1 China Banking Corporation v CA Facts: China Banking Corporation made a 53% equity investment (P16,227,851.

80) in the First CBC Capital a Hongkong subsidiary engaged in financing and investment with deposit-taking function. It was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and treated it as a bad debt or as an ordinary loss deductible from its gross income. CIR disallowed the deduction on the ground that the investment should not be classified as being worthless. It also held that assuming that the securities were worthless, then they should be classified as a capital loss and not as a bad debt since there was no indebtedness between China Banking and CBC. Issue: Whether or not the investment should be classified as a capital loss. Held: Yes. Section 29.d.4.B of the NIRC contains provisions on securities becoming worthless. It conveys that capital loss normally requires the concurrence of 2 conditions: a. there is a sale or exchange b. the thing sold or exchanges is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems it to be a loss. These are allowed to be deducted only to the extent of capital gains and not from any other income of the taxpayer. A similar kind of treatment is given by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, The NIRC dispenses with the standard requirements. There is ordinary loss when the property sold is not a capital asset. In the case, CBC as an investee corporation, is a subsidiary corporation of China Banking whose shares in CBC are not intended for purchase or sale but as an investment. An equity investment is a capital asset of the investor. Unquestionably, any loss is a capital loss to the investor. AFISCO INSURANCE CORP. V CA 302 SCRA 1 (January 25, 1999) Facts: AFISCO and 40 other non-life insurance companies entered into a Quota Share Reinsurance Treaties with Munich, a non-resident foreign insurance corporation, to cover for All Risk Insurance Policiesover machinery erection, breakdown and boiler explosion. The treaties required petitioners to form a pool, to which AFISCO and the others complied. On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an Information Return of Organization Exempt from Income Tax for the year ending 1975, on the basis of which, it was assessed by the commissioner of Internal Revenuedeficiency corporate taxes. A protest was filed but denied by the CIR. Petitioners contend that they cannot be taxed as a corporation, because (a) the reinsurance policies were written by them individually and separately, (b) their liability was limited to the extent of their allocated share in the original risks insured and not solidary, (c) there was no common fund, (d) the executive board of the pool did not exercise control and management of its funds, unlike the board of a corporation, (e) the pool or clearing house was not and could not possibly have engaged in the business of reinsurance from which it could have derived income for itself. They further contend that remittances to Munich are not dividends and to subject it to tax would be tantamount to an illegal double taxation, as it would result totaxing the same premium income twice in the hands of the sametaxpayer. Finally, petitioners argue that the governments right to assess and collect the subject Information Return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981 to give them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that the five-year prescriptive period then provided in the NIRC had already lapsed, and that the internal revenue commissioner was already barred by

2 prescription from making an assessment.

Held: A pool is considered a corporation for taxation purposes. Citing the case of Evangelista v. CIR, the court held that Sec. 24 of the NIRC covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from individual members. Further, the pool is a partnership as evidence by a common fund, the existence of executive board and the fact that while the pool is not in itself, a reinsurer and does not issue any insurance policy, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. As to the claim of double taxation, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividendsreceived by the said companies. Clearly, there is no double taxation. As to the argument on prescription, the prescriptive period was totaled under the Section 333 of the NIRC, because the taxpayer cannot be located at the address given in the information return filed and for which reason there was delay in sending the assessment. Further, the law clearly states that the prescriptive period will be suspended only if the taxpayer informs the CIR of any change in the address.

N.V REEDERIJ AMSTERDAM AND ROYAL INTEROCEAN LINES VS. COMMISSIONER OF INTERNAL REVENUE FACTS: Both vessels of petitioner N.V. Reederij Amsterdam called on Philippine ports to load cargoes for foreign destinations. The freight fees for these transactions were paid in abroad. In these two transactions, petition Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax has been paid by Amsterdam on the freight receipts. As a result, Commissioner of Internal Revenue filed the corresponding income tax returns for the petitioner. Commissioner assessed petitioner for deficiency of income tax, as a non-resident foreign corporation NOT engaged in trade or business. On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels and paid the tax in pursuant to their supposed classification. On the same date, petitioner Royal Interocean Lines, as the husbanding agent of Amsterdam, filed a writ ten protest against the abovementioned assessment made by the respondent Commissioner. The protest was denied. On appeal, CTA modified the assessment by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioner still was not satisfied and decided to appeal to the SC. ISSUE: Whether or not N.V. Reederij Amsterdam should be taxed as a foreign corporation not engaged in trade or business in the Philippines? HELD: Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines. It does not have a branch in the Philippines, and it only made two calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes. A foreign corporation doing business in the Philippines is taxable on income solely from sources within the Philippines. It is permitted to claim deductions from gross income but only to the extent connected with income earned in the Philippines. On the other hand, foreign corporations not doing business in the Philippines are

3 taxable on income from all sources within the Philippines . The tax is 30% (now 35% for non-resident foreign corp which is also known as foreign corp not engaged in trade or business) of such gross income. (*take note that in a resident foreign corp, what is being taxed is the taxable income, which is with deductions, as compared to a non-resident foreign corp which the tax base is gross income) Petiioner Amsterdam is a non-resident foreign corporation, organized and existing under the laws of the Netherlands with principal office in Amsterdam and not licensed to do business in the Philippines. CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR- SURTAX Facts: Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of earnings. It claimed that said profits were retained to increase petitioners working capital and it would be used for reasonable business needs of the company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that petitioners purpose did not fall within such purposes. It found that there was no need to set aside such retained earnings as working capital as it had considerable liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTAs decision. Issue: Whether or not the accumulation of income was justified. Held: In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts. The accumulated profits must be used within reasonable time after the close of the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for the immediate needs of the business. To determine the reasonable needs of the business, the United States Courts have invented the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it is held that if the corporation did not prove an immediate need for the accumulation of earnings and profits such was not for reasonable needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend on the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and other similar factors. The Tax Court opted to determine the working capital sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax Courts ruling is upheld. CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204 SCRA 377) FACTS: Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or

4 tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%. MAIN ISSUE: Whether or not P&G Philippines is entitled to the refund or tax credit. HELD: YES. P&G Philippines is entitled. Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to nonresident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he 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. However, such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met. CIR V. WANDER PHILIPPINES INC.-DIVIDENDS, WITHHOLDING TAX Facts: Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro S.A. Ltd.,a Swiss corporation not engaged in trade/business in the Philippines. In two instances, Wander filed its withholding tax return and remitted to Glaro (the parent company) dividends (P222,000 in the first instance and P355,200 in the second), on which 35% tax was withheld and paid to the BIR. Wander now files a claim for refund of the withheld tax contending that it is liable only to 15% withholding tax pursuant to Section 24. B.1 of the Tax Code. The BIR did not act upon the claim filed by Wander so the corporation filed a petition to the Court of Tax Appeals (CTA). The CTA held that the corporation is entitled to 15% withholding tax rate on dividends remitted to Glaro, a non-resident foreign corporation. Issue: Whether or not Wander is entitled to the 15% withholding tax rate. Held: Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from a domestic corporation is liable to a 15% withholding tax, provided that the country in which the foreign corporation is domiciled shall allow a tax credit (equivalent to 20% which is the difference between the 35% tax due on regular corporations and the 15% tax due on dividends) against the taxes due to have been paid in the Philippines. In the case, Switzerland did not impose any tax on the dividends received by Glaro thus it should be considered as a full satisfaction of the given condition. To deny respondent the privilege to withhold 15% would run counter to the spirit and intent of the law and will adversely affect the foreign corporations interest and discourage them from investing capital in our country. MARUBENI CORPORATION V. COMMISSIONER OF INTERNAL REVENUE- INCOME TAX Facts: Marubeni Corporation is a Japanese corporation licensed to engage in business in the Philippines. When the profits on Marubenis investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for the amount which it has allegedly overpaid the BIR. Issues and Ruling:

5 1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co. are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to 15% profit remittance tax imposed under Section 24(b)(2) of the National Internal Revenue Code. NO. 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. The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the business activity in which Marubeni Corporation 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. 2. Whether Marubeni Corporation is a resident or non-resident foreign corporation. Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. Marubeni Corporations head office in Japan is a separate and distinct income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in the Philippines. 3. At what rate should Marubeni be taxed? 15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of not less than 20% of the dividends received. This 15% tax rate imposed on the dividends received 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. CIR v. YMCA GR No. 124043, October 14, 1998 298 SCRA 83 FACTS: Private Respondent YMCA--a non-stock, non-profit institution, which conducts various programs beneficial to the public pursuant to its religious, educational and charitable objectives--leases out a portion of its premises to small shop owners, like restaurants and canteen operators, deriving substantial income for such. Seeing this, the Commissioner of Internal Revenue (CIR) issued an assessment to private respondent for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA opposed arguing that its rental income is not subject to tax, mainly because of the provisions of Section 27 of NIRC which provides that civic league or organizations not organized for profit but operate exclusively for promotion of social welfare and those organized exclusively for pleasure, recreation and other non-profitble businesses shall not be taxed. ISSUE: Is the contention of YMCA tenable? HELD: No. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be granted in a statute stated in a language too clear to be mistaken." COMMISSIONER vs. BOAC 149 SCRA 395 GR No. L-65773-74 April 30, 1987

6 "The source of an income is the property, activity or service that produced the income. For such source to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines." FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1971. BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom, and is engaged in the international airline business. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines. 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. The CTA sided with BOAC citing that the proceeds of sales of BOAC tickets 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. ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable? HELD: Yes. The source of an income is the property, activity or service that produced the income. 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. COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORP GR 148512 June 26, 2006 FACTS: This is a petition for review under Rule 45 of Rules of Court seeking the nullification of CA decision granting respondents claim for tax equal to the amount of the 20% that it extended to senior citizens on the latters purchases pursuant to Senior Citizens Act. Respondent deducted the total amount of Php219,778 from its gross income for the taxable year 1995 whereby respondent did not pay tax for that year reporting a net loss of Php20,963 in its corporate income tax. In 1996, claiming that the Php219,778 should be applied as a tax credit, respondent claimed for refund in the amount of Php150, 193. ISSUE: Whether or not the 20% discount granted by the respondent to qualified senior citizens may be claimed as tax credit or as deduction from gross sales? RULING: Tax credit is explicitly provided for in Sec4 of RA 7432. The discount given to Senior citizens is a tax credit, not a deduction from the gross sales of the establishment concerned. The tax credit that is contemplated under this Act is a form of just compensation, not a remedy for taxes that were erroneously or illegally assessed and collected. In the same vein, prior payment of any tax liability is a pre-condition before a taxable entity can benefit from tax credit. The credit may be availed of upon payment, if any. Where there is no tax liability or where a private establishment reports a net loss for the period, the tax credit can be availed of and carried over to the next taxable year.

7 ATLAS CONSOLIDATED MINING DEVT CORP vs. CIR 524 SCRA 73, 103 GR Nos. 141104 & 148763, June 8, 2007 FACTS: Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale of various mineral products, filed claims with the BIR for refund/credit of input VAT on its purchases of capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992. BIR did not immediately act on the matter prompting the petitioner to file a petition for review before the CTA. The latter denied the claims on the grounds that for zero-rating to apply, 70% of the company's sales must consists of exports, that the same were not filed within the 2-year prescriptive period (the claim for 1992 quarterly returns were judicially filed only on April 20, 1994), and that petitioner failed to submit substantial evidence to support its claim for refund/credit. The petitioner, on the other hand, contends that CTA failed to consider the following: sales to PASAR and PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive period should be counted from the date of filing of the last adjustment return which was April 15, 1993, and not on every end of the applicable quarters; and that the certification of the independent CPA attesting to the correctness of the contents of the summary of suppliers invoices or receipts examined, evaluated and audited by said CPA should substantiate its claims. ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications for refund/credit of input VAT? HELD: No. Although the Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that sales to PASAR and PHILPOS inside the EPZA are taxed as exports because these export processing zones are to be managed as a separate customs territory from the rest of the Philippines, and thus, for tax purposes, are effectively considered as foreign territory, it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and effectively zero-rated sales during the period claimed for not being established and substantiated by appropriate and sufficient evidence. Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign authority, and should be construed in strictissimi juris against the person or entity claiming the exemption. The taxpayer who claims for exemption must justify his claim by the clearest grant of organic or statute law and should not be permitted to stand on vague implications. CIR V GENERAL FOODS GR No. 143672| April 24, 2003 | J. Corona Facts: Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang, Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction, among other business expenses, P9,461,246 for media advertising for Tang. The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied. General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA dismissing the companys appeal. Issue: W/N the subject media advertising expense for Tang was ordinary and necessary expense fully deductible under the NIRC Held:

8 No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. While the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business, hence necessary, the parties views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred and second, the amount incurred must not be a capital outlay to create goodwill for the product and/or private respondents business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time.