CIR vs. CA Facts: Don Andres Soriano, a citizen and resident of U.S., formed the corporation "A.

Soriano Y Cia", predecessor of ANSCOR. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. When Don Andres died, he has total shareholdings of 185,154 shares, 50,495 of which are original issues and the balance of 134.659 shares as stock dividend declarations. Correspondingly, one-half of those shareholdings were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of his estate. After the death of Don Andres, ANSCOR declared several increased in its capital stock. It also made two redemptions from the estate of Don Andres. As stated in the Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash dividends are declared. After examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks. The BIR made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty. ANSCOR's subsequent protest on the assessments was denied. Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling. In a petition for review the CA affirmed the ruling of the CTA. Hence, this petition. Issue: Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable. Held: The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR started making assessments on the proceeds of the redemption. Such corporate plan was not stated in nor supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation can act only through its Board of Directors. The Board Resolutions authorizing the redemptions state only one purpose reduction of foreign exchange remittances in case cash dividends are declared. Not even this purpose can be given credence. Records show that despite the existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was issued for about three decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign exchange remittances in case of cash dividend declaration, considering that ANSCOR is a family corporation where the majority shares at the time of redemptions were held by Don Andres' foreign heirs. Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to depend upon a third person who did not earn the income being taxed. Furthermore, even if the said purposes support the redemption and justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are deemed taxable dividends since it was shown that income was generated therefrom. After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" it is part of the "entire income" subject to tax. Moreover, dividends are included in "gross income". As income, it is subject to income tax which is required to be withheld at source. Exchange is an act of taking or giving one thing for another involving reciprocal transfer and is generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable. In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes.

The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest. WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all other respects. G.R. No. 172231 February 12, 2007. COMMISSIONER of INTERNAL REVENUE, petitioner, vs. ISABELA CULTURAL CORPORATION (ICC), respondent. CA Affirmed CTAs CTA cancelled and set aside the Assessment Notices for deficiency Income Tax and Expanded Withholding Tax issued by the BIR against respondent ICC. FACTS: On February 23, 1990, ICC, a domestic corporation, received from the BIR the assessment notices for deficiency Income Tax and Expanded Withholding Tax, inclusive of charges and interests, both for the taxable year 1986. The deficiency Income Tax arose from the BIRs disallowance of ICCs claimed expenses deductions for professional and security services billed to and paid by ICC in 1986 on income accrued in 1984 and 85. The deficiency Expanded Withholding Tax was allegedly due to the failure of ICC to withheld 1% withholding tax on its claimed deduction for security services. ICC is using the ACCRUAL METHOD OF ACCOUNTING. ISSUE: W/N the deduction should be allowed for the year 1986 on Income accrued in years 1984 and 85 using the Accrual Method. HELD: No! The Supreme Court said that the deduction should not be allowed. The high Tribunal has opined that the requisites for deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services must be met. These are: a) the expense must be ordinary and necessary; b) it must have been paid or incurred in during the taxable year; c) it must have been paid or incurred in carrying on a trade or business of the taxpayer; and d) it must be supported by receipts, records or other pertinent papers. Also, the requisite that it must have been paid or incurred during the taxable year is further qualified by SEC 45 of the NIRC which states that the deduction provided for in this title shall be taken for the taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting upon the basis of which the net income is computed. The SC said that under the ACCRUAL METHOD of ACCOUNTING, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Facts: Before the Court are two consolidated Petitions for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to set aside the Decisions of the Court of Appeals. The controversies arose when Filipinas Synthetic Fiber Corporation, a domestic corporation received a demand letter from the Commissioner of Internal Revenue assessing it for deficiency withholding tax with interest and compromise penalties. The basis of such assessment was two BIR Rulings and a CTA decision stating that: "For Philippine internal revenue tax purposes, the liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of actual payment or remittance thereof" and "the withholding agent/corporation is obliged to remit the tax to the government since it already and properly belongs to the government. Since the taxpayer failed to pay the withholding tax on interest, royalties, and guarantee fee at the time of their accrual and in the books of the corporation the aforesaid assessment is therefore legal and proper. A protest was filed which was denied. CTA: Oredered petitioner to pay. CA: AFFIRMED Issue: whether the liability to withhold tax at source on income payments to non-resident foreign corporations arises upon remittance of the amounts due to the foreign creditors or upon accrual thereof. Held: It is petitioner's submission that the withholding taxes on the said interest income and royalties were paid to the government when the subject interest and royalties were actually remitted abroad. Petitioner adopted the accrual basis method of accounting. Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that

determines when to include the amount in gross income." 5 Gleanable from this notion are the following requisites of accrual method of accounting, to wit: "(1) that the right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon future time; (2) the amount must be reasonably susceptible of accurate estimate; and (3) there must be a reasonable expectation that the amount will be paid in due course." In the case at bar, the Court concurred in the finding by the Court of Appeals "that there was a definite liability, a clear and imminent certainty that at the maturity of the loan contracts, the foreign corporation was going to earn income in an ascertained amount, so much so that petitioner already deducted as business expense the said amount as interests due to the foreign corporation. This is allowed under the law, petitioner having adopted the "accrual method" of accounting in reporting its incomes." All things studiedly considered, the Court is of the opinion, and holds, that the Court of Appeals erred not in ruling that: . . . Petitioner cannot now claim that there is no duty to withhold and remit income taxes as yet because the loan contract was not yet due and demandable. Having "written-off" the amounts as business expense in its books, it had taken advantage of the benefit provided in the law allowing for deductions from gross income. Moreover, it had represented to the BIR that the amounts so deducted were incurred as a business expense in the form of interest and royalties paid to the foreign corporations. It is estopped from claiming otherwise now. Notes: (NIRC of 1975) The withholding agent is explicitly made personally liable for the income tax withheld; The return shall be filed and paid within 25 days from the close of each calendar quarter; The withholding agent is the agent of both the taxpayer (w/ respect to the filing of th return) and the government (w/ respect to collection/withholding of the tax). G.R. No. 78953 July 31, 1991 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents. FACTS: That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private respondent herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and continuing duty to return the said amount from the moment it was received. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and benefit the amount of US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank and as a result of the mistake in the remittance by the latter. Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount of private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the said dollar account in the sum of $975,000.00 or P7,020,000.00. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment notices for the years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for

the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable." The Commissioner also imposed a 50% fraud penalty against Javier. ISSUE: Whether or not respondent Javier s liable for the 50% fraud penalty RULING: We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted. COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORP. G.R. No. 137377, December 18, 2001 FACTS: National Development Company (NDC) awarded to Marubeni after conducting a public bidding a contract for the construction and installation of an integrated wharf/port complex on a turnkey basis. The contract price was Y12, 790 389,000 and Y44,327,940. The price in Japanese currency was broke down into two portions: the Japanese Yen Portion I and the Japanese Yen Portion II, while the price in Philippine currency was referred to as the Philippine Peso Portion. The Japanese Yen Portions I and II were financed in two years: (a) by Yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by suppliers credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a fund under the Ministry of Finance of Japan extended by the Japanese Government as assistance to foreign government to promote economic development. The price was broken down into the corresponding materials, equipment and services required for the project and their individual prices. Under the Philippine Onshore Portion, Marubeni does not deny its liability for the contractors tax on the income from the two projects. On the Foreign Offshore Portion, the Commissioner argues that since the agreement was turnkey, it calls for the supply of both materials and services to the client; it is contract for a piece of work and is indivisible. The situs of the project is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines; hence, the entire receipts from the contracts including the receipts from the Offshore Portion, constitute income from Philippine sources. On the other hand, Marubeni argues that the works therein were not all performed in the Philippines. Machines and equipment were manufactured in Japan. They were designed, engineered and fabricated by Japanese firms in Japan sub-contracted to Marubeni.

ISSUE: Whether or not respondent is liable to pay the income and contractors taxes assessed by petitioner?

HELD: The court ruled that while the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and the mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when

shipped to the Philippines. The other construction supplies listed under the Offshore portion such as the still sheets, pipes and structures, electrical and instrument apparatus, were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication and engineering and manufacture of the materials under Japanese Portion Yen I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to tax. * Turnkey Contract is a contract to construct a complete project, such as a factory, plant or installation, from the bare site to the stage where it can be put to immediate use. FERNANDEZ HERMANOS, INC. v. CIR and CTA Facts: The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the purpose of engaging in business as an "investment company. The CIR assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the taxpayer's income tax returns for the said years. The Tax Court sustained the Commissioner's disallowances of the following losses: losses in or bad debts of Palawan Manganese Mines, Inc. in 1951, losses in Hacienda Samal in 1951 and 1952 and excessive depreciation of houses. It however overruled the Commissioners disallowances of the other items. After the modifications, it was found that the total deficiency income taxes due from the taxpayer for the years under review to amount to P123,436.00 instead of P166,063.00 as originally assessed by the Commissioner. Both parties appealed from the respective adverse rulings against them. Issues: 1. Whether or not the Tax Court was correct in its ruling regarding the disputed items of disallowances; and 2. Whether or not the governments right to collect the deficiency income taxes in question has already prescribed.

Ruling: The first issue is the allowances/disallowances of losses. The CIR questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its return the sum representing the cost of shares of stock of Mati Lumber Co. acquired in1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly established. The Commissioners contention was, although the said Company was no longer in operati on in 1950, it still had its sawmill and equipment which must be of considerable value. The Court, however, found that "the company ceased operations in 1949 when its Manager and owner left for Spain and subsequently died. When the company ceased to operate it was completely insolvent. The information as to the insolvency of the Company reached the taxpayer in 1950. It properly claimed the loss as a deduction in its 1950 tax return. Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). The taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5 The evidence shows that the board of directors of the two companies were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary company. Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains the Tax Court's disallowance spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951, and claimed as losses in the taxpayer's returns for said years. Losses "are deductible in 1952, when the mines were abandoned, and not in 1950 and 1951, when they were still in operation." Some definite event must fix the time when the loss is sustained, and here it was the event of actual abandonment of the mines in 1952. Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952). The Tax Court overruled the Commissioner's disallowance of these items of losses thus: Hacienda Dalupiri was operated by petitioner for business and not pleasure. It was mainly a cattle farm. It does not appear that the farm was used by petitioner for entertainment, social activities, or other non-business purposes. Therefore, it is entitled to deduct expenses and losses in connection with the operation of said far. The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952. 10 Disallowance of excessive depreciation of buildings (1950-1954). During the years 1950 to 1954, the taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The Commissioner claimed that the reasonable depreciation rate is only 3% per annum, and, hence, disallowed as excessive the amount claimed as depreciation allowance in excess of 3% annually.

Taxable increase in net worth (1950-1951). The Tax Court set aside the Commissioner's treatment as taxable income of certain increases in the taxpayer's net worth. Respondent contends that the reduction of petitioner's liability to Manila Insurance Company resulted in the increase of petitioner's net worth to the extent of P30,050.00 which is taxable. This is erroneous. The increase in the net worth of petitioner for 1950 to the extent of P30,050.00 was not the result of the receipt by it of taxable income. It was merely the outcome of the correction of an error in the entry in its books relating to its indebtedness to the Manila Insurance Company. The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in the sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in petitioner's books as outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having been paid in prior years, so that the necessary adjustments were made to correct the errors. These increases in the taxpayer's net worth were not taxable increases in net worth, as they were not the result of the receipt by it of unreported or unexplained taxable income, but were shown to be merely the result of the correction of errors in its entries in its books relating to its indebtednesses to certain creditors. Gain realized from sale of real property (1950). We likewise sustain as being in accordance with the evidence the Tax Court's reversal of the Commissioner's assessment on all alleged unreported gain in the sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. The evidence shows that the property was acquired in 1926 for P11,852.74, and was sold in 1950 for P60,000.00, apparently, resulting in a gain of P48,147.26. 14 The taxpayer reported in its return a gain of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved from that after acquiring the property, the taxpayer had made improvements totalling P11,147.26, 16 accounting for the apparent discrepancy in the reported gain. On the second issue, the taxpayer's contention that the Commissioner's action to recover its tax liability should be deemed to have prescribed for failure on the part of the Commissioner to file a complaint for collection against it in an appropriate civil action has been rejected by the Court. A judicial action for the collection of a tax is begun by the filing of a complaint with the proper court of first instance, or where the assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for ." In the present case, the government's right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or petition for review was filed with the Tax Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer with a prayer for payment of the taxes due, long before the expiration of the five-year period to effect collection by judicial action counted from the date of assessment. The judgment of the Court of Tax Appeals is affirmed. Gutierrez vs CTA G.R. Nos. L-9738 and L-9771; May 31, 1957 FACTS: Maria Morales was the registered owner of an agricultural land at Mabalacat, Pampanga. The Republic, at the request of the U.S. Government and pursuant to the terms of the Military Bases Agreement, instituted condemnation proceedings in the CFI Pampanga to expropriate the lands owned by Morales and others needed for the expansion of the Clark Field Air Base, which project is necessary for the mutual protection and defense of the Phils. and US. Blas Gutierrez was also made a party defendant in said case for being the husband of Morales. At the commencement of the action, the Republic deposited with the clerk of court the sum of P156,960, provisionally fixed as the value of the lands sought to be expropriated for it to take immediate possession of the same. CFI Pampanga fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per hectare for the others. Thus, Morales was to receive the amount of P94,305.75 as compensation for Lot No. 724-C which was one of the expropriated lands. To avoid further litigation, the parties entered into a compromise agreement fixing the compensation for all the lands, without distinction, at P2,500 per hectare. This reduction of price did not affect Lot No. 724-C of Morales. Blas Gutierrez and Maria Morales received the sum of P59.785.75 presenting the balance remaining in their favor after deducting the amount of P34,580 already withdrawn from the compensation to them. In a notice of assessment of January 28, 1953, the CIR demanded of the spouses the payment of alleged deficiency income tax for the year 1950. Counsel for petitioner sent a letter to the CIR requesting to the latter to withdraw and reconsider said assessment. This request was denied. The spouses brought the action to the CTA. After due hearing, CTA rendered decision held that the gain derived by the spouses from the expropriation of their property constituted taxable income and as such was capital gain, and that said gain was taxable in 1950 when it realized. It was also found by said Court that the evidence did not warrant the imposition of the 50 per cent surcharge because the spouses acted in good faith and without intent to defraud the Government when they failed to include in their gross income the proceeds they received from the expropriated property. ISSUES:

1.

WON the compensation received by the spouses via expropriation proceedings shall be included in their gross income as the said transfer of property shall be considered as sale, thus, income derived therefrom is taxable. 2. WON granting that said compensation shall be considered income, same is exempted under Section 29(b)-6 of the Tax Code. 3. WON CIR was barred from collecting the deficiency income tax assessment, it having been made beyond the 3-year period prescribed by section 51-(d) of the Tax Code. RULING: 1. Since the property was acquired by the Government through condemnation proceedings, the spouses claim that same cannot be considered as sale as the acquisition was by force. Consequently, they contend that this kind of transfer of ownership must perforce be distinguished from sale. But, authorities in US on the matter sustain the view by CIR holding that the transfer of property through condemnation proceedings is a sale or exchange within the meaning of section 117 ( a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain. The proposition that income from expropriation proceedings is income from sales or exchange and therefore taxable has been likewise upheld in the case of Lapham vs. U.S. (1949, 40 AFTR 1370) and in Kneipp vs. U.S. (1949, 85 F Suppl. 902). Thus, the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines. 2. The spouses maintain that since the proceeding to expropriate the land in question necessary for the expansion of the Clark Field Air Base was instituted by the Philippine Government as part of its obligation under the Military Bases Agreement, the compensation accruing therefrom must necessarily fall under the exemption provided for by Section 29-(b)-6 of the Tax Code. Although the condemnation or expropriation of properties was provided for in the treaty, the exemption from tax of the compensation to be paid for the expropriation of privately owned lands located in the Philippines was not given any attention, and the internal revenue exemptions in the said agreement applies only to members of the U.S. Armed Forces serving in the Philippines and U.S. nationals working in the Phils. in connection with the construction, maintenance, operation and defense of said bases. 3. The payment to Morales was actually made in 1950 and it has to be credited as income for 1950 for it was then when title over said property passed to the Republic of the Philippines. Spouses cannot say that the title over the property expropriated already passed to the Government when the latter was placed in possession thereof, for in condemnation proceedings, title to the land does not pass to the plaintiff until the indemnity is paid. Now, if said amount should have been reported as income for 1950 in the return that must have been filed on or before March 1, 1951, the assessment made by the Collector on January 28, 1953, is still within the 3-year prescriptive period provided for by Section 51-d and could, therefore, be collected either by the administrative methods of distraint and levy or by judicial action. G.R. No. L-68375 April 15, 1988 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS Facts: Private respondent, Wander, is a domestic corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro, 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 and remitted to its parent company, Glaro dividends on which 35% withholding tax was withheld and paid to the BIR. On the following year, Wander again filed a withholding tax return for the second quarter on the dividends it remitted to Glaro, on which 35% tax was withheld and paid to the BIR. On 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. The petitioner having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with CTA. Petitioner then filed its answer. The CTA rendered decision ordering respondent 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. Petitioner filed a Motion for Reconsideration but the same was denied.. Hence, a petition for review on certiorari was filed against CTA decision. Issue: Whether or not 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.

Held: Yes. Switzerland did not impose any tax on the dividends received by Glaro. 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 which is not present in the instant case. 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. COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS and EFREN P. CASTANEDA 203 SCRA 702 G.R. No. 96016 October 17, 1991 PADILLA, J.

FACTS: Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London, England, on 10 December 1982 under the provisions of Section 12 (c) of Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits, terminal leave pay from which petitioner Commissioner of Internal Revenue withheld P12, 557.13 allegedly representing income tax thereon. Castaneda filed a formal written claim with petitioner for a refund of the P12, 557.13, contending that the cash equivalent of his terminal leave is exempt from income tax. The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the terminal leave pay is income derived from employer-employee relationship, citing in support of his stand Section 28 of the National Internal Revenue Code; that as part of the compensation for services rendered, terminal leave pay is actually part of gross income of the recipient. Thus . . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . . there can thus be no "commutation of salary" when a government retiree applies for terminal leave because he is not

receiving it as salary. What he applies for is a "commutation of leave credits." It is an accumulation of credits intended for old age or separation from service. . . . FACTS: . ISSUE: Whether or not terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income) tax. HELD: No. The terminal leave pay received by a government official or employee is not subject to withholding (income) tax. Commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax. Jesus Sacred Heart College vs. CIR 95 PHIL 16, 24 May 1954, Concepcion, J. Facts: Jesus Sacred Heart College is an educational organization authorized to operate and existing in Lucena, Quezon, and offering to the public elementary, secondary and collegiate courses. That according to its income tax returns, plaintiff realized net incomes from the tuition and other fees in carrying on its educational activity. That the amount of P2,241.86 was paid by the plaintiff to the defendant as its income tax and penalties for the net incomes and compromise for late filing of its income tax returns. That a claim for refund for said amount was duly filed by the plaintiff with the defendant but the claim was denied. Assessment notices for the deficiency income tax were forwarded by the defendant to the plaintiff. Issue: Whether the net income from tuition and other fees collected and received by the plaintiff as an educational institution from its students in carrying on its educational activity under the conditions specified in paragraphs 1,2 and 3 hereof is subject to income tax under the provisions of Section 24 of the National Internal Revenue Code, notwithstanding the provisions of section 27(e) thereof, as amended by Republic Act No. 82. Ruling: Section 27 (e) of the NIRC, as amended by R.A. No. 82 (section 5), exempts from taxation the net income of corporations organized and operated exclusively for *** educational purposes*** no part of the net income of which inures to the benefit of any private stockholder or individual, and it is conceded that plaintiff corporation belongs to this class. To hold that an educational institution is subject to income tax whenever it is so administered as to reasonably assure that it will not incur in deficit, is to nullify and defeat the aforementioned exemption. Indeed, the effect , in general, of the interpretation advocated by appellant would be to deny the exemption whenever there is net income, contrary to the tenor of said section 27 (e) which positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of said income. 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, appellants 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. The final result of appellants 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 of a given administration, at a particular time. It is not conclusive of the purpose of the institution. Otherwise, such purpose would vary with the particular persons in charge of the administration of the organization. Under Section 27 (e) of our NIRC, as amended, an institution operated exclusively for educational purposes need not have, in addition thereto, a charitable or philanthropic character, to be exempt from taxation, provided only that no part of its net income inures to the benefit of any private st ockholder or individual. G.R. No. L-6988 May 24, 1954 U.S.T. HOSPITAL EMPLOYEES ASSOCIATION vs. STO. TOMAS UNIVERSITY HOSPITAL. 1. That the petitioner U.S.T. Employees Hospital Association, is a legitimate work organization duly registered with the Department of Labor under Registration No. 1073; 2. That the respondent U.S.T. Hospital is an institution owned by the Pontifical University of Sto. Tomas, managed and operated by an Administrator; 3. That the service being rendered by the Hospital to the public is, by its very nature, continuous that the service rendered by the Hospital can not be suspended on Sundays and legal holidays; 4. That on May 9, 1951, the petitioner and the respondent entered into a contract for a period of one year from and after May 15, 1951, Which was renewed the May 15, 1952 for up to another year and expiring on May 15, 1953 . A copy of said agreement is attached as Annex "A" of the original petition; 5. That prior to the signing of the agreement on May 9, 1951 A Majority of the employees of the respondent, including members of the Petitioning Union, were required to work and were working 7 days a week, including Sundays and holidays; 6. That In accordance with the agreement, the respondent paid the Hospital of the Petitioning Union members a monthly salary of P120.000 each from and after May 15, 1951, for those employees who were living outside and P50 and P70 monthly in cash monthly in the form of subsistence and quarters for those employees who, Because of the nature of their work were required to stay in the quarters provided by the Hospital. The respondent Hospital from August, 1951, without demand from the members of the Petitioning Union, Increased their salaries, In accordance with the respondent's view of the law, such that they are now receiving a monthly salary of P122 a month cash for those living outside P56 and P66 monthly in cash and monthly in the form of subsistence and quarters for those employees who, Because of the nature of their work, were required to stay in the quarters provided by the Hospital; 7. That after the signing of the agreement, The majority of the employees of the respondent Hospital, including members of the Union, contained to work on Sundays and holidays without additional compensation being paid therefor; 8. That the respondent is an institution Which hospital has to pay ward with a bed capacity of 140 and charity ward with a 203 bed capacity; 9. That the respondent has not secured a permit from the Secretary of Labor to require their employees to work Sundays and holidays on the sincere and honest belief that hospitals are exempted from the operation of the 8-hour work law and can require their employees to work on Sundays and holidays; 10. That the employees of the respondent, including members of the Union, who are assigned to work during night time are not paid any premium or additional pay aside from the regular salary. Manila, Philippines, February 3, 1953.

ISSUE: Whether or not respondent is a charitable institution? HELD: From this stipulation there is nothing to indicate that the Hospital of the University of Sto. Tomas has been established for profit. On the contrary, it is said in the appeal estipulacionde facts "is an institution that has 140 beds and 203 beds payment free, for with the proceeds of the 140 beds to pay the 203 beds are held free of charge. There is no indication that in this operation has a balance in favor of the hospital that constitutes gain. In a letter - says the dossier - which led the President of the University of Sto. Tomas the Director of Health, requesting permission to establish a private hospital, he said: "The object of the establishment is to provides modern facilities to both charity hospital patients and pay-patients. The former is a source of material for

instruction to medical students and the latter to seek the necessary funds to partly finance the expenses of the free ward. " If this is true, then the income of the 140 beds are not paying more than "necessary funds to partly finance the expenses of the free wards." Must not have ganacia then the hospital also raised the income of the paying beds, because everything collected is not sufficient to maintain free of 203 beds, but only represents an indispensable part of the cost. It is argued that as the hospital provides material for the instruction of students of the School of Medicine and strategic receives school fees and instruction, the hospital, therefore, must earn revenue from school. This is a forced inferncia because the hospital is used, not the school of medicine at the University of Sto Tomas, there is no evidence that the medical school hospital pay anything for the service that is provided. Medical school was the appeal was not the only hospital, the question porbalementseria different. Part of the factual findings of the Industrial Court are as follows: There is no other means of supporting the Hospital than the pay section. All the expenses are supplied exclusively by the payward. Although it was established for the instruction of medical students, the matriculation fees paid by said students are devoted exclusively to the maintenance of the College of Medicine. Thus, no part of the said tuition fees goes to the sustenance of the charity ward. The University of Sto. Tomas, far from making money from the pay ward, as its own profits, still pays the medicines of patients of the free ward. Since the free ward section is free for everybody, all routine treatment where needed, such as food, bed, medicines, operation, is supplied free by the hospital, it is clear that the respondent is a charitable institution. It is undoubted that the purpose of the hospital is not Primarily To obtain money. Such purposes, in the language of the witness Dr. Ramos, is: "This is killing two birds with one stone; Providing instruction to medical students, and at the same time, the public is free to enter the Hospital. From the proven facts - we can not alter faerza is concluded that the hospital is working not for profit but for a higher purpose: to serve the suffering humanity. G.R. No. L-12222 May 28, 1958 UNIVERSITY OF SAN AGUSTIN, petitioner, vs.CIR , ET AL., respondents. Facts: The petition stems from a complaint for unfair labor practice (ULP) filed by the Philippine Association of College and University Professors against the University of San Agustin before the industrial Court. Upon being required to answer, respondent denied the charge of ULP and at the same time disputed the jurisdiction of the court over the parties and over the subject-matter, Trial was held before a hearing examiner without prejudice to deciding the legal questions raised by respondent, and in the course of the trial, respondent raised a legal point: that the court could not go on with the trial because of lack of previous preliminary investigation required by law. The judge handling the case ordered that it be endorsed for such preliminary investigation which was affirmed by the court en banc hence a petition for review was filed. Issue: WON the University of San Agustin be said to have a relation with its professors one of employer and employee that comes under the jurisdiction of the CIR? WON the provisions on ULP apply to the relation between petitioner and members of respondent association? Ruling: It appears that the University of San Agustin, petitioner herein, is an educational institution conducted and managed by a "religious non-stock corporation duly organized and existing under the laws of the Philippines." It was organized not for profit or gain or division of the dividends among its stockholders, but solely for religions and educational purposes. It likewise appear that the Philippine Association of College and University Professors, respondent herein, is a non-stock association composed of professors and teachers in different colleges and universities and that since its organization two years ago, the university has adopted a hostile attitude to its formation and has tried to discriminate, harass and intimidate its members for which reason the association and the members affected filed the unfair labor practice complaint which initiated this proceeding. The SC cited the case of Boy Scouts of the Philippines vs. Juliana V. Araos and answered the issue in the negative. Finding that R.A. No. 875, particularly, that portion thereof regarding labor disputes and unfair labor practice, does not apply to the Boy Scouts of the Philippines, and consequently, the CIR had no jurisdiction to entertain and decide the action or petition filed by respondent Araos. that our labor legislation creating the CIR, was intended by the Legislature to apply only to industrial employment and to govern the relations between employers engaged in industry and occupations for purpose, of profit and gain, and their industrial employees, but not to organizations and entities, which are organized, operated, and maintained not for profit or gain, but for elevated and lofty purposes, such as, charity, social service, education and instruction, hospital and medical service, the

encouragement and promotion of character, patriotism and kindred virtues in the youth of the nation, etc. Hence the SC ruled that the CIR has no jurisdiction to entertain complaint for ULP. THE YOUNG MEN'S CHRISTIAN ASSOCIATION OF MANILA, vs. THE COLLECTOR OF INTERNAL REVENUE 19 January 1916 | Moreland, J; Facts: The Young Men's Christian Association (YMCA) came to the Philippine with the army of occupation in 1898. Thereupon the Young Men's Christian Association of Manila was incorporated under the law of the Philippine Islands and received its character in June, 1907. A site for the new building was selected on Calle Concepcion, Ermita. The city of Manila, contending that the property is taxable, assessed it and levied a tax thereon. It was paid under protest and this action begun to recover it on the ground that the property was exempt from taxation under the charter of the city of Manila. The decision was for the city and the association appealed. The association claims exemption from taxation on the ground that it is a religious, charitable and educational institution combined. It is claimed, however, that the institution is run as a business in that it keeps a lodging and boarding house.

Issue: WON the building and grounds of the Young Men's Christian Association of Manila are subject to taxation, under section 48 of the charter of the city of Manila.

Ruling: NO. The statute does not say that it must be devoted exclusively to any one of the purposes therein mentioned. It may be a combination of two or three or more of those purposes and still be entitled to exempt. The YMCA of Manila cannot be said to be an institution used exclusively for religious purposes, or an institution used exclusively for charitable purposes, or an institution devoted exclusively to educational purposes; but it can be truthfully said that it is an institution used exclusively for all three purposes, and that, as such, it is entitled to be exempted from taxation.

It may be admitted that there are 64 persons occupying rooms in the main building as lodgers or roomers and that they take their meals at the restaurant below. These facts, however, are far from constituting a business in ordinary acceptation of the word. In the first place, no profit is realized by the association in any sense. In the second place, it is undoubted, as it is undisputed, that the purpose of the association is not, primarily, to obtain the money which comes from the lodgers and boarders. The real purpose is to keep the membership continually within the sphere of influence of the institution; and thereby to prevent, as far as possible, the opportunities which vice president to young men in foreign countries who lack home or other similar influences. We regard this feature of the institution not as a business or means of making money, but, rather, as a very efficient means of maintaining the influence of the institution over its membership. From description already given of the association building and grounds, no part is occupied for any but institutional purposes. From end to end the building and grounds are devoted exclusively to the purposes stated in the constitution of the association. The library and reading rooms, the game and lounging halls, the lecture rooms, the auditorium, the baths, pools, devices for physical development, and the grounds, are all dedicated exclusively to the objects and purpose of the association the building of Christian character and the creation of moral sentiment and fiber in men. Dissenting opinion: Carson, J;

I am wholly unable to agree, that the lands or buildings occupied by YMCA are "used exclusively for religious, charitable, scientific or educational purposes, and not for profit," the only ground upon which the exemption form taxation in question in these proceedings can sustained. It is the theory of the Government that all property within the State held by individuals or corporations should contribute equally, in portions to its value to the support of the Government, in return for the protection which such property receives at the hands of the Government. This being the policy of the Government, a law which relieves any property from this burden should be strictly construed, to the end that no individual or corporation shall be relieved from bearing his or its full share of the burdens of taxation unless the law expressly so provides. This exemption should not be allowed by any strained or unnatural interpretation of law. CIR vs. SC Johnson GR No. 127105, June 25, 1999 FACTS: Respondent, a domestic corporation organized under the Philippine laws, entered into a license agreement with SC Johnson and Son , USA , a non-resident foreign corporation based in the U.S.A. pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the latter. Respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent] paid for the period covering July 1992 to May 1993. On October 29, 1993, respondent filed with BIR a claim for refund of overpaid withholding tax on royalties. It alleged that since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RPWest Germany Tax Treaty and not the 25% rate. The Commissioner did not act on said claim. Hence, respondent then filed a petition for review before the CTA. The CTA rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate. Petitioner contends respondent is not entitled 10% rate because that the RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. On appeal to CA, it affirmed the CTAs decision. Hence, this petition. ISSUE: Whether or not SC Johnson and Son USA is entitled to the most favored nation tax rate of 10% on royalties as provided in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. HELD: No. With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinent that 1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2) However, the tax imposed by that Contracting State shall not exceed. a) In the case of the United States , 15 percent of the gross amount of the royalties, and b) In the case of the Philippines , the least of: (i) 25 percent of the gross amount of the royalties; (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. xxx xxx xxx Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states 1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows: xxx xxx xxx

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the Republic of the Philippines , the tax paid under the laws of the Philippines in accordance with this Agreement on: xxx xxx xxx dd) royalties, as defined in paragraph 3 of Article 12; xxx xxx xxx c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed to be xxx xxx xxx cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties. xxx xxx xxx The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries.The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE AIRLINES, INC. OCTOBER 9, 2006 PANGANIBAN, CJ: Facts: [Respondent] Philippine Airlines, Inc. (PAL) is a domestic corporation organized in accordance with the laws of the Republic of the Philippines, while [Petitioner] Commissioner of Internal Revenue (CIR) is incharge of the assessment and collection of the 20% final tax on interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, imposed on domestic corporation under Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the National Internal Revenue Code (NIRC). On November 5, 1997, [respondents] AVP-Revenue Operations and Tax Services Officer, Atty. Edgardo P. Curbita, filed with the Office of the then Commissioner of Internal Revenue, Mdm. Liwayway Vinzons-Chato, a written request for refund of the amount of P2,241,527.22 which represents the total amount of 20% final withholding tax withheld from the [respondent] by various withholding agent banks, and which amount includes the 20% final withholding tax withheld by the United Coconut Planters Bank (UCPB) and Rizal Commercial Banking Corporation (RCBC) for the period starting March 1995 through February 1997. On December 4, 1997, the [respondents] AVP-Revenue Operations and Tax Services Officer again filed with [petitioner] CIR another written request for refund of the amount of P1,048,047.23, representing the total amount of 20% final withholding tax withheld by various depository banks of the [respondent] which amount includes the 20% withholding tax withheld by the Philippine National Bank (PNB), Equitable Banking Corporation (EBC), and the Jade Progressive Savings & Mortgage Bank (JPSMB) for the period starting March 1995 through November 1997. The amounts, subject of this petition, and which represent the 20% final withholding tax allegedly erroneously withheld and remitted to the BIR by the aforesaid banks. [Petitioner] CIR failed to act on the [respondents] request for refund; thus, a petition was filed before the CTA on April 23, 1999.The CTA ruled that Respon dent PAL was

not entitled to the refund. Section 13 of Presidential Decree No. 1590, PALs franchise, allegedly gave respondent the option to pay either its corporate income tax under the provisions of the NIRC or a franchise tax of two percent of its gross revenues. Payment of either tax would be in lieu of all other taxes. Had respondent paid the two percent franchise tax, then the final withholding taxes would have been considered as other taxes. Since it chose to pay its corporate income tax, pa yment of the final withholding tax is deemed part of this liability and therefore not refundable.

and without the Philippines by every corporation, x x x, organized in, or existing under the laws of the Philippines x x x. The NIRC also imposes final taxes on certain passive incomes, as follows: 1) 20 percent on the interests on currency bank deposits, other monetary benefits from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the Philippines; 2) 5 percent and 10 percent on the net capital gains realized from the sale of shares of stock in a domestic corporation not traded in the stock exchange; 3) 10 percent on income derived by a depositary bank under the expanded foreign currency deposit system; and 4) 6 percent on the gain presumed to be realized on the sale or disposition of lands and buildings treated as capital assets. These final taxes are withheld at source. A corporate income tax liability, therefore, has two components: the general rate of 35 percent, which is not disputed; and the specific final rates for certain passive i ncomes. PALs request for a refund in the present case pertains to the passive income on bank deposits, which is subject to the specific final tax of 20 percent. A careful reading of Section 13 rebuts the argument of the CIR that the in lieu of all othe r taxes proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option. Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may result in a negative amount and thus translate into a zero tax liability. Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instance, it has a lower tax liability than that provided by Subsection (b). While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the taxpayer and in favor of the taxing power, Section 13 of the franchise of respondent leaves no room for interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either the basic corporate income tax or the two percent gross revenue tax. Determining whether this tax exemption is wise or advantageous is outside the realm of judicial power. This matter is addressed to the sound discretion of the lawmaking department of government.

ISSUE: Whether or not PAL is entitled to a refund of the 20 % final witholding tax allegedly erroneously witheld by the BIR HELD: The resolution of the instant case hinges on the interpretation of Section 13 of PALs franchise, which states in part: SEC. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: (a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or (b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or non-transport operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax. The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future, x x x. Two points are evident from this provision. First, as consideration for the franchise, PAL is liable to pay either a) its basic corporate income tax based on its net taxable income, as computed under the National Internal Revenue Code; or b) a franchise tax of two percent based on its gross revenues, whichever is lower. Second, the tax paid is in lieu of all other taxes imposed by all government entities in the country. PAL availed itself of PD 1590, Section 13, Subsection (a), the crux of which hinged on the terms basic corporate income tax and annual net taxable income. The applicable laws (PALs franchise and the Tax Code) do not define the terms basic corporate income tax. On the other hand, annual net taxable income is computed in accordance with the provisions of the National Internal Revenue Code. The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the National Internal Revenue Code of 1997 under Chapter IV: Tax on Corporations. Section 27 enumerates the rate of income tax on domestic corporations; Section 28, the rates for foreign corporations; Section 29, the taxes on improperly accumulated earnings; and Section 30, the corporations exempt from tax. Being a domestic corporation, PAL is subject to Section 27, which reads as follows: Section 27. Rates of Income Tax on Domestic Corporations. (A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within