CASE DIGEST

CIR vs. ALGUE

Facts: Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities.
On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes from
1958-1959, amtg to P83,183.85. A letter of protest or reconsideration was filed by Algue Inc on Jan 18.
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty.
Guevara, who refused to receive it on the ground of the pending protest. Since the protest was not
found on the records, a file copy from the corp was produced and given to BIR Agent Reyes, who
deferred service of the warrant. On April 7, Atty. Guevara was informed that the BIR was not taking
any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier
sought to be served. On April 23, Algue filed a petition for review of the decision of the CIR with the
Court of Tax Appeals

CIR contentions: The claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. Payments are fictitious because most of the payees
are members of the same family in control of Algue and that there is not enough substantiation of such
payments

CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of
promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent purchase of the properties of the
Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed
by Algue as legitimate business expenses in its income tax returns

Ruling: Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance, made in accordance with law. RA 1125: the appeal may be made within thirty days after
receipt of the decision or ruling challenged. During the intervening period, the warrant was premature
and could therefore not be served. Originally, CIR claimed that the 75K promotional fees to be personal
holding company income, but later on conformed to the decision of CTA. There is no dispute that the
payees duly reported their respective shares of the fees in their income tax returns and paid the
corresponding taxes thereon. CTA also found, after examining the evidence, that no distribution of
dividends was involved. CIR suggests a tax dodge, an attempt to evade a legitimate assessment by
involving an imaginary deduction. Algue Inc. was a family corporation where strict business
procedures were not applied and immediate issuance of receipts was not required. at the end of the
year, when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. This arrangement was understandable in view of the
close relationship among the persons in the family corporation. The amount of the promotional fees
was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to
Algue Inc. was P125K. After deducting the said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate
properties.
· Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for personal services actually
rendered xxx
· the burden is on the taxpayer to prove the validity of the claimed deduction
· In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable in
the light of the efforts exerted by the payees in inducing investors and prominent businessmen to
venture in an experimental enterprise and involve themselves in a new business requiring millions of
pesos.
· Taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the people and
enhance their moral and material values
· Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it is
not, then the taxpayer has a right to complain and the courts will then come to his succor

Algue Inc.’s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep.
Act No. 1125. And we also find that the claimed deduction by Algue Inc. was permitted under the
Internal Revenue Code and should therefore not have been disallowed by the CIR

PHIL GUARANTY CO. INC. vs. CIR

FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance
contracts with foreign insurance companies not doing business in the country, thereby ceding to foreign
reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines. The
premiums
paid by such companies were excluded by the petitioner from its gross income when it file its income
tax returns
for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, the CIR
assessed against
the petitioner withholding taxes on the ceded reinsurance premiums to which the latter protested the
assessment on the ground that the premiums are not subject to tax for the premiums did not constitute
income
from sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines,
and CIR's previous rulings did not require insurance companies to withhold income tax due from
foreign
companies.

ISSUE: Are insurance companies not required to withhold tax on reinsurance premiums ceded to
foreign
insurance companies, which deprives the government from collecting the tax due from them?

HELD: No. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is
a
necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist
an
aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public
improvement
designed for the enjoyment of the citizenry and those which come within the State's territory, and
facilities and
protection which a government is supposed to provide. Considering that the reinsurance premiums in
question
were afforded protection by the government and the recipient foreign reinsurers exercised rights and
privileges
guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of
maintaining the
state.
The petitioner's defense of reliance of good faith on rulings of the CIR requiring no withholding of tax
due on
reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for
failure to
pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such
withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its
agents.

VILLANUEVA vs. CITY OF ILOILO

FACTS:
On September 30, 1946, the Municipal Board of Iloilo City enacted Ordinance 86 imposing license tax fees upon
tenement houses. The validity of such ordinance was challenged by Eusebio and Remedios Villanueva, owners of
four tenement houses containing 34 apartments. The Supreme Court held the ordinance to be ultra views. On
January 15, 1960, however, the municipal board, believing that it acquired authority to enact an ordinance of the
same nature pursuant to the Local Autonomy Act, enacted Ordinance 11, Eusebio and Remedios Villanueva
assailed the ordinance anew.

ISSUE:
Does Ordinance 11 violate the rule of uniformity of taxation?

RULING:
No. The Court has ruled the tenement houses constitute a distinct class of property and that taxes are uniform and
equal when imposed upon all property of the same class or character within the taxing authority.
The fact that the owners of the other classes of buildings in Iloilo are not imposed upon by the ordinance, or that
tenement taxes are imposed in other cities do not violate the rule of equality and uniformity. The rule does not
require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So
long as the burden of tax falls equally and impartially on all owners or operators of tenement houses similarly
classified or situated, equality and uniformity is accomplished. The presumption that tax statutes are intended to
operate uniformly and equally was not overthrown therein.
CIR vs. BANK OF COMMERCE

CIR VS BANK OF COMMERCE

-In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form
of interests or discounts from its investments in government securities and private commercial papers.
-
On several occasions during that period, it paid 5% gross receipts tax on its income. Included therein
were the respondent bank’s passive income from the said investments amounting to P

85M+, which had already been subjected to a final tax of 20%.

-
Meanwhile, CTA held in the Case ASIA BANK CORP. VS CIR, thatthe 20% final withholdingtax on interest
income from banks does not form part of taxable gross receipts for Gross ReceiptsTax (GRT) purposes.
The CTA relied on Sec 4(e) of Revenue Regulations.12-80.
-
Relying on the said decision, the respondent bank filed an administrative claim for refund with
theCommissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its grossreceipts
tax for 1994 to 1995 by P853K+ …submitted its own computation-Before the Commissioner could
resolve the claim, the respondent bank filed a petition for review with the CTA
-
CIR ANSWERED
:-The alleged refundable/creditable gross receipts taxes were collected and paid pursuant
to law and pertinent BIR implementing rules and regulations; hence, the same are not refundable.
Petitioner must prove that the income from which the refundable/creditable taxes were paid from,
weredeclared and included in its gross income during the taxable year under review;-That the alleged
excessive payment does automatically warrant the refund/credit
-
Claims for tax refund/credit are construed in
strictissimi juris
against the taxpayer as it partakesthe nature of an exemption from tax and it is incumbent upon the
petitioner to prove that it isentitled thereto under the law. Otherwise refund will not be allowed.
CTA summarized the issues:
-WON the final income tax withheld should form part of the gross receipts of the
taxpayer for GRT purposes;
-
WON the respondent bank was entitled to a refund of P853,842.54.
RESPONDENT BANK’s contends
:that for purposes of computing the 5% gross receipts tax, the final withholding tax does not form part
of gross receipts
CIR contends:
that the Court defined "gross receipts" as "all receipts of taxpayers excluding those which have
beenespecially earmarked by law or regulation for the government or some person other than the
taxpayer" in
CIR v. Manila Jockey Club, Inc.
,
7
he claimed that such definition was applicable only to a proprietor of anamusement place, not a
banking institution which is an entirely different entity altogether. As such,according to the
Commissioner, the ruling of the Court in
Manila Jockey Club
was inapplicable.
CTA HELD:
-
ORDERED
to
REFUND
in favor of petitioner Bank of Commerce the amount of P355k+representing validly proven erroneously
withheld taxes from interest income derived from itsinvestments in government securities for the years
1994 and 1995.
-
relied on the ruling in
Manila Jockey Club
, and held that the term "gross receipts" excluded thosewhich had been especially earmarked by law or
regulation for the government or persons other than the taxpayer.
CIR filed for petition for review with CA alleging that:

-There is no provision of law which excludes the 20% final income tax withheld under
Section50(a) of the Tax Code in the computation of the 5% gross receipts tax.
-
that the ruling of this Court in
Manila Jockey Club
, which was affirmed in
Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue,
14
is not decisive. He averred that the factual milieuin the said case is different, involving as it did the
"wager fund."
-
The Commissioner further pointed out that in
Manila Jockey Club,
the Court ruled that the racetrack’s commission did not form part of the gross receipts, and as such
were not subjected to the20% amusement tax.
-
the issue in
Visayan Cebu Terminal
was whether or not the gross receipts corresponding to 28% of the total gross income of the service
contractor delivered to the Bureau of Customs formed part of the gross receipts was subject to 3% of
contractor’s tax under Section 191 of the Tax Code.- On the other hand, resp Bank was a
banking institution and not a contractor. The petitioner insisted that the term "gross receipts" is
self-evident; it includes all items of income of therespondent bank regardless of whether or not the
same were allocated or earmarked for a specific purpose, to distinguish it from net receipts.
CA rendered judgment dismissing the petition
.
-
CA held that the P17,076,850.90 representing the final withholding tax derived from
passiveinvestments subjected to final tax should not be construed as forming part of the gross receipts
of the respondent bank upon which the 5% gross receipts tax should be imposed.-That the final
withholding tax was a trust fund for the government; hence, does not form part of the
respondent’s gross receipts. The legal ownership of the amount had already been vested in
thegovernment.-That subjecting the Final Withholding Tax (FWT) to the 5% of gross
receipts tax would result indouble taxation.- I n f a v o r o f r e s p B a n k . Hence the
petition by CIR THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL WITHHOLDING
TAX ONBANK’S INTEREST INCOME DOES NOT FORM PART OF THE TAXABLE GROSS RECEIPTS
INCOMPUTING THE 5% GROSS RECEIPTS TAX
ISSUE: IS THERE DOUBLE TAXATION?HELD:
SC reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% of
grossreceipts tax would result in double taxation.
-
In
CIR v. Solidbank CorporatioN, SC
said that the two taxes, subject of this litigation, are differentfrom each other. The basis of their
imposition may be the same, but their natures are different.- N O D O U B L E
TA X AT I O N
Double taxation
means taxing the same property twice when it should be taxed only once; that is, "xxxtaxing the same
person twice by the same jurisdiction for the same thing." It is obnoxious when thetaxpayer is taxed
twice, when it should be but once. Otherwise described as "direct duplicate taxation," thetwo taxes
must be imposed on the same subject matter, for the same purpose, by the same taxing authority,within
the same jurisdiction, during the same taxing period; and they must be of the same kind or character.
First,
the taxes herein are imposed on two different subject matters. The subject matter of theFWT is the
passive income generated in the form of interest on deposits and yield on depositsubstitutes, while the
subject matter of the GRT is the privilege of engaging in the business of banking

CIR vs. SC JOHNSON AND SON, INC.

Facts: Respondent is a domestic corporation organized and operating under the

Philippine Laws, entered into a licensed agreement with the SC Johnson and Son,
USA, a non-resident foreign corporation based in the USA pursuant to which the
respondent was granted the right to use the trademark, patents and technology
owned by the later including the right to manufacture, package and distribute the
products covered by the Agreement and secure assistance in management,
marketing and production from SC Johnson and Son USA.

For the use of trademark or technology, 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 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties
arguing that, the antecedent facts attending respondents case fall squarely within
the same circumstances under which said MacGeorge and Gillette rulings were
issued. Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the respondent. So, royalties paid by
the respondent to SC Johnson and Son, USA is only subject to 10% withholding
tax.

The Commissioner did not act on said claim for refund. Private respondent SC
Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a
refund of the overpaid withholding tax on royalty payments from July 1992 to
May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and
ordered the CIR to issue a tax credit certificate in the amount of P163,266.00
representing overpaid withholding tax on royalty payments beginning July 1992
to May 1993.

The CIR thus filed a petition for review with the CA which rendered the decision
subject of this appeal on November 7, 1996 finding no merit in the petition and
affirming in toto the CTA ruling.

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of tax exemptions. As
such they are registered as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the exemption.
The burden of proof is upon him who claims the exemption in his favor and he
must be able to justify his claim by the clearest grant of organic or statute law.
Private respondent is claiming for a refund of the alleged overpayment of tax on
royalties; however there is nothing on record to support a claim that the tax on
royalties under the RP-US Treaty is paid under similar circumstances as the tax
on royalties under the RP-West Germany Tax Treaty.

CIR vs. ESTATE OF BENIGNO P. TODA Jr.

FACTS:
• March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and
Owner of 99.991% of outstanding capital stock, to sell the Cibeles Building and 2 parcels of
land which he sold to Rafael A. Altonaga on August 30, 1987 for P 100M who then sold it on
the same day to Royal Match Inc. for P 200M.
• CIC included gains from sale of real property of P 75,728.021 in its annual income tax return
while Altonaga paid a 5% capital gains tax of P 10M
• July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale
of shares of stock which provides that the buyer is free from all income tax liabilities for 1987,
1988 and 1989.
• Toda Jr. died 3 years later.
• March 29, 1994: BIR sent an assessment notice and demand letter to CIC for deficiency of
income tax of P 79,099, 999.22
• January 27, 1995: BIR sent the same to the estate of Toda Jr.
• Estate filed a protest which was dismissed - fraudulent sale to evade the 35% corporate income
tax for the additional gain of P 100M and that there is in fact only 1 sale.
• Since it is falsity or fraud, the prescription period is 10 years from the discovery of the
falsity or fraud as prescribed under Sec. 223 (a) of the NIRC
• CTA: No proof of fraudulent transaction so the applicable period is 3 years after the last day
prescribed by law for filing the return
• CA: affirmed
• CIR appealed
ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance so the period for
assessment has not prescribed.

HELD: YES. Estate shall be liable since NOT yet prescribed.

• Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. ax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the
other hand, is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.
• Tax evasion connotes the integration of three factors:
• (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due
• (2) an accompanying state of mind which is described as being evil, in bad faith,
willfull,or deliberate and not accidental; and
• (3) a course of action or failure of action which is unlawful.
• All are present in this case. The trial balance showed that RMI debited P 40M as "other-
inv. Cibeles Building" that indicates RMI Paid CIC (NOT Altonaga)
• Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another.
• Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of
tax to be paid especially that the transfer from him to RMI would then subject the
 income to only 5% individual capital gains tax, and not the 35% corporate income tax.
• Generally, a sale of or exchange of assets will have an income tax incidence only when it
is consummated but such tax incidence depends upon the substance of the transaction
rather them mere formalities.

FULL CASES

CIR vs. ALGUE

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent
Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of
the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities,
received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18,
1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12,
1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to
BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on
the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of
the decision or ruling challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a
request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not
taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after
Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus
had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz.,
January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been
consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business
expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent
for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later
conformed to the decision of the respondent court rejecting this assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of
the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara,
Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately,
after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties.15 For this sale, Algue received
as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The
Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved.18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no
indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the
petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus,
testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered
that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of
the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20
Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family
corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of
the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or
business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This
test and its practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary
paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few
stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely
that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we
find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light
of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended
to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No.
1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been
disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED

TALENTO vs. ESCALDA Jr.

THIRD DIVISION
EMERLINDA S. TALENTO, G.R. No. 180884
in her capacity as the Provincial
Treasurer of the Province of Bataan,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Carpio Morales,*
Chico-Nazario, and
 Reyes, JJ.
HON. REMIGIO M. ESCALADA, JR.,
Presiding Judge of the Regional Trial
Court of Bataan, Branch 3, and Promulgated:
PETRON CORPORATION,
Respondents. June 27, 2008
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
The instant petition for certiorari under Rule 65 of the Rules of Court assails the
November 5, 2007 Order[1] of the Regional Trial Court of Bataan, Branch 3, in Civil
Case No. 8801, granting the petition for the issuance of a writ of preliminary injunction
filed by private respondent Petron Corporation (Petron) thereby enjoining petitioner
Emerlinda S. Talento, Provincial Treasurer of Bataan, and her representatives from
proceeding with the public auction of Petrons machineries and pieces of equipment
during the pendency of the latters appeal from the revised assessment of its properties.

The facts of the case are as follows:

On June 18, 2007, Petron received from the Provincial Assessors Office of Bataan a
notice of revised assessment over its machineries and pieces of equipment in Lamao,
Limay, Bataan. Petron was given a period of 60 days within which to file an appeal with
the Local Board of Assessment Appeals (LBAA).[2] Based on said revised assessment,
petitioner Provincial Treasurer of Bataan issued a notice informing Petron that as of June
30, 2007, its total liability is P1,731,025,403.06,[3] representing deficiency real property
tax due from 1994 up to the first and second quarters of 2007.

On August 17, 2007, Petron filed a petition[4] with the LBAA (docketed as LBAA Case
No. 2007-01) contesting the revised assessment on the grounds that the subject
assessment pertained to properties that have been previously declared; and that the
assessment covered periods of more than 10 years which is not allowed under the Local
Government Code (LGC). According to Petron, the possible valid assessment pursuant
to Section 222 of the LGC could only be for the years 1997 to 2006. Petron further
contended that the fair market value or replacement cost used by petitioner included
items which should be properly excluded; that prompt payment of discounts were not
considered in determining the fair market value; and that the subject assessment should
take effect a year after or on January 1, 2008. In the same petition, Petron sought the
approval of a surety bond in the amount of P1,286,057,899.54.[5]

On August 22, 2007, Petron received from petitioner a final notice of delinquent real
property tax with a warning that the subject properties would be levied and auctioned
should Petron fail to settle the revised assessment due.[6]

Consequently, Petron sent a letter[7] to petitioner stating that in view of the pendency of
its appeal[8] with the LBAA, any action by the Treasurers Office on the subject
properties would be premature. However, petitioner replied that only Petrons payment
under protest shall bar the collection of the realty taxes due,[9] pursuant to Sections 231
and 252 of the LGC.

With the issuance of a Warrant of Levy[10] against its machineries and pieces of
equipment, Petron filed on September 24, 2007, an urgent motion to lift the final notice
of delinquent real property tax and warrant of levy with the LBAA. It argued that the
issuance of the notice and warrant is premature because an appeal has been filed with
the LBAA, where it posted a surety bond in the amount of P1,286,057,899.54.[11]

On October 3, 2007, Petron received a notice of sale of its properties scheduled on

October 17, 2007.[12] Consequently, on October 8, 2007, Petron withdrew its motion to
lift the final notice of delinquent real property tax and warrant of levy with the LBAA.
[13] On even date, Petron filed with the Regional Trial Court of Bataan the instant
case (docketed as Civil Case No. 8801) for prohibition with prayer for the issuance
of a temporary restraining order (TRO) and preliminary injunction.[14]

On October 15, 2007, the trial court issued a TRO for 20 days enjoining petitioner from
proceeding with the public auction of Petrons properties.[15] Petitioner thereafter filed
an urgent motion for the immediate dissolution of the TRO, followed by a motion to
dismiss Petrons petition for prohibition.

On November 5, 2007, the trial court issued the assailed Order granting Petrons petition
for issuance of writ of preliminary injunction, subject to Petrons posting of a
P444,967,503.52 bond in addition to its previously posted surety bond of
P1,286,057,899.54, to complete the total amount equivalent to the revised assessment of
P1,731,025,403.06. The trial court held that in scheduling the sale of the properties
despite the pendency of Petrons appeal and posting of the surety bond with the LBAA,
petitioner deprived Petron of the right to appeal. The dispositive portion thereof, reads:

WHEREFORE, the writ of preliminary injunction prayed for by plaintiff is hereby GRANTED and
ISSUED, enjoining defendant Treasurer, her agents, representatives, or anybody acting in her behalf
from proceeding with the scheduled public auction of plaintiffs real properties, or any disposition
thereof, pending the determination of the merits of the main action, to be effective upon posting by
plaintiff to the Court of an injunction bond in the amount of Four Hundred Forty Four Million Nine
Hundred Sixty Seven Thousand Five Hundred Three and 52/100 Pesos (P444,967,503.52) and the
approval thereof by the Court.
Defendants Urgent Motion for the Immediate Dissolution of the Temporary Restraining Order dated is
hereby DENIED.
SO ORDERED.[16]
From the said Order of the trial court, petitioner went directly to this Court via the
instant petition for certiorari under Rule 65 of the Rules of Court.

The question posed in this petition, i.e., whether the collection of taxes may be
suspended by reason of the filing of an appeal and posting of a surety bond, is
undoubtedly a pure question of law. Section 2(c) of Rule 41 of the Rules of Court
provides:

SEC. 2. Modes of Appeal.

(c) Appeal by certiorari. In all cases when only questions of law are raised or involved, the appeal shall
be to the Supreme Court by petition for review on certiorari under Rule 45. (Emphasis supplied)
Thus, petitioner resorted to the erroneous remedy when she filed a petition for certiorari
under Rule 65, when the proper mode should have been a petition for review on
certiorari under Rule 45. Moreover, under Section 2, Rule 45 of the same Rules, the
period to file a petition for review is 15 days from notice of the order appealed from. In
the instant case, petitioner received the questioned order of the trial court on November
6, 2007, hence, she had only up to November 21, 2007 to file the petition. However, the
same was filed only on January 4, 2008, or 43 days late. Consequently, petitioners
failure to file an appeal within the reglementary period rendered the order of the trial
court final and executory.

The perfection of an appeal in the manner and within the period prescribed by law is
mandatory. Failure to conform to the rules regarding appeal will render the judgment
final and executory and beyond the power of the Courts review. Jurisprudence mandates
that when a decision becomes final and executory, it becomes valid and binding upon
the parties and their successors in interest. Such decision or order can no longer be
disturbed or reopened no matter how erroneous it may have been.[17]

Petitioners resort to a petition under Rule 65 is obviously a play to make up for the loss
of the right to file an appeal via a petition under Rule 45. However, a special civil action
under Rule 65 can not cure petitioners failure to timely file a petition for review on
certiorari under Rule 45 of the Rules of Court. Rule 65 is an independent action that
cannot be availed of as a substitute for the lost remedy of an ordinary appeal, including
that under Rule 45, especially if such loss or lapse was occasioned by ones own neglect
or error in the choice of remedies.[18]

Moreover, even if we assume that a petition under Rule 65 is the proper remedy, the
petition is still dismissible.

We note that no motion for reconsideration of the November 5, 2007 order of the trial
court was filed prior to the filing of the instant petition. The settled rule is that a motion
for reconsideration is a sine qua non condition for the filing of a petition for certiorari.
The purpose is to grant the public respondent an opportunity to correct any actual or
perceived error attributed to it by the re-examination of the legal and factual
circumstances of the case. Petitioners failure to file a motion for reconsideration
deprived the trial court of the opportunity to rectify an error unwittingly committed or to
vindicate itself of an act unfairly imputed. Besides, a motion for reconsideration under
the present circumstances is the plain, speedy and adequate remedy to the adverse
judgment of the trial court.[19]
Petitioner also blatantly disregarded the rule on hierarchy of courts. Although the
Supreme Court, Regional Trial Courts, and the Court of Appeals have concurrent
jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, habeas
corpus and injunction, such concurrence does not give the petitioner unrestricted
freedom of choice of court forum. Recourse should have been made first with the Court
of Appeals and not directly to this Court.[20]

True, litigation is not a game of technicalities. It is equally true, however, that every case
must be presented in accordance with the prescribed procedure to ensure an orderly and
speedy administration of justice.[21] The failure therefore of petitioner to comply with
the settled procedural rules justifies the dismissal of the present petition.

Finally, we find that the trial court correctly granted respondents petition for issuance of
a writ of preliminary injunction. Section 3, Rule 58, of the Rules of Court, provides:

SEC. 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted by
the court when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the acts complained of, or in the performance of an act or
acts, either for a limited period or perpetually;
(b) That the commission, continuance or non-performance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or
(c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is procuring
or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting
the subject of the action or proceeding, and tending to render the judgment ineffectual.
The requisites for the issuance of a writ of preliminary injunction are: (1) the existence
of a clear and unmistakable right that must be protected; and (2) an urgent and
paramount necessity for the writ to prevent serious damage.[22]
The urgency and paramount necessity for the issuance of a writ of injunction becomes
relevant in the instant case considering that what is being enjoined is the sale by public
auction of the properties of Petron amounting to at least P1.7 billion and which
properties are vital to its business operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations of Petron merit the issuance
of a writ of preliminary injunction in its favor.

We are not unaware of the doctrine that taxes are the lifeblood of the government,
without which it can not properly perform its functions; and that appeal shall not
suspend the collection of realty taxes. However, there is an exception to the foregoing
rule, i.e., where the taxpayer has shown a clear and unmistakable right to refuse or to
hold in abeyance the payment of taxes. In the instant case, we note that respondent
contested the revised assessment on the following grounds: that the subject assessment
pertained to properties that have been previously declared; that the assessment covered
periods of more than 10 years which is not allowed under the LGC; that the fair market
value or replacement cost used by petitioner included items which should be properly
excluded; that prompt payment of discounts were not considered in determining the fair
market value; and that the subject assessment should take effect a year after or on
January 1, 2008. To our mind, the resolution of these issues would have a direct bearing
on the assessment made by petitioner. Hence, it is necessary that the issues must first be
passed upon before the properties of respondent is sold in public auction.

In addition to the fact that the issues raised by the respondent would have a direct impact
on the validity of the assessment made by the petitioner, we also note that respondent
has posted a surety bond equivalent to the amount of the assessment due. The Rules of
Procedure of the LBAA, particularly Section 7, Rule V thereof, provides:

Section 7. Effect of Appeal on Collection of Taxes. An appeal shall not suspend the collection of the
corresponding realty taxes on the real property subject of the appeal as assessed by the Provincial, City
or Municipal Assessor, without prejudice to the subsequent adjustment depending upon the outcome of
the appeal. An appeal may be entertained but the hearing thereof shall be deferred until the
corresponding taxes due on the real property subject of the appeal shall have been paid under protest or
the petitioner shall have given a surety bond, subject to the following conditions:
(1) the amount of the bond must not be less than the total realty taxes and penalties due as assessed by
the assessor nor more than double said amount;
(2) the bond must be accompanied by a certification from the Insurance Commissioner (a) that the
surety is duly authorized to issue such bond; (a) that the surety bond is approved by and registered with
said Commission; and (c) that the amount covered by the surety bond is within the writing capacity of
the surety company; and
(3) the amount of the bond in excess of the surety companys writing capacity, if any, must be covered
by Reinsurance Binder, in which case, a certification to this effect must likewise accompany the surety
bond.
Corollarily, Section 11 of Republic Act No. 9282,[23] which amended Republic Act No.
1125 (The Law Creating the Court of Tax Appeals) provides:

Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; -

xxxx
No appeal taken to the Court of Appeals from the Collector of Internal Revenue x x x shall suspend the
payment, levy, distraint, and/or sale of any property for the satisfaction of his tax liability as provided
by existing law. Provided, however, That when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the interest of the Government and/or the
taxpayer the Court at any stage of the processing may suspend the collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double the amount with
the Court.
WHEREFORE, in view of all the foregoing, the instant petition is DISMISSED.

SO ORDERED.

PHIL GUARANTY CO. INC. vs. CIR

G.R. No. L-22074 April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,
respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts,
on various dates, with foreign insurance companies not doing business in the Philippines namely:
Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance Corp., Ltd.,
Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance
Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co.,
Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance it has
originally underwritten in the Philippines, in consideration for the assumption by the latter of liability
on an equivalent portion of the risks insured. Said reinsurrance contracts were signed by Philippine
Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract
with Swiss Reinsurance Company, which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of
Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required
to keep a register in Manila where the risks ceded to the foreign reinsurers where entered, and entry
therein was binding upon the reinsurers. A proportionate amount of taxes on insurance premiums not
recovered from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers
further agreed, in consideration for managing or administering their affairs in the Philippines, to
compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the reinsurance premiums.
Conflicts and/or differences between the parties under the reinsurance contracts were to be arbitrated in
Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract
shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against
Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
 TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded
to foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest
was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co.,
Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes for
the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs against
petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the
foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor
did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances
in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced
simultaneously with the liability of Philippine Guaranty Co., Inc. under the original insurances.
Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign reinsurers.
Entries made in such register bound the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the reinsurance undertaking by the foreign
reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing
insurance business in the Philippines were payable by the foreign reinsurers when the same were not
recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an
amount equivalent to 5% of the ceded premiums, in consideration for administration and management
by the latter of the affairs of the former in the Philippines in regard to their reinsurance activities here.
Disputes and differences between the parties were subject to arbitration in the City of Manila. All the
reinsurance contracts, except that with Swiss Reinsurance Company, were signed by Philippine
Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad. Although the
contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both
parties in Switzerland, the same specifically provided that its provision shall be construed according to
the laws of the Philippines, thereby manifesting a clear intention of the parties to subject themselves to
Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the
Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to
the income. 1 The reinsurance premiums were income created from the undertaking of the foreign
reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under original
insurances. Such undertaking, as explained above, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate
income tax.
The foreign insurers' place of business should not be confused with their place of activity. Business
should not be continuity and progression of transactions 2 while activity may consist of only a single
transaction. An activity may occur outside the place of business. Section 24 of the Tax Code does not
require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It
suffices that the activity creating the income is performed or done in the Philippines. What is
controlling, therefore, is not the place of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein
should be treated as income from sources within the Philippines but it does not require that other kinds
of income should not be considered likewise.1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an
aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public
improvement designed for the enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is supposed to provide. Considering that the
reinsurance premiums in question were afforded protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner may
free if from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax Code,
suffice it to state that this question has already been answered in the affirmative in Alexander Howden
& Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit any
amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in Section fifty-three a tax
equal to twenty-four per centum thereof, and such tax shall be returned and paid in the same
manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships (compañias
colectivas), in what ever capacity acting, including lessees or mortgagors of real or personal
property, trustees acting in any trust capacity, executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the Government of the Philippines
 having the control, receipt, custody, disposal, or payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income of any nonresident alien individual,
not engaged in trade or business within the Philippines and not having any office or place of
business therein, shall (except in the case provided for in subsection [a] of this section) deduct
and withhold from such annual or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more than
eighty-five per centum of the gross income of such corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such dividends (or for such part of
such period as the corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-seven: Provided, further, That
the Collector of Internal Revenue may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining
the amount to be withheld. According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or
a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the
amount of P375,345.00 is not paid within 30 days from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum amount that may be
collected as interest shall not exceed the amount corresponding to a period of three (3) years. With
costs againsts petitioner.

VILLANUEVA vs. CITY OF ILOILO

G.R. No. L-26521 December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,
vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.
Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo
declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License
Tax On Persons Engaged In The Business Of Operating Tenement Houses," and ordering the City to
refund to the plaintiffs-appellees the sums of collected from them under the said ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax
fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly or
wholly engaged in or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00 per
apartment; (3) tenement house, partly or wholly engaged in business in any other streets, P12.00 per
apartment. The validity and constitutionality of this ordinance were challenged by the spouses Eusebio
Villanueva and Remedies Sian Villanueva, owners of four tenement houses containing 34 apartments.
This Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio Villanueva, L-12695, March 23,
1959, declared the ordinance ultra vires, "it not appearing that the power to tax owners of tenement
houses is one among those clearly and expressly granted to the City of Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of
Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority or
power to enact an ordinance similar to that previously declared by this Court as ultra vires, enacted
Ordinance 11, series of 1960, hereunder quoted in full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN
THE BUSINESS OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of
Republic Act No. 2264, otherwise known as the Autonomy Law of Local Government, that:
Section 1. — A municipal license tax is hereby imposed on tenement houses in accordance with
the schedule of payment herein provided.
Section 2. — Tenement house as contemplated in this ordinance shall mean any building or
dwelling for renting space divided into separate apartments or accessorias.
Section 3. — The municipal license tax provided in Section 1 hereof shall be as follows:

I. Tenement houses:

(a) Apartment house made of strong materials P20.00 per door p.a.

(b) Apartment house made of mixed materials P10.00 per door p.a.

II Rooming house of strong materials P10.00 per door p.a.

Rooming house of mixed materials P5.00 per door p.a.

III. Tenement house partly or wholly engaged in or dedicated to

business in the following streets: J.M. Basa, Iznart, Aldeguer,
Guanco and Ledesma from Plazoleto Gay to Valeria. St. P30.00 per door p.a.

IV. Tenement house partly or wholly engaged in or dedicated to

business in any other street P12.00 per door p.a.

V. Tenement houses at the streets surrounding the super market

as soon as said place is declared commercial P24.00 per door p.a.

Section 4. — All ordinances or parts thereof inconsistent herewith are hereby amended.
Section 5. — Any person found violating this ordinance shall be punished with a fine note
 exceeding Two Hundred Pesos (P200.00) or an imprisonment of not more than six (6) months
or both at the discretion of the Court.
Section 6 — This ordinance shall take effect upon approval.
ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five
tenement houses, aggregately containing 43 apartments, while the other appellees and the same
Remedios S. Villanueva are owners of ten apartments. Each of the appellees' apartments has a door
leading to a street and is rented by either a Filipino or Chinese merchant. The first floor is utilized as a
store, while the second floor is used as a dwelling of the owner of the store. Eusebio Villanueva owns,
likewise, apartment buildings for rent in Bacolod, Dumaguete City, Baguio City and Quezon City,
which cities, according to him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva
and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees
Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of
P1,317.00. Eusebio Villanueva has likewise been paying real estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended
complaint, respectively, against the City of Iloilo, in the aforementioned court, praying that Ordinance
11, series of 1960, be declared "invalid for being beyond the powers of the Municipal Council of the
City of Iloilo to enact, and unconstitutional for being violative of the rule as to uniformity of taxation
and for depriving said plaintiffs of the equal protection clause of the Constitution," and that the City be
ordered to refund the amounts collected from them under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the grounds
that (a) "Republic Act 2264 does not empower cities to impose apartment taxes," (b) the same is
"oppressive and unreasonable," for the reason that it penalizes owners of tenement houses who fail to
pay the tax, (c) it constitutes not only double taxation, but treble at that and (d) it violates the rule of
uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double
taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal
clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities
and municipal districts shall have authority to impose municipal license taxes or fees upon
persons engaged in any occupation or business, or exercising privileges in chartered cities,
municipalities or municipal districts by requiring them to secure licences at rates fixed by the
municipal board or city council of the city, the municipal council of the municipality, or the
municipal district council of the municipal district; to collect fees and charges for services
rendered by the city, municipality or municipal district; to regulate and impose reasonable fees
for services rendered in connection with any business, profession or occupation being
conducted within the city, municipality or municipal district and otherwise to levy for public
 purposes, just and uniform taxes, licenses or fees; Provided, That municipalities and municipal
districts shall, in no case, impose any percentage tax on sales or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax, except gasoline, under the
provisions of the National Internal Revenue Code; Provided, however, That no city,
municipality or municipal district may levy or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and publication of any newspaper,
magazine, review or bulletin appearing at regular intervals and having fixed prices for for
subscription and sale, and which is not published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric
light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the national government,
tonnage, and all other kinds of customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign
insurance companies.
A tax ordinance shall go into effect on the fifteenth day after its passage, unless the ordinance
shall provide otherwise: Provided, however, That the Secretary of Finance shall have authority
to suspend the effectivity of any ordinance within one hundred and twenty days after its
passage, if, in his opinion, the tax or fee therein levied or imposed is unjust, excessive,
oppressive, or confiscatory, and when the said Secretary exercises this authority the effectivity
of such ordinance shall be suspended.
In such event, the municipal board or city council in the case of cities and the municipal council
or municipal district council in the case of municipalities or municipal districts may appeal the
decision of the Secretary of Finance to the court during the pendency of which case the tax
levied shall be considered as paid under protest.
It is now settled that the aforequoted provisions of Republic Act 2264 confer on local governments
broad taxing authority which extends to almost "everything, excepting those which are mentioned
therein," provided that the tax so levied is "for public purposes, just and uniform," and does not
transgress any constitutional provision or is not repugnant to a controlling statute. 2 Thus, when a tax,
levied under the authority of a city or municipal ordinance, is not within the exceptions and limitations
aforementioned, the same comes within the ambit of the general rule, pursuant to the rules of expressio
unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the exceptions provided for in
section 2 of the Local Autonomy Act? For this purpose, it is necessary to determine the true nature of
the tax. The appellees strongly maintain that it is a "property tax" or "real estate tax," 3 and not a "tax on
persons engaged in any occupation or business or exercising privileges," or a license tax, or a privilege
tax, or an excise tax.4 Indeed, the title of the ordinance designates it as a "municipal license tax on
persons engaged in the business of operating tenement houses," while section 1 thereof states that a
"municipal license tax is hereby imposed on tenement houses." It is the phraseology of section 1 on
which the appellees base their contention that the tax involved is a real estate tax which, according to
them, makes the ordinance ultra vires as it imposes a levy "in excess of the one per centum real estate
tax allowable under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in question is not a real estate tax.
Obviously, the appellees confuse the tax with the real estate tax within the meaning of the Assessment
Law,6 which, although not applicable to the City of Iloilo, has counterpart provisions in the Iloilo City
Charter.7 A real estate tax is a direct tax on the ownership of lands and buildings or other improvements
thereon, not specially exempted,8 and is payable regardless of whether the property is used or not,
although the value may vary in accordance with such factor. 9 The tax is usually single or indivisible,
although the land and building or improvements erected thereon are assessed separately, except when
the land and building or improvements belong to separate owners.10 It is a fixed proportion11 of the
assessed value of the property taxed, and requires, therefore, the intervention of assessors. 12 It is
collected or payable at appointed times,13 and it constitutes a superior lien on and is enforceable against
the property14 subject to such taxation, and not by imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not a tax
on the land on which the tenement houses are erected, although both land and tenement houses may
belong to the same owner. The tax is not a fixed proportion of the assessed value of the tenement
houses, and does not require the intervention of assessors or appraisers. It is not payable at a designated
time or date, and is not enforceable against the tenement houses either by sale or distraint. Clearly,
therefore, the tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court
looks less to its words and more to the context, subject-matter, consequence and effect. Accordingly,
what is within the spirit is within the ordinance although it is not within the letter thereof, while that
which is in the letter, although not within the spirit, is not within the ordinance." 15 It is within neither
the letter nor the spirit of the ordinance that an additional real estate tax is being imposed, otherwise the
subject-matter would have been not merely tenement houses. On the contrary, it is plain from the
context of the ordinance that the intention is to impose a license tax on the operation of tenement
houses, which is a form of business or calling. The ordinance, in both its title and body, particularly
sections 1 and 3 thereof, designates the tax imposed as a "municipal license tax" which, by itself,
means an "imposition or exaction on the right to use or dispose of property, to pursue a business,
occupation, or calling, or to exercise a privilege."16.
"The character of a tax is not to be fixed by any isolated words that may beemployed in the
statute creating it, but such words must be taken in the connection in which they are used and
the true character is to be deduced from the nature and essence of the subject." 17 The subject-
matter of the ordinance is tenement houses whose nature and essence are expressly set forth in
section 2 which defines a tenement house as "any building or dwelling for renting space divided
into separate apartments or accessorias." The Supreme Court, in City of Iloilo vs. Remedios Sian
Villanueva, et al., L-12695, March 23, 1959, adopted the definition of a tenement house 18 as
"any house or building, or portion thereof, which is rented, leased, or hired out to be occupied,
 or is occupied, as the home or residence of three families or more living independently of each
other and doing their cooking in the premises or by more than two families upon any floor, so
living and cooking, but having a common right in the halls, stairways, yards, water-closets, or
privies, or some of them." Tenement houses, being necessarily offered for rent or lease by their
very nature and essence, therefore constitute a distinct form of business or calling, similar to the
hotel or motel business, or the operation of lodging houses or boarding houses. This is precisely
one of the reasons why this Court, in the said case of City of Iloilo vs. Remedios Sian
Villanueva, et al., supra, declared Ordinance 86 ultra vires, because, although the municipal
board of Iloilo City is empowered, under sec. 21, par. j of its Charter, "to tax, fix the license fee
for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding
houses, livery garages, public warehouses, pawnshops, theaters, cinematographs," tenement
houses, which constitute a different business enterprise,19 are not mentioned in the aforestated
section of the City Charter of Iloilo. Thus, in the aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is one among those
clearly and expressly granted to the City of Iloilo by its Charter, the exercise of such power
cannot be assumed and hence the ordinance in question is ultra vires insofar as it taxes a
tenement house such as those belonging to defendants." .
The lower court has interchangeably denominated the tax in question as a tenement tax or an apartment
tax. Called by either name, it is not among the exceptions listed in section 2 of the Local Autonomy
Act. On the other hand, the imposition by the ordinance of a license tax on persons engaged in the
business of operating tenement houses finds authority in section 2 of the Local Autonomy Act which
provides that chartered cities have the authority to impose municipal license taxes or fees upon persons
engaged in any occupation or business, or exercising privileges within their respective territories, and
"otherwise to levy for public purposes, just and uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only double taxation but treble at that,"
because "buildings pay real estate taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of
the National Internal Revenue Code, besides the tenement tax under the said ordinance." Obviously,
what the trial court refers to as "income taxes" are the fixed taxes on business and occupation provided
for in section 182, Title V, of the National Internal Revenue Code, by virtue of which persons engaged
in "leasing or renting property, whether on their account as principals or as owners of rental property or
properties," are considered "real estate dealers" and are taxed according to the amount of their annual
income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the National
Internal Revenue Code as real estate dealers, and still taxable under the ordinance in question, the
argument against double taxation may not be invoked. The same tax may be imposed by the national
government as well as by the local government. There is nothing inherently obnoxious in the exaction
of license fees or taxes with respect to the same occupation, calling or activity by both the State and a
political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate
taxes and the tenement tax imposed by the ordinance in question, is also devoid of merit. It is a well-
settled rule that a license tax may be levied upon a business or occupation although the land or property
used in connection therewith is subject to property tax. The State may collect an ad valorem tax on
property used in a calling, and at the same time impose a license tax on that calling, the imposition of
the latter kind of tax being in no sensea double tax.22.
"In order to constitute double taxation in the objectionable or prohibited sense the same
 property must be taxed twice when it should be taxed but once; both taxes must be imposed on
the same property or subject-matter, for the same purpose, by the same State, Government, or
taxing authority, within the same jurisdiction or taxing district, during the same taxing period,
and they must be the same kind or character of tax." 23 It has been shown that a real estate tax
and the tenement tax imposed by the ordinance, although imposed by the sametaxing authority,
are not of the same kind or character.
At all events, there is no constitutional prohibition against double taxation in the Philippines. 24 It is
something not favored, but is permissible, provided some other constitutional requirement is not
thereby violated, such as the requirement that taxes must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not only
oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months or both,
if the owner or owners of the tenement buildings divided into apartments do not pay the tenement or
apartment tax fixed in said ordinance," but also unconstitutional as it subjects the owners of tenement
houses to criminal prosecution for non-payment of an obligation which is purely sum of money." The
lower court apparently had in mind, when it made the above ruling, the provision of the Constitution
that "no person shall be imprisoned for a debt or non-payment of a poll tax." 26 It is elementary,
however, that "a tax is not a debt in the sense of an obligation incurred by contract, express or implied,
and therefore is not within the meaning of constitutional or statutory provisions abolishing or
prohibiting imprisonment for debt, and a statute or ordinance which punishes the non-payment thereof
by fine or imprisonment is not, in conflict with that prohibition." 27 Nor is the tax in question a poll tax,
for the latter is a tax of a fixed amount upon all persons, or upon all persons of a certain class, resident
within a specified territory, without regard to their property or the occupations in which they may be
engaged.28 Therefore, the tax in question is not oppressive in the manner the lower court puts it. On the
other hand, the charter of Iloilo City 29 empowers its municipal board to "fix penalties for violations of
ordinances, which shall not exceed a fine of two hundred pesos or six months' imprisonment, or both
such fine and imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this
Court overruled the pronouncement of the lower court declaring illegal and void an ordinance imposing
an occupation tax on persons exercising various professions in the City of Manilabecause it imposed a
penalty of fine and imprisonment for its violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.
"... because while the owners of the other buildings only pay real estate tax and income taxes
the ordinance imposes aside from these two taxes an apartment or tenement tax. It should be
noted that in the assessment of real estate tax all parts of the building or buildings are included
so that the corresponding real estate tax could be properly imposed. If aside from the real estate
tax the owner or owners of the tenement buildings should pay apartment taxes as required in the
ordinance then it will violate the rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue that there is "lack of
uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo are singled out to
pay taxes on their tenement houses, while citizens of other cities, where their councils do not enact a
similar tax ordinance, are permitted to escape such imposition." .
It is our view that both assertions are undeserving of extended attention. This Court has already ruled
that tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform
and equal when imposed upon all property of the same class or character within the taxing authority." 31
The fact, therefore, that the owners of other classes of buildings in the City of Iloilo do not pay the
taxes imposed by the ordinance in question is no argument at all against uniformity and equality of the
tax imposition. Neither is the rule of equality and uniformity violated by the fact that tenement taxesare
not imposed in other cities, for the same rule does not require that taxes for the same purpose should be
imposed in different territorial subdivisions at the same time. 32 So long as the burden of the tax falls
equally and impartially on all owners or operators of tenement houses similarly classified or situated,
equality and uniformity of taxation is accomplished. 33 The plaintiffs-appellees, as owners of tenement
houses in the City of Iloilo, have not shown that the tax burden is not equally or uniformly distributed
among them, to overthrow the presumption that tax statutes are intended to operate uniformly and
equally.34.
5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a mere
reproduction of Ordinance 86 of the City of Iloilo which was declared by this Court in L-12695, supra,
as ultra vires, the decision in that case should be accorded the effect of res judicata in the present case
or should constitute estoppel by judgment. To dispose of this contention, it suffices to say that there is
no identity of subject-matter in that case andthis case because the subject-matter in L-12695 was an
ordinance which dealt not only with tenement houses but also warehouses, and the said ordinance was
enacted pursuant to the provisions of the City charter, while the ordinance in the case at bar was
enacted pursuant to the provisions of the Local Autonomy Act. There is likewise no identity of cause of
action in the two cases because the main issue in L-12695 was whether the City of Iloilo had the power
under its charter to impose the tax levied by Ordinance 11, series of 1960, under the Local Autonomy
Act which took effect on June 19, 1959, and therefore was not available for consideration in the
decision in L-12695 which was promulgated on March 23, 1959. Moreover, under the provisions of
section 2 of the Local Autonomy Act, local governments may now tax any taxable subject-matter or
object not included in the enumeration of matters removed from the taxing power of local
governments.Prior to the enactment of the Local Autonomy Act the taxes that could be legally levied
by local governments were only those specifically authorized by law, and their power to tax was
construed in strictissimi juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid, the
complaint is hereby dismissed. No pronouncement as to costs..
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,Fernando and Capistrano, JJ.,
concur..

Footnotes
1 The record discloses that the delay caused in the lower court was due to the loss of the original
record while the same was in the possession of the late Judge Perfecto Querubin. The record
was later reconstituted under Judge Ramon Blanco..
2Nin Bay Mining Co. vs. Mun. of Roxas, Prov. of Palawan, L-20125, July 20, 1965, per
Concepcion, J.: .
"Neither the plaintiff nor the lower court maintains that the subject matter of the
ordinance in question comes under any of the foregoing exceptions. Hence, under the
rule - "expressio unius est exclusio alterius", the ordinance should be deemed to come
within the purview of the general rule. Indeed, the sponsor of the bill, which upon its
passage became Republic Act No. 2264, explicitly informed the House of
Representatives when he urged the same to approve it, that, under its provisions, local
governments would be "able to do everything, excepting those things which are
mentioned therein." ..." .
 C.N. Hodges vs. The Mun. Board of the City of Iloilo, et al., L-18276, Jan. 12, 1967, per
Castro, J.: .
"... Heretofore, we have announced the doctrine that the grant of the power to tax to
chartered cities under section 2 of the Local Autonomy Act is sufficiently plenary to
cover "everything, excepting those which are mentioned therein," subject only to the
limitation that the tax so levied is for "public purposes, just and uniform" (Nin Bay
Mining Co. vs. Mun. of Roxas, Prov. of Palawan, G.R. No. L-20125, July 20, 1965).
There is no showing, and we do not believe it is possible to show, that the tax levied,
called by any name - percentage tax or sales tax - comes under any of the specific
exceptions listed in Section 2 of the Local Autonomy Act. Not being excepted, it must be
regarded as coming within the purview of the general rule. As the maxim goes,
"Exceptio firmat regulum in casibus non excepti." Since its public purpose, justness and
uniformity of application are not disputed, the tax so levied must be sustained as valid."
(Re: Ordinance imposing a tax on sales or real estate property situated in the City of
Iloilo, of 1/2% of 1% of the contract price or consideration.).
Ormoc Sugar Co., Inc. vs. Mun. Board of Ormoc City, et al., L-24322, July 21, 1967, per
Fernando, J.: .
"In a number of decisions starting from City of Bacolod v. Gruet, L-18290, Jan. 31,
1963, to Hodges vs. Mun. Board, L-18276, Jan. 12, 1967, such broad taxing authority
has been implemented and vitalized by this Court.
"... The question before this Court is one of power. From and after June 19, 1959, when
the Local Autonomy Act was enacted, the sphere of autonomy of a chartered city in the
enactment of taxing measures has been considerably enlarged.
"... In the absence of a clear and specific showing that there was a transgression of a
constitutional provision or repugnancy to a controlling statute, an objection of such a
generalized character deserves but scant sympathy from this Court. Considering the
indubitable policy expressly set forth in the Local Autonomy Act, the invocation of such
a talismanic formula as "restraint of trade" without more no longer suffices, assuming it
ever did, to nullify a taxing ordinance, otherwise valid." [Re: Ordinance imposing tax on
all productions of centrifugal sugar (B-sugar) locally sold or sold within the Phil., at P.20
per picul, etc.].
3 "Taxes on property are taxes assessed on all property or on all property of a certain class
located within a certain territory on a specified date in proportion to its value, or in accordance
with some other reasonable method of apportionment, the obligation to pay which is absolute
and unavoidable and it is not based upon any voluntary action of the person assessed. A
property tax is ordinarily measured by the amount of property owned by the taxpayer on a given
day, and not on the total amount owned by him during the year. It is ordinarily assessed at stated
periods determined in advance, and collected at appointed times, and its payment is usually
enforced by sale of the property taxed, and, occassionally, by imprisonment of the person
assessed." (51 Am. Jur. 57) .
"A "real estate tax" is a tax in rem against realty without personal liability therefor on
part of owner thereof, and a judgment recovered in proceedings for enforcement of real
estate tax is one in rem against the realty without personal liability against the owner."
(36 Words and Phrases, 286, citing Land O'Lakes Dairy Co. vs. Wadena County, 39 N.
W. 2d. 164, 171, 229 Minn. 263).
4 "The term "license tax" or "license fee" implies an imposition or exaction on the right to use or
dispose of a property, to pursue a business, occupation, or calling, or to exercise a privilege."
(33 Am. Jur. 325-v26) .
"The term "excise tax" is synonymous with "privilege tax", and the two are often used
interchangeably, and whether a tax is characterized in the statute imposing it as a
privilege tax or an excise tax is merely a choice of synonymous words, for an excise tax
is a privilege tax." (51 Am. Jur. 62, citing Bank of Commerce & T. Co. vs. Senter, 149
Tenn. 569, 260 SW 144) .
"Thus, it is said that an excise tax is a charge imposed upon the performance of an act,
the enjoyment of a privilege, or the engaging in an occupation." (51 Am. Jur. 61) .
5 "SEC. 38. Annual tax and penalties. Extension and remission of the tax. -- An annual tax of
one per centum on the assessed value of all real estate in the city subject to taxation shall be
levied by the city treasurer..." .
6 Commonwealth Act No. 470 -- "SECTION 1. Title of this Act. - This Act shall be known as
the Assessment Law. `.
`SEC. 2. Incidence of real property tax. -- Except in chartered cities, there shall be
levied, assessed, and collected an annual ad valorem tax on real property, including land,
buildings, machinery and other improvements not hereinafter specially exempted.".
7 Com. Act 158, sections 28 to 53.
8 Com. Act 158, sec. 29.
951 Am. Jur. 53: "An ad valorem property tax is invariably based upon ownership of property,
and is payable regardless of whether the property is used or not, although of course the value
may vary in accordance with such factor." .
10 "Real estate, for purposes of taxation, includes all land within the district by which the tax is
levied, and all rights and interests in such land, and all buildings and other structures affixed to
the land, even though as between the landlord and the tenant they are the property of the tenant
and may be removed by him at the termination of the lease." (51 Am. Jur. 438) Sec. 31 of Com.
Act 158 provides: "When it shall appear that there are separate owners of the land and the
improvements thereon, a separate assessment of the property of each shall be made." .
11 Sec. 38 of Com. Act 158 provides: "An annual tax of one per centum on the assessed value of
all real estate in the city subject to taxation shall be levied by the city treasurer." .
12 Secs. 28 to 34, Com. Act 158.
13 Sec. 38 of Com. Act 158 provides: "All taxes on real estate for any year shall be due and
payable on the first day of January and from this date such taxes together with all penalties
accruing thereto shall constitute a lien on the property subject to such taxation." .
14 Sec. 38 of Com. Act 158 provides: "Such lien shall be superior to all other liens, mortgages
or incumbrances of any kind whatsoever, and shall be enforceable against the property whether
in the possession of the delinquent or any subsequent owner, and can only be removed by the
payment of the tax and penalty.".
1562 C.J.S. 845; Manila Race Horse Trainers Assn. vs. De la Fuente, L-2947, Jan. 11, 1951, 88
Phil. 60.
16 51 Am. Jur. 59-60; 33 Am. Jur. 325-326..
17 51 Am. Jur. 56, citing Eyre v. Jacob, 14 Gratt (Va.) 422; 73 Am. Dec. 367.
18 Webster's New International Dictionary, 2nd Ed., p. 2601.
19 City of Iloilo vs. Remedios Sian Villanueva, et al., L-12695, March 23, 1959: "As may be
seen from the definition of each establishment hereunder quoted, a tenement house is different
from hotel, lodging house, or boarding house. These are different business enterprises. They
have been established for different purposes.
20 National Internal Revenue Code: .
"SEC. 182. Fixed taxes. -- On business ...; (3) Other fixed taxes. -- The following fixed
taxes shall be collected as follows, the amount stated being for the whole year, when not
otherwise specified: .
XXX XXX XXX
"(s) Stockbrokers, dealers in securities, real estate brokers, real estate dealers,
commercial brokers, customs brokers, and immigration brokers, one hundred and fifty
pesos: Provided, however, That in the case of real estate dealers, the annual fixed tax to
be collected shall be as follows: .
"One hundred and fifty pesos, if the annual income from buying, selling, exchanging,
leasing, or renting property (whether on their own account as principals or as owners of
rental property or properties) is four thousand pesos or more but not exceeding ten
thousand pesos; .
"Three hundred pesos, if such annual income exceeds ten thousand pesos but does not
exceed thirty thousand pesos; and .
"Five hundred pesos, if such annual income exceeds thirty thousand pesos."
21 Punsalan, et al. vs. Mun. Board of the City of Manila, et al., L-4817, May 26, 1954, 95 Phil.
46, per Reyes, J.: In this case the Supreme Court upheld the validity of Ordinance 3398 of the
City of Manila, approved on July 25, 1950, imposing a municipal occupation tax on persons
exercising various professions (lawyers, medical practitioners, public accountants, dental
surgeons, pharmacists, etc.), in the city and penalizes non-payment of the tax by a fine of not
more than P200.00 or by imprisonment of not more than 6 months, or by both such fine and
imprisonment in the discretion of the court, although section 201 [now sec. 182(B)] of the
National Internal Revenue Code requires the payment of taxes on occupation or professional
taxes. Said Justice Reyes: "The argument against double taxation may not be invoked where one
tax is imposed by the state and the other is imposed by the city (1 Cooley on Taxation, 4th ed.,
p. 492), it being widely recognized that there is nothing obnoxious in the requirement
thatlicense fees or taxes be exacted with respect to the same occupation, calling or activity by
both the state and the political subdivision thereof. (51 Am. Jur., 341.)" .
A month after the promulgation of the above decision, Congress passed Rep. Act 1166,
approved on June 18, 1954, providing as follows: "Any provisions of existing laws, city
charters and ordinances, executive orders and regulations, or parts thereof, to the
contrary notwithstanding, every professional legally authorized to practice his
profession, who has paid the corresponding annual privilege tax on professions required
by Sec. 182 of the NIRC, Com. Act No. 466,shall be entitled to practice the profession
 for which he has been duly qualified under the law, in all parts of the Philippines without
being subject to any other tax, charge, license or fee for the practice of such profession;
Provided, however, That they have paid to the office concerned the registration fees
required in their respective professions." .
22 People vs. Santiago Mendaros, et al., L-6975, May 27, 1955, 97 Phil. 958-959, per Bautista
Angelo, J. Appeal from the decision of the CFI of Zambales. Defendants-appellees were
convicted by the JP Court of Palauig, Zambales, and sentenced to pay a fine of P5.00, for failure
to pay the occupation tax imposed by a municipal ordinance on owners of fishponds on lands of
private ownership. The Supreme Court, in sustaining the validity of the ordinance, held:.
"The ground on which the trial court declared the municipal ordinance invalid would
seem to be that, since the land on which the fishpond is situated is already subject to land
tax, it would be unfair and discriminatory to levy another tax on the owner of the
fishpond because that would amount to double taxation. This view is erroneous because
it is a well-settled rule that a license tax may be levied upon a business or occupation
although the land or property used therein is subject to property tax. It was also held that
"the state may collect an ad valorem tax on property used in a calling, and at the same
time impose a license tax on the pursuit of that calling." The imposition of this kind of
tax is in no sense called a double tax." .
Veronica Sanchez vs. The Collector of Internal Revenue, L-7521, Oct. 18, 1955, 97 Phil.
687, per Reyes, J.B.L., J.
"Considering that appellant constructed her four-door "accessoria" purposely for rent or
profit; that she has been continuously leasing the same to third persons since its
construction in 1947; that she manages her property herself; and that said leased holding
appears to be her main source of livelihood, she is engaged in the leasing of real estate,
and is a real estate dealer as defined in section 194(s) [now, Sec. 182(A)(3)(s)] of the
Internal Revenue Code, as amended by Rep. Act No. 42.
"Appellant argues that she is already paying real estate taxes on her property, as well as
income tax on the income derived therefrom, so that to further subject its rentals to the
"real estate dealers" tax amounts to double taxation. This argument has already been
rejected by this Court in the case of People vs. Mendaros et al., L-6975, promulgated
May 27, 1955, wherein we held that it is a well-settled rule that license tax may be
levied upon a business or occupation although the land or property used therein is
subject to property tax, and that"the state may collect an ad valorem tax on property used
in a calling, and at the same time impose a license tax on the pursuit of that calling", the
imposition of the latter kind of tax being in no sense a double tax." ".
23 84 C.J.S. 131-132.
24 Manufacturers' Life Insurance Co. vs. Meer, L-2910, June 29, 1951; City of Manila vs.
Interisland Gas Service, L-8799, Aug 31, 1956; Commissioner of Internal Revenue vs.
Hawaiian-Philippine Co., L-16315, May 30, 1964; Pepsi-Cola Bottling Co. of the Philippines
vs. City of Butuan, et al., L-22814, Aug. 28, 1968.
Pepsi-Cola Bottling Co. vs. City of Butuan, supra: .
"The second and last objections are manifestly devoid of merit. Indeed -- independently
of whether or not the tax in question, when considered in relation to the sales tax
prescribed by Acts of Congress, amounts to double taxation, on which we need not and
 do not express any opinion -- double taxation, in general, is not forbidden by our
fundamental law. We have not adopted, as part thereof, the injunction against double
taxation found in the Constitution of the United States and some States of the Union.
Then, again, the general principle against delegation of legislative powers, in
consequence of the theory of separation of powers is subject to one well-established
exception, namely; legislative powers may be delegated to local governments - to which
said theory does not apply - in respect of matters of local concern." .
2584 C.J.S. 133-134; "Double taxation, although not favored, is permissible in the absence of
express or implied constitutional prohibition.
"Double taxation should not be permitted unless the legislature has authority to impose
it. However, since the taxing power is exclusively a legislative function, and since,
except as it is limited or restrained by constitutional provisions, it is absolute and
unlimited, it is generally held that there is nothing, in the abscence of any express or
implied constitutional prohibition against double taxation, to prevent the imposition of
more than one tax on property within the jurisdiction, as the power to tax twice is as
ample as the power to tax once. In such case whether or not there should be double
taxation is a matter within the discretion of the legislature.
"In some states where double taxation is not expressly prohibited, it is held that double
taxation is permissible, or not invalid or unconstitutional, or necessarily unlawful,
provided some other constitutional requirement is not thereby violated, as a requirement
that taxes must be equal and uniform." .
The Constitution of the Philippines, Art. VI, sec. 22 (1) provides: "The rule of taxation
shall be uniform." .
26 Art. III, sec. 1, par. 12, Constitution.
27 51 Am. Jur. 860-861, citing Cousins v. State, 50 Ala. 113, 20 Am. Rep. 290; Rosenbloom v.
State, 64 Neb. 342, 89 NW 1053, 57 LRA 922; Voelkel v. Cincinnati, 112 Ohio St. 374, 147 NE
754, 40 ALR 73 (holding the provisions of an ordinance making the non-payment of an excise
tax levied in pursuance of such ordinance a misdemeanor punishable by fine not in violation of
the constitutional prohibition against the imprisonment of any person for "debt in a civil action,
or mesne or final process"); Ex parte Mann, 39 Tex. Crim. Rep. 491, 46 SW 828,73 Am. St.
Rep. 961.
26 R.C.L. 25-26: "It is generally considered that a tax is not a debt, and that the
municipality to which the tax is payable is not a creditor of the person assessed. A debt is
a sum of money due by certain and express agreement. It originates in, and is founded
upon, contract express or implied. Taxes, on the other hand, do not rest upon contract,
express or implied. They are obligations imposed upon citizens to pay the expenses of
government. They are forced contributions, and in no way dependent upon the will or
contract, express or implied, of the persons taxed." .
28 51 Am. Jur. 66-67; "Capitation or poll taxes are taxes of a fixed amount upon all persons, or
upon all the persons of a certain class, resident within a specified territory, without regard to
their property or the occupations in which they may be engaged. Taxes of a specified amount
upon each person performing a certain act or engaging in a certain business or profession are
not, however, poll taxes." .
29 Com. Act No. 158 (An Act Establishing a Form of Government for the City of Iloilo), section
21: "Except as otherwise provided by law, and subject to the conditions and limitations thereof,
the Municipal Board shall have the following legislative powers: .
"(aa) ... and to fix penalties for the violation of ordinances which shall not exceed a fine
of two hundred pesos or six months' imprisonment, or both such fine and imprisonment,
for each offense." .
30 "To begin with the defendants' appeal, we find that the lower court was in error in saying that
the imposition of the penalty provided for in the ordinance was without the authority of law. The
last paragraph (kk) of the very section that authorizes the enactment of the ordinance (section 18
of the Manila Charter) in express terms also empowers the Municipal Board to "fix penalties for
the violation of ordinances which not exceed to [sic] two hundred pesos fine or six months'
imprisonment, or both such fine and imprisonment, for a single offense." Hence, the
pronouncement below that the ordinance in question is illegal and void because it imposes a
penalty not authorized by law is clearly without legal basis." .
31 51 Am. Jur. 203, citing Re Page, 60 Kan. 842, 59 P 478, 47 LRA 68: "Taxes are uniform and
equal when imposed upon all property of the same character within the taxing authority."
Manila Race Horse Trainers Assn., Inc. vs. De la Fuente, L-2947, Jan. 11, 1951, 88 Phil. 60: "In
the case of Eastern Theatrical Co., Inc. vs. Alfonso, [L-1104, May 31, 1949], 46 O.G. Supp. to
No. 11, p. 303, it was said that there is equality and uniformity in taxation if all articles or kinds
of property of the same class are taxed at the same rate. Thus, it was held in that case, that "the
fact that some places of amusement are not taxed while others, such as cinematographs,
theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of
amusements or places of amusement are taxed, is no argument at all against equality and
uniformity of the tax imposition." Applying this criterion to the present case, there would be
discrimination if some boarding stables of the class used for the same number of horses were
not taxed or were made to pay less or more than others." Tan Kim Kee vs. Court of Tax
Appeals, et al., L-18080, April 22, 1963, per Reyes, J.B.L., J.: "The rule of uniform taxation
does not deprive Congress of the power to classify subjects of taxation, and only demands
uniformity within the particular class.".
32 Am. Jur. 203: "153. Uniformity of Operation Throughout Tax Unit. — One requirement with
respect to taxation imposed by provisions relating to equality and uniformity, which has been
introduced into some state constitutions in express language, is that taxation must be uniform
throughout the political unit by or with respect to which the tax is levied. This means, for
example, that a tax for a state purpose must be uniform and equal throughout the state, a tax for
a county purpose must be uniform and equal throughout the county, anda tax for a city, village,
or township purpose must be uniform and equal throughout the city, village, or township. It does
not mean, however, that the taxes levied by or with respect to the various political subdivisions
or taxing districts of the state must be at the same rate, or, as one court has graphically put it,
that a man in one county shall pay the same rate of taxation for all purposes that is paid by a
man in an adjoining county. Nor does the rule require that taxes for the same purposes shall be
imposed in different territorial subdivisions at the same time. It has also been said in this
connection that the omission to tax any particular individual who may be liable does not render
the whole tax illegal or void."
3384 C.J.S. 77: "Equality in taxation is accomplished when the burden of the tax falls equally
and impartially on all the persons and property subject to it [State ex rel. Haggart v. Nichols,
265 N.W. 859, 66 N.D. 355], so that no higher rate or greater levy in proportion to value is
imposed on one person or species of property than on others similarly situated or of like
 character."
84 C.J.S. 79: "The rule of uniformity in taxation applies to property of like kind and
character and similarly situated, and a tax, in order to be uniform, must operate alike on
all persons, things, or property, similarly situated. So the requirement is complied with
when the tax is levied equally and uniformly on all subjects of the same class and kind
and is violated if particular kinds, species or items of property are selected to bear the
whole burden of the tax, while others, which should be equally subjected to it, are left
untaxed."
34 84 C.J.S. 81: "There is a presumption the at tax statutes are intended to operate uniformly and
equally [Alaska Consol. Canneries v. Territory of Alaska, C.C.A. Alaska, 16 F. 2d. 256], and a
liberal construction will be indulged in order to accomplish fair and equal taxation of all
property within the state."
35Medina vs. City of Baguio, L-4060, Aug. 29, 1952; Wa Wa Yu vs. City of Lipa, L-9167, Sept.
27, 1956; Saldana vs. City of Iloilo, 55 O.G. 10267, and the cases cited therein.

SAN MIGUEL BREWERY vs. CITY OF CEBU

G.R. No. L-20312 February 26, 1972

SAN MIGUEL BREWERY, INC., plaintiff-appellant,

vs.
THE CITY OF CEBU, defendant-appellee.

G.R. No. L-20496 February 26, 1972

CEBU PORTLAND CEMENT COMPANY, plaintiff-appellant,

vs.
MUNICIPALITY OF NAGA, CEBU and THE MUNICIPAL TREASURER, NAGA, CEBU, defendants-appellees.

Picazo and Agcaoili for plaintiff-appellant San Miguel Brewery, Inc.

Government Corporate Counsel Tomas P. Matic, Jr. and Assistant Government Corporate Counsel Lorenzo R. Mosqueda for plaintiff-appellant Cebu Portland
Cement Company.

Eliseo Ynclino, Second Asst. City Fiscal and Quirico del Mar for defendant-appellee The City of Cebu.

Ananias V. Maribao, 2nd Asst. Provincial Fiscal and Vicente Mendiola for defendants-appellees Municipality of Naga, Cebu, etc.

CONCEPCION, C.J.:p

The above-entitled cases are jointly disposed of in this decision owing to the common issue therein — namely, the extent of the taxing power of municipal
corporations under section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act.

In L-20312, plaintiff San Miguel Brewery, Inc. — hereinafter referred to as SMB — assails the validity of Ordinance No. 298, as amended by Ordinance No. 300,
both series of 1960, of the City of Cebu, providing that "(t)here shall be collected on any sale or disposal of liquor or intoxicating beverages of any form in the City
of Cebu by manufacturers and wholesalers for purposes of a municipal tax the following rates: .

(a) On sales or disposal per bottle or container not exceeding P.50, a tax of P.03;

(b) On sales or disposal per bottle or container over P.50, but not exceeding P1, a tax of P.05;

(c) On sales or disposal per bottle or container over P1, but not exceeding P2, a tax of P.15;

(d) On sales or disposal per bottle or container exceeding P2, the amount of tax provided under schedule C, plus P.10 per P1, or a fraction
thereof.

PROVIDED, however, that manufacturers, who are at the same time wholesalers of their own product, shall pay only as manufacturers
under the rates specified hereinabove.

Pursuant to said ordinance, the SMB which is engaged in the manufacture, bottling, distribution and sale of beer throughout the Philippines, including the
defendant Cebu City, paid thereto, under protest, on April 20, 1961, the sum of P29,874.69, the refund of which is prayed for in the complaint herein, upon the
ground that said ordinance is ultra vires, for imposing a sales tax, which is allegedly beyond defendant's power to levy, apart from resulting in illegal double
taxation, since SMB already pays the defendant a business license tax of P600 per annum. The Court of First Instance of Manila having rendered judgment
dismissing the complaint, with costs, plaintiff seeks a review by record on appeal.

In L-20496, the Cebu Portland Cement Company — Cebu Portland for short — seeks to annul Ordinance No. 22, series of 1959, of the Municipality of Naga,
Cebu, imposing upon "all cement factories, corporations, or enterprises operating within" said municipality "an annual municipal license tax, payable quarterly,
graduated" according to the "maximum annual output capacity" of the factory, as follows: P150 if the capacity is not more than 10,000 bags of cement; P300, if
over 10,000 but not more than 20,000 bags; P450, if over 20,000 but not more than 30,000 bags; P600, if over 30,000 but not more than 40,000 bags; P750, if
over 40,000 but not more than 50,000 bags; P900, if over 50,000 but not more than 60,000 bags; and P75 for every 5,000 bags or fraction thereof in excess of
60,000 bags.

Having failed to pay said tax for the years 1960 and 1961, and the corresponding penalties therefor, 100,000 bags of cement of Cebu Portland were placed
under distraint and levy by the municipal treasurer of Naga. This triggered the filing by Cebu Portland of two (2) actions, namely: 1) one to impugn the validity of
the distraint and then the sale of said 100,000 bags of cement, both of which were, in due course, upheld by the Court of First Instance of Manila, the decision of
which was, on appeal, affirmed by Us1; and 2) the present case, to annul said ordinance and secure the refund of P44,000, subsequently paid under protest by
Cebu Portland, in partial satisfaction of its tax liability, which said plaintiff contests as illegal upon the theory that it partakes of the nature of a specific tax and that
it is allegedly unjust, excessive, oppressive and confiscatory. The defendants having obtained a favorable judgment in the Court of First Instance of Manila, Cebu
Portland appealed by record on appeal.

Said section 2 of Republic Act No. 2264 reads as follows: .

"SEC. 2. Taxation. -- Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and municipal districts shall
have authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges in
chartered cities, municipalities or municipal districts by requiring them to secure licenses at rates fixed by the municipal board or city
council of the city, the municipal council of the municipality, or the municipal district council of the municipal district; to collect fees and
charges for services rendered by the city, municipality or municipal district; to regulate and impose reasonable fees for services rendered
in connection with any business, profession or occupation being conducted within the city, municipality or municipal district and otherwise
to levy for public purposes, just and uniform taxes, licenses or fees: Provided, That municipalities and municipal districts shall, in no case,
impose any percentage tax on sales or other taxes in any form based thereon nor impose taxes on articles subject to specific tax, except
gasoline, under the provisions of the national internal revenue code: Provided, however, That no city, municipality or municipal district may
levy or impose any of the following: .

(a) Residence tax;

(b) Documentary stamp tax;

(c) Taxes on the business of persons engaged in the printing and publication of any newspaper, magazine, review or bulletin appearing at
regular intervals and having fixed prices for subscription and sale, and which is not published primarily for the purpose of publishing
advertisements;

(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light, heat and power;

(e) Taxes on forest products and forest concessions;

(f) Taxes on estates, inheritances, gifts, legacies, and other acquisitions mortis causa;

(g) Taxes on income of any kind whatsoever;

(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof;

(i) Customs duties registration, wharfage on wharves owned by the national government, tonnage, and all other kinds of customs fees,
charges and dues;

(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and

(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign insurance companies." .

Referring to the above provision, this Court declared in Nin Bay Mining Co. vs. Municipality of Roxas, Palawan,2 that "Republic Act No. 2264 confers upon all
chartered cities, municipalities and municipal districts the general power to levy, not only taxes, but, also, municipal license taxes, subject to specified exceptions,
as well as service fees." Subsequently, Luzon Surety Co., Inc. vs. City of Bacolod3 cited with approval the fact that this Court had consistently upheld the
"doctrine that the grant of the power to tax to chartered cities under section 2 of the Local Autonomy Act is sufficiently plenary to cover everything excepting those
which are mentioned therein, subject only to the limitation that the tax so levied is for public purposes, just and uniform."4

Appellant in L-20312 questions the conclusions reached in the decision appealed from, to the effect that the first proviso in the above-quoted provision,
prohibiting "municipalities and municipal districts" from imposing "any percentage tax on sales or other taxes in any form based thereon," implies that cities, like
appellee therein, are not subject to said restriction, and that the contested ordinance is not invalid upon the ground of double taxation.

We find no merit in this pretense, for: (a) double taxation is not prohibited by the Constitution 5; (b) there is double taxation when the same person is taxed by the
same jurisdiction for the same purpose,6 which is not the case in L-20312, for the ordinance in question imposes a tax on the sale or disposal of every "bottle or
container" of "liquor intoxicating beverages," and, as such, is a typical tax or revenue measure, whereas the sum of P600 it pays annually is for a "second-class
wholesale liquor license," which is a license to engage in the business of wholesale liquor in Cebu City, and, accordingly, constitutes a regulatory measure, in the
exercise of the police power;7 and (c) the authority of cities under the above -- quoted section 2 of Rep. Act No. 2264, to impose a sales tax has already been
upheld in City of Bacolod vs. Gruet8 and Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. City of Butuan, 9 and We find no plausible reason to depart from said
view.

Neither is there any merit in the contention of Cebu Portland in L-20496, to the effect that the tax involved therein partakes of the nature of a percentage or sales
tax or a specific tax, merely because the amount of the tax is dependent upon the maximum annual capacity of the cement factory subject thereto. Settled is the
rule that a graduation of the tax based upon the taxpayer's volume of business, when the same is considered solely for purposes of classification, and there is no
set ratio between said volume and the amount of the tax, does not render the latter invalid as a sales, percentage or specific tax. Thus, in Northern Philippines
Tobacco Corporation vs. Municipality of Agoo, La Union, 10 We held: .

The circumstance that the rate of tax payable under the ordinance is made to some extent dependent on the minimum and maximum
quantity of tobacco redried per quarter, does not transform said tax into a percentage or sales or income tax and does not bring the case
out of the council's authorized sphere of action. It may be noted that, as framed in the ordinance, the volume of business is merely taken
into account in classifying the taxpayer's business according to its size or extent of operations, for the purpose of imposing the fixed
graduated tax it has to pay; and that there is no set ratio between the tax and the amount of tobacco redried.

This criterion was, also, adhered to in Nin Bay Mining Co. vs. Municipality of Roxas, 11 Li Seng Giap vs. Municipality of Daet, 12 Standard-Vacuum Oil Co. vs.
Antigua, 13 Shell Co. of P.I. vs. Vano, 14 Syjuco vs. Municipality of Parañaque, 15 Marinduque Iron Mines Agents, Inc. vs. Municipal Council of Hinabangan, 16
and Victorias Milling Co., Inc. vs. Municipality of Victorias. 17

For the rest, Cebu Portland has not introduced any evidence in support of its claim that the tax in question is excessive, oppressive, and confiscatory. Hence, this
objection cannot be sustained for: .

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry. Much should be
left thus to the discretion of municipal authorities. Courts will go slow in writing off an ordinance as unreasonable unless the amount is so
excessive as to be prohibitive. A rule which has gained acceptance is that factors relevant to such an inquiry are the municipal conditions
as a whole and the nature of the business made subject to imposition." 18
In Northern Philippines Tobacco Corporation vs. Municipality of Agoo, 19 a similar charge was disposed of in the following language: .

We find nothing in the record, however, to supports such charge. Appellant has failed to present proof of the existing municipal conditions
and the nature of its business, as well as other factors that would have been relevant to the issue of the arbitrariness or unreasonableness
of the questioned rates. An increase in the rate of tax alone would not support the claim that it is oppressive, unjust and confiscatory;
municipal corporations are allowed much discretion in determining the rates of imposable license fees, even in cases of purely police
power-measures.

WHEREFORE, the decisions appealed from should be and are hereby affirmed, with costs against plaintiffs-appellants San Miguel Brewery, Inc. and Cebu
Portland Cement Company. It is so ordered.

Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

CIR vs. BANK OF COMMERCE

SECOND DIVISION
[G.R. No. 149636. June 8, 2005]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF COMMERCE, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) in CA-G.R.
SP No. 52706, affirming the ruling of the Court of Tax Appeals (CTA)[2] in CTA Case No. 5415.
The facts of the case are undisputed.
In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of interests or
discounts from its investments in government securities and private commercial papers. On several
occasions during the said period, it paid 5% gross receipts tax on its income, as reflected in its quarterly
percentage tax returns. Included therein were the respondent banks passive income from the said
investments amounting to P85,384,254.51, which had already been subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank Corporation v.
Commissioner of Internal Revenue, CTA Case No. 4720, holding that the 20% final withholding tax on
interest income from banks does not form part of taxable gross receipts for Gross Receipts Tax (GRT)
purposes. The CTA relied on Section 4(e) of Revenue Regulations (Rev. Reg.) No. 12-80.
Relying on the said decision, the respondent bank filed an administrative claim for refund with the
Commissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its gross receipts
tax for 1994 to 1995 by P853,842.54, computed as follows:
Gross receipts subjected to
Final Tax Derived from Passive
Investment P85,384,254.51
x 20%
20% Final Tax Withheld 17,076,850.90
at Source x 5%
P 853,842.54
Before the Commissioner could resolve the claim, the respondent bank filed a petition for review with
the CTA, lest it be barred by the mandatory two-year prescriptive period under Section 230 of the Tax
Code (now Section 229 of the Tax Reform Act of 1997).
In his answer to the petition, the Commissioner interposed the following special and affirmative
defenses:
5. The alleged refundable/creditable gross receipts taxes were collected and paid pursuant to law and
pertinent BIR implementing rules and regulations; hence, the same are not refundable. Petitioner must
prove that the income from which the refundable/creditable taxes were paid from, were declared and
included in its gross income during the taxable year under review;
6. Petitioners allegation that it erroneously and excessively paid its gross receipt tax during the year
under review does not ipso facto warrant the refund/credit. Petitioner must prove that the exclusions
claimed by it from its gross receipts must be an allowable exclusion under the Tax Code and its
pertinent implementing Rules and Regulations. Moreover, it must be supported by evidence;
7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt taxes were neither
automatically applied as tax credit against its tax liability for the succeeding quarter/s of the succeeding
year nor included as creditable taxes declared and applied to the succeeding taxable year/s;
8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer as it partakes the
nature of an exemption from tax and it is incumbent upon the petitioner to prove that it is entitled
thereto under the law. Failure on the part of the petitioner to prove the same is fatal to its claim for tax
refund/credit;
9. Furthermore, petitioner must prove that it has complied with the provision of Section 230 (now
Section 229) of the Tax Code, as amended.[3]
The CTA summarized the issues to be resolved as follows: whether or not the final income tax withheld
should form part of the gross receipts[4] of the taxpayer for GRT purposes; and whether or not the
respondent bank was entitled to a refund of P853,842.54.[5]
The respondent bank averred that for purposes of computing the 5% gross receipts tax, the final
withholding tax does not form part of gross receipts.[6] On the other hand, while the Commissioner
conceded that the Court defined gross receipts as all receipts of taxpayers excluding those which have
been especially earmarked by law or regulation for the government or some person other than the
taxpayer in CIR v. Manila Jockey Club, Inc.,[7] he claimed that such definition was applicable only to a
proprietor of an amusement place, not a banking institution which is an entirely different entity
altogether. As such, according to the Commissioner, the ruling of the Court in Manila Jockey Club was
inapplicable.
In its Decision dated April 27, 1999, the CTA by a majority decision[8] partially granted the petition and
ordered that the amount of P355,258.99 be refunded to the respondent bank. The fallo of the decision
reads:
WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND in favor of
petitioner Bank of Commerce the amount of P355,258.99 representing validly proven erroneously
withheld taxes from interest income derived from its investments in government securities for the years
1994 and 1995.[9]
In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila Jockey Club, and
held that the term gross receipts excluded those which had been especially earmarked by law or
regulation for the government or persons other than the taxpayer. The CTA also cited its rulings in
China Banking Corporation v. CIR[10] and Equitable Banking Corporation v. CIR.[11]
The CTA ratiocinated that the aforesaid amount of P355,258.99 represented the claim of the respondent
bank, which was filed within the two-year mandatory prescriptive period and was substantiated by
material and relevant evidence. The CTA applied Section 204(3) of the National Internal Revenue Code
(NIRC).[12]
The Commissioner then filed a petition for review under Rule 43 of the Rules of Court before the CA,
alleging that:
(1) There is no provision of law which excludes the 20% final income tax withheld under Section
50(a) of the Tax Code in the computation of the 5% gross receipts tax.
(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue vs. Manila Jockey
Club (108 Phil. 821) in the resolution of the legal issues involved in the instant case.[13]
The Commissioner reiterated his stand that the ruling of this Court in Manila Jockey Club, which was
affirmed in Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue,[14] is not decisive.
He averred that the factual milieu in the said case is different, involving as it did the wager fund. The
Commissioner further pointed out that in Manila Jockey Club, the Court ruled that the race tracks
commission did not form part of the gross receipts, and as such were not subjected to the 20%
amusement tax. On the other hand, the issue in Visayan Cebu Terminal was whether or not the gross
receipts corresponding to 28% of the total gross income of the service contractor delivered to the
Bureau of Customs formed part of the gross receipts was subject to 3% of contractors tax under Section
191 of the Tax Code. It was further pointed out that the respondent bank, on the other hand, was a
banking institution and not a contractor. The petitioner insisted that the term gross receipts is self-
evident; it includes all items of income of the respondent bank regardless of whether or not the same
were allocated or earmarked for a specific purpose, to distinguish it from net receipts.
On August 14, 2001, the CA rendered judgment dismissing the petition. Citing Sections 51 and 58(A)
of the NIRC, Section 4(e) of Rev. Reg. No. 12-80[15] and the ruling of this Court in Manila Jockey
Club, the CA held that the P17,076,850.90 representing the final withholding tax derived from passive
investments subjected to final tax should not be construed as forming part of the gross receipts of the
respondent bank upon which the 5% gross receipts tax should be imposed. The CA declared that the
final withholding tax in the amount of P17,768,509.00 was a trust fund for the government; hence, does
not form part of the respondents gross receipts. The legal ownership of the amount had already been
vested in the government. Moreover, the CA declared, the respondent did not reap any benefit from the
said amount. As such, subjecting the said amount to the 5% gross receipts tax would result in double
taxation. The appellate court further cited CIR v. Tours Specialists, Inc.,[16] and declared that the ruling
of the Court in Manila Jockey Club was decisive of the issue.
The Commissioner now assails the said decision before this Court, contending that:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL WITHHOLDING TAX
ON BANKS INTEREST INCOME DOES NOT FORM PART OF THE TAXABLE GROSS
RECEIPTS IN COMPUTING THE 5% GROSS RECEIPTS TAX (GRT, for brevity). [17]
The petitioner avers that the reliance by the CTA and the CA on Section 4(e) of Rev. Reg. No. 12-80 is
misplaced; the said provision merely authorizes the determination of the amount of gross receipts based
on the taxpayers method of accounting under then Section 37 (now Section 43) of the Tax Code. The
petitioner asserts that the said provision ceased to exist as of October 15, 1984, when Rev. Reg. No. 17-
84 took effect. The petitioner further points out that under paragraphs 7(a) and (c) of Rev. Reg. No. 17-
84, interest income of financial institutions (including banks) subject to withholding tax are included as
part of the gross receipts upon which the gross receipts tax is to be imposed. Citing the ruling of the CA
in Commissioner of Internal Revenue v. Asianbank Corporation[18] (which likewise cited Bank of
America NT & SA v. Court of Appeals,[19]) the petitioner posits that in computing the 5% gross receipts
tax, the income need not be actually received. For income to form part of the taxable gross receipts,
constructive receipt is enough. The petitioner is, likewise, adamant in his claim that the final
withholding tax from the respondent banks income forms part of the taxable gross receipts for purposes
of computing the 5% of gross receipts tax. The petitioner posits that the ruling of this Court in Manila
Jockey Club is not decisive of the issue in this case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court in China Banking Corporation v.
Court of Appeals,[20] and CIR v. Solidbank Corporation.[21]
Section 27(D)(1) of the Tax Code reads:
(D) Rates of Tax on Certain Passive Incomes.
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and Royalties. A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust funds and similar arrangements
received by domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7%) of such interest income.
On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of final tax on certain
income creditable at source:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)
(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)
(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall
be withheld by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of income payable
to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
The tax deducted and withheld by withholding agents under the said provision shall be held as a special
fund in trust for the government until paid to the collecting officer.[22]
Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross receipts derived from
sources within the Philippines by all banks and non-bank financial intermediaries shall be computed in
accordance with the schedules therein:
(a) On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived:
Short-term maturity (not in excess of two (2) years) 5%
Medium-term maturity (over two (2) years but
not exceeding four (4) years) 3%
Long-term maturity
(1) Over four (4) years but not exceeding
 seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal,
profits from exchange and all other items treated
as gross income under Section 32 of this Code 5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pre-
termination, then the maturity period shall be reckoned to end as of the date of pre-termination for
purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall
be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities.
The Tax Code does not define gross receipts. Absent any statutory definition, the Bureau of Internal
Revenue has applied the term in its plain and ordinary meaning.[23]
In National City Bank v. CIR,[24] the CTA held that gross receipts should be interpreted as the whole
amount received as interest, without deductions; otherwise, if deductions were to be made from gross
receipts, it would be considered as net receipts. The CTA changed course, however, when it
promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg. No. 12-80 and the ruling of
this Court in Manila Jockey Club, holding that the 20% final withholding tax on the petitioner banks
interest income should not form part of its taxable gross receipts, since the final tax was not actually
received by the petitioner bank but went to the coffers of the government.
The Court agrees with the contention of the petitioner that the appellate courts reliance on Rev. Reg.
No. 12-80, the rulings of the CTA in Asia Bank, and of this Court in Manila Jockey Club has no legal
and factual bases. Indeed, the Court ruled in China Banking Corporation v. Court of Appeals[25] that:
In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v. Commissioner, both
promulgated on 16 November 2001, the tax court ruled that the final withholding tax forms part of the
banks gross receipts in computing the gross receipts tax. The tax court held that Section 4(e) of
Revenue Regulations No. 12-80 did not prescribe the computation of the amount of gross receipts but
merely authorized the determination of the amount of gross receipts on the basis of the method of
accounting being used by the taxpayer.
The word gross must be used in its plain and ordinary meaning. It is defined as whole, entire, total,
without deduction. A common definition is without deduction.[26] Gross is also defined as taking in the
whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate or
specified parts.[27] Gross is the antithesis of net.[28] Indeed, in China Banking Corporation v. Court of
Appeals,[29] the Court defined the term in this wise:
As commonly understood, the term gross receipts means the entire receipts without any deduction.
Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless
the law itself makes an exception. As explained by the Supreme Court of Pennsylvania in
Commonwealth of Pennsylvania v. Koppers Company, Inc., -
Highly refined and technical tax concepts have been developed by the accountant and legal technician
primarily because of the impact of federal income tax legislation. However, this in no way should affect
or control the normal usage of words in the construction of our statutes; and we see nothing that would
require us not to include the proceeds here in question in the gross receipts allocation unless statutorily
such inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term gross
receipts, in the absence of any statutory definition of the term, must be taken to include the whole total
gross receipts without any deductions, x x x. [Citations omitted] (Emphasis supplied)
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:
The word gross appearing in the term gross receipts, as used in the ordinance, must have been and was
there used as the direct antithesis of the word net. In its usual and ordinary meaning gross receipts of a
business is the whole and entire amount of the receipts without deduction, x x x. On the contrary, net
receipts usually are the receipts which remain after deductions are made from the gross amount thereof
of the expenses and cost of doing business, including fixed charges and depreciation. Gross receipts
become net receipts after certain proper deductions are made from the gross. And in the use of the
words gross receipts, the instant ordinance, of course, precluded plaintiff from first deducting its costs
and expenses of doing business, etc., in arriving at the higher base figure upon which it must pay the
5% tax under this ordinance. (Emphasis supplied)
Absent a statutory definition, the term gross receipts is understood in its plain and ordinary meaning.
Words in a statute are taken in their usual and familiar signification, with due regard to their general
and popular use. The Supreme Court of Hawaii held in Bishop Trust Company v. Burns that -
xxx It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the
legislature, the language used therein is to be taken in the generally accepted and usual sense. Courts
will presume that the words in a statute were used to express their meaning in common usage. This
principle is equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)
The Court, likewise, declared that Section 121 of the Tax Code expressly subjects interest income of
banks to the gross receipts tax. Such express inclusion of interest income in taxable gross receipts
creates a presumption that the entire amount of the interest income, without any deduction, is subject to
the gross receipts tax. Indeed, there is a presumption that receipts of a person engaging in business are
subject to the gross receipts tax. Such presumption may only be overcome by pointing to a specific
provision of law allowing such deduction of the final withholding tax from the taxable gross receipts,
failing which, the claim of deduction has no leg to stand on. Moreover, where such an exception is
claimed, the statute is construed strictly in favor of the taxing authority. The exemption must be clearly
and unambiguously expressed in the statute, and must be clearly established by the taxpayer claiming
the right thereto. Thus, taxation is the rule and the claimant must show that his demand is within the
letter as well as the spirit of the law.[30]
In this case, there is no law which allows the deduction of 20% final tax from the respondent banks
interest income for the computation of the 5% gross receipts tax. On the other hand, Section 8(a)(c),
Rev. Reg. No. 17-84 provides that interest earned on Philippine bank deposits and yield from deposit
substitutes are included as part of the tax base upon which the gross receipts tax is imposed. Such
earned interest refers to the gross interest without deduction since the regulations do not provide for
any such deduction. The gross interest, without deduction, is the amount the borrower pays, and the
income the lender earns, for the use by the borrower of the lenders money. The amount of the final tax
plainly covers for the interest earned and is consequently part of the taxable gross receipt of the lender.
[31]

The bare fact that the final withholding tax is a special trust fund belonging to the government and that
the respondent bank did not benefit from it while in custody of the borrower does not justify its
exclusion from the computation of interest income. Such final withholding tax covers for the
respondent banks income and is the amount to be used to pay its tax liability to the government. This
tax, along with the creditable withholding tax, constitutes payment which would extinguish the
respondent banks obligation to the government. The bank can only pay the money it owns, or the
money it is authorized to pay.[32]
In the same vein, the respondent banks reliance on Section 4(e) of Rev. Reg. No. 12-80 and the ruling
of the CTA in Asia Bank is misplaced. The Courts discussion in China Banking Corporation[33] is
instructive on this score:
CBC also relies on the Tax Courts ruling in Asia Bank that Section 4(e) of Revenue Regulations No.
12-80 authorizes the exclusion of the final tax from the banks taxable gross receipts. Section 4(e)
provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other
non-bank financial intermediaries not performing quasi-banking functions. - The rates of taxes to be
imposed on the gross receipts of such financial institutions shall be based on all items of income
actually received. Mere accrual shall not be considered, but once payment is received on such accrual
or in cases of prepayment, then the amount actually received shall be included in the tax base of such
financial institutions, as provided hereunder: x x x. (Emphasis supplied by Tax Court)
Section 4(e) states that the gross receipts shall be based on all items of income actually received. The
tax court in Asia Bank concluded that it is but logical to infer that the final tax, not having been
received by petitioner but instead went to the coffers of the government, should no longer form part of
its gross receipts for the purpose of computing the GRT.
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80. Income
may be taxable either at the time of its actual receipt or its accrual, depending on the accounting
method of the taxpayer. Section 4(e) merely provides for an exception to the rule, making interest
income taxable for gross receipts tax purposes only upon actual receipt. Interest is accrued, and not
actually received, when the interest is due and demandable but the borrower has not actually paid and
remitted the interest, whether physically or constructively. Section 4(e) does not exclude accrued
interest income from gross receipts but merely postpones its inclusion until actual payment of the
interest to the lending bank. This is clear when Section 4(e) states that [m]ere accrual shall not be
considered, but once payment is received on such accrual or in case of prepayment, then the amount
actually received shall be included in the tax base of such financial institutions x x x.
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be
physical receipt or constructive receipt. When the depository bank withholds the final tax to pay the tax
liability of the lending bank, there is prior to the withholding a constructive receipt by the lending bank
of the amount withheld. From the amount constructively received by the lending bank, the depository
bank deducts the final withholding tax and remits it to the government for the account of the lending
bank. Thus, the interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that the amount of the
tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld
constitutes income earned by the taxpayer, then that amount manifestly forms part of the taxpayers
gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to
the government in payment of his tax liability. The amount withheld indubitably comes from income of
the taxpayer, and thus forms part of his gross receipts.
The Court went on to explain in that case that far from supporting the petitioners contention, its ruling
in Manila Jockey Club, in fact even buttressed the contention of the Commissioner. Thus:
CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the final withholding
tax on interest income does not form part of a banks gross receipts because the final tax is earmarked
by regulation for the government. CBCs reliance on the Manila Jockey Club is misplaced. In this case,
the Court stated that Republic Act No. 309 and Executive Order No. 320 apportioned the total amount
of the bets in horse races as follows:
87 % as dividends to holders of winning tickets, 12 % as commission of the Manila Jockey Club, of
which % was assigned to the Board of Races and 5% was distributed as prizes for owners of winning
horses and authorized bonuses for jockeys.
A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by ordering the
distribution of the bets as follows:
Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the sale of pari-mutuel
tickets shall be apportioned as follows: eighty-seven and one-half per centum shall be distributed in the
form of dividends among the holders of win, place and show horses, as the case may be, in the regular
races; six and one-half per centum shall be set aside as the commission of the person, racetrack, racing
club, or any other entity conducting the races; five and one-half per centum shall be set aside for the
payment of stakes or prizes for win, place and show horses and authorized bonuses for jockeys; and
one-half per centum shall be paid to a special fund to be used by the Games and Amusements Board to
cover its expenses and such other purposes authorized under this Act. xxx. (Emphasis supplied)
Under the distribution of receipts expressly mandated in Section 19 of RA No. 1933, the gross receipts
apportioned to Manila Jockey Club referred only to its own 6 % commission. There is no dispute that
the 5 % share of the horse-owners and jockeys, and the % share of the Games and Amusements Board,
do not form part of Manila Jockey Clubs gross receipts. RA No. 1933 took effect on 22 June 1957,
three years before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 % commission. Manila
Jockey Club owned, and could keep and use, only 7% of the total bets. Manila Jockey Club merely
held in trust the balance of 5 % for the benefit of the Board of Races and the winning horse-owners and
jockeys, the real owners of the 5 1/2 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary of
Justice made prior to RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the bets registered by
the Totalizer. This portion represents its share or commission in the total amount of money it handles
and goes to the funds thereof as its own property which it may legally disburse for its own purposes.
The 5% [sic] does not belong to the club. It is merely held in trust for distribution as prizes to the
owners of winning horses. It is destined for no other object than the payment of prizes and the club
cannot otherwise appropriate this portion without incurring liability to the owners of winning horses. It
can not be considered as an item of expense because the sum used for the payment of prizes is not
taken from the funds of the club but from a certain portion of the total bets especially earmarked for
that purpose. (Emphasis supplied)
Consequently, the Court ruled that the 5 % balance of the commission, not being owned by Manila
Jockey Club, did not form part of its gross receipts for purposes of the amusement tax. Manila Jockey
Club correctly paid the amusement tax based only on its own 7% commission under RA No. 309 and
Executive Order No. 320.
Manila Jockey Club does not support CBCs contention but rather the Commissioners position. The
Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but merely held
by it in trust did not form part of Manila Jockey Clubs gross receipts. Conversely, receipts owned by
the Manila Jockey Club would form part of its gross receipts.[34]
We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% of gross
receipts tax would result in double taxation. In CIR v. Solidbank Corporation,[35] we ruled, thus:
We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The
basis of their imposition may be the same, but their natures are different, thus leading us to a final
point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once; that is, xxx
taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the
taxpayer is taxed twice, when it should be but once. Otherwise described as direct duplicate taxation,
the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and they must be of the same
kind or character.
First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is
the passive income generated in the form of interest on deposits and yield on deposit substitutes, while
the subject matter of the GRT is the privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than
a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can be
taxed for engaging in business and further taxed differently for the income derived therefrom. Akin to
our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different
provisions.
Second, although both taxes are national in scope because they are imposed by the same taxing
authority the national government under the Tax Code and operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter
in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only
after every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing authority,
within the same jurisdiction, for the same purpose, in different taxing periods, some of the property in
the territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5%
GRT is clearly not double taxation.
IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the Court of Appeals
in CA-G.R. SP No. 52706 and that of the Court of Tax Appeals in CTA Case No. 5415 are SET ASIDE
and REVERSED. The CTA is hereby ORDERED to DISMISS the petition of respondent Bank of
Commerce. No costs.
SO ORDERED.

CIR vs. PROCTER & GAMBLE

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-66838 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT
OF TAX APPEALS, respondents.

PARAS, J.:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal Revenue, seeking the reversal of the decision of the Court of Tax
Appeals dated January 31, 1984 in CTA Case No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. Bureau of Internal Revenue,"
which declared petitioner therein, Procter and Gamble Philippine Manufacturing Corporation to be entitled to the sought refund or tax credit in the amount of
P4,832,989.00 representing the alleged overpaid withholding tax at source and ordering payment thereof.

The antecedent facts that precipitated the instant petition are as follows:

Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMC-Phil.), a corporation duly organized and existing
under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. herein
referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the sole
shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil.
in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a legal personality separate and distinct from PMC-U.S.A. (Rollo, pp. 122-123).

For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and accordingly paid the corresponding income tax
thereon equivalent to P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code, the pertinent portion of which reads:

SEC. 24. Rates of tax on corporation. — a) Tax on domestic corporations. — A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation organized in, or geting under the laws of the Philippines, and
partnerships, no matter how created or organized, but not including general professional partnerships, in accordance with the following:

Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-
U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of
the Philippine Tax Code which reads in full:

SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue Code, as amended, is hereby
further amended to read as follows:

(b) Tax on foreign corporations. — 41) 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,
rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or
otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and
capital gains: Provided, however, That premiums shall not include re-insurance premium Provided, further, That
cinematograpy film owners, lessors, or distributors, shall pay a tax of 15% on their gross income from sources
within the Philippines: Provided, still further That on dividends received from a domestic corporation hable to tax
under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in
Section 53(d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this section: Provided, finally That regional or area
headquarters established in the Philippines by multinational corporations and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region shall not be subject to tax.

For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which was subjected to Philippine taxation at the rate of
25%-35% or P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of PMC-
U.S.A. at the tax rate of 35% or P6,457,485.00.

In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the withholding agent of the Philippine government, with
respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of the 20 percentage-
point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax in the
amount of P4,832,989.00," computed as follows:

Dividend Tax 15% tax Alleged of

Income withheld under

PMC-U.S.A. at source at tax sparing over

 35% proviso payment

P17,707,460 P6,196,611 P2,656,119 P3,541,492

6,457,485 2,260,119 968,622 1,291,497

P24,164,946 P8,457,731 P3,624,941 P4,832,989

There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA when on July 13, 1977 it filed with herein
respondent court a petition for review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. The Commissioner of
Internal Revenue," praying that it be declared entitled to the refund or tax credit claimed and ordering respondent therein to refund to it the amount of
P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund. (Rollo, p. 41)

On the other hand therein respondent, Commissioner of qqqInterlaal Revenue, in his answer, prayed for the dismissal of said Petition and for the denial of the
claim for refund. (Rollo, p. 48)

On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the herein petitioner, the dispositive portion of the same reading as
follows:

Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing the overpaid withholding tax at source and
the payment therefor by the respondent hereby ordered. No costs.

SO ORDERED.

Hence this petition.

The Second Division of the Court without giving due course to said petition resolved to require the respondents to comment (Rollo, p. 74). Said comment was
filed on November 8, 1984 (Rollo, pp. 83-90). Thereupon this Court by resolution dated December 17, 1984 resolved to give due course to the petition and to
consider respondents' comulent on the petition as Answer. (Rollo, p. 93)

Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on May 13, 1985 (Rollo, p. 107), while private respondent PMC
Phil filed its brief on August 22, 1985.

Petitioner raised the following assignments of errors:

THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN LAW, THAT THE HEREIN RESPONDENT PROCTER &
GAMBLE PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT)IS ENTITLED TO THE SOUGHT REFUND OR TAX CREDIT OF
P4,832,989.00, REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND INCOME IN THE
TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA FOR SHORT).

II

THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND IN LAW, THAT PMC-USA, A NON-RESIDENT FOREIGN
CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION DOMICILED IN THE UNITED STATES, IS
ENTITLED UNDER THE U.S. TAX CODE AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST
THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID
BY THE PHILIPPINE GOVERNMENT.

The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate on dividends declared and remitted to its parent
corporation.

From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and they are (1) Whether or not PMC-Phil. is the proper party to
claim the refund and (2) Whether or not the U. S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends?

The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or payor of the dividend income, and a mere withholding agent for
and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any. (Rollo, p. 129)

It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court. He did not raise it at the administrative level, nor at the
Court of Tax Appeals. As clearly ruled by Us "To allow a litigant to assume a different posture when he comes before the court and challenges the position he had
accepted at the administrative level," would be to sanction a procedure whereby the Court-which is supposed to review administrative determinations would not
review, but determine and decide for the first time, a question not raised at the administrative forum." Thus it is well settled that under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot generally be raised for the first time on
appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]),

Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain administrative
officers should never be allowed to jeopardize the government's financial position.

The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement
of the alleged over paid taxes, is completely meritorious. The real party in interest being the mother corporation in the United States, it follows that American
entity is the real party in interest, and should have been the claimant in this case.

Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. — a non-resident foreign corporation under Section 24(b)(1) of
the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by
the government. The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax
credits granted to U.S. corporations on dividends received from foreign corporations, which to the extent applicable reads:

SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.

 (a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this subject, a domestic corporation which owns at least 10 percent
of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall-

(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect
to such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears
to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other
than those deemed paid); and

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect
to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined - For purpose of this section, the term 'accumulated profits' means with respect to any foreign corporation.

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without
reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such
profits or income by any foreign country.... ; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the
income, was profits, and excess profits taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were
paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or
years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings. .. (Rollo, pp. 55-56)

To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued
by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in
the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount
credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax
return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines.

PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is REVERSED and SET ASIDE.

SO ORDERED.

CIR vs. SC JOHNSON AND SON, INC.

THIRD DIVISION
[G.R. No. 127105. June 25, 1999]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and
COURT OF APPEALS, respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the
decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a
license agreement with SC Johnson and Son, United States of America (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 including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in management, marketing and
production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of
Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. A).
For the use of the trademark or technology, [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 in the total amount
of P1,603,443.00 (Exhs. B to L and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR
a claim for refund of overpaid withholding tax on royalties arguing that, the antecedent facts attending
[respondents] case fall squarely within the same circumstances under which said MacGeorge and
Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by
the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the
most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the
RP-West Germany Tax Treaty [Article 12 (2) (b)] (Petition for Review [filed with the Court of
Appeals], par. 12). [Respondents] claim for the refund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
______ _______ __________ __________ ______
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
P6,421,770 P1,605,443 P642,177 P963,266[1]
======== ======== ======= =======
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc.
(S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case
was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty
payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered
the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00
representing overpaid withholding tax on royalty payments beginning July, 1992 to May, 1993.[2]
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which
rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and
affirming in toto the CTA ruling.[3]
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT 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.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the
most favored nation clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties
derived by a resident of the United States from sources within the Philippines only if the circumstances
of the resident of the United States are similar to those of the resident of West Germany. Since the RP-
US Tax Treaty contains no matching credit provision as that provided under Article 24 of the RP-West
Germany Tax Treaty, 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. Even assuming that the phrase
paid under similar circumstances refers to the payment of royalties, and not taxes, as held by the Court
of Appeals, still, the most favored nation clause cannot be invoked for the reason that when a tax treaty
contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter,
these must necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since
S.C. Johnsons invocation of the most favored nation clause is in the nature of a claim for exemption
from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be
construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1)
because it contains a defective certification against forum shopping as required under SC Circular No.
28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2)
that the most favored nation clause under the RP-US Tax Treaty refers to royalties paid under similar
circumstances as those royalties subject to tax in other treaties; that the phrase paid under similar
circumstances does not refer to payment of the tax but to the subject matter of the tax, that is, royalties,
because the most favored nation clause is intended to allow the taxpayer in one state to avail of more
liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is
also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax
treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US
Tax Treaty speaks of royalties of the same kind paid under similar circumstances. S.C. Johnson also
contends that the Commissioner is estopped from insisting on her interpretation that the phrase paid
under similar circumstances refers to the manner in which the tax is paid, for the reason that said
interpretation is embodied in Revenue Memorandum Circular (RMC) 39-92 which was already
abandoned by the Commissioners predecessor in 1993; and was expressly revoked in BIR Ruling No.
052-95 which stated that royalties paid to an American licensor are subject only to 10% withholding tax
pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty.
Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant to
Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by
petitioners counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-
91 applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement
that the certification should be signed by petitioner and not by counsel does not apply to petitioner who
has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the
phrase paid under similar circumstances embodied in the most favored nation clause of the RP-US Tax
Treaty refers to the payment of royalties and not taxes, still the presence or absence of a matching
credit provision in the said RP-US Tax Treaty would constitute a material circumstance to such
payment and would be determinative of the said clauses application.
We address first the objection raised by private respondent that the certification against forum shopping
was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General
(O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT
AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF
PETITIONS AND COMPLAINTS
TO : xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints involving
the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the
result that said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the
petitioner aside from complying with pertinent provisions of the Rules of Court and existing circulars,
must certify under oath to all of the following facts or undertakings: (a) he has not theretofore
commenced any other action or proceeding involving the same issues in the Supreme Court, the Court
of Appeals, or any tribunal or agency; xxx
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for
the summary dismissal of the multiple petitions or complaints; xxx
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions
filed before this Court and the Court of Appeals. Petitioners allegation that Circular No. 28-91 applies
only to original actions and not to appeals as in the instant case is not supported by the text nor by the
obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue
being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced
any other action involving the same issues in this Court or the Court of Appeals or any other tribunal or
agency, we are inclined to accept petitioners submission that since the OSG is the only lawyer for the
petitioner, which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of
the 1987 Administrative Code[4] to be represented only by the Solicitor General, the certification
executed by the OSG in this case constitutes substantial compliance with Circular No. 28-91.
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
(italics supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to
the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax
Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State in which they arise, and
according to the law of that State, but the tax so charged shall not exceed:
xxx
b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or
scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of
the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines,
only apply if the contract giving rise to such royalties has been approved by the Philippine competent
authorities.
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:
xxxxxxxxx
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:
xxxxxxxxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxxxxxxxx
c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be deemed to be
xxxxxxxxx
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.
xxxxxxxxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20
percent matching credit in the former convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty.
Petitioners position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income
from sources within the Philippines is allowed as a credit against German income and corporation tax
on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according
to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross
amount of such royalty. To illustrate, the royalty income of a German resident from sources within the
Philippines arising from the use of, or the right to use, any patent, trade mark, design or model, plan,
secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions.
The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is
allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer
if he is similarly granted a credit against the income and corporation tax of West Germany. The clear
intent of the matching credit is to soften the impact of double taxation by different jurisdictions.
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.[5]
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax
Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the
reason that the phrase paid under similar circumstances is followed by the phrase to a resident of a third
state. The respondent court held that Words are to be understood in the context in which they are used,
and since what is paid to a resident of a third state is not a tax but a royalty logic instructs that the treaty
provision in question should refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into
account the purpose animating the treaty provisions in point. To begin with, we are not aware of any
law or rule pertinent to the payment of royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and the
circumstances of payment thereof are the same for all the recipients of such royalties and there is no
disparity based on nationality in the circumstances of such payment.[6] On the other hand, a cursory
reading of the various tax treaties will show that there is no similarity in the provisions on relief from
or avoidance of double taxation[7] as this is a matter of negotiation between the contracting parties.[8]
As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and
the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered
into for the avoidance of double taxation.[9] The purpose of these international agreements is to
reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.[10] More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation, which is defined as
the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.[11], citing the Committee on Fiscal Affairs of the Organization
for Economic Co-operation and Development (OECD).11 The apparent rationale for doing away with
double taxation is to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies.[12] Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate.[13]
Double taxation usually takes place when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states impose tax on that income or
capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of source is limited.[14]
The second method for the elimination of double taxation applies whenever the state of source is given
a full or limited right to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two
methods of relief- the exemption method and the credit method. In the exemption method, the income
or capital which is taxable in the state of source or situs is exempted in the state of residence, although
in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers
remaining income or capital. On the other hand, in the credit method, although the income or capital
which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is
credited against the tax levied in the latter. The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon
the tax.[15]
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will
give up a part of the tax in the expectation that the tax given up for this particular investment is not
taxed by the other country.[16] Thus the petitioner correctly opined that the phrase royalties paid under
similar circumstances in the most favored nation clause of the US-RP Tax Treaty necessarily
contemplated circumstances that are tax-related.
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines.[17] The
United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to
tax the royalties, with a restraint on the tax that may be collected by the state of source.[18]
Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit
to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or
accrued to the Philippines) against the United States tax, but such amount shall not exceed the
limitations provided by United States law for the taxable year.[19] Under Article 13 thereof, the
Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent
when the royalties are paid by a corporation registered with the Philippine Board of Investments and
engaged in preferred areas of activities; or 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.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the
taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid
under similar circumstances. This would mean that private respondent must prove that the RP-US Tax
Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon
royalties earned from sources within the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting.
Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income
and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On
the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to
relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties
paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of the United States (as it
may be amended from time to time without changing the general principle thereof), the United States
shall allow to a citizen or resident of the United States as a credit against the United States tax the
appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it
receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying such dividends with respect to the
profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount
of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose
of limiting the credit to the United States tax on income from sources within the Philippines or on
income from sources outside the United States) provided by United States law for the taxable year. xxx.
The reason for construing the phrase paid under similar circumstances as used in Article 13 (2) (b) (iii)
of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light
of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by
lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than
what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to
be achieved and that the general purpose is a more important aid to the meaning of a law than any rule
which grammar may lay down.[20] It is the duty of the courts to look to the object to be accomplished,
the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal
construction which will best effectuate its purpose.[21] The Vienna Convention on the Law of Treaties
states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be
given to the terms of the treaty in their context and in the light of its object and purpose.[22]
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to
invest in the Philippines - a crucial economic goal for developing countries.[23] The goal of double
taxation conventions would be thwarted if such treaties did not provide for effective measures to
minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor.
Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should
be a concomitant commitment on the part of the state of residence to grant some form of tax relief,
whether this be in the form of a tax credit or exemption.[24] Otherwise, the tax which could have been
collected by the Philippine government will simply be collected by another state, defeating the object
of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of
residence does not grant some form of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower
tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather
than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on relief from double taxation in
the two tax treaties in question should be considered in light of the purpose behind the most favored
nation clause.
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.[25]
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 favored nation clause to 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.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption.[27] The burden of proof is upon him who claims the exemption in his favor
and he must be able to justify his claim by the clearest grant of organic or statute law.[28] Private
respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is
nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under
similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7,
1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are
hereby SET ASIDE.
SO ORDERED.

DELPHER TRADES CORP. vs. IAC

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC.,
respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed of exchange whereby
Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale
which violated a right of first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot. No.
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer
Certificate of Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and providing that during
the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee
and the letter has the priority to buy under similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to
B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the parties (Exhs. A to
D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together with another parcel of land also
located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes
Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the subject
property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom to convey the said property to plaintiff
who may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square meters
only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land consisting of
27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a
total of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual ownership interests by
petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the land not under
"similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in the same contractual provision
invoked by private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher
Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first refusal over the leased
property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; that the
corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar
Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro Pipes
Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in
exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to
Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos remained in
control of the property. Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the
original co-owners, there was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the
latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or
conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity
of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of stocks in
their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain
in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil
Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Thus, it
contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated
Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades
Corporation in exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners
thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the
Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders
of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or
to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an
aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself
that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false
appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value
shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000
shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value
they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of assets and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to the
family's corporation for only P14.00 a square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as
against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their
ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on
inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange on the properties for no par value shares of the defendant
corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange?

A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of
exchange?

A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to
execute the deed of exchange free from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the
provision which I quote: "No gain or loss shall also be recognized if a person exchanges his property for stock in a
corporation of which as a result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have no par value share in the defendant
corporation was for the purpose of flexibility. Can you explain flexibility in connection with the ownership of the
property in question?

A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing
capitalization. The board can fix the value of the shares equivalent to the capital requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in
question?

A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least
50 years. On the other hand, if the property is held by the spouse the property will be tied up in succession
proceedings and the consequential payments of estate and inheritance taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in
 respect to taxation?

A The property is not subjected to taxes on succession as the corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v.
The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of
actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership
remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate Appellate Court are REVERSED and
SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.

CIR vs. ESTATE OF BENIGNO P. TODA Jr.

FIRST DIVISION
[G.R. No. 147188. September 14, 2004]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P.
TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista,
respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision[1] of the Court of Appeals of 31 January 2001 in CA-
G.R. SP No. 57799 affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for
the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for
the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner
of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued
and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the
building stands for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in
turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary
public.[5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount of P75,728.021. After
crediting withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of
P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks.[9] Three and a half years later, or on 16 January 1994,
Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice[10] and demand
letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment[12] dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return P75,987,725.00
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a fraudulent
scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up
the additional gain of P100 million, which resulted in the change in the income structure of the
proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains,
thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud
of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to
assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the
difference between the second simulated sale for P200 million and the first simulated sale for P100
million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga,
instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for
1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud
was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well
within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of
1986, which provides that tax may be assessed within ten years from the discovery of the falsity or
fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be
disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial
owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should
be held liable for the deficiency income tax, especially because the gains realized from the sale were
withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-
conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion.
There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law
for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The
assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable
for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment
issued by the Commissioner on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property owned by
CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter
was a representative, dummy, and a close business associate of the former, having held his office in a
property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned
by Toda for representation services rendered. The CTA denied[20] the motion for reconsideration,
prompting the Commissioner to file a petition for review[21] with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary expertise in
matters of taxation, is better situated to determine the correctness, propriety, and legality of the income
tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO
FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO
ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of
the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud
in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of
Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and
Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91,
Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the
same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the
declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989,
if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a
scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that
a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or
deliberate and not accidental; and (3) a course of action or failure of action which is unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,
prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received
P40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and reflected
in its trial balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million was
debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show that the real
buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one
of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the
assistant accountant of CIC and an old timer in the company. [27] But Mr. Prieto did not testify on this
matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of Altonaga was unserved,[28] Altonaga having
left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit
finds support in the admission of respondent Estate that the sale to him was part of the tax planning
scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate
declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one
hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is
absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot
be faulted for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties,
i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax
planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is
taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to
him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless,
the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.[31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.
[32] The incidence of taxation depends upon the substance of a transaction. The tax consequences
arising from gains from a sale of property are not finally to be determined solely by the means
employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from
the commencement of negotiations to the consummation of the sale is relevant. A sale by one person
cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through
which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms,
which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.[34] The two
sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended
(now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or
organized but not including general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 1986[35] (now 6% under Section 24 (D)
(1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax
issued by the BIR must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case
of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance
of in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the
BIR on the tax consequence of the two sale transactions.[36] Thus, the BIR was amply informed of the
transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently,
the two sales were openly made with the execution of public documents and the declaration of taxes for
1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those
two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find
that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual
amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or
reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years
from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof
was claimed to have been discovered only on 8 March 1991.[37] The assessment for the 1989 deficiency
income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may not generally be made to answer for the
liabilities of a corporation and vice versa. There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that personal liability of a corporate director,
trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders,
or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years
1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those
reported in its audited financial statement as of December 31, 1989, attached hereto as Annex B and
made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and
Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.[39] [Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency
income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation
arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay
P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal
interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.