, cash deposit in a bank,
investment in the stocks of a corporation, inventory of goods, or any property from which the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real property is a component of the tax base in real property tax (RPT).87 Also, the landed cost of
imported goods is a component of the tax base in VAT on importation88 and tariff duties.89
Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it
shall be exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.
To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which the entity shall be exempted from
shall depend on whether the item is an item of revenue or asset.
To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion is not actually, directly and exclusively
used for educational purposes, even if the bookstore or canteen caters only to university students, faculty and staff.
The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the
test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. We also held that the exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.
In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from the property tax exemption granted
under the Constitution.91 There is no exemption because the asset is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not incidental to and reasonably necessary for the accomplishment of the main purpose of a university, which is
to educate its students.
However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from the lease of its school building, such
revenues shall be exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the revenues were earned, but
on the actual, direct and exclusive use of the revenues for educational purposes.
Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and exclusively for educational purposes
are not exempt from duties and taxes. To avail of the exemption, the taxpayer must factually prove that it used actually, directly and exclusively for
educational purposes the revenues or income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that must be viewed and treated
separately. But so long as the assets or revenues are used actually, directly and exclusively for educational purposes, they are exempt from duties and
taxes.
The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.
That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational institutions cannot be doubted. As
discussed, the privilege granted to the former is conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations imposed by law.
We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit educational institutions compared with
their proprietary counterparts.
While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30 (Exemptions from Tax on Corporations) of the
Tax Code, a proprietary educational institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations).
To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions shall not be taxed on income received by
them as such.
Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are nonprofit shall pay a tax of ten percent (10%) on their
taxable income .. . 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 ... [the regular corporate income tax of 30%] shall be imposed on the entire taxable income ... "92
By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of 10% corporate income tax. The reduced rate is
applicable only if: (1) the proprietary educational institution is nonprofit and (2) its gross income from unrelated trade, business or activity does not
exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-profit educational institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution insofar as it subjects
to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purpose. We
make this declaration in the exercise of and consistent with our duty93 to uphold the primacy of the Constitution.94
Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not cover the other exempt organizations
under Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly and exclusively for educational
purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.
DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and insists that the entire LOA should be voided for being
contrary to RMO No. 43-90, which provides that if tax audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to examine the books of account and other accounting records of the taxpayer in order
to determine the taxpayer's correct internal revenue liabilities95 and for the purpose of collecting the correct amount of tax,96 in accordance with
Section 5 of the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take testimony of persons. The LOA
commences the audit process97 and informs the taxpayer that it is under audit for possible deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently, disregard the BIR and the CTA's findings of
tax deficiency for taxable year 2003?
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of issuing [LO As] covering audit of unverified
prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the [LOA].98
What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO 43-90 does not say that a LOA which
contains unverified prior years is void. It merely prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one taxable year, the BIR must specify each taxable year or
taxable period on separate LOAs.
Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer of the extent of the audit and the
scope of the revenue officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting records
from random unverified years, which may include documents from as far back as ten years in cases of fraud audit.99
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA does not strictly comply with RMO 43-90
because it includes unverified prior years. This does not mean, however, that the entire LOA is void.
As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is specified in the LOA. DLSU was fully apprised that
it was being audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and 2002 are void for having been unspecified on
separate LOAs as required under RMO No. 43-90.
Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA Division, and thus, should not have been
entertained on appeal, is not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.100 DLSU then raised the issue in its memorandum
and motion for partial reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banc could, as it did,
pass upon the validity of the LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of the LOA at the CTA En Banc but she
chose not to file her comment and memorandum despite notice.102
III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA Division.103 The CTA Division
admitted the supplemental evidence, which proved that a portion of DLSU's rental income was used actually, directly and exclusively for educational
purposes. Consequently, the CTA Division reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing grounds, to wit: (1) the Commissioner failed
to timely object to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard such evidence.104
The Court has held that if a party desires the court to reject the evidence offered, it must so state in the form of a timely objection and it cannot raise
the objection to the evidence for the first time on appeal.105 Because of a party's failure to timely object, the evidence offered becomes part of the
evidence in the case. As a consequence, all the parties are considered bound by any outcome arising from the offer of evidence properly presented.106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite notice.107 The Commissioner objected to the
admission of the supplemental evidence only when the case was on appeal to the CTA En Banc. By the time the Commissioner raised her objection, it
was too late; the formal offer, admission and evaluation of the supplemental evidence were all fait accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency of the supplemental evidence
admitted, she was bound by the outcome of the CTA Division's assessment of the evidence.108
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the formal offer of supplemental evidence,
without prompt objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for reconsideration.1âwphi1
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its motion for reconsideration with the CT A its Final
Adjustment Return. The Commissioner, as in the present case, did not oppose the taxpayer's motion for reconsideration and the admission of the Final
Adjustment Return.110 We thus admitted and gave weight to the Final Adjustment Return although it was only submitted upon motion for
reconsideration.
We held that while it is true that strict procedural rules generally frown upon the submission of documents after the trial, the law creating the CTA
specifically provides that proceedings before it shall not be governed strictly by the technical rules of evidence111 and that the paramount consideration
remains the ascertainment of truth. We ruled that procedural rules should not bar courts from considering undisputed facts to arrive at a just
determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of Internal Revenue113 and
Commissioner of Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the supplemental supporting document only
upon filing their motions for reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the technical rules of evidence in the present tax
assessment case. If anything, the liberal application of the rules assumes greater force and significance in the case of a taxpayer who claims a
constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of excess tax payments based on the Tax Code,115 DLSU
is claiming tax exemption based on the Constitution. If liberality is afforded to taxpayers who paid more than they should have under a statute, then
with more reason that we should allow a taxpayer to prove its exemption from tax based on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the Commissioner failed to promptly object, but more
so because the strict application of the technical rules of evidence may defeat the intent of the Constitution.
IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its function of being dedicated
exclusively to the resolution of tax problems, has developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.116 We thus accord the findings of fact by the CTA with the highest respect. These findings of facts can only be disturbed on appeal if they
are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the CTA. In the absence of any clear and
convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect.117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly and exclusively for educational
purposes a portion of its assessed income and that it had remitted the DST payments though an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that DLSU successfully proved that it used
actually, directly and exclusively for educational purposes a portion of its rental income.
The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the supplemental evidence, which consisted of statement
of receipts, statement of disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed ₱93.86 Million,119 which was used to build the university's Sports Complex. Based on these pieces of
evidence, the CTA found that DLSU' s rental income from its concessionaires were indeed transmitted and used for the payment of this loan. The CTA
held that the degree of preponderance of evidence was sufficiently met to prove actual, direct and exclusive use for educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to a fund (CF-CPA Account),120 intended for
the university's capital projects, was not proved to have been used actually, directly and exclusively for educational purposes. The CTA observed that
"[DLSU] ... failed to fully account for and substantiate all the disbursements from the [fund]." Thus, the CTA "cannot ascertain whether rental income
from the [other] concessionaires was indeed used for educational purposes."121
To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who reviewed, audited and examined the
voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of receipts, invoices, vouchers and other long
accounts; (b) reproduction of, and comparison of such reproduction with, and certification that the same are faithful copies of original documents, and
pre-marking of documentary exhibits consisting of voluminous documents; (c) preparation of schedules or summaries containing a chronological listing
of the numbers, dates and amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes paid; (d) making findings
as to compliance with substantiation requirements under pertinent tax laws, regulations and jurisprudence; (e) submission of a formal report with
certification of authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on such formal report; and (g)
performing such other functions as the CTA may direct.122
Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only the portion of the rental income pertaining
to the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated disbursements must be subjected to income tax and VAT.123
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002 due to the defective LOA.124
The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the evidence on record, which we reiterate,
were examined and verified by the Independent CPA. Thus, we see no persuasive reason to deviate from these factual findings.
However, while we generally respect the factual findings of the CTA, it does not mean that we are bound by its conclusions. In the present case, we do
not agree with the method used by the CTA to arrive at DLSU' s unsubstantiated rental income (i.e., income not proved to have been actually, directly
and exclusively used for educational purposes).
To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year 2003.125 DLSU earned this income from leasing a portion
of its premises to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore.126
To prove that its rental income was used for educational purposes, DLSU identified the transactions where the rental income was expended, viz.: 1)
₱4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00 transferred to the CF-CPA Account was used actually, directly
and exclusively for educational purposes. According to the Independent CPA' findings, DLSU was able to substantiate disbursements from the CF-CPA
Account amounting to ₱6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of the ₱l0,610,379.00 rental income, ₱4,841,066.65 was
unsubstantiated, and thus, subject to income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%.130 The CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO Bookstore, which were transmitted to
the CF-CPA Account, petitioner again failed to fully account for and substantiate all the disbursements from the CF-CPA Account; thus failing to prove
that the rental income derived therein were actually, directly and exclusively used for educational purposes. Likewise, the findings of the Court-
Commissioned Independent CPA show that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to ₱6,259,078.30 only. Hence, this
portion of the rental income, being the substantiated disbursements of the CF-CPA Account, was considered by the Special First Division as used
actually, directly and exclusively for educational purposes. Since for fiscal year 2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-
25-C"), and the total disbursements per subsidiary ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for
fiscal year 2003 is 26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived at by
multiplying the ratio of 26.68% with the total rent income added to and used in the CF-CPA Account in the amount of ₱6,602,655.00 is
₱1,761,588.35.131 (emphasis supplied)
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports Complex (₱4,007,724.00) from the rental income (₱10,610,379.00) earned
from the abovementioned concessionaries. The difference (₱6,602,655.00) was the portion claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (₱1,761,308.37) from the ₱6,602,655.00 to arrive at the
supposed unsubstantiated portion of the rental income (₱4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was derived by multiplying the rental income claimed to have been added to
the CF-CPA Account (₱6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total disbursements (₱23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA Account as found by the Independent CPA
(₱6,259,078.30) by the total disbursements (₱23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the constitutional grant of tax exemption to non-stock, non-profit
educational institutions. The CTA's reasoning is flawed because it required DLSU to substantiate an amount that is greater than the rental income
deposited in the CF-CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which amounted to a total of ₱10.61
million)135 were used for educational purposes. This amount was divided into two parts: (a) the ₱4.0l million, which was used to pay the loan obtained
for the construction of the Sports Complex; and (b) the ₱6.60 million,136 which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46 million.137 These figures, read in light of the constitutional
exemption, raises the question: does DLSU claim that the whole total CF-CPA disbursement of ₱23.46 million is tax-exempt so that it is required to
prove that all these disbursements had been made for educational purposes?
The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million had been for educational purposes and should thus be
tax-exempt; DLSU only claimed ₱10.61 million for tax-exemption and should thus be required to prove that this amount had been used as claimed.
Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed by the Independent CPA. The amount in issue is
therefore the balance of ₱6.60 million which was transferred to the CF-CPA which in turn made disbursements of ₱23.46 million for various general
purposes, among them the ₱6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in year 2003 in the amount ₱6.26 million.
Based on these given figures, the CT A concluded that the expenses for educational purposes that had been coursed through the CF-CPA should be
prorated so that only the portion that ₱6.26 million bears to the total CF-CPA disbursements should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that revenues actually and directly used for educational purposes should be
tax-exempt. As already mentioned above, DLSU is not claiming that the whole ₱23.46 million CF-CPA disbursement had been used for educational
purposes; it only claims that ₱6.60 million transferred to CF-CPA had been used for educational purposes. This was what DLSU needed to prove to have
actually and directly used for educational purposes.
That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital projects) lends peculiarity to the facts of this case,
but does not detract from the fact that the deposited funds were DLSU revenue funds that had been confirmed and proven to have been actually and
directly used for educational purposes via the CF-CPA. That the CF-CPA might have had other sources of funding is irrelevant because the assessment in
the present case pertains only to the rental income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA funds used for
educational purposes should not be prorated as part of its total CF-CPA disbursements for purposes of crediting to DLSU is also logical because no claim
whatsoever had been made that the totality of the CF-CPA disbursements had been for educational purposes. No prorating is necessary; to state the
obvious, exemption is based on actual and direct use and this DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and what it has proven. In more
concrete terms, DLSU only had to prove that its rental income for taxable year 2003 (₱10,610,379.00) was used for educational purposes. Hence, while
the total disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU only had to substantiate its Pl0.6 million rental income, part of
which was the ₱6,602,655.00 transferred to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have been used for
educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:
CTA
Decision138
Revised
Rental income
10,610,379.00 10,610,379.00
Less: Rent income used in construction of the Sports Complex 4,007,724.00 4,007,724.00
Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00
Less: Substantiated portion of CF-CPA disbursements 1,761,588.35 6,259,078.30
Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70
On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did with the evidence submitted by Ateneo in another
separate case, the CTA explained that the issue in the Ateneo case was not the same as the issue in the present case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under certain BIR and Department of Finance
issuances139 that required the educational institution to own and operate the canteens, or other commercial enterprises within its campus, as condition
for tax exemption. The CTA held that the Constitution does not require the educational institution to own or operate these commercial establishments to
avail of the exemption.140
Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of evidence differently. The CTA
likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."141
DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar, if not stronger sets of evidence, as
Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the evidence supporting their respective claims
for tax exemption would necessarily differ because their attendant issues and facts differ.
To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were assessed varied. The amount of tax
assessment also varied. The amount of income proven to have been used for educational purposes also varied because the amount substantiated
varied.142 Thus, the amount of tax assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand, the BIR
assessed Ateneo a total deficiency tax of ₱8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo was not.143
Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and exclusively for educational purposes by
submitting similar evidence, e.g., the testimony of their employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income and revenues had indeed been
used for educational purposes.
The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced in court. Indeed, the Independent
CPA testified that some disbursements had not been proven to have been used actually, directly and exclusively for educational purposes.144
The final nail on the question of evidence is DLSU's own admission that the original of these documents had not in fact been produced before the CTA
although it claimed that there was no bad faith on its part.145 To our mind, this admission is a good indicator of how the Ateneo and the DLSU cases
varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised
Rules on Evidence, that the contents of the missing supporting documents were proven by its recital in some other authentic documents on record,146
can no longer be entertained at this late stage of the proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on DLSU'
s assertion of lack of bad faith. Besides, it is not our duty to go over these documents to test the truthfulness of their contents, this Court not being a
trier of facts.
Second, DLSU misunderstands the concept of uniformity of taxation.
Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.147 A tax is
uniform when it operates with the same force and effect in every place where the subject of it is found.148 The concept requires that all subjects of
taxation similarly situated should be treated alike and placed in equal footing.149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their income proved to have been used actually,
directly and exclusively for educational purposes were exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if they
indeed used their revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used actually, directly and exclusively for
educational purposes its income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a different result happened
because it failed to fully prove that it used actually, directly and exclusively for educational purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation similarly situated are treated in literally
the same way in all and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that
the CTA or this Court would similarly decide every case for (or against) both universities. Success in tax litigation, like in any other litigation, depends to
a large extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted through its bank's On-Line Electronic
DST Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this method of payment because an educational institution is
excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making, signing, issuing, accepting, or
transferring the same.150 The Tax Code provides that whenever one party to the document enjoys exemption from DST, the other party not exempt
from DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the document, such that the payment and
compliance by one shall mean the full settlement of the DST due on the document.
In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to DST.151 For the purpose of
showing that the DST on the loan agreement has been paid, DLSU presented its agreements bearing the imprint showing that DST on the document
has been paid by the bank, its counterparty. The imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be further assessed for
deficiency DST on the said documents.
Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST through the On-Line Electronic DST
Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line Electronic DST
Imprinting Machine but the bank that handled its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers that
can use the On-Line Electronic DST Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the
payment of the assessed DST deficiency, except for the unpaid balance of
₱13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No. 196596 and AFFIRM the December 10,
2010 decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total amount of
deficiency tax liabilities of De La Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the Commissioner of Internal Revenue in G.R. No.
198941 and thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 671,
with the MODIFICATION that the base for the deficiency income tax and VAT for taxable year 2003 is ₱343,576.70.
SO ORDERED.
EN BANC
G.R. No. L-12719 May 31, 1962
THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.

V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and
demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly
due from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the
Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar,
operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no
prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y
entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-
laws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after
paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells
wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of
the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to
defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real properties,
the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-
7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums:
—
As percentage tax on its gross receipts

during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00
The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for
review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections
182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the
periods mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay
in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183
provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the
business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment
parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of
their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by
mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper
and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive,
and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or
livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959,
giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959,
the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and
entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered
only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail
from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making
enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental
to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus
Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct.
23, 1956).1äwphï1.ñët
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The facts
that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as
stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the
business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced,
the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to
distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case
at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly
speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the
contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable
for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed without costs.
SECOND DIVISION
March 8, 2017
G.R. No. 215383
HON. KIM S. JACINTO-HENARES, in her official capacity as COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Petitioner
vs
ST. PAUL COLLEGE OF MAKATI, Respondent
RESOLUTION
CARPIO, J.:
The Case
This petition for review1 assails the Decision dated 25 July 20142 and Joint Resolution dated 29 October 20143 of the Regional Trial Court, Branch 143,
Makati City (RTC), in Civil Case No. 13-1405, declaring Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional.
The Facts
On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then Commissioner of Internal Revenue (CIR), issued RMO No. 20-2013,
"Prescribing the Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations
under Section 30 of the National Internal Revenue Code of 1997, as Amended."
On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, non-profit educational institution organized and existing under
Philippine laws, filed a Civil Action to Declare Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with Prayer for Issuance of Temporary
Restraining Order and Writ of Preliminary Injunction4 before the RTC. SPCM alleged that "RMO No. 20-2013 imposes as a prerequisite to the enjoyment
by non-stock, non-profit educational institutions of the privilege of tax exemption under Sec. 4(3) of Article XIV of the Constitution both a registration
and approval requirement, i.e., that they submit an application for tax exemption to the BIR subject to approval by CIR in the form of a Tax[]Exemption
Ruling (TER) which is valid for a period of [three] years and subject to renewal."5 According to SPCM, RMO No. 20-2013 adds a prerequisite to the
requirement under Department of Finance Order No. 137-87,6 and makes failure to file an annual information return a ground for a non-stock, nonprofit
educational institution to "automatically lose its income tax-exempt status."7
In a Resolution dated 27 December 2013,8 the RTC issued a temporary restraining order against the implementation of RMO No. 20- 2013. It found
that failure of SPCM to comply with RMO No. 20-2013 would necessarily result to losing its tax-exempt status and cause irreparable injury.
In a Resolution dated 22 January 2014,9 the RTC granted the writ of preliminary injunction after finding that RMO No. 20-2013 appears to divest non-
stock, non-profit educational institutions of their tax exemption privilege. Thereafter, the RTC denied the CIR's motion for reconsideration. On 29 April
2014, SPCM filed a Motion for Judgment on the Pleadings under Rule 34 of the Rules of Court.
The Ruling of the RTC
In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and declared RMO No. 20-2013 unconstitutional.1âwphi1 It held that "by imposing the
x x x [prerequisites alleged by SPCM,] and if not complied with by nonstock, non-profit educational institutions, [RMO No. 20-2013 serves] as diminution
of the constitutional privilege, which even Congress cannot diminish by legislation, and thus more so by the [CIR] who merely exercise[s] quasi-
legislative function."10
The dispositive portion of the Decision reads:
WHEREFORE, in view of all the foregoing, the Court hereby declares BIR RMO No. 20-2013 as UNCONSTITUTIONAL for being violative of Article XIV,
Section 4, paragraph 3. Consequently, all Revenue Memorandum Orders subsequently issued to implement BIR RMO No. 20-2013 are declared null and
void.
The writ of preliminary injunction issued on 03 February 2014 is hereby made permanent.
SO ORDERED.11
On 18 September 2014, the CIR issued RMO No. 34-2014,12 which clarified certain provisions of RMO No. 20-2013, as amended by RMO No. 28-
2013.13
In a Joint Resolution dated 29 October 2014, the RTC denied the CIR's motion for reconsideration, to wit:
WHEREFORE, viewed in the light of the foregoing premises, the Motion for Reconsideration filed by the respondent is hereby DENIED for lack of merit.
Meanwhile, this Court clarifies that the phrase "Revenue Memorandum Order" referred to in the second sentence of its decision dated July 25, 2014
refers to "issuance/s" of the respondent which tends to implement RMO 20-2013 for if it is otherwise, said decision would be useless and would be
rendered nugatory.
SO ORDERED.14
Hence, this present petition.
The Issues
The CIR raises the following issues for resolution:
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO [NO.] 20-2013 IMPOSES A PREREQUISITE BEFORE A NONSTOCK, NON-PROFIT
EDUCATIONAL INSTITUTION MAY AVAIL OF THE TAX EXEMPTION UNDER SECTION 4(3), ARTICLE XIV OF THE CONSTITUTION.
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO NO. 20-2013 ADDS TO THE REQUIREMENT UNDER DEPARTMENT OF FINANCE
ORDER NO. 137-87.15
The Ruline of the Court
We deny the petition on the ground of mootness.
We take judicial notice that on 25 July 2016, the present CIR Caesar R. Dulay issued RMO No. 44-2016, which provides that:
SUBJECT: Amending Revenue Memorandum Order No. 20- 2013, as amended (Prescribing the Policies and Guidelines in the Issuance of Tax Exemption
Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations under Section 30 of the National Internal Revenue Code of 1997, as Amended)
In line with the Bureau's commitment to put in proper context the nature and tax status of non-profit, non-stock educational institutions, this Order is
being issued to exclude non-stock, non-profit educational institutions from the coverage of Revenue Memorandum Order No. 20-2013, as amended.
SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-stock, non-profit educational institutions is directly conferred by paragraph 3,
Section 4, Article XIV of the 1987 Constitution, the pertinent portion of which reads:
"All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively (or educational purposes shall be exempt
from taxes and duties."
This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended, which provides as follows:
"Sec. 30. Exempt from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as
such:
xxx xxx xxx
(H) A non-stock and non-profit educational institution; x x x."
It is clear and unmistakable from the aforequoted constitutional provision that non-stock, non-profit educational institutions are constitutionally exempt
from tax on all revenues derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational
purposes. This constitutional exemption gives the non-stock, non-profit educational institutions a distinct character. And for the constitutional exemption
to be enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are only two requisites: (1) The school must be non-stock and non-
profit; and (2) The income is actually, directly and exclusively used for educational purposes. There are no other conditions and limitations.
In this light, the constitutional conferral of tax exemption upon non-stock and non-profit educational institutions should not be implemented or
interpreted in such a manner that will defeat or diminish the intent and language of the Constitution.
SECTION 2. Application for Tax Exemption. --- Non-stock, nonprofit educational institutions shall file their respective Applications for Tax Exemption with
the Office of the Assistant Commissioner, Legal Service, Attention: Law Division.
SECTION 3. Documentary Requirements. --- The non-stock, nonprofit educational institution shall submit the following documents:
a. Original copy of the application letter for issuance of Tax Exemption Ruling;
b. Certified true copy of the Certificate of Good Standing issued by the Securities and Exchange Commission;
c. Original copy of the Certification under Oath of the Treasurer as to the amount of the income, compensation, salaries or any emoluments paid to its
trustees, officers and other executive officers;
d. Certified true copy of the Financial Statements of the corporation for the last three (3) years;
e. Certified true copy of government recognition/permit/accreditation to operate as an educational institution issued by the Commission on Higher
Education (CHED), Department of Education (DepEd), or Technical Education and Skills Development Authority (TESDA); Provided, that if the
government recognition/permit/accreditation to operate as an educational institution was issued five (5) years prior to the application for tax exemption,
an original copy of a current Certificate of Operation/Good Standing, or other equivalent document issued by the appropriate government agency (i.e.,
CHED, DepEd, or TESDA) shall be submitted as proof that the non-stock and non-profit education is currently operating as such; and
f. Original copy of the Certificate of utilization of annual revenues and assets by the Treasurer or his equivalent of the non-stock and nonprofit
educational institution.
SECTION 4. Request for Additional Documents. --- In the course of review of the application for tax exemption, the Bureau may require additional
information or documents as the circumstances may warrant.
SECTION 5. Validity of the Tax Exemption Ruling. --- Tax Exemption Rulings or Certificates of Tax Exemption of non-stock, nonprofit educational
institutions shall remain valid and effective, unless recalled for valid grounds. They are not required to renew or revalidate the Tax exemption rulings
previously issued to them.
The Tax Exemption Ruling shall be subject to revocation if there are material changes in the character, purpose or method of operation of the
corporation which are inconsistent with the basis for its income tax exemption.
SECTION 6. Transitory Provisions. --- To update the records of the Bureau and for purposes of a better system of monitoring, non-stock, nonprofit
educational institutions with Tax Exemption Rulings or Certificates of Exemption issued prior to June 30, 2012 are required to apply for new Tax
Exemption Rulings.
SECTION 7. Repealing Clause. --- Any revenue issuance which is inconsistent with this Order is deemed revoked, repealed, or modified accordingly.
SECTION 8. Effectivity. --- This Order shall take effect immediately. (Emphases supplied)
A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening events, so that an adjudication of the case or
a declaration on the issue would be of no practical value or use.16 Courts generally decline jurisdiction over such case or dismiss it on the ground of
mootness.17
With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this petition moot and academic, and subject to
denial.1âwphi1 The CIR, in her petition, assails the RTC Decision finding RMO No. 20-2013 unconstitutional because it violated the non-stock, non-profit
educational institutions' tax exemption privilege under the Constitution. However, subsequently, RMO No. 44-2016 clarified that non-stock, nonprofit
educational institutions are excluded from the coverage of RMO No. 20-2013. Consequently, the RTC Decision no longer stands, and there is no longer
any practical value in resolving the issues raised in this petition.
WHEREFORE, we DENY the petition on the ground of mootness. We SET ASIDE the Decision dated 25 July 2014 and Joint Resolution dated 29 October
2014 of the Regional Trial Court, Branch 143, Makati City, declaring Revenue Memorandum Order No. 20-2013 unconstitutional. The writ of preliminary
injunction is superseded by this Resolution.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. 198756 January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,

vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion worth of 10-year zero-coupon treasury bonds
issued by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by the
Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being
deposit substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to
withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued by BIR of similar tenor and import, for being
unconstitutional and for having been issued without jurisdiction or with grave abuse of discretion amounting to lack or· excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT from the payment of the face value of the Government
Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining Respondents, particularly the BIR and the
BTr, from withholding or collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well
asother related rulings issued by the BIR of similar tenor and import, pending the resolution by [the court] of the merits of [the] Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury
Certificates (T-notes).6 The T-notes would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a
premium to investors as the PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund (Hanapbuhay®
Fund) to finance meritorious activities and projects of accredited non-government organizations (NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds were also presented by banks and
financial institutions, such as First Metro Investment Corporation (proposal dated March 1, 2001),9 International Exchange Bank (proposal dated July
27, 2000),10 Security Bank Corporation and SB Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc.
(proposal dated August 25, 1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest
income or discount earned on the proposed zerocoupon bonds would be subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep discount), with the face value repaid at the time of
maturity.14 It does not make periodic interest payments, or have socalled "coupons," hence the term zero-coupon bond.15 However, the discount to
face value constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on
the tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue René G. Bañez confirmed
that the PEACe Bonds would not be classified as deposit substitutes and would not be subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20) or more individuals or corporate lenders at
any one time. In the light of your representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be
considered as "deposit substitutes" falling within the purview of the above definition. Hence, the withholding tax on deposit substitutes will not apply.18
(Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR Ruling No. 035-200119 dated August
16, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able
to determine whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or corporate lenders"
rule must apply. Moreover, the determination of the phrase "at any one time" for purposes of determining the "20 or more lenders" is to be determined
at the time of the original issuance. Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of
issuing the bonds directly to a special purpose vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED).22 Former
Treasurer Edeza recommended that the issuance of the Bonds "be done through the ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic]
its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that "₱30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]"26 The notice stated that the Bonds
"shall be issued to not morethan 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue."27 It also required the GSEDs to
submit their bids not later than 12 noon on auction date and to disclose in their bid submissions the names of the institutions bidding through them to
ensure strict compliance with the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19 lenders and while taxable shall not be subject to
the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-Coupon Bond." The memo stated inpart that the formula
(in determining the purchase price and settlement amount) "is only applicable to the zeroes that are not subject to the 20% final withholding due to the
19 buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury
Bond to be Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to
20% withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020
2001)."33 The Auction Guidelines, for the first time, also stated that the Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545
dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also on the same date, the Bureau of Treasury
issued another memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20%
final withholding tax and the opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as 12.248% to as high as 18.000%.39
Nonetheless, the Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having tendered the lowest bids.42 Accordingly,
on October 18, 2001, the Bureau of Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately ₱10.17
billion,43 resulting in a discount of approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds.45 RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution
and sale of the 35 billion Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll
income derived from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all forms of taxation as
confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of ₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on
different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and directing the BTr to withhold
said final tax at the maturity thereof, [allegedly without] consultation with Petitioners as bond holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the proper tax treatment of the discount
or interest income derived from the Government Bonds."51 The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005,
namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated
July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest income from deposit substitutes. It is
now settled that all treasury bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are
considered deposit substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value
of the bond) is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest income should have been properly subject to the 20%
Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final tax on the discount/interest income realized
by RCBC as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes
the 2001 Rulings by stating that the [1997] Tax Code is clear that the "term public means borrowing from twenty (20) or more individual or corporate
lenders at any one time." The word "any" plainly indicates that the period contemplated is the entire term of the bond, and not merely the point of
origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax, an
exemption in favour of the PEACe Bonds was created when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System Holdings Corporation and Subsidiaries
("PDS Group"). The Memo provides that in view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government
Bonds, no transferof the same shall be allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12 October 2011 until the
redemption payment date on 18 October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011, which include the
Petitioners, shall be treated by the BTr asthe beneficial owners of such securities for the relevant [tax] payments to be imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157
clarifying that the final withholding tax due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld not only on
RCBC/CODE NGO but also [on] ‘all subsequent holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application for a temporary restraining order
and/or writ of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on interest income there from shall be withheld by the petitioner banks
and placed in escrow pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-intervention62 dated October 27,
2011, which was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO."64
They alleged that on the same day that the temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders
the amounts representing the face value of the Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income,
and that the Bureau of Treasury refused to release the amounts corresponding to the 20% final withholding tax.65 On November 15, 2011, this court
directed respondents to: "(1) SHOW CAUSE why they failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution
in order that petitioners may place the corresponding funds in escrow pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention with comment on the petitionin-
intervention of RCBC and RCBC Capital).67 The motion was granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They explained that: 1) "the implementation of [BIR Ruling No. 370-2011], which
has already been performed on October 18, 2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already
fait accompli . . . when the Resolution and TRO were served to and received by respondents BTr and National Treasurer [on October 19, 2011]";70 and
2) the withheld amount has ipso facto become public funds and cannot be disbursed or released to petitioners without congressional appropriation.71
Respondents further aver that"[i]nasmuch as the . . . TRO has already become moot . . . the condition attached to it, i.e., ‘that the 20% final
withholding tax on interest income therefrom shall be withheld by the banks and placed in escrow . . .’has also been rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73

On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed by RCBC and RCBC Capital and On
November 27, 2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the Temporary
Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to direct respondents to comply with the
temporary restraining order); and (b) required respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under the 1997 National Internal Revenue Code.
Related to this question is the interpretation of the phrase "borrowing from twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the Bureau of Internal Revenue is estopped from imposing
and/or collecting the 20% final withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is obligated . . . to pay the face value amount
of Ph₱35 Billion upon maturity without any deduction whatsoever."79 They add that "the Government cannot impair the efficacy of the [Bonds] by
arbitrarily, oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after
several, consistent categorical declarations that such bonds are exempt from the 20% FWT, without violating due process"80 and the constitutional
principle on non-impairment of contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that they would
receive the full face value of the Bonds upon maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings are
correct, the fact remains that [they] relied [on] good faith thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the 1997 National Internal Revenue
Code because there was only one lender (RCBC) to whom the Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR
Rulings "erroneously interpreted that the number of investors that participate in the ‘secondary market’ is the determining factor in reckoning the
existence or non-existence of twenty (20) or more individual or corporate lenders."85 Furthermore, they contend that the Bureau of Internal Revenue
unduly expanded the definition of deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that "the mere
issuance of government debt instruments and securities is deemed as falling within the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he 2011 BIR
Ruling clearly amount[ed] to an unauthorized act of administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from income tax.88 They insist that "[t]hey are not
lenders whose income is considered as ‘interest income or yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal
Revenue Code]"89 because they "acquired the Government Bonds in the secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the collection of the final tax was barred by
prescription.91 They point out that under Section 7 of DOF Department Order No. 141-95,92 the final withholding tax "should have been withheld at the
time of their issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue Code, "internal revenuetaxes, such as the final tax, [should]
be assessed within three (3) years after the last day prescribed by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was in violation of their property
rights,95 their constitutional right to due process96 as well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97
Allegedly, it would also have "an adverse effect of colossal magnitude on the investors, both localand foreign, the Philippine capital market, and most
importantly, the country’s standing in the international commercial community."98 Petitioners explained that "unless enjoined, the government’s
threatened refusal to pay the full value of the Government Bonds will negatively impact on the image of the country in terms of protection for property
rights (including financial assets), degree of legal protection for lender’s rights, and strength of investor protection."99 They cited the country’s ranking
in the World Economic Forum: 75th in the world in its 2011–2012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the
last among ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide and last among ASEAN countries in terms of Property
Rights Index and Legal Rights Index.100 It would also allegedly "send a reverberating message to the whole world that there is no certainty,
predictability, and stability of financial transactions in the capital markets[.]"101 "[T]he integrity of Government-issued bonds and notes will be greatly
shattered and the credit of the Philippine Government will suffer"102 if the sudden turnaround of the government will be allowed,103 and it will
reinforce "investors’ perception that the level of regulatory risk for contracts entered into by the Philippine Government is high,"104 thus resulting in
higher interestrate for government-issued debt instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue "gravely and seriously abused her discretion
in the exercise of her rule-making power"106 when she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are ‘deposit substitutes’
regardless of the number of lenders, in clear disregard of the requirement of twenty (20)or more lenders mandated under the NIRC."107 They argue
that "[b]y her blanket and arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC,
but effectively imposed a new tax on privately-placed treasury bonds."108 Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011
BIR Ruling will cause substantial impairment of their vested rights109 under the Bonds since the ruling imposes new conditions by "subjecting the
PEACe Bonds to the twenty percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR, expressly state that it is not subject to final withholding tax upon their maturity."110
They added that "[t]he exemption from the twenty percent (20%) final withholding tax [was] the primary inducement and principal consideration for
[their] participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of Internal Revenue violated their rights to
due process when she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling deprived them of
the opportunity to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau of
Treasury and CODE-NGO should be held liable "as [these] parties explicitly represented . . . that the said bonds are exempt from the final withholding
tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-
2011] will have pernicious effects on the integrity of existing securities, which is contrary to the State policies of stabilizing the financial system and of
developing capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are "invalid because they contravene Section 22(Y) of the
1997 [NIRC] when the said rulings disregarded the applicability of the ‘20 or more lender’ rule to government debt instruments"[;]115 (b) "when [it]
sold the PEACe Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income,
which [are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the issuance of the PEACe Bonds
. . . partakes of a contractual commitment granted by the Government in exchange for a valid and material consideration [i.e., the issue price paid and
savings in borrowing cost derived by the Government,] thus protected by the non-impairment clause of the 1987 Constitution"[;]117 and (d) the 2004,
2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and
petitioners[-bondholders], nor was there any BIR administrative guidance issued and published[.]"118 CODE-NGO additionally argues that impleading it
in a Rule 65 petition was improper because: (a) it involves determination of a factual question;119 and (b) it is premature and states no cause of action
as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the doctrines of exhaustion of administrative
remedies and hierarchy ofcourts, resulting in a lack of cause of action that justifies the dismissal of the petition.121 According to them, "the jurisdiction
to review the rulings of the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative remedies, pertains to the Court
of Tax Appeals."122 They point out that "a case similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA
Case No. 8351 [and] entitled, ‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention.124 They argue that under the guise of mainly
assailing the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the
petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but interest income subject to income
tax.126 They explain that "[w]ith the payment of the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money
equivalent to about Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners considering that the same is a flow of
wealth and not merely a return of capital – the capital initially invested in the Bonds being approximately Ph₱10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds"[;]128 "[t]here has been no change in the laws governing the taxability of interest income from deposit
substitutes and said laws are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term "deposit substitute" in accordance
with the letter and spirit of the Tax Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the Government as the latter
performed its obligations to the bondholders in full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was between RCBC/CODE-
NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe Bonds does not amount to a deprivation of
property without due process of law."133 Their imposition of the 20% final withholding tax is not arbitrary because they were only performing a duty
imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier
construction given to the termby the 2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there was no need to observe the requirements
of notice, hearing, and publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major financial institutions equipped with both internal and
external accounting and compliance departments as wellas access to both internal and external legal counsel; actively involved in industry organizations
such as the Bankers Association of the Philippines and the Capital Market Development Council; all actively taking part in the regular and special debt
issuances of the BTr and indeed regularly proposing products for issue by BTr — had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly,
"the sudden and drastic drop — including virtually zero trading for extended periods of six months to almost a year — in the trading volume of the
PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market participants, including the Petitioners herein,
were aware of the ruling and its consequences for the PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal Revenue’s rule-making power;139 that it
and the 2004 and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes by creating an unwarranted exception to the requirement
of having 20 or more lenders/purchasers;140 and the word "any" in Section 22(Y) of the National Internal Revenue Code plainly indicates that the
period contemplated is the entire term of the bond and not merely the point of origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice petitioners.142 "[W]ith or without the
2011 BIR Ruling, Petitioners would be liable topay a 20% final withholding tax just the same because the PEACe Bonds in their possession are legally in
the nature of deposit substitutes subject to a 20% final withholding tax under the NIRC."143 Section 7 of DOF Department Order No. 141-95 also
provides that incomederived from Treasury bonds is subject to the 20% final withholding tax.144 "[W]hile revenue regulations as a general rule have no
retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation
as to affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and factors affecting a capital market."146 "[C]apital market itself is inherently
unstable."147 Thus, "[p]etitioners’ argument that the 20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere
supposition that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could no longer be implemented [because] the acts sought to be
enjoined are already fait accompli."149 They add that "to disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI
of the Constitution prohibiting ‘money being paid out of the Treasury except in pursuance of an appropriation made by law[.]’"150 "The remedy of
petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their position be upheld by the Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code in relation to Section 11 of Republic Act No.
1125 (as amended by Section 9 of Republic Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain
the collection of any national internal revenue tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when it declared that all government debt
instruments are deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented by the government as an inducement and
important consideration for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due process because there was no prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal Revenue’s power to interpret the provisions
of the 1997 National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in previously issued BIR Ruling Nos. 007-2004, DA-491-
04,and 008-05, which have already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially when the latter’s rulings are not in harmony with the
law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can
be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to interpret the provisions of this Code and other tax
laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions are generally not entertained."153
The remedy within the administrative machinery must be resorted to first and pursued to its appropriate conclusion before the court’s judicial power can
be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the peculiarity and uniqueness of the factual
and circumstantial settings of a case. Hence, it is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of
the administrative agency concerned,(5) when there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego
of the President bears the implied and assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject matter is a private land in land case proceedings, (10) when
the rule does not provide a plain, speedy and adequate remedy, (11) when there are circumstances indicating the urgency of judicial intervention.156
(Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely: (a) the interpretation of the 20-lender rule in
the definition of the terms public and deposit substitutes under the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20%
final withholding tax on the PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and due process. Judicial
intervention is likewise urgent with the impending maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise because it was upon the request of
the Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the
Commissioner of Internal Revenue’s opinions as his own.158 This position was in fact confirmed in the letter159 dated October 10, 2011 where he
ordered the Bureau of Treasury to withhold the amount corresponding to the 20% final withholding tax on the interest or discounts allegedly due from
the bondholders on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code
on the taxability of the interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282,160 such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal
Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the
Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such
decision or rulingor after the expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National Internal Revenue Code, the
Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously
filed with the CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals
over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the jurisdiction to review the rulings of
the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or
opinions in connection with the implementation of the provisionsof internal revenue laws, including ruling on the classification of articles of sales and
similar purposes." (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to nullify General Circular No. V-
148, which does not adjudicate or settle any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and license fees to adhere strictly
to the interpretation given by the defendant tothe statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a
decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the
administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7
of which provides that the Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of
Internal Revenue in . . . matters arising under the National Internal Revenue Code or other law or part of the law administered by the Bureau of
Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare and the advancement of public policy, or
demanded by the broader interest of justice, or the orders complained of were found to be patent nullities, or the appeal was considered as clearly an
inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and Local Government,165 this court
noted that the petition for prohibition was filed directly before it "in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take
primary jurisdiction over the . . . petition and decide the same on its merits in viewof the significant constitutional issues raised by the parties dealing
with the tax treatment of cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a definitive declaration of whether
government debt instruments are deposit substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling circumstances
to justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or product that may be issued and
traded in the market. Due to the changing positions of the Bureau of Internal Revenue on this issue, there isa need for a final ruling from this court to
stabilize the expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been rendered moot by this court’s
issuance of the temporary restraining order enjoining the implementation of the 2011 BIR Ruling. The temporary restraining order effectively recognized
the urgency and necessity of direct resort to this court.
Substantive issues
Tax treatment of deposit

substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholdingtax at the rate of 20% is imposed on
interest on any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.
These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest
fromany currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . .
Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the
deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and
Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties,
derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under
the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income. (Emphasis supplied)
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. -
Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of
such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977 National Internal Revenue Code
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984, formally added the
definition of deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer.These promissory notes, repurchase agreements, certificates of assignment or
participation and similar instrument with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial
intermediaries or by the Securities and Exchange Commission of the Philippines for commercial, industrial, finance companies and either non-financial
companies: Provided, however, that only debt instruments issued for inter-bank call loans to cover deficiency in reserves against deposit liabilities
including those between or among banks and quasi-banks shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same definition and specifically identified the
following borrowings as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasi-banking functions evidenced by
deposit substitutes instruments, except interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan
advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt
instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust companies, including the trust
department of banks and investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the addition of the qualifying phrase for public –
borrowing from 20 or more individual or corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions-
When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public(the term 'public' means borrowing from twenty (20)
or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs
of their agent or dealer. These instruments may include, but need not be limited to, bankers’ acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates
of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with
maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-
banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at
any one time." Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently
subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the Government Bonds."169 On the other hand, respondents
theorize that the word "any" "indicates that the period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]"170 such that if the debt instruments "were subsequently sold in secondary markets and so on, insuch a way that twenty (20) or more
buyers eventually own the instruments, then it becomes indubitable that funds would be obtained from the "public" as defined in Section 22(Y) of the
NIRC."171 Indeed, in the context of the financial market, the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units (households and business firms that have savings or excess funds)
flow to the deficit units (mainly business firms and government that need funds to finance their operations or growth). They bring suppliers and users of
funds together and provide the means by which the lenders transform their funds into financial assets, and the borrowers receive these funds now
considered as their financial liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund suppliers earn a return on
their investment; the return is necessary to ensure that funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the securities[,]"173 namely: (1) the
money market, which facilitates the flow of short-term funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow
of long-term funds (with maturities of more than one year).174
Whether referring to money marketsecurities or capital market securities, transactions occur either in the primary market or in the secondary
market.175 "Primary markets facilitate the issuance of new securities. Secondary markets facilitate the trading of existing securities, which allows for a
change in the ownership of the securities."176 The transactions in primary markets exist between issuers and investors, while secondary market
transactions exist among investors.177
"Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial transactions."178 Still, all systems
perform one basic function: the quick mobilization of money from the lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange funds in returnfor financial assets"181 (e.g., purchasing bonds directly
from the company issuing them). This method provides certain limitations such as: (a) "both borrower and lender must desire to exchange the same
amount of funds at the same time"[;]182 and (b) "both lender and borrower must frequently incur substantial information costs simply to find each
other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing information costs.184 A Broker185 is "an
individual or financial institution who provides information concerning possible purchases and sales of securities. Either a buyer or a seller of securities
may contact a broker, whose job is simply to bring buyers and sellers together."186 A dealer187 "also serves as a middleman between buyers and
sellers, but the dealer actually acquires the seller’s securities in the hope of selling them at a later time at a more favorable price."188 Frequently, "a
dealer will split up a large issue of primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into
investment."189 In semi direct financing, "[t]he ultimate lender still winds up holding the borrower’s securities, and therefore the lender must be willing
to accept the risk, liquidity, and maturity characteristics of the borrower’s [debt security]. There still must be a fundamental coincidence of wants and
needs between [lenders and borrowers] for semidirect financial transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions, carried out with the help of financial
intermediaries"191 or financial institutions, like banks, investment banks, finance companies, insurance companies, and mutual funds.192 Financial
intermediaries accept funds from surplus units and channel the funds to deficit units.193 "Depository institutions [such as banks] accept deposits from
surplus units and provide credit to deficit units through loans and purchase of [debt] securities."194 Nondepository institutions, like mutual funds, issue
securities of their own (usually in smaller and affordable denominations) to surplus units and at the same time purchase debt securities of deficit
units.195 "By pooling the resources of[small savers, a financial intermediary] can service the credit needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities performed by market participants that works to transfer the
funds from the surplus units (or investors/lenders) to those who need them (deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining the "20 or more lenders" would mean
every transaction executed in the primary or secondary market in connection with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the reckoning of "20 or more lenders/investors" is made at any
transaction in connection with the purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or morelenders/investors, there is deemed to be a public
borrowing and the bonds at that point intime are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding
tax on the imputed interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997 National Internal Revenue Code are
subject to the regular income tax.
The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income, Section 32(A) of the 1997 National Internal
Revenue Code discloses a legislative policy to include all income not expressly exempted as within the class of taxable income under our laws.
"The definition of gross income isbroad enough to include all passive incomes subject to specific tax rates or final taxes."197 Hence, interest income
from deposit substitutes are necessarily part of taxable income. "However, since these passive incomes are already subject to different rates and taxed
finally at source, they are no longer included in the computation of gross income, which determines taxable income."198 "Stated otherwise . . . if there
were no withholding tax system in place in this country, this 20 percent portion of the ‘passive’ income of [creditors/lenders] would actually be paid to
the [creditors/lenders] and then remitted by them to the government in payment of their income tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable
income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the
corresponding returns[;] and third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of
taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.201 (Citations
omitted)
"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."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller isrequired to withhold the 20% final income tax
on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains" contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal
Revenue Code, which exempts gains derived from trading, redemption, or retirement of long-term securities from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of money. Gains from sale or
exchange or retirement of bonds orother certificate of indebtedness fall within the general category of "gainsderived from dealings in property" under
Section 32(A)(3), while interest from bonds or other certificate of indebtedness falls within the category of "interests" under Section 32(A)(4).204 The
use of the term "gains from sale" in Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under Sections 24, 25, 27, and
28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds before their maturity date, which is the
difference between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller; and (2) gain
realized by the last holder of the bonds when the bonds are redeemed at maturity, which is the difference between the proceeds from the retirement of
the bonds and the price atwhich such last holder acquired the bonds. For discounted instruments,like the zero-coupon bonds, the trading gain shall be
the excess of the selling price over the book value or accreted value (original issue price plus accumulated discount from the time of purchase up to the
time of sale) of the instruments.206
The Bureau of Internal

Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not consistent with law.207 Its interpretation of "at any
one time" to mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof
the number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes."208 Being the subject of this petition, it is,
thus, declared void because it completely disregarded the 20 or more lender rule added by Congress in the 1997 National Internal Revenue Code. It also
created a distinction for government debt instruments as against those issued by private corporations when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions must be read together, endeavoring to make
every part effective, harmonious, and sensible.209 That construction which will leave every word operative will be favored over one that leaves some
word, clause, or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997 National Internal Revenue Code is
an authoritative construction ofgreat weight, but the principle is not absolute and may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has issued an erroneous interpretation, the error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the nullification of Revenue Memorandum Circular
(RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because it was contrary to the express provision of Section 230 of the 1977
National Internal Revenue Codeand, hence, "[cannot] be given weight for to do so would, in effect, amend the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess
quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not
simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is
not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead
of remaining consistent and in harmony with, the law they seek to apply and implement.213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action
[because] there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation
could not place the Government in estoppel to correct or overrule the same."214 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop,
Inc.,215 this court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on
pawnshops.216 It was held that "the [Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars not
consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out. Only Congress can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court stated that the Commissioner of Internal
Revenue is not bound by the ruling of his predecessors,219 but, to the contrary, the overruling of decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated authority of the administrative
agency; (ii) whether itis reasonable; and (iii) whether it was issued pursuant to proper procedure. But the court is not free to substitute its judgment as
to the desirability or wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed those questions to
administrative judgments and not to judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the correctness
or propriety of the rule. As a matter of power a court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go
to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an "agricultural food product" within
the meaning of § 103(b) of the NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended for human consumption.
Simply stated, nobody eats copra for food." That previous Commissioners considered it so, is not reason for holding that the present interpretation is
wrong. The Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in
the interpretation of laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income

derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds were issued at the time of origination.
However, a reading of the underwriting agreement221 and RCBC term sheet222 reveals that the settlement dates for the sale and distribution by RCBC
Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately ₱11.996 would fall on
the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion
borrowing received by the Bureau of Treasury in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from the undisclosed number
of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or issuance. At this point, however, we do
not know as to how many investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substitutes within the meaning of
Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax
on the interest or discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe
Bonds would likewise be required of any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received by individuals from longterm
deposits or investments with a holding period of not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for the Bureau of Treasury to pay
the face value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from
RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as the withholding agents.
The collection of tax is not

barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and collect internal revenue taxes is
extended to 10 years in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failureto file a return, to be computed from
the time of discovery of the falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within
three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three
(3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the Bureau of Internal Revenue may still
collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the

20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties affected."224 Moreover, service may be made personally or by
mail.225 And, "[p]ersonal service is complete upon actual delivery [of the order.]"226 This court’s temporary restraining order was received only on
October 19, 2011, or a day after the PEACe Bonds had matured and the 20% final withholding tax on the interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of service of pleadings, court orders,
or processes. Moreover, the news reports227 cited by petitioners were posted minutes before the close of office hours or late in the evening of October
18, 2011, and they did not givethe exact contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that suchinjunction or order was served on him
personally or that he had notice of the issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax due"229 and return the amount of the
tax withheld should it be finally determined that the income paid is not subject to withholding.230 Hence, respondent Bureau of Treasury was justified
in withholding the amount corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received this court’s temporary
restraining order only on October 19, 2011, or the day after this tax had been withheld.
Respondents’ retention of the

amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20% final withholding tax in order that it may be
placed in escrow as directed by this court constitutes a defiance of this court’s temporary restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act to be considered fait accompli, the act
must have already been fully accomplished and consummated.232 It must be irreversible, e.g., demolition of properties,233 service of the penalty of
imprisonment,234 and hearings on cases.235 When the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in nature,236
the defense of fait accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the withholding and remittance of the
20% final withholding tax to the Bureau of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final withholding
tax237 when it received the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance
which was due only on November 10, 2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and was still
continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government agencies such as the Bureau of Treasury
the procedure for the remittance of all taxes it withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal
Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following month after the said taxes had
been withheld.240 The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury,241 which shall be the basis for
recording the remittance of the tax collection.242 The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as tax
collection in the Journal ofTax Remittance by government agencies based on its copies of the TRA.243 Respondents did not submit any withholding tax
return or TRA to provethat the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October
18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011 submitted to this court shows:
Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero
Coupon T/Bonds 442-360 35,000,000,000.00
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.
The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41, representing the 20% final withholding tax on the PEACe
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies
corresponding to 20% final withholding tax was set aside for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause why they failed to comply with the [TRO]; and
[to] comply with the [TRO] in order that petitioners may place the corresponding funds in escrow pending resolution of the petition."245 The 20% final
withholding tax was effectively placed in custodia legiswhen this court ordered the deposit of the amount in escrow. The Bureau of Treasury could still
release the money withheld to petitioners for the latter to place in escrow pursuant to this court’s directive. There was no legal obstacle to the release of
the 20% final withholding tax to petitioners. Congressional appropriation is not required for the servicing of public debts in view of the automatic
appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government guarantees of obligations which are drawn upon, are automatically
appropriated: provided, that no obligations shall be incurred or payments made from funds thus automatically appropriated except as issued in the form
of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such amounts as may be necessary to
effect payments on foreign or domestic loans, or foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of the
Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled corporations and/or government financial
institutions;
b. government-owned or controlled corporations and/or government financial institutions the proceeds of which were relent to public or private
institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned or controlled corporations and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a lawfuland valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government Bonds may be lawfully taken from the
continuing appropriation out of any monies in the National Treasury and is not required to be the subject of another appropriation legislation: SEC. 2.
The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not otherwise appropriated, or from any sinking funds
provided for the purpose by law, any interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid
out of any such money, or from any such sinking funds the principal amount of any obligations which have matured, or which have been called for
redemption or for which redemption has been demanded in accordance with terms prescribed by him prior to date of issue. . . In the case of interest-
bearing obligations, he shall pay not less than their face value; in the case of obligations issued at a discount he shall pay the face value at maturity; or
if redeemed prior to maturity, such portion of the face value as is prescribed by the terms and conditions under which such obligations were originally
issued. There are hereby appropriated as a continuing appropriation out of any moneys in the National Treasury not otherwise appropriated, such sums
as may be necessary from time to time to carry out the provisions of this section. The Secretary of Finance shall transmit to Congress during the first
month of each regular session a detailed statement of all expenditures made under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be made through the National Treasury’s
account with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to
which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption of
Treasury Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution, which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization therefor already exists under RA Nos. 4860 and 245, as amended, and
PD 1967. Precisely in the light of this subsisting authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern
itself with details for implementation by the Executive, butlargely with annual levels and approval thereof upon due deliberations as part of the whole
obligation program for the year. Upon such approval, Congress has spoken and cannot be said to havedelegated its wisdom to the Executive, on whose
part lies the implementation or execution of the legislative wisdom.246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which remained in full force and effect, until
set aside, vacated, or modified. Its conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding to the 20% final withholding tax
despite this court's directive in the temporary restraining order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to
be placed in escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the bondholders the amount corresponding-to the 20% final
withholding tax that it withheld on October 18, 2011.
EN BANC
G.R. No. 198756, August 16, 2016
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK, AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE PHILIPPINES, COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER, AND BUREAU OF TREASURY,
Respondents.
RESOLUTION
LEONEN, J.:
This resolves separate motions for reconsideration and clarification filed by the Office of the Solicitor General1 and petitioners-intervenors Rizal
Commercial Banking Corporation and RCBC Capital Corporation2 of our Decision dated January 13, 2015, which: (1) granted the Petition and Petitions-
in-Intervention and nullified Bureau of Internal Revenue (BIR) Ruling Nos. 370-2011 and DA 378-2011; and (2) reprimanded the Bureau of Treasury for
its continued retention of the amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011, and ordered it to release the
withheld amount to the bondholders.
In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering of Treasury Bonds3 (Public Offering) dated October 9, 2001,
the Bureau of Treasury announced that "P30.0 [billion] worth of 10-year Zero[-]Coupon Bonds [would] be auctioned on October 16, 2001[.]"4 It stated
that "the issue being limited to 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]."5chanrobleslaw
On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-Coupon Bond.6 The memo stated in part that the formula,
in determining the purchase price and settlement amount, "is only applicable to the zeroes that are not subject to the 20% final withholding due to the
19 buyer/lender limit."7chanrobleslaw
On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury issued the Auction Guidelines for the 10-year Zero-Coupon Treasury
Bond to be Issued on October 16, 2001 (Auction Guidelines).8 The Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to
20% withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020
2001)."9chanrobleslaw
At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC) participated on behalf of Caucus of Development NGO Networks
(CODE-NGO) and won the bid.10 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at yield-to-maturity of
12.75% to RCBC for approximately P10.17 billion,11 resulting in a discount of approximately P24.83 billion.
Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement12 with CODE-NGO, where RCBC Capital was appointed as the
Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.13 RCBC Capital agreed to underwrite14 on a firm basis the offering,
distribution, and sale of the P35 billion Bonds at the price of P11,995,513,716.51.15 In Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all
forms of taxation as confirmed by [the] Bureau of Internal Revenue . . . letter rulings dated 31 May 2001 and 16 August 2001,
respectively."16chanrobleslaw
RCBC Capital sold and distributed the Government Bonds for an issue price of P11,995,513,716.51.17 Banco de Oro, et al. purchased the PEACe Bonds
on different dates.18chanrobleslaw
On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the Commissioner of Internal Revenue issued BIR Ruling No. 370-201119
declaring that the PEACe Bonds, being deposit substitutes, were subject to 20% final withholding tax.20 Under this ruling, the Secretary of Finance
directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on October 18,
2011.21chanrobleslaw
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201122
clarifying that the final withholding tax due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld not only on
RCBC/CODE NGO but also [on] 'all subsequent holders of the Bonds.'"23chanrobleslaw
On October 17, 2011, petitioners filed before this Court a Petition for Certiorari, Prohibition, and/or Mandamus (with urgent application for a temporary
restraining order and/or writ of preliminary injunction).24chanrobleslaw
On October 18, 2011, this Court issued a temporary restraining order25cralawred "enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on interest income therefrom shall be withheld by the petitioner banks
and placed in escrow pending resolution of [the] petition."26chanrobleslaw
RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to intervene and to admit the Petition-in-Intervention. The Motions
were granted by this Court.27chanrobleslaw
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte Motion to Direct Respondents to Comply with the
TRO.28chanrobleslaw
On November 15, 2011, this Court directed respondents to: "(1) show cause why they failed to comply with the October 18, 2011 resolution; and (2)
comply with the Court's resolution in order that petitioners may place the corresponding funds in escrow pending resolution of the
petition."29chanrobleslaw
On December 6, 2011, this Court noted respondents' compliance.30chanrobleslaw
On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion [To Direct Respondents to Comply with the Temporary
Restraining Order].31chanrobleslaw
On December 4, 2012, this Court noted petitioners' Manifestation with Urgent Reiterative Motion and required respondents to comment.32chanrobleslaw
Respondents filed their Comment,33 to which petitioners filed the Reply.34chanrobleslaw
On January 13, 2015, this Court promulgated the Decision35 granting the Petition and the Petitions-in-Intervention. Applying Section 22(Y) of the
National Internal Revenue Code, we held that the number of lenders/investors at every transaction is determinative of whether a debt instrument is a
deposit substitute subject to 20% final withholding tax. When at any transaction, funds are simultaneously obtained from 20 or more lenders/investors,
there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes. Consequently, the seller is required to
withhold the 20% final withholding tax on the imputed interest income from the bonds. We further declared void BIR Rulings Nos. 370-2011 and DA
378-2011 for having disregarded the 20-lender rule provided in Section 22(Y). The Decision disposed as follows:ChanRoblesVirtualawlibrary
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding to the 20% final withholding tax
despite this court's directive in the temporary restraining order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to
be placed in escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount corresponding to the 20% final
withholding tax that it withheld on October 18, 2011.36chanroblesvirtuallawlibrary
On March 13, 2015, respondents filed by registered mail their Motion for Reconsideration and Clarification.37chanrobleslaw
On March 16, 2015, petitioners-intervenors RCBC and RCBC Capital moved for clarification and/or partial reconsideration.38chanrobleslaw
On July 6, 2015, petitioners Banco de Oro, et al. filed their Consolidated Comment39 on respondents' Motion for Reconsideration and Clarification and
petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for Clarification and/or Partial Reconsideration.
On October 29, 2015, petitioners Banco de Oro, et al. filed their Urgent Reiterative Motion [to Direct Respondents to Comply with the Temporary
Restraining Order].40chanrobleslaw
The issues raised in the motions revolve around the following:
chanRoblesvirtualLawlibraryFirst, the proper interpretation and application of the 20-lender rule under Section 22(Y) of the National Internal Revenue
Code, particularly in relation to issuances of government debt instruments;
Second, whether the seller in the secondary market can be the proper withholding agent of the final withholding tax due on the yield or interest income
derived from government debt instruments considered as deposit substitutes;
Third, assuming the PEACe Bonds are considered "deposit substitutes," whether government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face value of these Bonds. Further:
chanRoblesvirtualLawlibrary
(a)
Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?
(b)
Will it constitute a deprivation of property without due process of law?
Lastly, whether the respondent Bureau of Treasury is liable to pay 6% legal interest.
Before going into the substance of the motions for reconsideration, we find it necessary to clarify on the procedural aspects of this case. This is with
special emphasis on the jurisdiction of the Court of Tax Appeals in view of the previous conflicting rulings of this Court.
Earlier, respondents questioned the propriety of petitioners' direct resort to this Court. They argued that petitioners should have challenged first the
2011 Bureau of Internal Revenue rulings before the Secretary of Finance, consistent with the doctrine on exhaustion of administrative remedies.
In the assailed Decision, we agreed that interpretative rulings of the Bureau of Internal Revenue are reviewable by the Secretary of Finance under
Section 441 of the National Internal Revenue Code. However, we held that because of the special circumstances availing in this case�namely: the
question involved is purely legal; the urgency of judicial intervention given the impending maturity of the PEACe Bonds; and the futility of an appeal to
the Secretary of Finance as the latter appeared to have adopted the challenged Bureau of Internal Revenue rulings�there was no need for petitioners
to exhaust all administrative remedies before seeking judicial relief.
We also stated that:ChanRoblesVirtualawlibrary

[T]he jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos.
370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on the taxability of the
interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:
chanRoblesvirtualLawlibrarySEC. 7. Jurisdiction. - The CTA shall exercise:ChanRoblesVirtualawlibrary

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:��
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal
Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the
Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such
decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National Internal Revenue Code, the
Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously
filed with the CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court emphasized the jurisdiction of the Court of Tax Appeals over
rulings of the Bureau of Internal Revenue, thus:ChanRoblesVirtualawlibrary
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the jurisdiction to review the rulings of
the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.
...
....
�
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:ChanRoblesVirtualawlibrary
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. � The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or
opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and
similar purposes."
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:ChanRoblesVirtualawlibrary
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to nullify General Circular No. V-
148, which does not adjudicate or settle any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and license fees to adhere strictly
to the interpretation given by the defendant to the statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore,
a decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the
administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7
of which provides that the Court of Tax Appeals 'shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of
Internal Revenue in . . . matters arising under the National Internal Revenue Code or other law or part of the law administered by the Bureau of
Internal Revenue.'"42chanroblesvirtuallawlibrary
In Commissioner of Internal Revenue v. Leal,43 the Commissioner issued Revenue Memorandum Order (RMO) No. 15-91 imposing 5% lending investors
tax on pawnshops, and Revenue Memorandum Circular (RMC) No. 43-91 subjecting the pawn ticket to documentary stamp tax.44 Leal, a pawnshop
owner and operator, asked for reconsideration of the revenue orders, but it was denied by the Commissioner in BIR Ruling No. 221-91.45 Thus, Leal
filed before the Regional Trial Court a petition for prohibition seeking to prohibit the Commissioner from implementing the revenue orders.46 This Court
held that Leal should have filed her petition for prohibition before the Court of Tax Appeals, not the Regional Trial Court, because "the questioned RMO
No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of pawnshops."47 This
Court held that such rulings in connection with the implementation of internal revenue laws are appealable to the Court of Tax Appeals under Republic
Act No. 1125, as amended.48chanrobleslaw
Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno, Jr.,49 this Court upheld the jurisdiction of the Court of Tax Appeals over the Regional
Trial Courts, on the issue of the validity of revenue memorandum circulars.50 It explained that "the assailed revenue regulations and revenue
memorandum circulars [were] actually rulings or opinions of the [Commissioner of Internal Revenue] on the tax treatment of motor vehicles sold at
public auction within the [Subic Special Economic Zone] to implement Section 12 of [Republic Act] No. 7227." This Court further held that the taxpayers'
invocation of this Court's intervention was premature for its failure to first ask the Commissioner of Internal Revenue for reconsideration of the assailed
revenue regulations and revenue memorandum circulars.
However, a few months after the promulgation of Asia International Auctioneers, British American Tobacco v. Camacho51 pointed out that although
Section 7 of Republic Act No. 1125, as amended, confers on the Court of Tax Appeals jurisdiction to resolve tax disputes in general, this does not
include cases where the constitutionality of a law or rule is challenged. Thus:ChanRoblesVirtualawlibrary
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by Republic Act No. 9282. Section 7 thereof states, in
pertinent part:
chanRoblesvirtualLawlibrary. . . .
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality of a
law or rule is challenged. Where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in
the performance of its quasi-legislative function, the regular courts have jurisdiction to pass upon the same. The determination of whether a specific
rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the
Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of judicial power, which includes the
authority of the courts to determine in an appropriate action the validity of the acts of the political departments. Judicial power includes the duty of the
courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.
In Drilon v. Lim, it was held:ChanRoblesVirtualawlibrary

We stress at the outset that the lower court had jurisdiction to consider the constitutionality of Section 187, this authority being embraced in the general
definition of the judicial power to determine what are the valid and binding laws by the criterion of their conformity to the fundamental law. Specifically,
B.P. 129 vests in the regional trial courts jurisdiction over all civil cases in which the subject of the litigation is incapable of pecuniary estimation, even as
the accused in a criminal action has the right to question in his defense the constitutionality of a law he is charged with violating and of the proceedings
taken against him, particularly as they contravene the Bill of Rights. Moreover, Article X, Section 5(2), of the Constitution vests in the Supreme Court
appellate jurisdiction over final judgments and orders of lower courts in all cases in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on the constitutionality of Section 145(C) of the NIRC, as amended, and
the validity of its implementing rules and regulations. In fact, the RTC limited the resolution of the subject case to the issue of the constitutionality of
the assailed provisions. The determination of whether the assailed law and its implementing rules and regulations contravene the Constitution is within
the jurisdiction of regular courts. The Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. Petitioner, therefore,
properly filed the subject case before the RTC.52 (Citations omitted)
British American Tobacco involved the validity of: (1) Section 145 of Republic Act No. 8424; (2) Republic Act No. 9334, which further amended Section
145 of the National Internal Revenue Code on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4) RMO No. 6-
A similar ruling was made in Commissioner of Customs v. Hypermix Feeds Corporation.54 Central to the case was Customs Memorandum Order (CMO)
No. 27-2003 issued by the Commissioner of Customs. This issuance provided for the classification of wheat for tariff purposes. In anticipation of the
implementation of the CMO, Hypermix filed a Petition for Declaratory Relief before the Regional Trial Court. Hypermix claimed that said CMO was issued
without observing the provisions of the Revised Administrative Code; was confiscatory; and violated the equal protection clause of the 1987
Constitution.55 The Commissioner of Customs moved to dismiss on the ground of lack of jurisdiction.56 On the issue regarding declaratory relief, this
Court ruled that the petition filed by Hypermix had complied with all the requisites for an action of declaratory relief to prosper.
Moreover:ChanRoblesVirtualawlibrary
Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of judicial power, which
includes the authority of the courts to determine in an appropriate action the validity of the acts of the political
departments.57chanroblesvirtuallawlibrary
We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc. The Court of Tax Appeals has exclusive jurisdiction to
determine the constitutionality or validity of tax laws, rules and regulations, and other administrative issuances of the Commissioner of Internal
Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial power:ChanRoblesVirtualawlibrary
ARTICLE VIII
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and
to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government. (Emphasis supplied)
Based on this constitutional provision, this Court recognized, for the first time, in The City of Manila v. Hon. Grecia-Cuerdo,58 the Court of Tax Appeals'
jurisdiction over petitions for certiorari assailing interlocutory orders issued by the Regional Trial Court in a local tax case.
Thus:ChanRoblesVirtualawlibrary
[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that
judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law and that judicial power includes the duty of
the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA includes that of determining whether or not
there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases
falling within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to
issue writs of certiorari in these cases.59 (Emphasis in the original)
This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is inherent in the exercise of its appellate
jurisdiction:ChanRoblesVirtualawlibrary
A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it effectively, to make all orders that will preserve the
subject of the action, and to give effect to the final determination of the appeal. It carries with it the power to protect that jurisdiction and to make the
decisions of the court thereunder effective. The court, in aid of its appellate jurisdiction, has authority to control all auxiliary and incidental matters
necessary to the efficient and proper exercise of that jurisdiction. For this purpose, it may, when necessary, prohibit or restrain the performance of any
act which might interfere with the proper exercise of its rightful jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction should have powers which are necessary to enable
it to act effectively within such jurisdiction. These should be regarded as powers which are inherent in its jurisdiction and the court must possess them
in order to enforce its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of such process.
In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall possess all the inherent powers of a court of
justice.
Indeed, courts possess certain inherent powers which may be said to be implied from a general grant of jurisdiction, in addition to those expressly
conferred on them. These inherent powers are such powers as are necessary for the ordinary and efficient exercise of jurisdiction; or are essential to
the existence, dignity and functions of the courts, as well as to the due administration of justice; or are directly appropriate, convenient and suitable to
the execution of their granted powers; and include the power to maintain the court's jurisdiction and render it effective in behalf of the litigants.
Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary to effectuate its jurisdiction, a grant of
jurisdiction, in the absence of prohibitive legislation, implies the necessary and usual incidental powers essential to effectuate it, and, subject to existing
laws and constitutional provisions, every regularly constituted court has power to do all things that are reasonably necessary for the administration of
justice within the scope of its jurisdiction and for the enforcement of its judgments and mandates." Hence, demands, matters or questions ancillary or
incidental to, or growing out of, the main action, and coming within the above principles, may be taken cognizance of by the court and determined,
since such jurisdiction is in aid of its authority over the principal matter, even though the court may thus be called on to consider and decide matters
which, as original causes of action, would not be within its cognizance.60 (Citations omitted)
Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a law or regulation in the first instance.61 This is
contemplated in the Constitution when it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality is in
issue.62chanrobleslaw
On, June 16, 1954, Republic Act No. 1125 created the Court, of Tax Appeals not as another superior administrative agency as was its predecessor�the
former Board of Tax Appeals�but as a part of the judicial system63 with exclusive jurisdiction to act on appeals from:ChanRoblesVirtualawlibrary
(1)
Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue;
(2)
Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges; seizure, detention or release of
property affected fines, forfeitures or other penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or part of
law administered by the Bureau of Customs; and
(3)
Decisions of provincial or city Boards of Assessment Appeals in cases involving the assessment and taxation of real property or other matters arising
under the Assessment Law, including rules and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters involving assessments that were previously cognizable by the
Regional Trial Courts (then courts of first instance).64chanrobleslaw
In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax Appeals and elevated its rank to the level of a collegiate
court with special jurisdiction. Section 1 specifically provides that the Court of Tax Appeals is of the same level as the Court of Appeals and possesses
"all the inherent powers of a Court of Justice."65chanrobleslaw
Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all tax-related issues:ChanRoblesVirtualawlibrary
Section 7. Jurisdiction - The CTA shall exercise:ChanRoblesVirtualawlibrary
(a)
Exclusive appellate jurisdiction to review by appeal, as herein provided:
1)
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue;
2)
Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;
3)
Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or
appellate jurisdiction;
4)
Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of
property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by
the Bureau of Customs;
5)
Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of
real property originally decided by the provincial or city board of assessment appeals;
6)
Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which
are adverse to the Government under Section 2315 of the Tariff and Customs Code;
7)
Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the
case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff
and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said
duties.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or regulation when raised by the taxpayer
as a defense in disputing or contesting an assessment or claiming a refund. It is only in the lawful exercise of its power to pass upon all maters brought
before it, as sanctioned by Section 7 of Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases directly challenging the constitutionality or validity of
a tax law or regulation or administrative issuance (revenue orders, revenue memorandum circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the decisions of quasi-judicial agencies66
(Commissioner of Internal Revenue, Commissioner of Customs, Secretary of Finance, Central Board of Assessment Appeals, Secretary of Trade and
Industry) on tax-related problems must be brought exclusively to the Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction to resolve all tax problems. Petitions
for writs of certiorari against the acts and omissions of the said quasi-judicial agencies should, thus, be filed before the Court of Tax
Appeals.67chanrobleslaw
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 12968 provides an exception to the original jurisdiction of the Regional Trial
Courts over actions questioning the constitutionality or validity of tax laws or regulations. Except for local tax cases, actions directly challenging the
constitutionality or validity of a tax law or regulation or administrative issuance may be filed directly before the Court of Tax Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum circulars, or rulings), these are issued by the
Commissioner under its power to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws. Tax rulings,
on the other hand, are official positions of the Bureau on inquiries of taxpayers who request clarification on certain provisions of the National Internal
Revenue Code, other tax laws, or their implementing regulations.69 Hence, the determination of the validity of these issuances clearly falls within the
exclusive appellate jurisdiction of the Court of Tax Appeals under Section 7(1) of Republic Act No. 1125, as amended, subject to prior review by the
Secretary of Finance, as required under Republic Act No. 8424.70chanrobleslaw
We now proceed to the substantive aspects.
II
Respondents contend that the 20-lender rule should not strictly apply to issuances of government debt instruments, which by nature, are borrowings
from the public.71 Applying the rule otherwise leads to an absurd result.72 They point out that in BIR Ruling No. 007-0473 dated July 16, 2004 (the
precursor of BIR Ruling Nos. 370-2011 and DA 378-2011), the Bureau of Treasury's admitted intent to make the government securities freely tradable
to an unlimited number of lenders/investors in the secondary market was considered in place of an actual head count of lenders/investors due to the
limitations brought about by the absolute confidentiality of investments in government bonds under Section 2 of Republic Act No. 1405, otherwise
known as the Bank Secrecy Law.74chanrobleslaw
Considering that the PEACe Bonds were intended to be freely tradable in the secondary market to 20 or more lenders/investors, respondents contend-
that they, like other similarly situated government securities�awarded to 19 or less GSEDs in the primary market but freely tradable to 20 or more
lenders/investors in the secondary market�should be treated as deposit substitutes subject to the 20% final withholding tax.75chanrobleslaw
Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that Section 22(Y) of the National Internal Revenue Code applies to all types of
securities, including those issued by government. They add that under this provision, it is the actual number of lenders at any one time that is material
in determining whether an issuance is to be considered a deposit substitute and not the intended distribution plan of the issuer.
Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue that the real intent behind the issuance of the PEACe Bonds, as
reflected by the representations and assurances of government in various issuances and rulings, was to limit the issuance to 19 lenders and below.
Hence, they contend that government cannot now take an inconsistent position.
We find respondents' proposition to consider the intended public distribution of government securities�in this case, the PEACe Bonds�in place of an
actual head count to be untenable.
The general rule of requiring adherence to the. letter in construing statutes applies with peculiar strictness to tax laws and the provisions o taxing act
are not to be extended by implication.76chanrobleslaw
The definition of deposit substitutes in Section 22(Y) specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at any
one time."77 The qualifying phrase for public introduced78 by the National Internal Revenue Code shows that a change in the meaning of the provision
was intended, and this Court should construe the provision as to give effect to the amendment.79 Hence, in light of Section 22(Y), the reckoning of
whether there are 20 or more individuals or corporate lenders is crucial in determining the tax treatment of the yield from the debt instrument. In other
words, if there are 20 or more lenders, the debt instrument is considered a deposit substitute and subject to 20% final withholding tax.
II.A
The definition of deposit substitutes under the National Internal Revenue Code was lifted from Section 95 of Republic Act No. 7653, otherwise known as
the New Central Bank Act:ChanRoblesVirtualawlibrary
SEC. 95. Definition of Deposit Substitutes. The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers' acceptances, promissory notes,
participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. The Monetary Board shall determine what
specific instruments shall be considered as deposit substitutes for the purposes of Section 94 of this Act: Provided, however, That deposit substitutes of
commercial, industrial and other nonfinancial companies issued for the limited purpose of financing their own needs or the needs of their agents or
dealers shall not be covered by the provisions of Section 94 of this Act. (Emphasis supplied)
Banks are entities engaged in the lending of funds obtained from the public in the form of deposits.80 Deposits of money in banks and similar
institutions are considered simple loans.81 Hence, the relationship between a depositor and a bank is that of creditor and debtor. The ownership of the
amount deposited is transmitted to the bank upon the perfection of the contract and it can make use of the amount deposited for its own transactions
and other banking operations. Although the bank has the obligation to return the amount deposited, it has no obligation to return or deliver the same
money that was deposited.82chanrobleslaw
The definition of deposit substitutes in the banking laws was brought about by an observation that banks and non-bank financial intermediaries have
increasingly resorted to issuing a variety of debt instruments, other than bank deposits, to obtain funds from the public. The definition also laid down
the groundwork for the supervision by the Central Bank of quasi-banking functions.83chanrobleslaw
As defined in the banking sector, the term "public" refers to 20 or more lenders.84 "What controls is the actual number of persons or entities to whom
the products or instruments are issued. If there are at least twenty (20) lenders or creditors, then the funds are considered obtained from the
public."85chanrobleslaw
If a bank or non-bank financial intermediary sells debt instruments to 20 or more lenders/placers at any one time, irrespective of outstanding amounts,
for the purpose of relending or purchasing of receivables or obligations, it is considered to be performing a quasi-banking function and consequently
subject to the appropriate regulations of the Bangko Sentral Pilipinas (BSP).
II.B
Under the National Internal Revenue Code, however, deposit substitutes include not only the issuances and sales of banks and quasi-banks for relending
or purchasing receivables and other similar obligations, but also debt instruments issued by commercial, industrial, and other non-financial companies to
finance their own needs or the needs of their agents or dealers. This can be deduced from a reading together of Section 22(X)
and(Y):ChanRoblesVirtualawlibrary
Section 22. Definitions - When used in this Title:
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate lenders at any one time, through the
issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or through the issuance of
certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and
other similar obligations: Provided, however, That commercial industrial and other non-financial companies, which borrow funds through any of these
means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking
functions.
(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining funds from the public (the term 'public' means borrowing from twenty (20)
or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments
for the borrower's own account, for the purpose of re-lending or purchasing of receivables and other obligations, or financing their own needs or the
needs of their agent or dealer. (Emphasis supplied)
For internal revenue tax purposes, therefore, even debt instruments issued and sold to 20 or more lenders/investors by commercial or industrial
companies to finance their own needs are considered deposit substitutes, taxable as such.
II.C
The interest income on bank deposits was subjected for the first time to the withholding tax system under Presidential Decree No. 1156,86 which was
promulgated in 1977. The whereas clauses spell the reasons for the law:ChanRoblesVirtualawlibrary
[I]nterest on bank deposit is one of the items includible in gross income. . . . [M]any bank depositors fail to declare interest income in their income tax
returns. . . . [I]n order to maximize the collection of the income tax on interest on bank deposits, it is necessary to apply the withholdings system on
this type of fixed or determinable income.
In the same year, Presidential Decree No. 115487 was also promulgated. It imposed a 35% transaction tax (final tax) on interest income from every
commercial paper issued in the primary market, regardless of whether they are issued to the public or not.88 Commercial paper was defined as "an
instrument evidencing indebtedness of any person of entity, including banks and non-banks performing quasi-banking functions, which is issued,
endorsed, sold, transferred or in any manner conveyed to another person or entity, either with or without recourse and irrespective of maturity." The
imposition of a final tax on commercial papers was "aimed primarily to improve the administrative provisions of the National Internal Revenue Code to
ensure the collection on the tax on interest on commercial papers used as principal instruments issued in the primary market."89 It was reported that
"the [Bureau of Internal Revenue had] no means of enforcing strictly the taxation on interest income earned in the money market
transactions."90chanrobleslaw
These presidential decrees, as well as other new internal revenue laws and various laws and decrees that have so far amended the provisions of the
1939 National Internal Revenue Code were consolidated and codified into the 1977 National Internal Revenue Code.91chanrobleslaw
In 1980, Presidential Decree No. 173992 was promulgated, which further amended certain provisions of the 1977 National Internal Revenue Code and
repealed Section 210 (the provision embodying the percentage tax on commercial paper transactions). The Decree imposed a final tax of 20% on
interests from yields on deposit substitutes issued to the public.93 The tax was required to be withheld by banks and non-bank financial intermediaries
and paid to the Bureau of Internal Revenue in accordance with Section 54 of the 1977 National Internal Revenue Code. Presidential Decree No. 31739,
as amended by Presidential Decree No. 1959 in 1984 (which added the definition of deposit substitutes) was subsequently incorporated in the National
Internal Revenue Code.
These developments in the National Internal Revenue Code reflect the rationale for the application of the withholding system to yield from deposit
substitutes, which is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source,94 as with the case of
the interest on bank deposits. When banks sell deposit substitutes to the public, the final withholding tax is imposed on the interest income because it
would be difficult to collect from the public. Thus, the incipient scheme in the final withholding tax is to achieve an effective administration in capturing
the interest-income windfall from deposit substitutes as a source of revenue.
It must be emphasized, however, that withholding tax is merely a method of collecting income tax in advance. The perceived tax is collected at the
source of income payment to ensure collection. Consequently, those subjected to the final withholding tax are no longer subject to the regular income
tax.
III
Respondents maintain that the phrase "at any one time" must be given its ordinary meaning, i.e. "at any given time" or "during any particular point or
moment in the day."95 They submit that the correct interpretation of Section 22(Y) does not look at any specific transaction concerning the security;
instead, it considers the existing number of lenders/investors of such security at any moment in time, whether in the primary or secondary market.96
Hence, when during the lifetime of the security, there was any one instance where twenty or more individual or corporate lenders held the security, the
borrowing becomes "public" in character and is ipso facto subject to 20% final withholding tax.97chanrobleslaw
Respondents further submit that Section 10.1(k) of the Securities Regulation Code and its Implementing Rules and Regulations may be applied by
analogy, such that if at any time, (a) the lenders/investors number 20 or more; or (b) should the issuer merely offer the securities publicly or to 20 or
more lenders/investors, these securities should be deemed deposit substitutes.98chanrobleslaw
On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the phrase "at any one time" only refers to transactions made in the
primary market. According to them, the PEACe Bonds are not deposit substitutes since CODE-NGO, through petitioner-intervenor RCBC, is the sole
lender in the primary market, and all subsequent transactions in the secondary market merely pertain to a sale and/or assignment of credit and not
borrowings from the public.99chanrobleslaw
Similarly, petitioners contend that for a government security, such as the PEACe Bonds, to be considered as deposit substitutes, it is an indispensable
requirement that there is "borrowing" between the issuer and the lender/investor in the primary market and between the transferee and the transferor
in the secondary market. Petitioners submit that in the secondary market, the transferee/buyer must have recourse to the selling investor as required by
Section 22(Y) of the National Internal Revenue Code so that a borrowing "for the borrower's (transferor's) own account" is created between the buyer
and the seller. Should the transferees in the secondary market who have recourse to the transferor reach 20 or more, the transaction will be subjected
to a final withholding tax.100chanrobleslaw
Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that respondents' proposed application of Section 10.1(kl) of the Securities
Regulation Code and its Implementing Rules is misplaced because: (1) the National Internal Revenue Code clearly provides the conditions when a
security issuance should qualify as a deposit substitute subject to the 20% final withholding tax; and (2) the two laws govern different matters.
III.A
Generally, a corporation may obtain funds for capital expenditures by floating either shares of stock (equity) or bonds (debt) in the capital market.
Shares of stock or equity securities represent ownership, interest, or participation in the issuer-corporation. On the other hand, bonds or debt securities
are evidences of indebtedness of the issuer-corporation.
New securities are issued and sold to the investing public for the first time in the primary market. Transactions in the primary market involve an actual
transfer of funds from the investor to the issuer of the new security. The transfer of funds is evidenced by a security, which becomes a financial asset in
the hands of the buyer/investor.
New issues are usually sold through a registered underwriter, which may be an investment house or a bank registered as an underwriter of
securities.101 An underwriter helps the issuer find buyers for its securities. In some cases, the underwriter buys the whole issue from the issuer and
resells this to other security dealers and the public.102 When a group of underwriters pool together their resources to underwrite an issue, they are
called the "underwriting syndicate."103chanrobleslaw
On the other hand, secondary markets refer to the trading of outstanding or already-issued securities. In any secondary market trade, the cash
proceeds normally go to the selling investor rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A bonds. The proceeds of the sale go to A, the issuer. The sale
between A and X is a primary market transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's indebtedness. The cash paid for the bonds no longer go to A, but remains
with X, the selling investor/holder. The transfer of A bonds from X to Y is considered a secondary market transaction. Any difference between the
purchase price of the assets (A bonds) and the sale price is a trading gain subject to a different tax treatment, as will be explained later.
When Y trades its A bonds to Z, the sale is still considered a secondary market transaction. In other words, the trades from X to Y, Y to Z, and Z to
subsequent holders/investors are considered secondary market transactions. If Z holds on to the bonds and the bonds mature, Z will receive from A the
face value of the bonds.
A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and the issuer pays interest on the invested amount.
However, unlike bank deposits, bonds are marketable securities. The market mechanism provides quick mobility of money and securities.104 Thus,
bondholders can sell their bonds before they mature to other investors, in turn converting their financial assets to cash. In contrast, deposits, in the
form of savings accounts for instance, can only be redeemed by the issuing bank.
III.B
An investor in bonds may derive two (2) types of income:
chanRoblesvirtualLawlibraryFirst, the interest or the amount paid by the borrower to the lender/investor for the use of the lender's money.105 For
interest-bearing bonds, interest is normally earned at the coupon date. In zero-coupon bonds, the discount is an interest amortized up to maturity.
Second, the gain, if any, that is earned when the bonds are traded before maturity date or when redeemed at maturity.
The 20% final withholding tax imposed on interest income or yield from deposit substitute does not apply to the gains derived from trading, retirement,
or redemption of the instrument.
It must be stressed that interest income, derived by individuals from long-term deposits or placements made with banks in the form of deposit
substitutes, is exempt from income tax. Consequently, it is likewise exempt from the final withholding tax under Sections 24(B)(1) and 25(A)(2) of the
National Internal Revenue Code. However, when it is preterminated by the individual investor, graduated rates of 5%, 12%, or 20%, depending on the
remaining maturity of the instrument, will apply on the entire income, to be deducted and withheld by the depository bank.
With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of the National Internal Revenue Code
provides:ChanRoblesVirtualawlibrary
Sec. 32. Gross Income. -
....
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the sale or exchange or retirement of bonds,
debentures or other certificate of indebtedness with a maturity of more than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a maturity of more than five years) in the secondary market,
are exempt from income tax. These "gains" refer to the difference between the selling price of the bonds in the secondary market and the price at
which the bonds were purchased by the seller. For discounted instruments such as the zero-coupon bonds, the trading gain is the excess of the selling
price over the book value or accreted value (original issue price plus accumulated discount from the time of purchase up to the time of sale) of the
instruments.106chanrobleslaw
Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when the bonds are redeemed at maturity, which is the difference
between the proceeds from the retirement of the bonds and the price at which the last holder acquired the bonds.
On the other hand, gains realized from the trading of short-term bonds (i.e., those with a maturity of less than five years) in the secondary market are
subject to regular income tax rates (ranging from 5% to 32% for individuals, and 30% for corporations) under Section 32107 of the National Internal
Revenue Code.
III.C
The Secretary of Finance, through the Bureau of Treasury,108 is authorized under Section 1 of Republic Act No. 245, as amended, to issue evidences of
indebtedness such as treasury bills and bonds to meet public expenditures or to provide for the purchase, redemption, or refunding of any obligations.
These treasury bills and bonds are issued and sold by the Bureau of Treasury to lenders/investors through a network of licensed dealers (called
Government Securities Eligible Dealers or GSEDs).109 GSEDs are classified into primary and ordinary dealers.110 A primary dealer enjoys certain
privileges such as eligibility to participate in the competitive bidding of regular issues, eligibility to participate in the issuance of special issues such as
zero-coupon treasury bonds, and access to tap facility window.111 On the other hand, ordinary dealers are only allowed to participate in the non-
competitive bidding.112 Moreover, primary dealers are required to meet the following obligations:ChanRoblesVirtualawlibrary
Must submit at least one competitive bid in each scheduled auction.
Must have total awards of at least 2% of the total amount of bills or bonds awarded within a particular quarter. This requirement does not cover special
issues.
Must be active in the trading of GS [government securities] in the secondary market.113
A primary dealer who fails to comply with its obligations will be dropped from the roster of primary dealers and classified as an ordinary dealer.
The auction method is the main channel used for originating government securities.114 Under this method, the Bureau of Treasury issues a public
notice offering treasury bills and bonds for sale and inviting tenders.115 The GSEDs tender their bids electronically;116 after the cut-off time, the
Auction Committee deliberates on the bids and decide on the award.117chanrobleslaw
The Auction Committee then downloads the awarded securities to the winning bidders' Principal Securities Account in the Registry of Scripless Securities
(RoSS). The RoSS, an electronic book-entry system established by the Bureau of Treasury, is the official Registry of ownership of or interest in
government securities.118 All government securities floated/originated by the National Government under its scripless policy, as well as subsequent
transfers of the same in the secondary market, are recorded in the RoSS in the principal Securities Account of the GSED.119chanrobleslaw
A GSED is required to open and maintain Client Securities Accounts in the name of its respective clients for segregating government securities acquired
by such clients from the GSED's own securities holdings. A GSED may also lump all government securities sold to clients in one account, provided that
the GSED maintains complete records of ownership/other titles of its clients in the GSED's own books.120chanrobleslaw
Thus, primary issues of treasury bills and bonds are supposed to be issued only to GSEDs. By participating in auctions, the GSED acts as a channel
between the Bureau of Treasury and investors in the primary market. The winning GSED bidder acquires the privilege to on-sell government securities
to other financial institutions or final investors who need not be GSEDs.121 Further, nothing in the law or the rules of the Bureau of Treasury prevents
the GSED from entering into contract with another entity to further distribute government securities.
In effecting a sale or distribution of government securities, a GSED acts in a certain sense as the "agent" of the Bureau of Treasury. In Doles v.
Angeles,122 the basis of an agency is representation.123 The question of whether an agency has been created may be established by direct or
circumstantial evidence.124 For an agency to arise, it is not necessary that the principal personally encounter the third person with whom the agent
interacts.125 The law contemplates impersonal dealings where the principal need not personally know or meet the third person with whom the agent
transacts: precisely, the purpose of agency is to extend the personality of the principal through the facility of the agent.126 It was also stressed that the
manner in which the parties designate the relationship is not controlling.127 If an act done by one person on behalf of another is in its essential nature
one of agency, the former is the agent of the latter, notwithstanding he or she is not so called.128chanrobleslaw
Through the use of GSEDs, particularly primary dealers, government is able to ensure the absorption of newly issued securities and promote activity in
the government securities market. The primary dealer system allows government to access potential investors in the market by taking advantage of the
GSEDs' distribution capacity. The sale transactions executed by the GSED are indirectly for the benefit of the issuer. An investor who purchases bonds
from the GSED becomes an indirect lender to government. The financial asset in the hand of the investor represents a claim to future cash, which the
borrower-government must pay at maturity date.129chanrobleslaw
Accordingly, the existence of 20 or more lenders should be reckoned at the time when the successful GSED-bidder distributes (either by itself or through
an underwriter) the government securities to final holders. When the GSED sells the government securities to 20 or more investors, the government
securities are deemed to be in the nature of a deposit substitute, taxable as such.
On the other hand, trading of bonds between two (2) investors in the secondary market involves a purchase or sale transaction. The transferee of the
bonds becomes the new owner, who is entitled to recover the face value of the bonds from the issuer at maturity date. Any profit realized from the
purchase or sale transaction is in the nature of a trading gain subject to a different tax treatment, as explained above.
Respondents contend that the literal application of the "20 or more lenders at any one time" to government securities would lead to: (1) impossibility of
tax enforcement due to limitations imposed by the Bank Secrecy Law; (2) possible uncertainties130; and (3) loopholes.131chanrobleslaw
These concerns, however, are not sufficient justification for us to deviate from the text of the law.132 Determining the wisdom, policy or expediency of
a statute is outside the realm of judicial power.133 These are matters that should be addressed to the legislature. Any other interpretation looking into
the purported effects of the law would be tantamount to judicial legislation.
IV
Section 57 prescribes the withholding tax on interest or yield on deposit substitutes, among others, and the person obligated to withhold the same.
Section 57 reads:ChanRoblesVirtualawlibrary
Section 57. Withholding of Tax at Source. �
�
(A)
Withholding of Final Tax on Certain Incomes. � Subject to rules and regulations, the Secretary of Finance may promulgate, upon the recommendation
of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c), 33 and 282 of the Code on specified items of income shall be withheld
by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.
Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National Internal Revenue Code relative to the Withholding on Income
subject to the Expanded Withholding Tax and Final Withholding Tax) states that the liability for payment of the tax rests primarily on the payor as a
withholding agent. Section 2.57 reads:ChanRoblesVirtualawlibrary
Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. �
�
(A)
Final Withholding Tax � Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and
final payment of the income tax due from the payee of said income. The liability for payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding
agent[.] (Emphasis supplied)
From these provisions, it is the payor-borrower who primarily has the duty to withhold and remit the 20% final tax on interest income or yield from
deposit substitutes.
This does not mean, however, that only the payor-borrower can be constituted as withholding agent. Under Section 59 of the National Internal Revenue
Code, any person who has control, receipt, custody, or disposal of the income may be constituted as withholding agent:ChanRoblesVirtualawlibrary
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under this Title upon gains, profits, and income not falling under the
foregoing and not returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal return under rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. The intent and purpose of the Title is that all
gains, profits and income of a taxable class, as defined in this Title, shall be charged and assessed with the corresponding tax prescribed by this Title,
and said tax shall be paid by the owners of such gains, profits and income, or the proper person having the receipt, custody, control or disposal of the
same. For purposes of this Title, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the year for which a
return is required to be rendered. (Emphasis supplied)
The intent and purpose of the National Internal Revenue Code provisions on withholding taxes is also explicitly stated, i.e., that all gains, profits, and
income "are charged and assessed with the corresponding tax"134 and said tax paid by "the owners of such gains, profits and income, or the proper
person having the receipt, custody, control or disposal of the same."135chanrobleslaw
The obligation to deduct and withhold tax at source arises at the time an income subject to withholding is paid or payable, whichever comes first.136 In
interest-bearing bonds, the interest is taxed at every instance that interest is paid (and income is earned) on the bond. However, in a zero-coupon
bond, it is expected that no periodic interest payments will be made. Rather, the investor will be paid the principal and interest (discount) together
when the bond reaches maturity.
As explained by respondents, "the discount is the imputed interest earned on the security, and since payment is made at maturity, there is an accreted
interest that causes the price of a zero coupon instrument to accordingly increase with time, all things being constant."137chanrobleslaw
In a 10-year zero-coupon bond, for instance, the discount (or inter is not earned in the first period, i.e., the value of the instrument does not equal par
at the end of the first period. The total discount is earned over the life of the instrument. Nonetheless, the total discount is considered earned on the
year of sale based on current value.138chanrobleslaw
In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary responsibility to withhold the 20% final withholding tax
on the interest valued at present value, when its sale and distribution of the government securities constitutes a deposit substitute transaction. The 20%
final tax is deducted by the buyer from the discount of the bonds and included in the remittance of the purchase price.
The final tax withheld by the withholding agent is considered as a "full and final payment of the income tax due from the payee on the said income [and
the] payee is not required to file an income tax return for the particular income."139 Section 10 of Department of Finance Department Order No. 020-
10140 in relation to the National Internal Revenue Code also provides that no other tax shall be collected on subsequent trading of the securities that
have been subjected to the final tax.
In this case, the PEACe Bonds were awarded to petitioners-intervenors RCBC/CODE-NGO as the winning bidder in the primary auction. At the same
time, CODE-NGO got RCBC Capital as underwriter, to distribute and sell the bonds to the public.
The Underwriting Agreement141 and RCBC Term Sheet142 for the sale of the PEACe bonds show that the settlement dates for the issuance by the
Bureau of Treasury of the Bonds to petitioners-intervenors RCBC/CODE-NGO and the distribution by petitioner-intervenor RCBC Capital of the PEACe
Bonds to various investors fall on the same day, October 18, 2001. This implies that petitioner-intervenor RCBC Capital was authorized to perform a
book-building process,143 a customary method of initial distribution of securities by underwriters, where it could collate orders for the securities ahead
of the auction or before the securities were actually issued. Through this activity, the underwriter obtains information about market conditions and
preferences ahead of the auction of the government securities.
The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-intervenor RCBC Capital sold the PEACe bonds to investors.
Should the number of investors to whom petitioner-intervenor RCBC Capital distributed the PEACe bonds, therefore, be found to be 20 or more, the
PEACe Bonds are considered deposit substitutes subject to the 20% final withholding tax. Petitioner-intervenors RCBC/CODE-NGO and RCBC Capital, as
well as the final bondholders who have recourse to government upon maturity, are liable to pay the 20% final withholding tax.
We note that although the originally intended negotiated sale of the bonds by government to CODE-NGO did not materialize, CODE-NGO, a private
entity�still through the participation of petitioners-intervenors RCBC and RCBC Capital�ended up as the winning bidder for the government securities
and was able to use for its projects the profit earned from the sale of the government securities to final investors.
Giving unwarranted benefits, advantage, or preference to a party and causing undue injury to government expose the perpetrators or responsible
parties to liability under Section 3(e) of Republic Act No. 3019. Nonetheless, this is not the proper venue to determine and settle any such liability.
VI
Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for the 20% final withholding tax for two (2) reasons. First, at
the time the required withholding should have been made, their obligation was not clear since BIR Ruling Nos. 370-2011 and DA 378-2011 stated that
the 20% final withholding tax does not apply to PEACe Bonds.144 Second, to punish them under the circumstances (i.e., when they secured the PEACe
Bonds from the Bureau of Treasury and sold the Bonds to the lenders/investors, they had no obligation to remit the 20% final withholding tax) would
violate due process of law and the constitutional proscription on ex post facto law.145chanrobleslaw
Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for the 20% final withholding tax even as a taxpayer because it never
earned interest income from the PEACe Bonds, and any income earned is deemed in the nature of an underwriting fee.146 Petitioners-intervenors RCBC
and RCBC Capital instead argue that the liability falls on the Bureau of Treasury and CODE-NGO, as withholding agent and taxpayer, respectively,
considering their explicit representation that the PEACe Bonds are exempt from the final withholding tax.147chanrobleslaw
Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal Revenue is barred from assessing and collecting the 20% final
withholding tax, assuming it was due, on the ground of prescription.148 They contend that the three (3)-year prescriptive period under Section 203,
rather than the 10-year assessment period under Section 222, is applicable because they were compliant with the requirement of filing monthly returns
that reflect the final withholding taxes due or remitted for the relevant; period. No false or fraudulent return was made because they relied on the 2001
BIR Rulings and on the representations made by the Bureau of Treasury and CODE-NGO that the PEACe Bonds were not subject to the 20% final
withholding tax.149chanrobleslaw
Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's interpretation of the phrase "at any one time" cannot be applied to the
PEACe Bonds and should be given prospective application only because it would cause prejudice to them, among others. They cite Section 246 of the
National Internal Revenue Code on non-retroactivity of rulings, as well as Commissioner of Internal Revenue v. San Roque Power Corporation,150 which
held that taxpayers may rely upon a rule or ruling issued by the Commissioner from the time it was issued up to its reversal by the Commissioner or the
court. According to them, the retroactive application of the court's decision would impair their vested rights, violate the constitutional prohibition on non-
impairment of contracts, and constitute a substantial breach of obligation on the part of government.151 In addition, the imposition of the 20% final
withholding tax on the PEACe Bonds would allegedly have pernicious effects on the integrity of existing securities that is contrary to the state policies of
stabilizing the financial system and of developing the capital markets.152chanrobleslaw
CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings confirming that the PEACe Bonds were not subject to the 20%
final withholding tax.153 Therefore, it should not be prejudiced if the BIR Rulings are found to be erroneous and reversed by the Commissioner or this
court.154 CODE-NGO argues that this Court's Decision construing the phrase "at any one time" to determine the phrase "20 or more lenders" to include
both the primary and secondary market should be applied prospectively.155chanrobleslaw
Assuming it is liable for the 20% final withholding tax, CODE-NGO argiles that the collection of the final tax was barred by prescription.156 CODE-NGO
points out that under Section 203 of the National Internal Revenue Code, internal revenue taxes such as the final tax, should be assessed within three
(3) years after the last day prescribed by law for the filing of the return.157 It farther argues that Section 222(a) on exceptions to the prescribed period,
for tax assessment and collection does not apply.158 It claims that there is no fraud or intent to evade taxes as it relied in good faith on the assurances
of the Bureau of Internal Revenue and Bureau of Treasury the PEACe Bonds are not subject to the 20% final withholding tax.159chanrobleslaw
We find merit on the claim of petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for prospective application of our Decision.
The phrase "at any one time" is ambiguous in the context of the financial market. Hence, petitioner-intervenor RCBC and the rest of the investors relied
on the opinions of the Bureau of Internal Revenue in BIR Ruling Nos. 020-2001, 035-2001160 dated August 16, 2001, and DA-175-01161 dated
September 29, 2001 to vested their rights in the exemption from the final withholding tax. In sum, these rulings pronounced that to determine whether
the financial assets, i.e., debt instruments and securities, are deposit substitutes, the "20 or more individual or corporate lenders" rule must apply.
Moreover, the determination of the phrase "at any one time" to determine the "20 or more lenders" is to be determined at the time of the original
issuance. This being the case, the PEACe Bonds were not to be treated as deposit substitutes.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,162 the Commissioner demanded from petitioner deficiency withholding income tax on film
rentals remitted to foreign corporations for the years 1965 to 1968. The assessment was made under Revised Memo Circular No. 4-71 issued in 1971,
which used gross income as tax basis for the required withholding tax, instead of one-half of the film rentals as provided under General Circular No. V-
334. In setting aside the assessment, this Court ruled that in the interest of justice and fair play, rulings or circulars promulgated by the Commissioner
of Internal Revenue have no retroactive application where applying them would prove prejudicial to taxpayers who relied in good faith on previous
issuances of the Commissioner. This Court further held that Section 24(b) of then National Internal Revenue Code sought to be implemented by General
Circular No. V-334 was neither too plain nor simple to understand and was capable of different interpretations. Thus:ChanRoblesVirtualawlibrary
The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha[d] been determined that the tax is still imposed on income
derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation . . . and that a mere return of capital or
investment is not income. . . ." "A part of the receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of
investment." The circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the portion of the rentals covering
the return of capital.
Were the "gross income" base clear from Sec. 24(b), perhaps, the ratiocination of the Tax Court could be upheld. It should be noted, however, that said
Section was not too plain and simple to understand. The fact that the issuance of the General Circular in question was rendered necessary leads to no
other conclusion than that it was not easy of comprehension and could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was just one in a series of enactments
regarding Sec. 24(b) of the Tax Code. Republic Act No. 3825 came next on June 22, 1963 without changing the basis but merely adding a proviso (in
bold letters).
(b) Tax on foreign corporation. � (1) Non-resident corporations. � There shall be levied, collected, and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines,
from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments,
or other fixed or determinable annual or periodical gains, profits and income, a tax equal to thirty per centum of such amount: PROVIDED, HOWEVER,
THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. (double emphasis ours)
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some words (also in bold letters).
"(b) Tax on foreign corporations. � (1) Non�resident corporations. � There shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines,
from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments,
or other fixed or determinable annual or periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal to thirty per centum of such
amount."
The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It provides that "the re-enactment of a
statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction." Note should be taken of the fact
that this case involves not a mere opinion of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all internal
revenue officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24(b)
was amended to refer specifically to 35% of the "gross income."163 (Emphasis supplied)
San Roque has held that the 120-day and the 30-day periods under Section 112 of the National Internal Revenue Code are mandatory and jurisdictional.
Nevertheless, San Roque provided an exception to the rule, such that judicial claims filed by taxpayers who relied on BIR Ruling No. DA-489-03�from
its issuance on December 10, 2003 until its reversal by this Court in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.164 on
October 6, 2010�are shielded from the vice of prematurity. The BIR Ruling declared that the "taxpayer-claimant need not wait for the lapse of the 120-
day period before it could seek judicial relief with the C[ourt] [of] T[ax] A[ppeals] by way of Petition for Review." The Court reasoned
that:ChanRoblesVirtualawlibrary
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit
they received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith
or misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling
under Section 246, should also apply prospectively. . . .
....
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to
a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a government
agency tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency
mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-
day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.165 (Emphasis supplied)
The previous interpretations given to an ambiguous law by the Commissioner of Internal Revenue, who is charged to carry out its provisions, are
entitled to great weight, and taxpayers who relied on the same should not be prejudiced in their rights.166 Hence, this Court's construction should be
prospective; otherwise, there will be a violation of due process for failure to accord persons, especially the parties affected by it, fair notice of the
special burdens imposed on them.
VII
Urgent Reiterative Motion [to Direct Respondents to Comply with the Temporary Restraining Order]
Petitioners Banco de Oro, et al. allege that the temporary restraining order issued by this Court on October 18, 2011 continues to be effective under
Rule 58, Section 5 of the Rules of Court and the Decision dated January 13, 2015. Thus, considering respondents' refusal to comply with their obligation
under the temporary restraining order, petitioners ask this Court to issue a resolution directing respondents, particularly the Bureau of Treasury, "to
comply with its order by immediately releasing to the petitioners during the pendency of the case the 20% final withholding tax" so that the monies may
be placed in escrow pending resolution of the case.167chanrobleslaw
We recall that in its previous pleadings, respondents remain firm in its stance that the October 18, 2011 temporary restraining order could no longer be
implemented because the acts sought to be enjoined were already fait accompli.168 They allege that the amount withheld was already remitted by the
Bureau of Treasury to the Bureau of Internal Revenue. Hence, it became part of the General Fund, which required legislative appropriation before it
could validly be disbursed.169 Moreover, they argue that since the amount in question pertains to taxes alleged to be erroneously withheld and
collected by government, the proper recourse was for the taxpayers to file an application for tax refund before the Commissioner of Internal Revenue
under Section 204 of the National Internal Revenue Code.170chanrobleslaw
In our January 13, 2015 Decision, we rejected respondents' defense of fait accompli. We held that the amount withheld were yet to be remitted to the
Bureau of Internal Revenue, and the evidence (journal entry voucher) submitted by respondents was insufficient to prove the fact of remittance.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the withholding and remittance of the
20% final withholding tax to the Bureau of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final withholding tax
when they received the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which
was due only on November 10, 2011. The act enjoined by the temporary restraining order had not yet been fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes they withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal
Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following month after the said taxes had
been withheld. The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury, which shall be the basis in
recording the remittance of the tax collection. The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as tax collection
in the Journal of Tax Remittance by government agencies based on its copies of the TRA. Respondents did not submit any withholding tax return or TRA
to prove that the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10-10395 dated October 18, 2011 submitted to this court
shows:ChanRoblesVirtualawlibrary
Account Code
Debit Amount
Credit Amount
Bonds Payable-L/T, Dom-Zero
442-360
35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) - 10 yr
Sinking Fund-Cash (BSF)
198-001
30,033,792,203.59
Due to BIR
412-002
4,966,207,796.41
To record redemption of 10 yr Zero coupon (Peace Bond) net of the 20% final withholding tax pursuant to BIR Ruling No. 378-2011, value date,
October 18, 2011 per BTr letter authority and BSP Bank Statements.
The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing the 20% final withholding tax on the PEACe
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies
corresponding to 20% final withholding tax was set aside for remittance to the Bureau of Internal Revenue.171
Respondents did not submit any withholding tax return or tax remittance advice to prove that the 20% final withholding tax was, indeed, remitted by
the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011, and consequently became part of the general fund of the government.
The corresponding journal entry in the books of both the Bureau of Treasury and Bureau of Internal Revenue showing the transfer of the withheld funds
to the Bureau of Internal Revenue was likewise not submitted to this Court. The burden of proof lies on them to show their claim of remittance. Until
now, respondents have failed to submit sufficient supporting evidence to prove their claim.
In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation,172 this Court upheld the right of a withholding agent
to file a claim for refund of the withheld taxes of its foreign parent company. This Court, citing Philippine Guaranty Company, Inc. v. Commissioner of
Internal Revenue,173 ruled that inasmuch as it is an agent of government for the withholding of the proper amount of tax, it is also an agent of its
foreign parent company with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government.
The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on Income]." It thus becomes
important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made "personally
liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the
amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and "subject to
tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding agent is in fact the agent both of
the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:ChanRoblesVirtualawlibrary
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax
under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over
whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to
the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of
the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because
under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made
liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the
necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the
authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, as in the
instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and
to commence an action for such refund.
....
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309,
NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.174 (Emphasis supplied, citations omitted)
In Commissioner of Internal Revenue v. Smart Communication, Inc.:175
[W]hile the withholding agent has the right to recover the taxes erroneously or illegally collected, he nevertheless has the obligation to remit the same
to the principal taxpayer. As an agent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly enriching himself
at the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right to file a claim for
refund.176chanroblesvirtuallawlibrary
Since respondents have not sufficiently shown the actual remittance of the 20% final withholding taxes withheld from the proceeds of the PEACe bonds
to the Bureau of Internal Revenue, there was no legal impediment for the Bureau of Treasury (as agent of petitioners) to release the monies to
petitioners to be placed in escrow, pending resolution of the motions for reconsideration filed in this case by respondents and petitioners-inervenors
RCBC and RCBC Capital.
Moreover, Sections 204 and 229 of the National Internal Revenue Code are not applicable since the Bureau of Treasury's act of withholding the 20%
final withholding tax was done after the Petition was filed.
Petitioners also urge177 us to hold respondents liable for 6% legal interest reckoned from October 19, 2011 until they fully pay the amount
corresponding to the 20% final withholding tax.
This Court has previously granted interest in cases where patent arbitrariness on the part of the revenue authorities has been shown, or where the
collection of tax was illegal.178chanrobleslaw
In Philex Mining Corp. v. Commissioner of Internal Revenue:179

[T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the collection of the tax was attended by arbitrariness. An
action is not arbitrary when exercised honestly and upon due consideration where there is room for two opinions, however much it may be believed that
an erroneous conclusion was reached. Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions.180 (Emphasis supplied, citations
omitted)
Here, the Bureau of Treasury made no effort to release the amount of P4,966,207,796.41, corresponding to the 20% final withholding tax, when it
could have done so.
In the Court's temporary restraining order dated October 18, 2011,181 which respondent received on October 19, 2011, we "enjoin[ed] the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on interest
income therefrom shall be withheld by the petitioner banks and placed in escrow pending resolution of [the] petition."182chanrobleslaw
Subsequently, in our November 15, 2011 Resolution, we directed respondents to "show cause why they failed to comply with the [temporary restraining
order]; and [to] comply with the [temporary restraining order] in order that petitioners may place the corresponding funds in escrow pending resolution
of the petition."183chanrobleslaw
Respondent did not heed our orders.
In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury for its continued retention of the amount corresponding to the 20%
final withholding tax, in wanton disregard of the orders of this Court.
We further ordered the Bureau of Treasury to immediately release and pay the bondholders the amount corresponding to the 20% final withholding tax
that it withheld on October 18, 2011.
However, respondent remained obstinate in its refusal to release the monies and exhibited utter disregard and defiance of this Court.
As early as October 19, 2011, petitioners could have deposited the amount of P4,966,207,796.41 in escrow and earned interest, had respondent Bureau
of Treasury complied with the temporary restraining order and released the funds. It was inequitable for the Bureau of Treasury to have withheld the
potential earnings of the funds in escrow from petitioners.
Due to the Bureau of Treasury's unjustified refusal to release the funds to be deposited in escrow, in utter disregard of the orders of the Court, it is held
liable to pay legal interest of 6% per annum184 on the amount of P4,966,207,796.41 representing the 20% final withholding tax on the PEACe Bonds.
WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and petitioners-intervenors RCBC and RCBC Capital Corporation's
Motion for Clarification and/or Partial Reconsideration is PARTLY GRANTED.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the bondholders the amount of P4,966,207,796.41, representing
the 20% final withholding tax on the PEACe Bonds, with legal interest of 6% per annum from October 19, 2011 until full payment.
SO ORDERED.chanroblesvirtuallawlibrary
THIRD DIVISION
G.R. No. 76573 September 14, 1989
MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing under the laws of Japan and duly licensed to
engage in business under Philippine laws with branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of
the decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40 representing
alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981 ending March
31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of
P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the
final withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan, the 10% final
intercorporate dividend tax and the 15% branch profit remittance tax paid thereon, is shown below:
1981
FIRST QUARTER (three months ended 3.31.81) (In Pesos)
THIRD QUARTER (three months ended 9.30.81)
TOTAL OF FIRST and THIRD quarters
Cash Dividends Paid

849,720.44
849,720.00
1,699,440.00
10% Dividend Tax Withheld
84,972.00
84,972.00
169,944.00
Cash Dividend net of 10% Dividend Tax Withheld
764,748.00
764,748.00
1,529,496.00
15% Branch Profit Remittance Tax Withheld
114,712.20
114,712.20
229,424.40 3
Net Amount Remitted to Petitioner
650,035.80
650,035.80
1,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the first quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on August 4, 1981 under
Central Bank Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit remittance on cash dividends declared and remitted to
petitioner at its head office in Tokyo in the total amount of P229,424.40 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines
as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as
amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not necessary that
the income be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the income arises from the business
activity in which the corporation is engaged. For example, if a resident foreign corporation is engaged in the buying and selling of machineries in the
Philippines and invests in some shares of stock on which dividends are subsequently received, the dividends thus earned are not considered 'effectively
connected' with its trade or business in this country. (Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged.
Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b)
(2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue on September 24, 1981, petitioner claimed for
the refund or issuance of a tax credit of P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and
Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same were not income earned by a Philippine
Branch of Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-
resident stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13,
1980 between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 % tax, and that the taxes withheld of 10 % as
intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to be
refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal Revenue in its assailed
judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact that the dividends in question are income taxable to the Marubeni
Corporation of Tokyo, Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific Company of Manila to its shareholder out of its
profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation. The investments in the Atlantic Gulf & Pacific
Company of the Marubeni Corporation of Japan were directly made by it and the dividends on the investments were likewise directly remitted to and
received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention, directly or
indirectly, in the investments and in the receipt of the dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not
come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the Central
Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent of (sic) the dividends in question, treated the Marubeni
Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it. Admittedly, the dividends under consideration were
earned by the Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine
Branch is duly licensed to engage in business under Philippine laws, such dividends are not the income of the Philippine Branch and are not taxable to
the said Philippine branch. We see no significance thereto in the identity concept or principal-agent relationship theory of petitioner because such
dividends are the income of and taxable to the Japanese corporation in Japan and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent relationship theory, Marubeni Japan is likewise a resident foreign
corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of
the Tax Code of 1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax under this Code — (1) Shall be subject to a final tax of 10% on the total
amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign corporation and not engaged in trade or
business in the Philippines, is subject to tax on income earned from Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1)
of the same Code which reads:
(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign corporation not engaged in trade or business in the Philippines shall
pay a tax equal to thirty-five per cent of the gross income received during each taxable year from all sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded between the Philippines and Japan.
11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that
other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according
to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed;
(a) ...
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is therefore the determination of whether it is a
resident or a non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner
reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does
not matter at all. A single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the particular
transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for
after all, the head office and the office branch constitute but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and
corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the
premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its
branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and
distinct income taxpayer from the branch in the Philippines. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of
Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable
only to the head office, cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower
tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 %
intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the
petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax
on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually
remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer
look at the Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any
tax imposable by the contracting state concerned should not exceed the 25 % limitation and that said rate would apply only if the tax imposed by our
laws exceeds the same. In other words, by reason of our bilateral negotiations with Japan, we have agreed to have our right to tax limited to a certain
extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24
(b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On dividends received from a domestic corporation liable to tax under
this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20 % which represents the difference between the regular tax (35
%) on corporations and the tax (15 %) on dividends as provided in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its
gross income from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile
state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between
the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends
received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:
Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder from a domestic corporation under
Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax
Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring under the impression that the Court of Tax
Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for
review was not perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal from final orders, resolutions, awards,
judgments, or decisions of any court in all cases shall be fifteen (15) days counted from the notice of the final order, resolution, award, judgment or
decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been created by virtue of a special law,
Republic Act No. 1125. Respondent court is not among those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of the Court of Tax Appeals is given thirty
(30) days from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund on April 15, 1986. On the 30th day, or
on May 15, 1986 (the last day for appeal), petitioner filed a motion for reconsideration which respondent court subsequently denied on November 17,
1986, and notice of which was received by petitioner on November 26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously filed a
notice of appeal with the Court of Tax Appeals and a petition for review with the Supreme Court. 14 From the foregoing, it is evident that the instant
appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day period to appeal having begun to run again from
notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed the denial by respondent
Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is
ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends received. No
costs.
So ordered.
FIRST DIVISION
G.R. No. 216130, August 03, 2016
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. GOODYEAR PHILIPPINES, INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated August 14, 2014 and the Resolution3 dated January 5, 2015 of the Court of Tax
Appeals (CTA) En Banc in C.T.A. EB No. 1041, which affirmed the Decision4 dated March 25, 2013 and the Resolution5 dated June 26, 2013 of the CTA
Second Division (CTA Division) in C.T.A. Case No. 8188, ordering petitioner Commissioner of Internal Revenue (petitioner) to refund or issue a tax credit
certificate (TCC) in the sum of P14,659,847.10 to respondent Goodyear Philippines, Inc. (respondent), representing erroneously withheld and remitted
final withholding tax (FWT).
The Facts
Respondent is a domestic corporation duly organized and existing under the laws of the Philippines, and registered with the Bureau of Internal Revenue
(BIR) as a large taxpayer with Taxpayer Identification Number 000-409-561-000.6 On August 19, 2003, the authorized capital stock of respondent was
increased from P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to P1,731,863,000.00 divided into 4,000,000 common
shares and 13,318,630 preferred shares with a par value of P100.00 each. Consequently, all the preferred shares were solely and exclusively subscribed
by Goodyear Tire and Rubber Company (GTRC), which was a foreign company organized and existing under the laws of the State of Ohio, United States
of America (US) and is unregistered in the Philippines.7chanrobleslaw
On May 30, 2008, the Board of Directors of respondent authorized the redemption of GTRC's 3,729,216 preferred shares on October 15, 2008 at the
redemption price of P470,653,914.00, broken down as follows: P372,921,600.00 representing the aggregate par value and P97,732,314.00,
representing accrued and unpaid dividends.8chanrobleslaw
On October 15, 2008, respondent filed an application for relief from double taxation before the International Tax Affairs Division of the BIR to confirm
that the redemption was not subject to Philippine income tax, pursuant to the Republic of the Philippines (RP) - US Tax Treaty.9 This notwithstanding,
respondent still took the conservative approach, and thus, withheld and remitted the sum of P14,659,847.10 to the BIR on November 3, 2008,
representing fifteen percent (15%) FWT, computed based on the difference of the redemption price and aggregate par value of the
shares.10chanrobleslaw
On October 21, 2010, respondent filed an administrative claim for refund or issuance of TCC, representing 15% FWT in the sum of P14,659,847.10
before the BIR. Thereafter, or on November 3, 2010, it filed a judicial claim, by way of petition for review, before the CTA, docketed as C.T.A. Case No.
For her part, petitioner maintained that respondent's claim must be denied, considering that: (a) it failed to exhaust administrative remedies by
prematurely filing its petition before the CTA; and (b) it failed to submit complete supporting documents before the BIR.12chanrobleslaw
The CTA Division Ruling
In a Decision13 dated March 25, 2013, the CTA Division granted the petition and thereby ordered petitioner to refund or issue a TCC in the sum of
P14,659,847.10 to respondent for being erroneously withheld and remitted as FWT.14 Concerning the procedural issue, the CTA Division ruled that it
was appropriate for respondent to dispense with the administrative remedy before the BIR, considering that court action should be instituted within two
(2) years after the payment of the tax regardless of the pendency of the administrative claim; otherwise, the taxpayer would be barred from recovering
the same.15chanrobleslaw
On the merits, the CTA Division found that the redemption of the 3,729,216 shares issued to GTRC � which were then converted to treasury shares �
was not subject to Philippine income tax. The CTA Division elucidated that while the general rule is that the net capital gain obtained by a non-resident
foreign corporation, such as GTRC, in the redemption of shares would be subjected to tax rates of five percent (5%) and ten percent (10%) under
Section 28 (B) (5) (c)16 of the National Internal Revenue Code, as amended (Tax Code), the provisions, however, of the RP-US Tax Treaty would also
apply in determining the tax implications of the redemption of GTRC's preferred shares because it is a resident of the US.17 It pointed out that under
Article 1418 of the RP-US Tax Treaty, any gain derived by a US resident (i.e., GTRC) from the alienation of its properties (i.e., the preferred shares),
other than those described in paragraph 1 thereof, shall only be taxable in the US. Nonetheless, the CTA Division remained mindful of the Reservation
Clause19 in the same treaty which provided that the gains derived by a US resident from the disposition of shares in a domestic corporation may be
taxed in the Philippines, provided that the latter's assets principally20 consist of real property. After evaluating the Audited Financial Statements (AFS) of
respondent for the years 2007 and 2008, and noting that the value of its real properties � i.e., property, plant, and equipment � comprise less than
50% of its total assets, the CTA Division held that respondent's assets did not principally consist of real property and, hence, exempt from capital gains
tax under Section 28 (B) (5) (c) of the Tax Code.21chanrobleslaw
The CTA Division then determined whether the net capital gain derived by GTRC would be subjected to 15% FWT imposed on intercorporate dividends
under Section 28 (B) (5) (b)22 of the Tax Code. Citing the RP-US Tax Treaty, the CTA Division noted that dividend income shall be determined by the
law of the state in which the distributing corporation is a resident,23 which in the Philippines' case, would be Section 73 (A)24 of the Tax Code, defining
dividends for income tax purposes as distributions to shareholders arising out of its earnings or profits.� Accordingly, the CTA Division held that the net
capital gain of GTRC could not be regarded as "dividends," considering that it did not come from respondent's unrestricted earnings or profits, as the
records would show that it did not have any unrestricted earnings from the years 2003-2009 to cover any dividend pay-outs.25cralawred Finally, the
CTA Division explained that there is only one instance in the Tax Code which treated the gains derived from redemptions or buy back of shares as
dividends, and this is found in Section 73 (B),26 which contemplated the issuance of stock dividends. The CTA Division, however, dispelled the
application of this provision, considering that the shares which respondent redeemed were neither stock dividends nor were they redeemed using
unrestricted retained earnings. In sum, the CTA Division ruled that absent any law which specifically treats the gain derived by GTRC as dividends, the
same could not be subjected to 15% FWT under Section 28 (B) (5) (b).27chanrobleslaw
Dissatisfied, petitioner moved for reconsideration,28 which was, however, denied in a Resolution29 dated June 26, 2013. Thereafter, she appealed30 to
the CTA En Banc.
The CTA En Banc Ruling
In a Decision31 dated August 14, 2014, the CTA En Banc affirmed the findings of the CTA Division. Echoing the ruling of the CTA Division, the CTA En
Banc found that respondent was compelled to seek judicial recourse after thirteen (13) days from filing its administrative claim so as not to forfeit its
right to appeal to the CTA. Anent the tax treatment of the redemption price paid by respondent to GTRC, the CTA En Banc fully agreed with the
disposition of the CTA Division, ruling that the net capital gain received by GTRC was not subject to Philippine income tax.32 Undaunted, petitioner filed
a motion for reconsideration,33 which was, however, denied in a Resolution34 dated January 5, 2015; hence, this petition.
The Issues Before the Court
The issues raised by petitioner in this case are: (a) whether or not the judicial claim of respondent should be dismissed for non-exhaustion of
administrative remedies; and (b) whether or not the CTA En Banc correctly ruled that the gain derived by GTRC was not subject to 15% FWT on
dividends.
The Court's Ruling
The petition is devoid of merit.
I.
At the onset, petitioner contends that by filing the administrative and judicial claims only 13 days apart, respondent, in effect, pursued an empty remedy
before the BIR, and thereby deprived the latter of the opportunity to ascertain the validity of the claim. In this regard, petitioner maintained that the
mere filing of the administrative claim before the BIR did not outrightly satisfy the requirement of exhaustion of administrative remedy.35chanrobleslaw
The contentions are untenable.
Section 229 of the Tax Code states that judicial claims for refund must be filed within two (2) years from the date of payment of the tax or penalty,
providing further that the same may not be maintained until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue
(CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. � No suit or proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment� x x x. (Emphases and underscoring supplied)
Verily, the primary purpose of filing an administrative claim was to serve as a notice of warning to the CIR that court action would follow unless the tax
or penalty alleged to have been collected erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code � [then Section 306 of the old Tax
Code] � however does not mean that the taxpayer must await the final resolution of its administrative claim for refund, since doing so would be
tantamount to the taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-year prescriptive period expire without the appropriate
judicial claim being filed. In CBK Power Company, Ltd. v. CIR,36 the Court enunciated:
In the foregoing instances, attention must be drawn to the Court's ruling in P.J. Kiener Co., Ltd. v. David (Kiener), wherein it was held that in no wise
does the law, i.e., Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the
taxpayer's claim, and that the taxpayer shall not go to court before he is notified of the Collector's action. In Kiener, the Court went on to say that the
claim with the Collector of Internal Revenue was intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded, court action will follow� x x x.37 (Emphases and underscoring supplied)
In the case at bar, records show that both the administrative and judicial claims for refund of respondent for its erroneous withholding and remittance
of FWT were indubitably filed within the two-year prescriptive period.38 Notably, Section 229 of the Tax Code, as worded, only required that an
administrative claim should first be filed. It bears stressing that respondent could not be faulted for resorting to court action, considering that the
prescriptive period stated therein was about to expire. Had respondent awaited the action of petitioner knowing fully well that the prescriptive period
was about to lapse, it would have resultantly forfeited its right to seek a judicial review of its claim, thereby suffering irreparable damage.
Thus, in view of the aforesaid circumstances, respondent correctly and timely sought judicial redress, notwithstanding that its administrative and judicial
claims were filed only 13 days apart.
II.
For another, petitioner asserts that the net capital gain derived by GTRC from the redemption of its 3,729,216 preferred shares should be subject to
15% FWT on dividends; She claims that while the payment of the original subscription price could not be taxed as it represented a return of capital, the
additional amount, however, or the component of the redemption price representing the amount of P97,732,314.00 should not be treated as a mere
premium and part of the subscription price, but as accumulated dividend in arrears, and, hence, subject to 15% FWT.39chanrobleslaw
Again, the assertions are wrong.
The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign corporation is found in Section 28 (B) (5) (b) of the Tax
Code which reads:
SEC. 28. Rates of Income Tax on Foreign Corporations. �
xxxx
(B) Tax on Nonresident Foreign Corporation. �
xxxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. �

(b) Intercorporate Dividends. � A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property
dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition
that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular
income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective
January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular
income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends;
xxxx (Emphasis and underscoring supplied)

It must be noted, however, that GTRC is a non-resident foreign corporation, specifically a resident of the US. Thus, pursuant to the cardinal principle
that treaties have the force and effect of law in this jurisdiction,40 the RP-US Tax Treaty complementarily governs the tax implications of respondent's
transactions with GTRC.
Under Article 11 (5)41 of the RP-US Tax Treaty, the term "dividends" should be understood according to the taxation law of the State in which the
corporation making the distribution is a resident, which, in this case, pertains to respondent, a resident of the Philippines. Accordingly, attention should
be drawn to the statutory definition of what constitutes "dividends," pursuant to Section 73 (A)42 of the Tax Code which provides that "[t]he term
'dividends' x x x means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether
in money or in other property."
In light of the foregoing, the Court therefore holds that the redemption price representing the amount of P97,732,314.00 received by GTRC could not be
treated as accumulated dividends in arrears that could be subjected to 15% FWT. Verily, respondent's AFS covering the years 2003 to 2009 show that it
did not have unrestricted retained earnings, and in fact, operated from a position of deficit.43Thus, absent the availability of unrestricted retained
earnings, the board of directors of respondent had no power to issue dividends.44 Consistent with Section 73 (A) of the Tax Code, this rule on dividend
declaration � i.e., that it is dependent upon the availability of unrestricted retained earnings � was further edified in Section 43 of The Corporation
Code of the Philippines45 which reads:
Section 43. Power to Declare Dividends. � The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose.
x x x x (Emphasis and underscoring supplied)

It is also worth mentioning that one of the primary features of an ordinary dividend is that the distribution should be in the nature of a recurring return
on stock46 which, however, does not obtain in this case. As aptly pointed out by the CTA En Banc, the amount of P97,732,314.00 received by GTRC did
not represent a periodic distribution of dividend, but rather a payment by respondent for the redemption47 of GTRC's 3,729,216 preferred shares. In
Wise & Co., Inc. v. Meer:48
The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock � in fact, they surrendered and relinquished
their stock in return for said distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a
going concern during its more or less brief administration of the business as trustee for the Manila Company, and finally disappeared even as such
trustee.
"The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each case depending on the particular
circumstances of the case and the intent of the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend.
However, if the corporation is really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in
complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out
all parts of the stockholders' interest in the company * * * ." (Montgomery, Federal Income Tax Handbook [1938-1939], 258 x x x)49 (Emphases and
underscoring supplied)
All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of its 3,729,216 preferred shares were not accumulated
dividends in arrears. Contrary to petitioner's claims, it is therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5) (b) of the
Tax Code.
WHEREFORE, the petition is DENIED. The Decision dated August 14, 2014 and the Resolution dated January 5, 2015 of the Court of Tax Appeals En
Banc in C.T.A. EB No. 1041 are hereby AFFIRMED.
SO ORDERED.chanRoblesvirtualLawlibrary
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-68375 April 15, 1988

vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled Wander
Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding tax
on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation organized under Philippine laws. It is wholly-owned
subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and remitted to its parent company, Glaro
dividends in the amount of P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of
Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on the dividends it remitted to Glaro
amounting to P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of P115,400.00,
contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos.
369 and 778, and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with respondent Court of Tax
Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to petitioner in the amount of P115,440.00 representing overpaid
withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated August 13, 1984. Hence, the instant
petition.
Petitioner raised two (2) assignment of errors, to wit:
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN
RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE
HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS INCOME TAX LIABILITY A TAX CREDIT
EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE
DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends declared
and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to claim the refund; and (2) Whether or not
Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the dividend income and a mere withholding
agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this Court. It was never raised at the
administrative level, or at the Court of Tax Appeals. To allow a litigant to assume a different posture when he comes before the court and challenge the
position he had accepted at the administrative level, would be to sanction a procedure whereby the Court—which is supposed to review administrative
determinations—would not review, but determine and decide for the first time, a question not raised at the administrative forum. Thus, it is well settled
that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot
be raised for the first time on appeal (Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev.
Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement of the
alleged overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it
became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch
of the imagination be considered as an abdication of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of the Internal
Revenue Code held that "the obligation imposed thereunder upon the withholding agent is compulsory." It is a device to insure the collection by the
Philippine Government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court
(Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21 SCRA 944). In fact, Wander may be assessed for deficiency withholding tax at
source, plus penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity who
should for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign country where Glaro is domiciled, grants to
Glaro a tax credit against the tax due it, equivalent to 20%, or the difference between the regular 35% rate of the preferential 15% rate. The dispute in
this issue lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation from corporations domiciled in
foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby further amended to read as
follows:
(b) Tax on foreign corporations. — 1) Non-resident corporation. A foreign corporation not engaged in trade or business in the Philippines,
including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross
income received during its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to
15% tax), dividends, premiums, annuities, compensations, remuneration for technical services or otherwise, emoluments or other fixed or determinable,
annual, periodical or casual gains, profits, and income, and capital gains: ... Provided, still further That on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53
(d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference
between the regular tax (35%) on corporations and the tax (15%) dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received,
subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly, Wander claims that full credit is granted and
not merely credit equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of the parent corporation
allows a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty percentage point portion spared,
waived or otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect that in case where a
foreign tax, such as the Philippine 35% dividend tax, is spared waived or otherwise considered as if paid in whole or in part by the foreign country, a
Swiss foreign-tax credit would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or waived or considered as if
paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax or
the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369, amending Section 24 (b) (1)
of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations" interest here and
discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner that
"since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition
imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the
very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, which is not
present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. L-66838 December 2, 1991

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and Gamble Philippine
Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding
tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit in the amount
of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent
[35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public respondent Court
of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund
or grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes
deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the regular tax of thirty-five
percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent
company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this Resolution resolving that Motion.
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit, which
need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by
the Commissioner of Internal Revenue. The question was not raised by the Commissioner on the administrative level, and neither was it raised by him
before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising this question of
alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should
it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole
stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow the same rules of
procedure which bind private parties. It is, for instance, clear that the government is held to compliance with the provisions of Circular No. 1-88 of this
Court in exactly the same way that private litigants are held to such compliance, save only in respect of the matter of filing fees from which the Republic
of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time on appeal
questions which had not been litigated either in the lower court or on the administrative level. For, if petitioner had at the earliest possible opportunity,
i.e., at the administrative level, demanded that P&G-Phil. produce an express authorization from its parent corporation to bring the claim for refund,
then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen below, also
ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of a suit for
recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the
tax or penalty regardless of any supervening cause that may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files
in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D. No. 69)
(Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term
"taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on Income]." 2 It thus becomes important to
note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such
tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments
effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable 3
for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have
been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms liable for tax" and "subject to
tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in fact the agent both of
the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax
under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over
whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to
the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of
the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because
under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made
liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the
necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the
authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, is in the
instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and
to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of
the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from
the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309,
NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen
percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of
the gross income receipt during its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends
received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which
represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation,
goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit
for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other
words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes
deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the
Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular
thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20
percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC
does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax
Code") are the following:
Sec. 901 — Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the
applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a
corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time
before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit
shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against
the personal holding company tax imposed by section 541.
(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection
(a):
(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income,
war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
xxx xxx xxx
Sec. 902. — Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation which owns at least 10 percent of the
voting stock of a foreign corporation from which it receives dividends in any taxable year shall —
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or
excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with
respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the
income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess
profits taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his
satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or
earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the
dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate part of the corporate income tax
actually paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its
Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax
was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words,
US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying
on business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA
are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate
income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of
P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend
tax rate under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and
which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by
the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:
P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA
P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax
P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the
"deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1),
NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed
arithmetically as follows:

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA
P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of
P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned
subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and
clearly complies with the requirements of Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of
Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by
the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later
Associate Justice of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue
Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax
"deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of
income tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S.
government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the
income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of
P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which
is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned
sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends
the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750

———
100,000 **
(2) The amount of 15% of

P75,000 withheld = 11,250
———
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine
subsidiary is clearly more than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by
your client to its parent company shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the
ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax
on dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987
addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at
bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the
same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in
the United States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .
(c) Taxes. — . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this paragraphs,
the tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war
profits or excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government—
e.g., for taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of
Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a
foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits,
or excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign
corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That
the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken
which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The
term "accumulated profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess
of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue
shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty
days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in
other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign
corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the
word "year" as used in this subsection shall be construed to mean such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is,
e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under
our NIRC to have paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the
subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax
credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax
credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8),
NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%)
rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by
the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation
arising after the legal question has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case:
the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US
tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the
applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC,
merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued
by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the
preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax
credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second
Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities
unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed
and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign
jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for
applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend
tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as a matter of law, of a particular
tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR
from issuing implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR the amount of
the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year
involved. Since the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit such
certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential.
The task of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We should leave details relating to
administrative implementation where they properly belong — with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct
reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather to
achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and objectives as
they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen percent
(15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy foremost of which is the financing of economic
development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends received by non-resident
foreign corporations in the same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of
earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home
country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would
be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the
investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 — Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA
P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits
P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.
P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)
-0- — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on the
dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the
dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should encourage additional investment or
re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," 15 the Philippines, by a
treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent
corporations:
Art 11. — Dividends
xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the
other Contracting State shall not exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year
which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares
of the voting stock of the paying corporation was owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent corporation
receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary] —. 16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is
here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is
still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the requirements of Section 24 (b)
(1), NIRC, makes available in respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the
Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax
Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.
FIRST DIVISION
June 7, 2017
G.R. No. 205428
REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS (DPWH), Petitioners
vs
SPOUSES SENANDO F. SALVADOR and JOSEFINA R. SALVADOR, Respondents
DECISION
DEL CASTILLO, J.:
We resolve the Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the August 23, 2012 Decision 1 and the January 10, 2013
Order 2 of the Regional Trial Court (RTC), Branch 270, Valenzuela City, in Civil Case No. 17 5-V-11 which directed petitioner Republic of the Philippines
(Republic) to pay respondents spouses Senando F. Salvador and Josefina R. Salvador consequential damages equivalent to the value of the capital gains
tax and other taxes necessary for the transfer of the expropriated property in the Republic's name.
The Antecedent Facts
Respondents are the registered owners of a parcel of land with a total land area of 229 square meters, located in Kaingin Street, Barangay Parada,
Valenzuela City, and covered by Transfer Certificate of Title No.V-77660. 3
On November 9, 2011, the Republic, represented by the Department of - Public Works and Highways (DPWH), filed a verified Complaint 4 before the
RTC
for the expropriation of 83 square meters of said parcel of land (subject property), as well as the improvements thereon, for the construction of the C-5
Northern Link Road Project Phase 2 (Segment 9) from the North Luzon Expressway (NLEX) to McArthur Highway. 5
On February 10, 2012, respondents received two checks from the DPWH representing 100% of the zonal value of the subject property and the cost of
the one-storey semi-concrete residential house erected on the property amounting to ₱l61,850.00 6 and ₱523,449.22,7 respectively. 8 The RTC
thereafter issued the corresponding Writ of Possession in favor of the Republic. 9
On the same day, respondents signified in open court that they recognized the purpose for which their property is being expropriated and interposed no
objection thereto. 10 They also manifested that they have already received the total sum of ₱685,349.22 from the DPWH and are therefore no longer
intending to claim any just compensation. 11
Ruling of the Regional Trial Court
In its Decision12 dated August 23, 2012, the RTC rendered judgment in favor of the Republic condemning t1Je subject property for the purpose of
implementing the construction of the C-5 Northern Link Road Project Phase 2 (Segment 9) from NLEX to McArthur Highway, Valenzuela City. 13
The RTC likewise directed the Republic to pay respondents consequential damages equivalent to the value of the capital gains tax and other taxes
necessary for the transfer of the subject property in the Republic's name. 14
The Republic moved for partial reconsideration, 15 specifically on the issue relating to the payment of the capital gains tax, but the RTC denied the
motion in its Order16 dated January 10, 2013 for having been belatedly filed. The RTC also found no justifiable basis to reconsider its award of
Consequential damages in favor of respondents, as the payment of capital gains tax and other transfer taxes is but a consequence of the expropriation
proceedings.17
As a result, the Republic filed the present Petition for Review on Certiorari assailing the RTC's August 23, 2012 Decision and January 10, 2013 Order.
Issues
In the present Petition, the Republic raises the following issues for the Court's resolution: first, whether the RTC correctly denied the Republic's Motion
for Partial Reconsideration for having been filed out of time; 18 and second, whether the capital gains tax on the transfer of the expropriated property
can be considered as consequential damages that may be awarded to respondents. 19
The Court's Ruling
The Petition is impressed with merit.
"Section 3, Rule 13 of the Rules of Court provides that if a pleading is filed by registered mail, x x x the date of mailing shall be considered as the date
of filing. It does not matter when the court actually receives the mailed pleading."20
In this case, the records show that the Republic filed its Motion for Partial Reconsideration before the RTC via registered mail on September 28, 2012.21
Although the trial cou1treceived the Republic's motion only on October 5, 2012,22 it should have considered the pleading to have been filed on
September 28, 2012, the date of its mailing, which is clearly within the reglementary period of 15 days to file said motion, 23 counted from September
13, 2012, or the date of the Republic's receipt of the assailed Decision.24
Given these circumstances, we hold that the RTC erred in denying the Republic's Motion for Partial Reconsideration for having been filed out of
time.1âwphi1
We likewise rule that the RTC committed a serious error when it directed the Republic to pay respondents consequential damages equivalent to the
value of the capital gains tax and other taxes necessary for the transfer of the subject property.
"Just compensation [is defined as] the full and fair equivalent of the property sought to be expropriated.x x x The measure is not the taker's gain but
the owner's loss. [The compensation, to be just,] must be fair not only to the owner but also to the taker."25
In order to determine just compensation, the trial court should first ascertain the market value of the property by considering the cost of acquisition, the
current value of like properties, its actual or potential uses, and in the particular case of lands, their size, shape, location, and the tax declarations
thereon. 26 if as a result of the expropriation, the remaining lot suffers from an impairment or decrease in value, consequential damages may be
awarded by the trial court, provided that the consequential benefits which may arise from the expropriation do not exceed said damages suffered by the
owner of the property. 27
While it is true that "the determination of the amount of just compensation is within the court's discretion, it should not be done arbitrarily or
capriciously. [Rather,] it must [always] be based on all established rules, upon correct legal principles and competent evidence." 28 The court cannot
base its judgment on mere speculations and surmises. 29
In the present case, the RTC deemed it "fair and just that x x x whatever is the value of the capital gains tax and all other taxes necessary for the
transfer of the subject property to the [Republic] are but consequential damages that should be paid by the latter."30 The RTC further explained in its
assailed Order that said award in favor of respondents is but equitable, just, and fair, viz.:
As aptly pointed out by [respondents], they were merely forced by circumstances to be dispossessed of [the] subject property owing to the exercise of
the State of its sovereign power to expropriate. The payment of capital gains tax and other transfer taxes is a consequence of the expropriation
proceedings. It is in the sense of equity, justness and fairness, and as upheld by the Supreme Court in the case of Capitol Subdivision, Inc. vs. Province
of Negros Occidental, G.R. No. L-16257, January 31, 1963 that the assailed consequential damages was awarded by the court. 31
This is clearly an error. It is settled that the transfer of property through expropriation proceedings is a sale or· exchange within the meaning of
Sections 24(D) and 56(A) (3) of the National Internal Revenue Code, and profit from the transaction constitutes capital gain. 32 Since capital gains tax
is a tax on passive income, it is the seller, or respondents in this case, who are liable to shoulder the tax. 33
In fact, the Bureau of Internal Revenue (BIR), in BIR Ruling No. 476-2013 dated December 18, 2013, has constituted the DPWH as a withholding agent
tasked to withhold the 6% final withholding tax in the expropriation of real property for infrastructure projects. 11ms, as far as the government is
concerned, the capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the seller's gain from the sale of real
property. 34
Besides, as previously explained, consequential damages are only awarded if as a result of the expropriation, the remaining property of the owner
suffersfrom an impairment or decrease in value. 35 In this case, no evidence was submitted to prove any impairment or decrease in value of the subject
property as a result of the expropriation. More significantly, given that the payment of capital gains tax on the transfer· of the subject property has no
effect on the increase or decrease in value of the remaining property, it can hardly be considered as consequential damages that may be awarded to
respondents.
WHEREFORE, we GRANT the Petition for Review on Certiorari. The Decision dated August 23, 2012 and the Order dated January 10, 2013 of the
Regional Trial Court, Branch 270, Valenzuela City, in Civil Case No. 175-V-11, are hereby MODIFIED, in that the award of consequential damages is
DELETED. In addition, spouses Senando F. Salvador and Josefina R. Salvador are hereby ORDERED to pay for the capital gains tax due on the transfer
of the expropriated property.
SO ORDERED.

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SUPREME COURT

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Sec. 24. Rates of tax on corporations. — ...

(b) Tax on foreign corporations. — ...

The Tax Code defines "gross income" thus:

G.R. No. 180356 February 16, 2010

SOUTH AFRICAN AIRWAYS, Petitioner,

VELASCO, JR., J.:

Period Date Filed 2.5% Gross

Hence, petitioner went to us.

The Court’s Ruling

This petition must be denied.

Petitioner has failed to overcome such burden.

Sec. 28(b)(2) of the 1939 NIRC provided:

Such position is untenable.

Its argument has no merit.

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

Art. 1279. In order that compensation may be proper, it is necessary:

(3) That the two debts be due;

(4) That they be liquidated and demandable;

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,13 thus:

G.R. No. 169507

AIR CANADA, Petitioner,

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

Hence, this Petition for Review29 was filed.

The issues for our consideration are:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

(A) Tax on Resident Foreign Corporations. -

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

c) Promotion of passenger transportation on AC;

The following terms are indicative of Aerotel’s dependent status:

Article VII, Section 21 of the Constitution provides:

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

G.R. No. 215427 December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

The facts are briefly summarized as follows:

II. INCOME TAX

a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

III. FRANCHISE TAX

(a) Income from its casino operations;

(b) Income from dollar pit operations;

(c) Income from regular bingo operations; and

2. Income from "other related operations"includes, but is not limited to:

(d) Income from private poker operations;

(f) Income from SM demo units; and

Section 14. Other Conditions.

G.R. No. 212530, August 10, 2016

[G.R. No. L-9276. October 23, 1956.]