REPUBLIC BANK, Petitioner, v.

COURT OF TAX APPEALS AND THE COMMISSIONER OF

INTERNAL REVENUE, Respondents.

Asisteo S. San Agustin for Petitioner.

SYLLABUS

1. TAXATION; DOUBLE TAXATION DEFINED; NOT PRESENT WHEN ONE IS A PENALTY AND
THE OTHER IS A TAX; CASE AT BAR. — The wisdom of this is not the province of the Court. It is
clear from the statutes then in force that there was no double taxation involved — one was a penalty and
the other was a tax. At any rate, We have upheld the validity of double taxation. (Double taxation: when the
same person is taxed by the same jurisdiction for the same purpose. [San Miguel Brewery, Inc. v. City of
Cebu 43 SCRA 275, 280]) The payment of 1/10 of 1% for incurring reserve deficiencies (Section 106,
Central Bank Act) is a penalty as the primary purpose involved is regulation, while the payment of 1% for
the same violation (Second Paragraph, Section 249, NIRC) is a tax for the generation of revenue which is
the primary purpose in this instance. Petitioner should not complain that it is being asked to pay twice for
incurring reserve deficiencies. It can always avoid this predicament by not having reserve deficiencies.
Petitioner’s case is covered by two special laws — one a banking law and the other, a tax law. These two
laws should receive such construction as to make them harmonize with each other and with the other body
of pre-existing laws. (Commissioner of Customs v. Esso Standard Eastern, Inc., 66 SCRA 113, 120)

2. ID.; RESERVE DEFICIENCY TAX; QUESTION ON THE COMPUTATION MUST BE RAISED AT

THE EARLIEST STAGE. — Corollary issue raised by petitioner bank, is the question on how the
respondent Commissioner computed reserve deficiency taxes considering that Sec. 249, NIRC, speaks of
computation of what it calls penalty on a per month basis while the Central Bank Act provides for the
computation of the penalty on a per day basis. It claims that respondent Commissioner never informed
them of the details of these assessments, considering the same involve complex and tedious computations.
It is too late in the day for petitioner to raise this matter for Us to resolve. The grounds alleged by the
petitioner in its motion for reconsideration of the Commissioner’s assessments are the very same grounds
raised in these petitions. Petitioner did not ask the Commissioner to explain how it arrived in computing
these reserve deficiency taxes. Neither did petitioner raise this question before the Court of Tax Appeals.

3. ID.; ID.; LETTER OF INSTRUCTION NO. 1330; CONDONATION OF PENALTIES AND OTHER
SANCTIONS; COVERAGE; NOT APPLICABLE IN CASE AT BAR. — petitioner bank in its brief
mentions that in Letter of Instruction No. 1330 issued by President Marcos on June 6, 1983, the Central
Bank was ordered to assist petitioner by way of full condonation of all penalties and other sanctions of
whatever kind, nature and description, as of the date they become due, on its legal reserve deficiencies.
Consequently, petitioner insists that it is now exempted from what it claims are the penalties imposed by
the second paragraph of Section 249, NIRC. A careful study of said LOI reveals that it was issued with
respect to petitioner bank’s (thereafter renamed Republic Planters Bank) role in the government’s sugar
production and procurement program as the financial arm of the sugar industry when the Philippine Sugar
Commission (PHILSUCOM), created by virtue of P.D. 388 1974), bought the petitioner bank from the
Roman family. The petition at bar involves the assessments for the years 1969 and 1970. This LOI
definitely does not cover the years 1969 and 1970 as it was issued only on June 6, 1983 and covers the
period when PHILSUCOM bought the then ailing Republic Bank from the Roman family and renamed it
the Philippine Planters Bank to be used as its financial conduit for the sugar industry. Therefore, even on
the thesis that the payment made (Second paragraph, Section 249, NIRC) is a penalty, this "penalty" for
1969 and 1970 can not be condoned as said LOI does not cover it.

DECISION

NOCON, J.:
Petitioner Republic Bank appeals the decision of public respondent Court of Tax Appeals dated September
30, 1982 dismissing its Petition for Review, thereby affirming public respondent Commissioner of Internal
Revenue’s assessment for petitioner’s reserve deficiency taxes inclusive of 25% surcharge for the taxable
years 1969 and 1970 in the amounts of P1,325,768.82 and P1,953,132.67, respectively.

The antecedent facts as briefly summarized by the Solicitor General are as follows:jgc:chanrobles.com.ph

"On 14 September 1971, respondent Commissioner assessed petitioner the amount of P1,060,615.06, plus
25% surcharge in the amount of P265,153.76, or a total of P1,325,768.82, as 1% monthly bank reserve
deficiency tax for taxable year 1969.chanrobles lawlibrary : rednad

"In a letter dated 6 October 1971, petitioner requested reconsideration of the assessment which respondent
Commissioner denied in a letter dated 26 February 1973.

"On 5 April 1973, respondent Commissioner assessed petitioner the amount of P1,562,506.14, plus 25%
surcharge in the amount of P390,626.53, or a total of P1,953,132.67, as 1% monthly bank reserve
deficiency tax for taxable year 1970.

"In a letter dated 16 May 1973, petitioner requested reconsideration of the assessment which respondent
Commissioner denied in a letter dated 6 May 1974.

"Petitioner contends that Section 249 of the Tax Code is no longer enforceable, because Section 126 of Act
1459, which was allegedly the basis for the imposition of the 1% reserve deficiency tax, was repealed by
Section 90 of Republic Act 337, the General Banking Act, and by Sections 100 and 101 of Republic Act
265.

"On 28 March 1973, petitioner filed a petition for review with the Tax Court, docketed as C.T.A. Case No.
2506, contesting the assessment for the taxable year 1969. On 3 July 1974, a similar petition, docketed as
C.T.A. Case No. 2618. was filed contesting the assessment for the taxable year 1970.

"The cases, involving similar issues, were consolidated. After hearing, the Tax Court rendered a decision
dated 30 September 1982 dismissing the petitions for review and upholding the validity of the assessments.

"Still not satisfied, petitioner filed this petition for review." 1

Petitioner urges that the issue to be resolved in this petition is:jgc:chanrobles.com.ph

"WHETHER SECTION 249 OF THE TAX CODE WHICH PROVIDES THAT ‘THERE SHALL BE
COLLECTED UPON THE AMOUNT OF RESERVE DEFICIENCIES INCURRED BY THE BANK . . .
AS PROVIDED IN SECTION ONE HUNDRED TWENTY-SIX OF ACT NUMBERED ONE
THOUSAND FOUR HUNDRED AND FIFTY-NINE (THE CORPORATION LAW) . . . ONE PER
CENTUM PER MONTH’ HAS BEEN RENDERED INOPERATIVE BY THE REPEAL OF THE
AFORESAID REFERRED PROVISION, I.E., SECTION ONE HUNDRED TWENTY-SIX OF THE
CORPORATION LAW." 2

The second paragraph of Section 249 of the Tax Code of 1970 (C.A. No. 466 as amended by Rep. Act No.
6110) invoked by the respondent Commissioner in making the assessments provides
that:jgc:chanrobles.com.ph

"There shall be collected upon the amount of reserve deficiencies incurred by the bank, and for the period
of their duration, as provided in section one hundred twenty-six of Act Numbered one thousand four
hundred and fifty-nine, as amended by Act Numbered three thousand six hundred and ten, one per centum
per month." chanrobles virtual lawlibrary
which paragraph was based on Sec. 26 of R.A. 337, the General Banking Act, and Sections 100, 101, and
106 of R.A. 265, the Central Bank Act, all providing for the reserve requirements on banking operations,
while Section 126 of Act No. 1459 (The Corporation Law), as amended by Art. 3610,
reads:jgc:chanrobles.com.ph

"SEC. 126. Whenever the reserve as defined in the last preceding section of any commercial banking
corporation shall be below the amount required in that section such commercial banking corporation shall
not diminish the amount of such reserve by making any new loans or discounts, or declare any dividend out
of its profits until the required proportion between the aggregate amount of its deposits and its reserve has
been restored. Reserve deficiencies shall be penalized at the rate of one per centum per month upon the
amount of the deficiencies and for the periods of their duration in accordance with the regulation to be
issued by the Bank Commissioner. The penalty assessed shall be collected by the Collector of Internal
Revenue in accordance with the rules, regulations and procedure to be determined by him. In the case of
any commercial banking corporation whose reserve is continuously deficient for a period of thirty days, the
business of such corporation may be wound up by the Bank Commissioner in accordance with section
sixteen hundred and thirty-nine of Act numbered twenty-seven hundred and eleven, as amended, known as
the Administrative Code" 3

According to petitioner, Section 126 has been expressly repealed by Section 90 of the General Banking Act
(R.A. No. 337), to wit:chanrobles law library : red

"Sec. 90. Sections one hundred seventy-five to one hundred eighty-three and one hundred ninety-nine to
two hundred seventeen of the Code of Commerce, as amended, section one hundred three to one hundred
forty-six and one hundred seventy-one to one hundred ninety of Act Numbered fourteen hundred and fifty-
nine, as amended; Acts Numbered Thirty-one hundred and fifty-four and Thirty-five hundred and twenty,
and all laws or parts thereof, including those parts of special charters of the Philippine National Bank and
other banking institutions in the Philippines which are inconsistent herewith, are hereby repealed.

Both petitioner and public respondent agree that:jgc:chanrobles.com.ph

". . . The requirement on the maintenance of bank reserves, previously found in Section 126 of Act 1459
(The Corporation Law), remained prescribed, after its repeal, in —

a. Sec. 26, RA 337 4 — subjecting the deposit liabilities of commercial banks including the Philippine
National Bank to the reserve requirements and other conditions prescribed by the Monetary Board in
accordance with the authority granted to 1t under the Central Bank Act.

b. Sec. 100, RA 265 5 — requiring banks to maintain reserves against their deposit liabilities;

c. Sec. 101, RA 265 6 — authorizing the Monetary Board to prescribe and to modify the minimum reserved
ratios applicable to each class of peso deposits;

d. Sec. 106, RA 265 7 — imposing a penalty of 1/10 of 1% for violation of the Banking Law." 8

As petitioner Republic sees it, Section 249 of the Tax Code (CA 466) can no longer be enforced as the
basis for which the tax is to be computed under Section 126, Act. 1459, is no longer in force. The Central
Bank Act (R.A. 265), specifically Sections 100, 101, 105 and 106, by providing for a whole new set of
rules in regard to reserve requirements and reserve deficiencies of banks clearly show that it was the
legislative intent to remove the regulation of the operations of banks under the ambit of the Corporation
Law (Art. 1459) and to place them under the purview of Central Bank Act (R.A. No. 265) and the General
Banking Act (R.A. 337).

Public respondents disagree and state that Section 249 of the then Tax Code (CA 466) is deemed to have
ipso facto incorporated by reference the new legislations on bank reserves after the repeal of Section 126,
Act. 1459.
Petitioner Republic argues then that in case of a reserve deficiency, the violating bank would be liable at
the same time for a tax of 1% a month (Second paragraph, Section 249, NIRC) payable to the Bureau of
Internal Revenue as well as a penalty of 1/10 of 1% a day (Section 106, Central Bank Act) payable to the
Central Bank. They argue that:jgc:chanrobles.com.ph

"As we examine the second paragraph of Section 249 of the Tax Code, we find nothing therein which says
that such imposition is a tax rather than a penalty. It merely states that ‘there shall be collected . . . as
provided in Section one hundred twenty six of Act Numbered one thousand four hundred and fifty-nine . . .
one per centum per month.’ On the contrary, the provision referred to (Section 126 of Act 1459) states that
‘. . . reserve deficiencies shall be penalized at the rate of one per centum per month . . . the penalty assessed
shall be collected by the Collector of Internal Revenue’. It would be wrong, therefore, to say that the
imposition in Section 249 of the Tax Code is a tax, not a penalty, because taken in the context of the
referred statute, it is really a penalty. Such imposition was provided in the Tax Code and payable to the
Collector of Internal Revenue simply because at that time there was yet no Central Bank Act and General
Banking Act nor a Monetary Board of Central Bank to regulate the operation of banks." 9

After a careful consideration of the facts of the case and the pertinent laws involved, We vote to deny the
petition.chanrobles.com:cralaw:red

Firstly, we would like to state that We find unfortunate petitioner’s act of quoting out context the
questioned provision in the Tax Code. Petitioner alleged that the second paragraph of Section 249 of the
Tax Code "merely states" that there "shall be collected . . . as provided in Section one hundred twenty one
of Act numbered one thousand four hundred and fifty nine . . . one per centum per month."cralaw
virtua1aw library

If petitioner had been candid and honest enough, it would have stated under what title and chapter of the
Tax Code the second paragraph of Section 249 falls. As it then stood, the law stated:chanrob1es virtual 1aw
library

x x x

TITLE VIII — MISCELLANEOUS TAXES

"Sec. 249. Tax on Banks . . .

"There shall be collected upon the amount of reserve deficiencies incurred by the bank, and for the period
of their duration, as provided in section one hundred twenty-six of Act numbered one thousand four
hundred and fifty-nine, as amended by Act Numbered Three thousand six hundred and ten, one per centum
per month, . . . (As amended by Rep. Act No. 6110)" 10

Clearly, the law states a tax is to be collected.

As the law stood during the years the petitioner was assessed for taxes on reserve deficiencies (1969 &
1970), petitioner had to pay twice — the first, a penalty, to the Central Bank by virtue of Section 106 for
violation of Secs. 100 and 101. all of the Central Bank Act and the second, a tax, to the Bureau of Internal
Revenue for incurring a reserve deficiency.

As correctly analyzed by the petitioner and public respondents, the new legislations on bank reserves
merely provided the basis for computation of the reserve deficiency of petitioner bank.

Petitioner submits that it was not the legislative intention that banks with reserve deficiencies would pay
twice as the Tax Code (CA 466, as amended by P.D. 69) enacted on January 1, 1973 did not contain said
questioned provision.

While petitioner might have a point, the wisdom of this legislation is not the province of the Court. 11 It is
clear from the statutes then in force that there was no double taxation involved — one was a penalty and
the other was a tax. At any rate, We have upheld the validity of double taxation. 12 The payment of 1/10 of
1% for incurring reserve deficiencies (Section 106, Central Bank Act) is a penalty as the primary purpose
involved is regulation, 13 while the payment of 1% for the same violation (Second Paragraph, Section 249,
NIRC) is a tax for the generation of revenue which is the primary purpose in this instance. 14 Petitioner
should not complain that it is being asked to pay twice for incurring reserve deficiencies. It can always
avoid this predicament by not having reserve deficiencies. Petitioner’s case is covered by two special laws
— one a banking law and the other, a tax law. These two laws should receive such construction as to make
them harmonize with each other and with the other body of pre-existing laws. 15

Dura lex sed lex!

II

Corollary to this issue raised by petitioner bank, is the question on how the respondent Commissioner
computed reserve deficiency taxes considering that Sec. 249, NIRC, speaks of computation of what it calls
penalty on a per month basis while the Central Bank Act provides for the computation of the penalty on a
per day basis. It claims that respondent Commissioner never informed them of the details of these
assessments, considering the same involve complex and tedious computations.

It is too late in the day for petitioner to raise this matter for Us to resolve.16 The grounds alleged by the
petitioner in its motion for reconsideration of the Commissioner’s assessments are the very same grounds
raised in these petitions. Petitioner did not ask the Commissioner to explain how it arrived in computing
these reserve deficiency taxes. Neither did petitioner raise this question before the Court of Tax Appeals.

Be that as it may, respondent Commissioner explained in compliance with Our Resolution of December 17,
1984, that:chanrobles.com : virtual law library

"3. The reserve deficiency tax amounting to P1,325,768.82 and P1,953,132.67, including surcharge, was
computed on the basis of the monthly averages of reserve deficiencies using figures on daily reserve
deficiencies as appearing in DSE Form No. 1 duly accomplished by the bank, required to be filed regularly
with the Department of Supervision and Examination of the Central Bank . . ." 17

Thus, what the respondent commissioner did was just to add up all the daily reserve deficiencies — as
stated by petitioner itself in DSE Form No. 1 which it submitted to the Central Bank — for one month,
divide such total by the number of banking days in a month to get the average monthly reserve deficiency.
For example, for January, 1970, the total daily average of reserve deficiencies being P175,228.031.73, the
monthly average was obtained by dividing said figure by 21 banking days to get P8,344,196.75. The tax
rate applied was 1% to get the reserve deficiency tax of P83,441.97. 18 Obviously, the respondent
commissioner could not apply the tax rate of 1% on the daily reserve deficiency as the law (Second
paragraph, Sec. 249, NIRC) calls only for a monthly computation. Mathematically, this is the right
procedure in obtaining the monthly average of the daily reserve deficiencies.

As can be, seen, even if petitioner had validly raised said issue, the respondent Commissioner merely
followed the law to the letter.

III

Lastly, petitioner bank in its brief mentions that in Letter of Instruction No. 1330 issued by President
Marcos on June 6, 1983, 19 the Central Bank was ordered to assist petitioner by way of full condonation of
all penalties and other sanctions of whatever kind, nature and description, as of the date they become due,
on its legal reserve deficiencies. Consequently, petitioner insists that it is now exempted from what it
claims are the penalties imposed by the second paragraph of Section 249, NIRC.
A careful study of said LOI reveals that it was issued with respect to petitioner bank’s (thereafter renamed
Republic Planters Bank) role in the government’s sugar production and procurement program as the
financial arm of the sugar industry when the Philippine Sugar Commission (PHILSUCOM), created by
virtue of P.D. 388 1974), bought the petitioner bank from the Roman family.

The LOI itself states that:chanrob1es virtual 1aw library

x x x

"WHEREAS, IN PURSUIT OF THE GOVERNMENT’S SUGAR PRODUCTION AND

PROCUREMENT PROGRAM, REPUBLIC PLANTERS BANK INCURRED OVERDRAFTS IN ITS
CLEARING ACCOUNT WITH THE CENTRAL BANK IN VIEW OF THE LATTER’S INABILITY TO
EFFECT SUBSTANTIAL REGULAR LOAN RELEASES THRU ITS REDISCOUNTING WINDOW
DUE TO CERTAIN CONSTRAINTS ON DOMESTIC CEILINGS RESULTING IN THE DEPOSIT
RESERVE DEFICIENCIES AND CORRESPONDING IMPOSITION OF PENALTIES FOR RESERVE
DEFICIENCIES;

"WHEREAS, CONSIDERING THE MAGNITUDE OF THE AMOUNT OF THE RESERVE

PENALTIES WHICH MAY AFFECT ITS VIABILITY AND IN ORDER TO RATIONALIZE THE
SITUATION, IT IS IMPERATIVE THAT REPUBLIC PLANTERS BANK BE GIVEN APPROPRIATE
RELIEF FROM ITS PRESENT PREDICAMENT BROUGHT ABOUT PRIMARILY BY THE
IMPLEMENTATION OF THE GOVERNMENT’S SUGAR PRODUCTION AND PROCUREMENT
PROGRAM AND NOT BY REASON OF ANY MISMANAGEMENT OR UNSOUND BANKING
PRACTICE ON THE OPERATION OF THE BANK." 20

The petition at bar involves the assessments for the years 1969 and 1970. This LOI definitely does not
cover the years 1969 and 1970 as it was issued only on June 6, 1983 and covers the period when
PHILSUCOM bought the then ailing Republic Bank from the Roman family and renamed it the Philippine
Planters Bank to be used as its financial conduit for the sugar industry. Therefore, even on the thesis that
the payment made (Second paragraph, Section 249, NIRC) is a penalty, this "penalty" for 1969 and 1970
can not be condoned as said LOI does not cover it.chanrobles law library : red

WHEREFORE, premises considered, the petition is denied with costs against petitioner.

SO ORDERED.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,

MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR.,
petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation
Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one
subject which shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due process
of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional
partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive,
have filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the
Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections 21
and 29 of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as
now amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. — A tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable year from all sources, other than
income covered by paragraphs (b), (c), (d) and (e) of this section by every individual
whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax
under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this section: Provided, however,
That in computing taxable income subject to tax under Section 21 (f) in the case of
individuals engaged in business or practice of profession, only the following direct costs
shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the
business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
 (g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with the
conduct of a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to
answer for business or professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still
retained the net income, taxation scheme. The allowance for deductible items, it is true, may have
significantly been reduced by the questioned law in comparison with that which has prevailed prior to the
amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor
opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by
no means inconsequential, continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people,
through such publications of its proceedings as are usually made, of the subjects of legislation.1 The above
objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to
require a virtual compendium of the law which could not have been the intendment of the constitutional
mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation
"shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on corporations and partnerships. The
contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule
even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna
Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the
standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to
achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future
conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi
Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment3 on taxable corporations.
We certainly do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those
who are not. With the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into
those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax
measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not
hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional
proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable
distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when
there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No
such transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to
carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership (GPP)

and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said law
are to be deducted from partnership income. Also, the expenses paid or incurred by
partners in their individual capacities in the practice of their profession which are not
reimbursed or paid by the partnership but are not considered as direct cost, are not
deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that
would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable
Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech by
way of commenting on the questioned implementing regulation of public respondents following the
effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct
impression of this bill. Do we speak here of individuals who are
earning, I mean, who earn through business enterprises and therefore,
should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of
the SNITS, it is categorically stated, thus:
 This bill, Mr. President, is not applicable to business corporations or to
partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax treatment
between individuals engaged in business or in the practice of their respective professions and partners in
general professional partnerships. The fact of the matter is that a general professional partnership, unlike an
ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to
the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the
professional partnership, which is tax exempt, but on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been
amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax only
in their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or
otherwise, shall be returned for taxation and the tax paid in accordance with the
provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each partner
—

(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he

declares his distributive share of the gross income undiminished by his
share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession
alone or individually and one who does it through partnership (whether registered or not) with others in the
exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on
passive investment income, under the present income tax system all individuals deriving income from any
source whatsoever are treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No.
7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily
become myopic, however, when the law is understood, as it should be, as only forming part of, and subject
to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code.
To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of
residence, and resident aliens subject to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable base (that can subject non-resident aliens
and foreign corporations to income tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under
Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations. Except for few variances, such as in the
application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike
to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the
discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A general professional partnership is
such an example.4 Here, the partners themselves, not the partnership (although it is still obligated to file an
income tax return [mainly for administration and data]), are liable for the payment of income tax in their
individual capacity computed on their respective and distributive shares of profits. In the determination of
the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the
Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere
mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as
now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on
their non-compensation income. There is no evident intention of the law, either before or after the
amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of
professionals who practice their respective professions individually and of those who do it through a
general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

COMMISSIONER OF INTERNAL G.R. No. 180066

REVENUE,

Petitioner,
Present:

YNARES-SANTIAGO, J.,

Chairperson,

CHICO-NAZARIO,

VELASCO, JR.,
- versus -
NACHURA, and

PERALTA, JJ.

Promulgated:
PHILIPPINE AIRLINES, INC., _____________________

Respondent.

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules of
Court, seeking the reversal and setting aside of the Decision1[1] dated 9 August 2007 and Resolution2[2]
dated 11 October 2007 of the Court of Tax Appeals (CTA) en banc in CTA E.B. No. 246. The CTA en
banc affirmed the Decision3[3] dated 31 July 2006 of the CTA Second Division in C.T.A. Case No. 7010,
ordering the cancellation and withdrawal of Preliminary Assessment Notice (PAN) No. INC FY-3-31-01-
000094 dated 3 September 2003 and Formal Letter of Demand dated 12 January 2004, issued by the
Bureau of Internal Revenue (BIR) against respondent Philippine Airlines, Inc. (PAL), for the payment of
Minimum Corporate Income Tax (MCIT) in the amount of P272,421,886.58.

There is no dispute as to the antecedent facts of this case.

PAL is a domestic corporation organized under the corporate laws of the Republic of the
Philippines; declared the national flag carrier of the country; and the grantee under Presidential Decree No.
15904[4] of a franchise to establish, operate, and maintain transport services for the carriage of passengers,
mail, and property by air, in and between any and all points and places throughout the Philippines, and
between the Philippines and other countries.5[5]

For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxable
income,6[6] which left it with unapplied creditable withholding tax7[7] in the amount of P2,334,377.95.
PAL did not pay any MCIT for the period.

In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR),
PAL requested for the refund of its unapplied creditable withholding tax for FY 2000-2001. PAL attached
to its letter the following: (1) Schedule of Creditable Tax Withheld at Source for FY 2000-2001; (2)
Certificates of Creditable Taxes Withheld; and (3) Audited Financial Statements.
 Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and Investigation
Division 1 (LTAID 1) of the BIR Large Taxpayers Service (LTS), issued on 16 August 2002, Tax
Verification Notice No. 00201448, authorizing Revenue Officer Jacinto Cueto, Jr. (Cueto) to verify the
supporting documents and pertinent records relative to the claim of PAL for refund of its unapplied
creditable withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID 1 Chief Armit S.
Linsangan invited PAL to an informal conference at the BIR National Office in Diliman, Quezon City, on
27 August 2003, at 10:00 a.m., to discuss the results of the investigation conducted by Revenue Officer
Cueto, supervised by Revenue Officer Madelyn T. Sacluti.

BIR officers and PAL representatives attended the scheduled informal conference, during which
the former relayed to the latter that the BIR was denying the claim for refund of PAL and, instead, was
assessing PAL for deficiency MCIT for FY 2000-2001. The PAL representatives argued that PAL was not
liable for MCIT under its franchise. The BIR officers then informed the PAL representatives that the matter
would be referred to the BIR Legal Service for opinion.

The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094, which was
received by PAL on 23 October 2003. LTAID 1 assessed PAL for P262,474,732.54, representing
deficiency MCIT for FY 2000-2001, plus interest and compromise penalty, computed as follows:

Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services 30,316,679,013.00
Gross Income from Operation 8,482,042,672.00
Add: Non-operating income 465,111,368.00
Total Gross Income for MCIT purposes 9,947,154,040.008[8]
Rate of Tax 2%
Tax Due 178,943,080.80
Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74
Compromise Penalty 25,000.00
Total Amount Due P 262,474,732.549[9]
 PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated 4 November 2003 to the
BIR LTS.

On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand for deficiency MCIT for
FY 2000-2001 in the amount of P271,421,88658, based on the following calculation:

Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services
Direct Costs - P 30,749,761,017.00
Less: Non-deductible
interest expense 433,082,004.00 30,316,679,013.00
Gross Income from Operation P 8,482,042,672.00
Add: Non-operating Income 465,111,368.00
Total Gross Income for MCIT purposes P 9,947,154,040.00
MCIT tax due P 178,943,080.80
Interest 20% per annum 7/16/01 to 02/15/04 92,453,805.78
Compromise Penalty 25,000.00
Total MCIT due and demandable P 271,421,886.5810[10]

PAL received the foregoing Formal Letter of Demand on 12 February 2004, prompting it to file
with the BIR LTS a formal written protest dated 13 February 2004.

The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed Assessment, which was
received by PAL on 26 May 2004. Invoking Revenue Memorandum Circular (RMC) No. 66-2003, the BIR
LTS denied with finality the protest of PAL and reiterated the request that PAL immediately pay its
deficiency MCIT for FY 2000-2001, inclusive of penalties incident to delinquency.
 PAL filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No. 7010 and
raffled to the CTA Second Division. The CTA Second Division promulgated its Decision on 31 July 2006,
ruling in favor of PAL. The dispositive portion of the judgment of the CTA Second Division reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby

GRANTED. Accordingly, Assessment Notice No. INC FY-3-31-01-000094 and Formal
Letter of Demand for the payment of deficiency Minimum Corporate Income Tax in the
amount of P272,421,886.58 are hereby CANCELLED and WITHDRAWN.11[11]

In a Resolution dated 2 January 2007, the CTA Second Division denied the Motion for
Reconsideration of the CIR.

It was then the turn of the CIR to file a Petition for Review with the CTA en banc, docketed as
C.T.A. E.B. No. 246. The CTA en banc found that the cited legal provisions and jurisprudence are teeming
with life with respect to the grant of tax exemption too vivid to pass unnoticed, and that the Court in
Division correctly ruled in favor of the respondent [PAL] granting its petition for the cancellation of
Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the deficiency MCIT in
the amount of P272,421,886.58.12[12] Consequently, the CTA en banc denied the Petition of the CIR for
lack of merit. The CTA en banc likewise denied the Motion for Reconsideration of the CIR in a Resolution
dated 11 October 2007.

Hence, the CIR comes before this Court via the instant Petition for Review on Certiorari, based
on the grounds stated hereunder:

THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS

ASSAILED DECISION BECAUSE:
 (1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX
PROVISION OF THE NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF
1997). (sic) AS AMENDED; HENCE, IT IS COVERED BY THE MCIT PROVISION
OF THE SAME CODE.

(2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF OTHER TAXES
WHICH WOULD ENABLE RESPONDENT TO AVAIL ITSELF OF THE IN LIEU
(sic) OF ALL OTHER TAXES CLAUSE UNDER SECTION 13 OF P.D. NO. 1590
(CHARTER).

(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT

OF [PALS] CHARTER.

(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN

WHAT WILL GIVE IT THE BENEFIT OF A LOWER TAX, BUT ALSO THE
RESPONSIBILITY OF PAYING ITS SHARE OF THE TAX BURDEN, AS IS
EVIDENT IN SECTION 22 OF RA NO. 9337.

(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED;

[PAL] IS LIABLE FOR THE DEFICIENCY MCIT.13[13]

There is only one vital issue that the Court must resolve in the Petition at bar, i.e., whether PAL is
liable for deficiency MCIT for FY 2000-2001.

The Court answers in the negative.

Presidential Decree No. 1590, the franchise of PAL, contains provisions specifically governing the
taxation of said corporation, to wit:

Section 13. In consideration of the franchise and rights hereby granted, the
grantee shall pay to the Philippine Government during the life of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable
income computed in accordance with the provisions of the National Internal Revenue
Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the
grantee from all sources, without distinction as to transport or nontransport operations;
provided, that with respect to international air-transport service, only the gross passenger,
mail, and freight revenues from its outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu
of all other taxes, duties, royalties, registration, license, and other fees and charges of
any kind, nature, or description, imposed, levied, established, assessed, or collected by
any municipal, city, provincial, or national authority or government agency, now or in the
future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the
grantee of aviation gas, fuel, and oil, whether refined or in crude form, and whether such
taxes, duties, charges, royalties, or fees are directly due from or imposable upon the
purchaser or the seller, producer, manufacturer, or importer of said petroleum products
but are billed or passed on to the grantee either as part of the price or cost thereof or by
mutual agreement or other arrangement; provided, that all such purchases by, sales or
deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its
transport and nontransport operations and other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due
on all importations by the grantee of aircraft, engines, equipment, machinery, spare parts,
accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined
or in crude form and other articles, supplies, or materials; provided, that such articles or
supplies or materials are imported for the use of the grantee in its transport and
nontransport operations and other activities incidental thereto and are not locally
available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors,
whether foreign or domestic, of aircraft, engines, equipment, machinery, spare parts, and
other property rented, leased, or chartered by the grantee where the payment of such taxes
is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and
other obligations incurred by the grantee where the payment of such taxes is assumed by
the grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition,
and transfer of aircraft, equipment, motor vehicles, and all other personal and real
property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with
existing law.
For purposes of computing the basic corporate income tax as provided herein,
the grantee is authorized:

(a) To depreciate its assets to the extent of not more than twice as fast the
normal rate of depreciation; and

(b) To carry over as a deduction from taxable income any net loss incurred in
any year up to five years following the year of such loss.

Section 14. The grantee shall pay either the franchise tax or the basic corporate
income tax on quarterly basis to the Commissioner of Internal Revenue. Within sixty (60)
days after the end of each of the first three quarters of the taxable calendar or fiscal year,
the quarterly franchise or income-tax return shall be filed and payment of either the
franchise or income tax shall be made by the grantee.

A final or an adjustment return covering the operation of the grantee for the
preceding calendar or fiscal year shall be filed on or before the fifteenth day of the fourth
 month following the close of the calendar or fiscal year. The amount of the final franchise
or income tax to be paid by the grantee shall be the balance of the total franchise or
income tax shown in the final or adjustment return after deducting therefrom the total
quarterly franchise or income taxes already paid during the preceding first three quarters
of the same taxable year.
Any excess of the total quarterly payments over the actual annual franchise of
income tax due as shown in the final or adjustment franchise or income-tax return shall
either be refunded to the grantee or credited against the grantee's quarterly franchise or
income-tax liability for the succeeding taxable year or years at the option of the grantee.

The term "gross revenues" is herein defined as the total gross income earned
by the grantee from; (a) transport, nontransport, and other services; (b) earnings realized
from investments in money-market placements, bank deposits, investments in shares of
stock and other securities, and other investments; (c) total gains net of total losses
realized from the disposition of assets and foreign-exchange transactions; and (d) gross
income from other sources. (Emphases ours.)

According to the afore-quoted provisions, the taxation of PAL, during the lifetime of its franchise,
shall be governed by two fundamental rules, particularly: (1) PAL shall pay the Government either basic
corporate income tax or franchise tax, whichever is lower; and (2) the tax paid by PAL, under either of
these alternatives, shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and
charges, except only real property tax.

The basic corporate income tax of PAL shall be based on its annual net taxable income, computed
in accordance with the National Internal Revenue Code (NIRC). Presidential Decree No. 1590 also
explicitly authorizes PAL, in the computation of its basic corporate income tax, to (1) depreciate its assets
twice as fast the normal rate of depreciation;14[14] and (2) carry over as a deduction from taxable income
any net loss incurred in any year up to five years following the year of such loss.15[15]

Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues derived by PAL
from all sources, whether transport or nontransport operations. However, with respect to international air-
transport service, the franchise tax shall only be imposed on the gross passenger, mail, and freight revenues
of PAL from its outgoing flights.
 In its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net taxable
income for the period, resulting in zero basic corporate income tax, which would necessarily be lower than
any franchise tax due from PAL for the same period.

The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the
MCIT is income tax for which PAL is liable. The CIR reasons that Section 13(a) of Presidential Decree No.
1590 provides that the corporate income tax of PAL shall be computed in accordance with the NIRC. And,
since the NIRC of 1997 imposes MCIT, and PAL has not applied for relief from the said tax, then PAL is
subject to the same.

The Court is not persuaded. The arguments of the CIR are contrary to the plain meaning and
obvious intent of Presidential Decree No. 1590, the franchise of PAL.

Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997, 16[16]
pertinent provisions of which are reproduced below for easy reference:

SEC. 27. Rates of Income Tax on Domestic Corporations.

(A) In General Except as otherwise provided in this Code, an income tax of

thirty-five percent (35%) is hereby imposed upon the taxable income derived during
each taxable year from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

xxxx

(E) Minimum Corporate Income Tax on Domestic Corporations.

(1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of
the gross income as of the end of the taxable year, as defined herein, is hereby imposed
on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business
 operations, when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.

Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under Section
27(A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of the
corporation; or (2) the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% of the gross
income of the corporation. Although this may be the general rule in determining the income tax due from a
domestic corporation under the NIRC of 1997, it can only be applied to PAL to the extent allowed by the
provisions in the franchise of PAL specifically governing its taxation.

After a conscientious study of Section 13 of Presidential Decree No. 1590, in relation to Sections
27(A) and 27(E) of the NIRC of 1997, the Court, like the CTA en banc and Second Division, concludes
that PAL cannot be subjected to MCIT for FY 2000-2001.

First, Section 13(a) of Presidential Decree No. 1590 refers to basic corporate income tax.
In Commissioner of Internal Revenue v. Philippine Airlines, Inc.,17[17] the Court already settled
that the basic corporate income tax, under Section 13(a) of Presidential Decree No. 1590, relates to the
general rate of 35% (reduced to 32% by the year 2000) as stipulated in Section 27(A) of the NIRC of 1997.

Section 13(a) of Presidential Decree No. 1590 requires that the basic corporate income tax be
computed in accordance with the NIRC. This means that PAL shall compute its basic corporate income tax
using the rate and basis prescribed by the NIRC of 1997 for the said tax. There is nothing in Section 13(a)
of Presidential Decree No. 1590 to support the contention of the CIR that PAL is subject to the entire Title
II of the NIRC of 1997, entitled Tax on Income.

Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporate
income tax of PAL shall be based on its annual net taxable income. This is consistent with Section 27(A)
of the NIRC of 1997, which provides that the rate of basic corporate income tax, which is 32% beginning 1
January 2000, shall be imposed on the taxable income of the domestic corporation.
 Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross
income specified in the said Code, less the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by the same Code or other special laws. The gross income,
referred to in Section 31, is described in Section 32 of the NIRC of 1997 as income from whatever source,
including compensation for services; the conduct of trade or business or the exercise of profession; dealings
in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partners
distributive share in the net income of a general professional partnership.

Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by
subtracting from gross income deductions authorized, not just by the NIRC of 1997,18[18] but also by
special laws. Presidential Decree No. 1590 may be considered as one of such special laws authorizing PAL,
in computing its annual net taxable income, on which its basic corporate income tax shall be based, to
deduct from its gross income the following: (1) depreciation of assets at twice the normal rate; and (2) net
loss carry-over up to five years following the year of such loss.

In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based on the
gross income of the domestic corporation. The Court notes that gross income, as the basis for MCIT, is
given a special definition under Section 27(E)(4) of the NIRC of 1997, different from the general one under
Section 34 of the same Code.

According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of a
domestic corporation engaged in the sale of service means gross receipts, less sales returns, allowances,
discounts and cost of services. Cost of services refers to all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (a) salaries and employee
benefits of personnel, consultants, and specialists directly rendering the service; and (b) cost of facilities
directly utilized in providing the service, such as depreciation or rental of equipment used and cost of
supplies.19[19] Noticeably, inclusions in and exclusions/deductions from gross income for MCIT purposes
are limited to those directly arising from the conduct of the taxpayers business. It is, thus, more limited than
the gross income used in the computation of basic corporate income tax.

In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable
income, which is the basis for basic corporate income tax under Section 27(A); and gross income, which is
the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and
cannot be used interchangeably. The same reasons prevent this Court from declaring that the basic
corporate income tax, for which PAL is liable under Section 13(a) of Presidential Decree No. 1590, also
covers MCIT under Section 27(E) of the NIRC of 1997, since the basis for the first is the annual net taxable
income, while the basis for the second is gross income.

Third, even if the basic corporate income tax and the MCIT are both income taxes under Section
27 of the NIRC of 1997, and one is paid in place of the other, the two are distinct and separate taxes.

The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc., 20 [20]
wherein it held that income tax on the passive income21[21] of a domestic corporation, under Section
27(D) of the NIRC of 1997, is different from the basic corporate income tax on the taxable income of a
domestic corporation, imposed by Section 27(A), also of the NIRC of 1997. Section 13 of Presidential
Decree No. 1590 gives PAL the option to pay basic corporate income tax or franchise tax, whichever is
lower; and the tax so paid shall be in lieu of all other taxes, except real property tax. The income tax on the
passive income of PAL falls within the category of all other taxes from which PAL is exempted, and
which, if already collected, should be refunded to PAL.

The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT
is different from the basic corporate income tax, not just in the rates, but also in the bases for their
computation. Not being covered by Section 13(a) of Presidential Decree No. 1590, which makes PAL
liable only for basic corporate income tax, then MCIT is included in all other taxes from which PAL is
exempted.
 That, under general circumstances, the MCIT is paid in place of the basic corporate income tax,
when the former is higher than the latter, does not mean that these two income taxes are one and the same.
The said taxes are merely paid in the alternative, giving the Government the opportunity to collect the
higher amount between the two. The situation is not much different from Section 13 of Presidential Decree
No. 1590, which reversely allows PAL to pay, whichever is lower of the basic corporate income tax or the
franchise tax. It does not make the basic corporate income tax indistinguishable from the franchise tax.

Given the fundamental differences between the basic corporate income tax and the MCIT,
presented in the preceding discussion, it is not baseless for this Court to rule that, pursuant to the franchise
of PAL, said corporation is subject to the first tax, yet exempted from the second.

Fourth, the evident intent of Section 13 of Presidential Decree No. 1520 is to extend to PAL tax
concessions not ordinarily available to other domestic corporations. Section 13 of Presidential Decree No.
1520 permits PAL to pay whichever is lower of the basic corporate income tax or the franchise tax; and
the tax so paid shall be in lieu of all other taxes, except only real property tax. Hence, under its franchise,
PAL is to pay the least amount of tax possible.

Section 13 of Presidential Decree No. 1520 is not unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions) under its franchise, as an inducement for the acceptance of
the franchise and the rendition of public service by the said public utility.22[22] In this case, in addition to
being a public utility providing air-transport service, PAL is also the official flag carrier of the country.

The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes
the objective of Section 13 of Presidential Decree No. 1590. In effect, PAL would not just have two, but
three tax alternatives, namely, the basic corporate income tax, MCIT, or franchise tax. More troublesome is
the fact that, as between the basic corporate income tax and the MCIT, PAL shall be made to pay
whichever is higher, irrefragably, in violation of the avowed intention of Section 13 of Presidential Decree
No. 1590 to make PAL pay for the lower amount of tax.

Fifth, the CIR posits that PAL may not invoke in the instant case the in lieu of all other taxes
clause in Section 13 of Presidential Decree No. 1520, if it did not pay anything at all as basic corporate
income tax or franchise tax. As a result, PAL should be made liable for other taxes such as MCIT. This line
of reasoning has been dubbed as the Substitution Theory, and this is not the first time the CIR raised the
same. The Court already rejected the Substitution Theory in Commissioner of Internal Revenue v.
Philippine Airlines, Inc.,23[23] to wit:

Substitution Theory
of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR that the in
lieu of all other taxes proviso is a mere incentive that applies only when PAL
actually pays something. It is clear that PD 1590 intended to give respondent the option
to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option
excludes the payment of other taxes and dues imposed or collected by the national or the
local government. PAL has the option to choose the alternative that results in lower taxes.
It is not the fact of tax payment that exempts it, but the exercise of its option.

Under Subsection (a), the basis for the tax rate is respondents annual net taxable
income, which (as earlier discussed) is computed by subtracting allowable deductions and
exemptions from gross income. By basing the tax rate on the annual net taxable income,
PD 1590 necessarily recognized the situation in which taxable income may result in a
negative amount and thus translate into a zero tax liability.

Notably, PAL was owned and operated by the government at the time the
franchise was last amended. It can reasonably be contemplated that PD 1590 sought to
assist the finances of the government corporation in the form of lower taxes. When
respondent operates at a loss (as in the instant case), no taxes are due; in this instances, it
has a lower tax liability than that provided by Subsection (b).

The fallacy of the CIRs argument is evident from the fact that the payment
of a measly sum of one peso would suffice to exempt PAL from other taxes, whereas
a zero liability arising from its losses would not. There is no substantial distinction
between a zero tax and a one-peso tax liability. (Emphasis ours.)

Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in the
present Petition.
 The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind the
Substitution Theory. Section 22 of Republic Act No. 9337, more popularly known as the Expanded Value
Added Tax (E-VAT) Law, abolished the franchise tax imposed by the charters of particularly identified
public utilities, including Presidential Decree No. 1590 of PAL. PAL may no longer exercise its options or
alternatives under Section 13 of Presidential Decree No. 1590, and is now liable for both corporate income
tax and the 12% VAT on its sale of services. The CIR alleges that Republic Act No. 9337 reveals the
intention of the Legislature to make PAL share the tax burden of other domestic corporations.

The CIR seems to lose sight of the fact that the Petition at bar involves the liability of PAL for
MCIT for the fiscal year ending 31 March 2001. Republic Act No. 9337, which took effect on 1 July
2005, cannot be applied retroactively24[24] and any amendment introduced by said statute affecting the
taxation of PAL is immaterial in the present case.

And sixth, Presidential Decree No. 1590 explicitly allows PAL, in computing its basic corporate
income tax, to carry over as deduction any net loss incurred in any year, up to five years following the year
of such loss. Therefore, Presidential Decree No. 1590 does not only consider the possibility that, at the end
of a taxable period, PAL shall end up with zero annual net taxable income (when its deductions exactly
equal its gross income), as what happened in the case at bar, but also the likelihood that PAL shall incur net
loss (when its deductions exceed its gross income). If PAL is subjected to MCIT, the provision in
Presidential Decree No. 1590 on net loss carry-over will be rendered nugatory. Net loss carry-over is
material only in computing the annual net taxable income to be used as basis for the basic corporate income
tax of PAL; but PAL will never be able to avail itself of the basic corporate income tax option when it is in
a net loss position, because it will always then be compelled to pay the necessarily higher MCIT.

Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without
contravening Presidential Decree No. 1520.
 Between Presidential Decree No. 1520, on one hand, which is a special law specifically governing
the franchise of PAL, issued on 11 June 1978; and the NIRC of 1997, on the other, which is a general law
on national internal revenue taxes, that took effect on 1 January 1998, the former prevails. The rule is that
on a specific matter, the special law shall prevail over the general law, which shall be resorted to only to
supply deficiencies in the former. In addition, where there are two statutes, the earlier special and the later
general the terms of the general broad enough to include the matter provided for in the special the fact that
one is special and the other is general creates a presumption that the special is to be considered as
remaining an exception to the general, one as a general law of the land, the other as the law of a particular
case. It is a canon of statutory construction that a later statute, general in its terms and not expressly
repealing a prior special statute, will ordinarily not affect the special provisions of such earlier
statute.25[25]

Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590.

While Section 16 of Presidential Decree No. 1590 provides that the franchise is granted to PAL
with the understanding that it shall be subject to amendment, alteration, or repeal by competent authority
when the public interest so requires, Section 24 of the same Decree also states that the franchise or any
portion thereof may only be modified, amended, or repealed expressly by a special law or decree that shall
specifically modify, amend, or repeal said franchise or any portion thereof. No such special law or decree
exists herein.

The CIR cannot rely on Section 7(B) of Republic Act No. 8424, which amended the NIRC in 1997
and reads as follows:

Section 7. Repealing Clauses.

xxxx

(B) The provisions of the National Internal Revenue Code, as amended, and all
other laws, including charters of government-owned or controlled corporations,
decrees, orders, or regulations or parts thereof, that are inconsistent with this Act are
hereby repealed or amended accordingly.
The CIR reasons that PAL was a government-owned and controlled corporation when Presidential Decree
No. 1590, its franchise or charter, was issued in 1978. Since PAL was still operating under the very same
charter when Republic Act No. 8424 took effect in 1998, then the latter can repeal or amend the former by
virtue of Section 7(B).

The Court disagrees.

A brief recount of the history of PAL is in order. PAL was established as a private corporation
under the general law of the Republic of the Philippines in February 1941. In November 1977, the
government, through the Government Service Insurance System (GSIS), acquired the majority shares in
PAL. PAL was privatized in January 1992 when the local consortium PR Holdings acquired a 67% stake
therein.26[26]

It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a
government-owned and controlled corporation; but when Republic Act No. 8424, amending the NIRC,
took effect on 1 January 1998, PAL was already a private corporation for six years. The repealing clause
under Section 7(B) of Republic Act No. 8424 simply refers to charters of government-owned and
controlled corporations, which would simply and plainly mean corporations under the ownership and
control of the government at the time of effectivity of said statute. It is already a stretch for the Court to
read into said provision charters, issued to what were then government-owned and controlled corporations
that are now private, but still operating under the same charters.

That the Legislature chose not to amend or repeal Presidential Decree No. 1590, even after PAL
was privatized, reveals the intent of the Legislature to let PAL continue enjoying, as a private corporation,
the very same rights and privileges under the terms and conditions stated in said charter. From the moment
PAL was privatized, it had to be treated as a private corporation, and its charter became that of a private
corporation. It would be completely illogical to say that PAL is a private corporation still operating under a
charter of a government-owned and controlled corporation.

The alternative argument of the CIR that the imposition of the MCIT is pursuant to the
amendment of the NIRC, and not of Presidential Decree No. 1590 is just as specious. As has already been
settled by this Court, the basic corporate income tax under Section 13(a) of Presidential Decree No. 1590
relates to the general tax rate under Section 27(A) of the NIRC of 1997, which is 32% by the year 2000,
imposed on taxable income. Thus, only provisions of the NIRC of 1997 necessary for the computation of
the basic corporate income tax apply to PAL. And even though Republic Act No. 8424 amended the NIRC
by introducing the MCIT, in what is now Section 27(E) of the said Code, this amendment is actually
irrelevant and should not affect the taxation of PAL, since the MCIT is clearly distinct from the basic
corporate income tax referred to in Section 13(a) of Presidential Decree No. 1590, and from which PAL is
consequently exempt under the in lieu of all other taxes clause of its charter.

The CIR calls the attention of the Court to RMC No. 66-2003, on Clarifying the Taxability of
Philippine Airlines (PAL) for Income Tax Purposes As Well As Other Franchise Grantees Similarly
Situated. According to RMC No. 66-2003:

Section 27(E) of the Code, as implemented by Revenue Regulations No. 9-98,

provides that MCIT of two percent (2%) of the gross income as of the end of the taxable
year (whether calendar or fiscal year, depending on the accounting period employed) is
imposed upon any domestic corporation beginning the 4th taxable year immediately
following the taxable year in which such corporation commenced its business operations.
The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of MCIT is greater than the normal income tax due from
such corporation.

With the advent of such provision beginning January 1, 1998, it is certain that
domestic corporations subject to normal income tax as well as those choose to be subject
thereto, such as PAL, are bound to pay income tax regardless of whether they are
operating at a profit or loss.

Thus, in case of operating loss, PAL may either opt to subject itself to minimum
corporate income tax or to the 2% franchise tax, whichever is lower. On the other hand, if
PAL is operating at a profit, the income tax liability shall be the lower amount between:

(1) normal income tax or MCIT whichever is higher; and

(2) 2% franchise tax.

 The CIR attempts to sway this Court to adopt RMC No. 66-2003 since the [c]onstruction by an
executive branch of government of a particular law although not binding upon the courts must be given
weight as the construction comes from the branch of the government called upon to implement the
law.27[27]

But the Court is unconvinced.

It is significant to note that RMC No. 66-2003 was issued only on 14 October 2003, more than
two years after FY 2000-2001 of PAL ended on 31 March 2001. This violates the well-entrenched principle
that statutes, including administrative rules and regulations, operate prospectively only, unless the
legislative intent to the contrary is manifest by express terms or by necessary implication.28[28]

Moreover, despite the claims of the CIR that RMC No. 66-2003 is just a clarificatory and internal
issuance, the Court observes that RMC No. 66-2003 does more than just clarify a previous regulation and
goes beyond mere internal administration. It effectively increases the tax burden of PAL and other
taxpayers who are similarly situated, making them liable for a tax for which they were not liable before.
Therefore, RMC No. 66-2003 cannot be given effect without previous notice or publication to those who
will be affected thereby. In Commissioner of Internal Revenue v. Court of Appeals,29[29] the Court
ratiocinated that:

It should be understandable that when an administrative rule is merely

interpretative in nature, its applicability needs nothing further than its bare issuance for it
gives no real consequence more than what the law itself has already prescribed. When,
upon the other hand, the administrative rule goes beyond merely providing for the
means that can facilitate or render least cumbersome the implementation of the law
but substantially adds to or increases the burden of those governed, it behooves the
agency to accord at least to those directly affected a chance to be heard, and
thereafter to be duly informed, before that new issuance is given the force and effect
of law.
 A reading of RMC 37-93, particularly considering the circumstances under
which it has been issued, convinces us that the circular cannot be viewed simply as a
corrective measure (revoking in the process the previous holdings of past
Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but
has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium
More" and "Champion" within the classification of locally manufactured cigarettes
bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the
new law would have its amendatory provisions applied to locally manufactured cigarettes
which at the time of its effectivity were not so classified as bearing foreign brands. Prior
to the issuance of the questioned circular, "Hope Luxury," "Premium More," and
"Champion" cigarettes were in the category of locally manufactured cigarettes not
bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the
enactment of RA 7654, would have had no new tax rate consequence on private
respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and
"Champion" cigarettes within the scope of the amendatory law and subject them to an
increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR
not simply interpreted the law; verily, it legislated under its quasi-legislative
authority. The due observance of the requirements of notice, of hearing, and of
publication should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

"RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations "It has

been observed that one of the problem areas bearing on compliance
with Internal Revenue Tax rules and regulations is lack or insufficiency
of due notice to the tax paying public. Unless there is due notice, due
compliance therewith may not be reasonably expected. And most
importantly, their strict enforcement could possibly suffer from legal
infirmity in the light of the constitutional provision on 'due process of
law' and the essence of the Civil Code provision concerning effectivity
of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV,
Constitution; Art. 2, New Civil Code).

"In order that there shall be a just enforcement of rules and

regulations, in conformity with the basic element of due process, the
following procedures are hereby prescribed for the drafting, issuance
and implementation of the said Revenue Tax Issuances:
"(1). This Circular shall apply only to (a) Revenue
Regulations; (b) Revenue Audit Memorandum Orders; and (c)
Revenue Memorandum Circulars and Revenue Memorandum Orders
bearing on internal revenue tax rules and regulations.

"(2). Except when the law otherwise expressly provides, the

aforesaid internal revenue tax issuances shall not begin to be
operative until after due notice thereof may be fairly presumed.

"Due notice of the said issuances may be fairly presumed only

after the following procedures have been taken:

"xxx xxx xxx "(5). Strict compliance with the foregoing

procedures is enjoined.13
 Nothing on record could tell us that it was either impossible or impracticable for
the BIR to observe and comply with the above requirements before giving effect to its
questioned circular. (Emphases ours.)

The Court, however, stops short of ruling on the validity of RMC No. 66-2003, for it is not among
the issues raised in the instant Petition. It only wishes to stress the requirement of prior notice to PAL
before RMC No. 66-2003 could have become effective. Only after RMC No. 66-2003 was issued on 14
October 2003 could PAL have been given notice of said circular, and only following such notice to PAL
would RMC No. 66-2003 have taken effect. Given this sequence, it is not possible to say that RMC No. 66-
2003 was already in effect and should have been strictly complied with by PAL for its fiscal year which
ended on 31 March 2001.

Even conceding that the construction of a statute by the CIR is to be given great weight, the
courts, which include the CTA, are not bound thereby if such construction is erroneous or is clearly shown
to be in conflict with the governing statute or the Constitution or other laws. "It is the role of the Judiciary
to refine and, when necessary, correct constitutional (and/or statutory) interpretation, in the context of the
interactions of the three branches of the government."30[30] It is furthermore the rule of long standing
that this Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its
functions, is dedicated exclusively to the resolution of tax problems and has, accordingly, developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority.31[31] In the
Petition at bar, the CTA en banc and in division both adjudged that PAL is not liable for MCIT under
Presidential Decree No. 1590, and this Court has no sufficient basis to reverse them.

As to the assertions of the CIR that exemption from tax is not presumed, and the one claiming it
must be able to show that it indubitably exists, the Court recalls its pronouncements in Commissioner of
Internal Revenue v. Court of Appeals32[32]:
 We disagree. Petitioner Commissioner of Internal Revenue erred in applying the
principles of tax exemption without first applying the well-settled doctrine of strict
interpretation in the imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first determining who are
covered by the aforesaid provision. The Commissioner should have determined first if
private respondent was covered by Section 205, applying the rule of strict interpretation
of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove
its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine
in the interpretation of tax laws that (a) statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. x x x (A) tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. Parenthetically, in answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. (Emphases ours.)

For two decades following the grant of its franchise by Presidential Decree No. 1590 in 1978,
PAL was only being held liable for the basic corporate income tax or franchise tax, whichever was lower;
and its payment of either tax was in lieu of all other taxes, except real property tax, in accordance with the
plain language of Section 13 of the charter of PAL. Therefore, the exemption of PAL from all other taxes
was not just a presumption, but a previously established, accepted, and respected fact, even for the BIR.

The MCIT was a new tax introduced by Republic Act No. 8424. Under the doctrine of strict
interpretation, the burden is upon the CIR to primarily prove that the new MCIT provisions of the NIRC of
1997, clearly, expressly, and unambiguously extend and apply to PAL, despite the latters existing tax
exemption. To do this, the CIR must convince the Court that the MCIT is a basic corporate income
tax,33[33] and is not covered by the in lieu of all other taxes clause of Presidential Decree No. 1590. Since
the CIR failed in this regard, the Court is left with no choice but to consider the MCIT as one of all other
taxes, from which PAL is exempt under the explicit provisions of its charter.

Not being liable for MCIT in FY 2000-2001, it necessarily follows that PAL need not apply for
relief from said tax as the CIR maintains.
 WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED, and the
Decision dated 9 August 2007 and Resolution dated 11 October 2007 of the Court of Tax Appeals en banc
in CTA E.B. No. 246 is hereby AFFIRMED. No costs.

SO ORDERED

THE MANILA BANKING CORPORATION, G.R. No. 168118

Petitioner,

Present:

PUNO, J., Chairperson,

- versus - SANDOVAL-GUTIERREZ,

CORONA,

AZCUNA, and

GARCIA, JJ.

COMMISSIONER OF INTERNAL
REVENUE,
Promulgated:
Respondent.

August 28, 2006

x-----------------------------------------------------------------------------------------x

DECISION
SANDOVAL-GUTIERREZ, J.:

Before us is a Petition for Review on Certiorari34[1] assailing the Decision35[2] of the Court of
Appeals dated May 11, 2005 in CA-G.R. SP No. 77177, entitled The Manila Banking Corporation,
petitioner, versus Commissioner of Internal Revenue, respondent.

The Manila Banking Corporation, petitioner, was incorporated in 1961 and since then had
engaged in the commercial banking industry until 1987. On May 22, 1987, the Monetary Board of the
Bangko Sentral ng Pilipinas (BSP) issued Resolution No. 505, pursuant to Section 29 of Republic Act
(R.A.) No. 265 (the Central Bank Act),36[3] prohibiting petitioner from engaging in business by reason of
insolvency. Thus, petitioner ceased operations that year and its assets and liabilities were placed under the
charge of a government-appointed receiver.

Meanwhile, R.A. No. 8424,37[4] otherwise known as the Comprehensive Tax Reform Act of
1997, became effective on January 1, 1998. One of the changes introduced by this law is the imposition of
the minimum corporate income tax on domestic and resident foreign corporations. Implementing this law is
Revenue Regulations No. 9-98 stating that the law allows a four (4) year period from the time the
corporations were registered with the Bureau of Internal Revenue (BIR) during which the minimum
corporate income tax should not be imposed.
 On June 23, 1999, after 12 years since petitioner stopped its business operations, the BSP
authorized it to operate as a thrift bank. The following year, specifically on April 7, 2000, it filed with the
BIR its annual corporate income tax return and paid P33,816,164.00 for taxable year 1999.

Prior to the filing of its income tax return, or on December 28, 1999, petitioner sent a letter to the
BIR requesting a ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In
other words, petitioners position is that since it resumed operations in 1999, it will pay its minimum
corporate income tax only after four (4) years thereafter.

On February 22, 2001, the BIR issued BIR Ruling No. 007-200138[5] stating that petitioner is
entitled to the four (4)-year grace period. Since it reopened in 1999, the minimum corporate income tax
may be imposed not earlier than 2002, i.e. the fourth taxable year beginning 1999. The relevant portions of
the BIR Ruling state:

In reply, we hereby confirm that the law and regulations allow new corporations
as well as existing corporations a leeway or adjustment period of four years counted from
the year of commencement of business operations (reckoned at the time of registration by
the corporation with the BIR) during which the MCIT (minimum corporate income tax)
does not apply. If new corporations, as well as existing corporations such as those
registered with the BIR in 1994 or earlier, are granted a 4-year grace period, we see no
reason why TMBC, a corporation that has ceased business activities due to involuntary
closure for more than a decade and is now only starting again to place its business back in
order, may not be given the same opportunity. It should be stressed that although TMBC
had been registered with the BIR before 1994, yet it did not have any business from 1987
to June 1999 due to its involuntary closure. This Office is therefore of an opinion, that for
purposes of justice, equity and consistent with the intent of the law, TMBC's reopening
last July 1999 is akin to the commencement of business operations of a new corporation,
in consideration of which the law allows a 4-year period during which MCIT is not to be
applied. Hence, MCIT may be imposed upon TMBC not earlier than 2002, i.e., the fourth
taxable year beginning 1999 which is the year when TMBC reopened.

Likewise, we find merit in your position that for having just come out of
receivership proceedings, which not only resulted in substantial losses but actually
 brought about a complete cessation of all businesses, TMBC may be qualified to ask for
suspension of the MCIT. The law provides that the Secretary of Finance, upon the
recommendation of the Commissioner, may suspend the imposition of the MCIT on any
corporation which suffers losses on account of prolonged labor dispute, or because of
force majeure, or because of legitimate business reverses. [NIRC, Sec. 27(E)(3)] Revenue
Regulations 9-98 defines the term legitimate business reverses to include substantial
losses sustained due to fire, robbery, theft or embezzlement, or for other economic
reasons as determined by the Secretary of Finance. Cessation of business activities as a
result of being placed under involuntary receivership may be one such economic reason.
But to be a basis for the recognition of the suspension of MCIT, such a situation should
be properly defined and included in the regulations, which this Office intends to do.
Pending such inclusion, the same cannot yet be invoked. Nevertheless, it is the position of
this Office that the counting of the fourth taxable year, insofar as TMBC is concerned,
begins in the year 1999 when TMBC reopened such that it will be only subject to MCIT
beginning the year 2002.

Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum of
P33,816,164.00 erroneously paid as minimum corporate income tax for taxable year 1999.

Due to the inaction of the BIR on its claim, petitioner filed with the Court of Tax Appeals (CTA) a
petition for review.

On April 21, 2003, the CTA denied the petition, finding that petitioners payment of the amount of
P33,816,164.00 corresponding to its minimum corporate income tax for taxable year 1999 is in order. The
CTA held that petitioner is not entitled to the four (4)-year grace period because it is not a new corporation.
It has continued to be the same corporation, registered with the Securities and Exchange Commission
(SEC) and the BIR, despite being placed under receivership, thus:

Moreover, it must be emphasized that when herein petitioner was placed under
receivership, there was merely an interruption of its business operations. However, its
corporate existence was never affected. The general rule is that the appointment of the
receiver does not terminate the charter or work a dissolution of the corporation, even
 though the receivership is a permanent one. In other words, the corporation continues to
exist as a legal entity, clothed with its franchises (65 Am. Jur. 2d, pp. 973-974).
Petitioner, for all intents and purposes, remained to be the same corporation, registered
with the SEC and with the BIR. While it may continue to perform its corporate functions,
all its properties and assets were under the control and custody of a receiver, and its
dealings with the public is somehow limited, if not momentarily suspended. x x x

On June 11, 2003, petitioner filed with the Court of Appeals a petition for review. On May 11,
2005, the appellate court rendered a Decision affirming the assailed judgment of the CTA.

Thus, this petition for review on certiorari.

The main issue for our resolution is whether petitioner is entitled to a refund of its minimum
corporate income tax paid to the BIR for taxable year 1999.

Petitioner contends that the Court of Tax Appeals erred in holding that it is not entitled to the four
(4)-year grace period provided by law suspending the payment of its minimum corporate income tax since
it is not a newly created corporation, having been registered as early as 1961.

For his part, the Commissioner of Internal Revenue (CIR), respondent, maintains that pursuant to
R.A. No. 8424, petitioner should pay its minimum corporate income tax beginning January 1, 1998 as it did
not close its business operations in 1987 but merely suspended the same. Even if placed under receivership,
its corporate existence was never affected. Thus, it falls under the category of an existing corporation
recommencing its banking business operations.

Section 27(E) of the Tax Code provides:

Sec. 27. Rates of Income Tax on Domestic Corporations. x x x

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%)
of the gross income as of the end of the taxable year, as defined herein, is hereby imposed
on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business
operations, when the minimum corporate income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum
corporate income tax over the normal income tax as computed under Subsection (A) of
this Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.

xxx

Upon the other hand, Revenue Regulation No. 9-98 specifies the period when a corporation
becomes subject to the minimum corporate income tax, thus:

(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to
the MCIT (minimum corporate income tax) -

For purposes of the MCIT, the taxable year in which business operations commenced
shall be the year in which the domestic corporation registered with the Bureau of Internal
Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998.

xxx
 The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year
suspension of tax payment to newly formed corporations. Corporations still starting their business
operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as
a surprise then when many companies reported losses in their initial years of operations. The following are
excerpts from the Senate deliberations:

Senator Romulo: x x x Let me go now to the minimum corporate income tax, which is on
page 45 of the Journal, which is to minimize tax evasion on those corporations which
have been declaring losses year in and year out. Here, the tax rate is three-fourths, three
quarter of a percent or .75% applied to corporations that do not report any taxable income
on the fourth year of their business operation. Therefore, those that do not report income
on the first, second and third year are not included here.

Senator Enrile: We assume that this is the period of stabilization of new company that is
starting in business.

Senator Romulo: That is right.

Thus, in order to allow new corporations to grow and develop at the initial stages of their
operations, the lawmaking body saw the need to provide a grace period of four years from their registration
before they pay their minimum corporate income tax.

Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known as the
Thrift Banks Act of 1995. It took effect on March 18, 1995. This law provides for the regulation of the
organization and operations of thrift banks. Under Section 3, thrift banks include savings and mortgage
banks, private development banks, and stock savings and loans associations organized under existing laws.

On June 15, 1999, the BIR issued Revenue Regulation No. 4-95 implementing certain provisions
of the said R.A. No. 7906. Section 6 provides:
 Sec. 6. Period of exemption. All thrift banks created and organized under the
provisions of the Act shall be exempt from the payment of all taxes, fees, and charges of
whatever nature and description, except the corporate income tax imposed under Title
II of the NIRC and as specified in Section 2(A) of these regulations, for a period of five
(5) years from the date of commencement of operations; while for thrift banks which are
already existing and operating as of the date of effectivity of the Act (March 18, 1995),
the tax exemption shall be for a period of five (5) years reckoned from the date of such
effectivity.

For purposes of these regulations, date of commencement of operations shall be

understood to mean the date when the thrift bank was registered with the Securities and
Exchange Commission or the date when the Certificate of Authority to Operate was
issued by the Monetary Board of the Bangko Sentral ng Pilipinas, whichever comes later.

xxx

As mentioned earlier, petitioner bank was registered with the BIR in 1961. However, in 1987, it
was found insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve
(12) years, or on June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank.
Earlier, or on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of
Incorporation which was approved on June 22, 1999.

It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date of
commencement of operations of a thrift bank is the date it was registered with the SEC or the date when
the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever
comes later.

Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the
minimum corporate income tax on corporations, provides that for purposes of this tax, the date when
business operations commence is the year in which the domestic corporation registered with the BIR.
However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks,
such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when
the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever
comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to
petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from
June 23, 1999 when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only
pay its minimum corporate income tax after four (4) years from 1999.

WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals in CA-
G.R. SP No. 77177 is hereby REVERSED. Respondent Commissioner of Internal Revenue is directed to
refund to petitioner bank the sum of P33,816,164.00 prematurely paid as minimum corporate income tax.

SO ORDERED.

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the
Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its
Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines,
and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the
Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it
was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or
cargo to or from the Philippines, although during the period covered by the assessments, it maintained a
general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways —
which was responsible for selling BOAC tickets covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was
protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16
January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter,
dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case
but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years
1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request
for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second
Case before the Tax Court praying that it be absolved of liability for deficiency income tax for the years
1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from services so that the place where services
are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered
petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
 1. Whether or not the revenue derived by private respondent British Overseas Airways
Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while
having no landing rights here, constitute income of BOAC from Philippine sources, and,
accordingly, taxable.

2. Whether or not during the fiscal years in question BOAC s a resident foreign
corporation doing business in the Philippines or has an office or place of business in the
Philippines.

3. In the alternative that private respondent may not be considered a resident foreign
corporation but a non-resident foreign corporation, then it is liable to Philippine income
tax at the rate of thirty-five per cent (35%) of its gross income received from all sources
within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign corporation not
engaged in trade or business within the Philippines and not having any office or place of
business therein

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to
what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light
of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those
activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of,
the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets,
its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through
a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation
subject to tax upon its total net income received in the preceding taxable year from all sources within the
Philippines. 5

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

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

(2) Resident corporations. — A corporation organized, authorized, or existing under the

laws of any foreign country, except a foreign fife insurance company, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
 section upon the total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax
laws.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any business carried on
for gain or profile, or gains, profits, and income derived from any source whatever (Sec.
29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific time ...; it means something
distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax
law, "income" refers to the flow of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71
amounted to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8 For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the source of income or
the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to
this case. The test of taxability is the "source"; and the source of an income is that activity ... which
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines.
business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from
foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income
herein is the Philippines. 13

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered
by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to
1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international
carriers are now taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their
cross Philippine billings. (Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
"gross Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in
the world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail provided the
cargo or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources. The 2-½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or
percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the
appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case was to the effect that the mere sale of
tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer
therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo
from one place to another. It purports to tax the business of transportation. 14 Being an excise tax, the same
can be levied by the State only when the acts, privileges or businesses are done or performed within the
jurisdiction of the Philippines. The subject matter of the case under consideration is income tax, a direct tax
on the income of persons and other entities "of whatever kind and in whatever form derived from any
source." Since the two cases treat of a different subject matter, the decision in one cannot be res judicata to
the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.

ING BANK N.V., ENGAGED IN BANKING OPERATIONS IN THE PHILIPPINES AS ING

BANK N.V. MANILA BRANCH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,
Respondent.

DECISION

LEONEN, J.:

Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty program under
Republic Act No. 9480,1 otherwise known as the 2007 Tax Amnesty Act. Thus, the provision in BIR
Revenue Memorandum Circular No. 19-2008 excepting "[i]ssues and cases which were ruled by any court
(even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" from the benefits of
the law is illegal, invalid, and null and void.2 The duty to withhold the tax on compensation arises upon its
accrual.

This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of Tax Appeals En Banc,
which in turn affirmed the August 9, 2004 Decision5 and November 12, 2004 Resolution6 of the Court of
Tax Appeals Second Division. The August 9, 2004 Decision held petitioner ING Bank, N.V. Manila
Branch (ING Bank) liable for (a) deficiency documentary stamp tax for the taxable years 1996 and 1997 in
the total amount of P238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax for the taxable year
1996 in the total amount of P997,333.89 inclusive of surcharges and interest; and (c) deficiency
withholding tax on compensation for the taxable years 1996 and 1997 in the total amount of P564,542.67
inclusive of interest. The Resolution denied ING Bank's Motion for Reconsideration. 7chanrobleslaw

While this case was pending before this court, ING Bank filed a Manifestation and Motion8 stating that it
availed itself of the government's tax amnesty program under Republic Act No. 9480 with respect to its
deficiency documentary stamp tax and deficiency onshore tax liabilities. 9 What is at issue now is whether
ING Bank is entitled to the immunities and privileges under Republic Act No. 9480, and whether the
assessment for deficiency withholding tax on compensation is proper.

ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign banking corporation
incorporated in the Netherlands[,] is duly authorized by the Bangko Sentral ng Pilipinas to operate as a
branch with full banking authority in the Philippines." 10chanrobleslaw

On January 3, 2000, ING Bank received a Final Assessment Notice 11 dated December 3, 1999.12 The Final
Assessment Notice also contained the Details of Assessment 13 and 13 Assessment Notices issued by the
Enforcement Service of the Bureau of Internal Revenue through its Assistant Commissioner Percival T.
Salazar[.]14 The Final Assessment Notice covered the following deficiency tax assessments for taxable
years 1996 and 1997:15cralawred
Particulars Basic Tax (P) Surcharge (P) Interest (P) Total (P)
� � � � �
Deficiency Income Tax � � � �
1996 (ST-INC-96-0174-99) 20,916,785.03 11,346,639.55 32,263,424.58
1997 (ST-INC-97-0185-99) 133,533,114.54 45,730,518.68 179,263,633.22
�
Deficiency Withholding Tax
on Compensation
1996 (ST-WC-96-0175-99) 1,027,267.20 602,288.17 1,629,555.37
1997 (ST-WC-97-0184-99) 2,505,925.25 968,042.36 3,473,967.61
�
Deficiency Onshore Tax
1996 (ST-OT-96-0176-99) 8,267,437.54 4,847,209.95 13,114,647.49
�
Deficiency Branch Profit
Remittance Tax
1996 (ST-RT-96-0177-99) 39,215,700.00 22,992,218[.]63 62,207,918.63
1997 (ST-RT-97-0181-99) 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17
�
Deficiency Documentary
Stamp Tax
1996 (ST-DST-96-0178-99 3,838,753.06 959,688.27 4,798,441.33
1997 (ST-DST-97-0181-99) 1,569,990.18 392,497.55 1,962,487.73
1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05
�
Compromise Penalty
1996 (ST-CP-96-0179-99) 1,000.00 1,000.00
1997 (ST-CP-97-0186-99) 1,000.00 1,000.00
�
Deficiency Final Tax
1997 (ST-FT-97-0183-99) 53,200.89 20,551.58 73,752.47
TOTALS 490.514.844.13 54.830.688.21 127.307.159.31 672.652.691.65
On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996 compromise penalty, 1997
deficiency documentary stamp tax and 1997 deficiency final tax in the respective amounts of P1,000.00,
P1,000.00 and P75,013.25 [the original amount of P73,752.47 plus additional interest]." 16 ING Bank,
however, "protested [on the same day] the remaining ten (10) deficiency tax assessments in the total
amount of P672,576,939.18." 17chanrobleslaw

ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000. This case was
docketed as C.T.A. Case No. 6187.18 The Petition was filed to seek "the cancellation and withdrawal of the
deficiency tax assessments for the years 1996 and 1997, including the alleged deficiency documentary
stamp tax on special savings accounts, deficiency onshore tax, and deficiency withholding tax on
compensation mentioned above."19chanrobleslaw

After trial, the Court of Tax Appeals Second Division rendered its Decision on August 9, 2004, with the
following disposition:chanRoblesvirtualLawlibrary
WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and 1997 deficiency
branch profit remittance tax and 1997 deficiency documentary stamp tax on IBCLs exceeding five days are
hereby CANCELLED and WITHDRAWN. However, the assessments for 1996 and 1997 deficiency
withholding tax on compensation, 1996 deficiency onshore tax and 1996 and 1997 deficiency documentary
stamp tax on special savings accounts are hereby UPHELD in the following
amounts:chanRoblesvirtualLawlibrary
Particulars Basic Tax Surcharge Interest Total
Deficiency Withholding
�
Tax on Compensation
1996 (ST-WC-96-
P 105,939.86 P 61,445.11 P 167,384.97
0175-99)
1997 (ST-WC-97-
� 287,795.44 109,362.26 397,157.70
0184-99)
Deficiency Onshore Tax
1996 (ST-OT-96-
� 544,991.20 P 136,247.80 316,094.89 997,333.89
0176-99)
Deficiency Documentary
Stamp Tax
1996 (ST-DST-96-
� 3,838,753.06 959,688.27 4,798,441.33
0178-99)
1997 (ST-DST-97-
� 186,997,288.84 46,749,322.21 233,746,611.05
0180-99)
P
TOTALS P 191,774,768.40 P 47,845,258.28 P 486,902.26
240,106,928.94
Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of P240,106,928.94,
plus 20% delinquency interest per annum from February 3, 2000 until fully paid, pursuant to Section
249(C) of the National Internal Revenue Code of 1997.

SO ORDERED.20 (Emphasis in the original)

Both the Commissioner of Internal Revenue and ING Bank filed their respective Motions for
Reconsideration.21 Both Motions were denied through the Second Division's Resolution dated November
12, 2004, as follows:chanRoblesvirtualLawlibrary
WHEREFORE, the respondent's Motion for Partial Reconsideration and the petitioner's Motion for
Reconsideration are hereby DENIED for lack of merit. The pronouncement reached in the assailed
decision is REITERATED.

SO ORDERED.22
On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En Banc. 23 The Court of
Tax Appeals En Banc denied due course to ING Bank's Petition for Review and dismissed the same for
lack of merit in the Decision promulgated on April 5, 2005.24chanrobleslaw

Hence, ING Bank filed its Petition for Review25 before this court. The Commissioner of Internal Revenue
filed its Comment26 on October 5, 2005 and ING Bank its Reply27 on December 14, 2005. Pursuant to this
court's Resolution28 dated January 25, 2006, the Commissioner of Internal Revenue filed its Manifestation
and Motion29 on February 14, 2006, stating that it is adopting its Comment as its Memorandum, and ING
Bank filed its Memorandum30 on March 9, 2006.

On December 20, 2007, ING Bank filed a Manifestation and Motion31 informing this court that it had
availed itself of the tax amnesty authorized and granted under Republic Act No. 9480 covering "all national
internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued
therefor, that have remained unpaid as of December 31, 2005 [,]" 32 ING Bank stated that it filed before the
Bureau of Internal Revenue its Notice of Availment of Tax Amnesty Under Republic Act No. 9480 33 on
December 14, 2007, together with the following documents:ChanRoblesVirtualawlibrary

(1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005 (original and
amended declarations);34
(2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIRFormNo. 2116);35 and
(3) Tax Amnesty Payment Form (Acceptance of Payment Form) for Taxable Year 2005 and Prior Years
(BIR Form No. 0617)36 showing payment of the amnesty tax in the amount of P500,000.00.

ING Bank prayed that this court issue a resolution taking note of its availment of the tax amnesty, and
confirming its entitlement to all the immunities and privileges under Section 6 of Republic Act No. 9480,
particularly with respect to the "payment of deficiency documentary stamp taxes on its special savings
accounts for the taxable years 1996 and 1997 and deficiency tax on onshore interest income derived under
the foreign currency deposit system for taxable year 1996[.]" 37chanrobleslaw

Pursuant to this court's Resolution38 dated January 23, 2008, the Commissioner of Internal Revenue filed its
Comment39 and ING Bank, its Reply.40chanrobleslaw

Originally, ING Bank raised the following issues in its pleadings:ChanRoblesVirtualawlibrary

First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner's Special Saving
Accounts are subject to documentary stamp tax (DST) as certificates of deposit under Section 180 of the
1977 Tax Code";41chanrobleslaw

Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency
onshore tax considering that under the 1977 Tax Code and the pertinent revenue regulations, the obligation
to pay the ten percent (10%) final tax on onshore interest income rests on the payors-borrowers and not on
petitioner as payee-lender";42 and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency
withholding tax on compensation for the accrued bonuses in the taxable years 1996 and 1997 considering
that these were not distributed to petitioner's officers and employees during those taxable years, hence,
were not yet subject to withholding tax." 43chanrobleslaw

However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with respect to its
liabilities for deficiency documentary stamp taxes on its special savings accounts for the taxable years 1996
and 1997 and deficiency tax on onshore interest income under the foreign currency deposit system for
taxable year 1996.

Consequently, the issues now for resolution are:ChanRoblesVirtualawlibrary

First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by Republic Act No.
9480; and

Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses for the
taxable years 1996 and 1997.

Tax amnesty availment

Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section 5 [of Republic
Act No. 9480] and not disqualified under Section 8 [of the same law]." 44chanrobleslaw

Respondent Commissioner of Internal Revenue, for its part, does not deny the authenticity of the
documents submitted by petitioner ING Bank or dispute the payment of the amnesty tax. However,
respondent Commissioner of Internal Revenue claims that petitioner ING Bank is not qualified to avail
itself of the tax amnesty granted under Republic Act No. 9480 because both the Court of Tax Appeals En
Banc and Second Division ruled in its favor that confirmed the liability of petitioner ING Bank for
deficiency documentary stamp taxes, onshore taxes, and withholding taxes.45chanrobleslaw

Respondent Commissioner of Internal Revenue asserts that BIR Revenue Memorandum Circular No. 19-
2008 specifically excludes "cases which were ruled by any court (even without finality) in favor of the BIR
prior to amnesty availment of the taxpayer" from the coverage of the tax amnesty under Republic Act No.
9480.46 In any case, respondent Commissioner of Internal Revenue argues that petitioner ING Bank's
availment of the tax amnesty is still subject to its evaluation,47 that it is "empowered to exercise [its] sound
discretion in the implementation of a tax amnesty in favor of a taxpayer," 48 and "petitioner cannot presume
that its application . . . would be granted[.]" 49 Accordingly, respondent Commissioner of Internal Revenue
prays that "petitioner [ING Bank's] motion be denied for lack of merit." 50chanrobleslaw

Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008 cannot override
Republic Act No. 9480 and its Implementing Rules and Regulations, which only exclude from tax amnesty
"tax cases subject of final and [executory] judgment by the courts."51chanrobleslaw

Petitioner ING Bank asserts that its full compliance with the conditions prescribed in Republic Act No.
9480 (the conditions being submission of the requisite documents and payment of the amnesty tax), which
respondent Commissioner of Internal Revenue does not dispute, confirms that it is "qualified to avail itself,
and has actually availed itself, of the tax amnesty."52 It argues that there is nothing in the law that gives
respondent Commissioner of Internal Revenue the discretion to rescind or erase the legal effects of its tax
amnesty availment.53 Thus, the issue is no longer about whether "[it] is entitled to avail itself of the tax
amnesty[,]"54 but rather whether the effects of its tax amnesty availment extend to the assessments of
deficiency documentary stamp taxes on its special savings accounts for 1996 and 1997 and deficiency tax
on onshore interest income for 1996.55chanrobleslaw

Petitioner ING Bank points out the Court of Tax Appeals' ruling in Metropolitan Bank and Trust Company
v. Commissioner of Internal Revenue,56 to the effect that full compliance with the requirements of the tax
amnesty law extinguishes the tax deficiencies subject of the amnesty availment. 57 Thus, with its availment
of the tax amnesty and full compliance with all the conditions prescribed in the statute, petitioner ING
Bank asserts that it is entitled to all the immunities and privileges under Section 6 of Republic Act No.
9480.58chanrobleslaw

Withholding tax on compensation

Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to its officers and
employees during taxable years 1996 and 1997.59 It maintains its position that the liability of the employer
to withhold the tax does not arise until such bonus is actually distributed. It cites Section 72 of the 1977
National Internal Revenue Code, which states that "[e]very employer making payment of wages shall
deduct and withhold upon such wages a tax," and BIR Ruling No. 555-88 (November 23, 1988) declaring
that "[t]he withholding tax on the bonuses should be deducted upon the distribution of the same to the
officers and employees[.]"60 ( Since the supposed bonuses were not distributed to the officers and
employees in 1996 and 1997 but were distributed in the succeeding year when the amounts of the bonuses
were finally determined, petitioner ING Bank asserts that its duty as employer to withhold the tax during
these taxable years did not arise.61chanrobleslaw

Petitioner ING Bank further argues that the Court of Tax Appeals' discussion on Section 29(j) of the 1993
National Internal Revenue Code and Section 3 of Revenue Regulations No. 8-90 is not applicable because
the issue in this case "is not whether the accrued bonuses should be allowed as deductions from petitioner's
taxable income but, rather, whether the accrued bonuses are subject to withholding tax on compensation in
the respective years of accrual[.]" 62chanrobleslaw

Respondent Commissioner of Internal Revenue counters that petitioner ING Bank's application of BIR
Ruling No. 555-88 is misplaced because as found by the Second Division of the Court of Tax Appeals, the
factual milieu is different:63cralawred
In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter [sic] the audit of each
company is completed (on or before April 15 of the succeeding year)". The withholding and remittance of
income taxes were also made in the year they were distributed to the employees. . . .

In petitioner's case, bonuses were determined during the year but were distributed in the succeeding year.
No withholding of income tax was effected but the bonuses were claimed as an expense for the year. . . .

Since the bonuses were not subjected to withholding tax during the year they were claimed as an expense,
the same should be disallowed pursuant to the above-quoted law.64
Respondent Commissioner of Internal Revenue contends that petitioner ING Bank's act of "claim[ing] [the]
subject bonuses as deductible expenses in its taxable income although it has not yet withheld and remitted
the [corresponding withholding] tax"65 to the Bureau of Internal Revenue contravened Section 29(j) of the
1997 National Internal Revenue Code, as amended.66 Respondent Commissioner of Internal Revenue
claims that "subject bonuses should also be disallowed as deductible expenses of
petitioner."67chanrobleslaw

Taxpayers with pending tax cases may avail themselves of the tax amnesty program under Republic Act
No. 9480.

In CS Garment, Inc. v. Commissioner of Internal Revenue,68 this court has "definitively declare[d] . . . the
exception '[i]ssues and cases which were ruled by any court (even without finality) in favor of the BIR prior
to amnesty availment of the taxpayer' under BIR [Revenue Memorandum Circular No.] 19-2008 [as]
invalid, [for going] beyond the scope of the provisions of the 2007 Tax Amnesty Law."69
Thus:chanRoblesvirtualLawlibrary
[N]either the law nor the implementing rules state that a court ruling that has not attained finality would
preclude the availment of the benefits of the Tax Amnesty Law. Both R.A. 9480 and DOF Order No. 29-07
are quite precise in declaring that "[t]ax cases subject of final and executory judgment by the courts" are
the ones excepted from the benefits of the law. In fact, we have already pointed out the erroneous
interpretation of the law in Philippine Banking Corporation (Now: Global Business Bank, Inc.) v.
Commissioner of Internal Revenue, viz:chanRoblesvirtualLawlibrary
The BIR's inclusion of "issues and cases which were ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-
2008 is misplaced. RA 9480 is specifically clear that the exceptions to the tax amnesty program include
"tax cases subject of final and executory judgment by the courts." The present case has not become final
and executory when Metrobank availed of the tax amnesty program. 70 (Emphasis in the original, citation
omitted)
Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner of Internal
Revenue,71 we confirmed that only cases that involve final and executory judgments are excluded from the
tax amnesty program as explicitly provided under Section 8 of Republic Act No. 9480. 72chanrobleslaw

Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty under the law during
the pendency of its appeal before this court.

II

Petitioner ING Bank showed that it complied with the requirements set forth under Republic Act No. 9480.
Respondent Commissioner of Internal Revenue never questioned or rebutted that petitioner ING Bank fully
complied with the requirements for tax amnesty under the law. Moreover, the contestability period of one
(1) year from the time of petitioner ING Bank's availment of the tax amnesty law on December 14, 2007
lapsed. Correspondingly, it is fully entitled to the immunities and privileges mentioned under Section 6 of
Republic Act No. 9480. This is clear from the following provisions:chanRoblesvirtualLawlibrary
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail himself of the tax
amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice
and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN) as of
December 31, 2005, in such form as may be prescribed in the implementing rules and regulations (IRR) of
this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR.

SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31. 2005 shall be
considered as true and correct except where the amount of declared networth is understated to the extent of
thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of, parties
other than the BIR or its agents: Provided, That such proceedings must be initiated within one year
following the date of the filing of the tax amnesty return and the SALN. Findings of or admission in
congressional hearings, other administrative agencies of government, and/or courts shall be admissible to
prove a thirty percent (30%) under-declaration.

SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty under Section 5
hereof and have fully complied with all its conditions shall be entitled to the following immunities and
privileges:

a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code
of 1997, as amended, arising from, the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.

b. The taxpayer's Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years, insofar
as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or
administrative bodies in which he is a defendant or respondent, and except for the purpose of
ascertaining the networth beginning January 1. 2006, the same shall not be examined, inquired or
looked into by any person or government office. However, the taxpayer may use this as a defense,
whenever appropriate, in cases brought against him.

c. The books of accounts and other records of the taxpayer for the years covered by the tax amnesty
availed of shall not be examined: Provided, That the Commissioner of Internal Revenue may
 authorize in writing the examination of the said books of accounts and other records to verify the
validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of taxes
withheld on wages), tax incentives, and/or exemptions under existing laws. (Emphasis supplied)

Contrary to respondent Commissioner of Internal Revenue's stance, Republic Act No. 9480 confers no
discretion on respondent Commissioner of Internal Revenue. The provisions of the law are plain and
simple. Unlike the power to compromise or abate a taxpayer's liability under Section 204 73 of the 1997
National Internal Revenue Code that is within the discretion of respondent Commissioner of Internal
Revenue,74 its authority under Republic Act No. 9480 is limited to determining whether (a) the taxpayer is
qualified to avail oneself of the tax amnesty; (b) all the requirements for availment under the law were
complied with; and (c) the correct amount of amnesty tax was paid within the period prescribed by law.
There is nothing in Republic Act No. 9480 which can be construed as authority for respondent
Commissioner of Internal Revenue to introduce exceptions and/or conditions to the coverage of the law nor
to disregard its provisions and substitute his own personal judgment.

Republic Act No. 9480 provides a general grant of tax amnesty subject only to the cases specifically
excepted by it. A tax amnesty "partakes of an absolute . . . waiver by the Government of its right to collect
what otherwise would be due it[.]" 75 The effect of a qualified taxpayer's submission of the required
documents and the payment of the prescribed amnesty tax was immunity from payment of all national
internal revenue taxes as well as all administrative, civil, and criminal liabilities founded upon or arising
from non-payment of national internal revenue taxes for taxable year 2005 and prior taxable
years.76chanrobleslaw

Finally, the documentary stamp tax and onshore income tax are covered by the tax amnesty program under
Republic Act No. 9480 and its Implementing Rules and Regulations. 77 Moreover, as to the deficiency tax
on onshore interest income, it is worthy to state that petitioner ING Bank was assessed by respondent
Commissioner of Internal Revenue, not as a withholding agent, but as one that was directly liable for the
tax on onshore interest income and failed to pay the same.

Considering petitioner ING Bank's tax amnesty availment, there is no more issue regarding its liability for
deficiency documentary stamp taxes on its special savings accounts for 1996 and 1997 and deficiency tax
on onshore interest income for 1996, including surcharge and interest.

III.

The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division that accrued
bonuses were recorded in petitioner ING Bank's books as expenses for taxable years 1996 and 1997,
although no withholding of tax was effected:chanRoblesvirtualLawlibrary
With the preceding defense notwithstanding, petitioner now maintained that the portion of the disallowed
bonuses in the amounts of P3,879,407.85 and P9,004,402.63 for the respective years 1996 and 1997, were
actually payments for reimbursements of representation, travel and entertainment expenses of its officers.
These expenses according to petitioner are not considered compensation of employees and likewise not
subject to withholding tax.

In order to prove that the discrepancy in the accrued bonuses represents reimbursement of expenses,
petitioner availed of the services of an independent CPA pursuant to CTA Circular No. 1-95, as amended.
As a consequence, Mr. Ruben Rubio was commissioned by the court to verify the accuracy of petitioner's
position and to check its supporting documents.

In a report dated January 29, 2002. the commissioned independent CPA noted the following pertinent
findings: . . .

Findings and Observations 1997 1996

Supporting document is under the name of the
P 930,307.56 P 1,849,040.70
employee
Supporting document is not under the name of the
Bank nor its employees (addressee is "cash"/blank) 537,456.37 53,384.80
Supporting document is under the name of the Bank 7,039,976.36 1,630,292.14
Supporting document is in the name of another
person (other than the employee claiming the
362,919.59 62,615.91
expense)
Supporting document is not dated within the period
13,404.00 423,199.07
(i.e., 1996 and 1997)
Date/year of transaction is not indicated 31,510.00 26,126.49
Amount is not supported by liquidation document(s) 313,319.09 935,044.28
TOTAL P9,228,892.97 P4,979,703.39

Based on the above report, only the expenses in the name of petitioner's employee and those under its name
can be given credence. Therefore, the following expenses are valid expenses for income tax
purposes:ChanRoblesVirtualawlibrary

� 1996 1997
Supporting document is under the name of the
P 1,849,040.70 P 930,307.56
employee
Supporting document is under the name of the Bank 1,630,292.14 7,039,976.36
TOTAL P3,479,332.84 P 7,970,283.92

Consequently, petitioner is still liable for the amounts of P167,384.97 and P397,157.70 representing
deficiency withholding taxes on compensation for the respective years of 1996 and 1997, computed as
follows:ChanRoblesVirtualawlibrary

� � 1996 1997
Total Disallowed Accrued Bonus P 3,879,407.85 P 9,004,402.63
Less: Substantiated
� Reimbursement of Expense 3,479,332.84 7,970.283.92
Unsubstantiated P 400,075.01 P 1,034,119.43
Tax Rate 26.48% 27.83%
Basic Withholding Tax Due
� Thereon P 105,939.86 P 287,795.44
Interest (Sec. 249) 61,445.11 109,362.26
Deficiency Withholding Tax on
P 167,384.97 P 397,157.7078
Compensation
An expense, whether the same is paid ox payable, "shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom [was] paid to the Bureau of Internal
Revenue[.]"79chanrobleslaw

Section 29(j) of the 1977 National Internal Revenue Code 80 (now Section 34(K) of the 1997 National
Internal Revenue Code) provides:chanRoblesvirtualLawlibrary
Section 29. Deductions from gross income. �In computing taxable income subject to tax under Sec. 21 (a);
24 (a), (b) and (c); and 25 (a) (1), there shall be allowed as deductions the items specified in paragraphs (a)
to (i) of this section:chanRoblesvirtualLawlibrary
(a) Expenses. �(1) Business expenses. �(A) In general. �All 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; travelling expenses while away
from home in the pursuit of a trade, profession or business, rentals or other payments required to be made
as a condition to the continued use or possession, for the purpose of the trade, profession or business, of
property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(j) Additional requirement for deducibility of certain payments. �Any amount paid or payable which is
otherwise deductible from, or taken into account in computing gross income for which depreciation or
amortization may be allowed under this section, shall be allowed as a deduction only if it is shown that the
tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in
accordance with this section, Sections 5181 and 7482 of this Code. (Emphasis supplied)
Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue Regulations No. 2-98)
provides:chanRoblesvirtualLawlibrary
Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as
follows:ChanRoblesVirtualawlibrary

Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise deductible under
Sections 29 and 54 of the Tax Code, as amended, shall be allowed as a deduction from the payor s gross
income only if it is shown that the tax required to be withheld has been paid to the Bureau of Internal
Revenue in accordance with Sections 50, 51, 72, and 74 also of the Tax Code. (Emphasis supplied)
Under the National Internal Revenue Code, every form of compensation for personal services is subject to
income tax and, consequently, to withholding tax. The term "compensation" means all remunerations paid
for services performed by an employee for his or her employer, whether paid in cash or in kind, unless
specifically excluded under Sections 32(B)83 and 78(A)84 of the 1997 National Internal Revenue Code.85
The name designated to the remuneration for services is immaterial. Thus, "salaries, wages, emoluments
and honoraria, bonuses, allowances (such as transportation, representation, entertainment, and the like),
[taxable] fringe benefits [,] pensions and retirement pay, and other income of a similar nature constitute
compensation income"86 that is taxable.

Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it claimed the same as
expenses in the year they were accrued.

Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were not yet subject to
withholding tax because these bonuses were actually distributed only in the succeeding years of their
accrual (i.e., in 1997 and 1998) when the amounts were finally determined.

Petitioner ING Bank's contention is untenable.

The tax on compensation income is withheld at source under the creditable withholding tax system wherein
the tax withheld is intended to equal or at least approximate the tax due of the payee on the said income. It
was designed to enable (a) the individual taxpayer to meet his or her income tax liability on compensation
earned; and (b) the government to collect at source the appropriate taxes on compensation.87 Taxes
withheld are creditable in nature.88 Thus, the employee is still required to file an income tax return to report
the income and/or pay the difference between the tax withheld and the tax due on the income. 89 For over
withholding, the employee is refunded.90 Therefore, absolute or exact accuracy in the determination of the
amount of the compensation income is not a prerequisite for the employer's withholding obligation to arise.

It is true that the law and implementing regulations require the employer to deduct and pay the income tax
on compensation paid to its employees, either actually or constructively.

Section 72 of the 1977 National Internal Revenue Code, as amended, 91 states:chanRoblesvirtualLawlibrary

SECTION 72. Income tax collected at source. �(a) Requirement of withholding. �Every employer
making payment of wages shall deduct and withhold, upon such wages a tax determined in accordance with
regulations to be prepared and promulgated by the Minister of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No. 6-82,92 as amended,93 relative to the withholding of tax on
compensation income, provide:chanRoblesvirtualLawlibrary
Section 7. Requirement of withholding. �Every employer or any person who pays or controls the
payment of compensation to an employee, whether resident citizen or alien, non-resident citizen, or
non�resident alien engaged in trade or business in the Philippines, must withhold from such compensation
paid, an amount computed in accordance with these regulations.

I. Withholding of tax on compensation paid to resident employees. �(a) In general, every employer
making payment of compensation shall deduct and withhold from such compensation income for the entire
calendar year, a tax determined in accordance with the prescribed new Withholding Tax Tables effective
January 1, 1992 (ANNEX "A").

Section 14. Liability for the Tax. �The employer is required to collect the tax by deducting and
withholding the amount thereof from the employee's compensation as when paid, either actually or
constructively. An employer is required to deduct and withhold the tax notwithstanding that the
compensation is paid in something other than money (for example, compensation paid in stocks or bonds)
and to pay the tax to the collecting officer. If compensation is paid in property other than money, the
employer should make necessary arrangements to ensure that the amount of the tax required to be withheld
is available for payment to the collecting officer.

Every person required to deduct and withhold the tax from the compensation of an employee is liable for
the payment of such tax whether or not collected from the employee. If, for example, the employer deducts
less than the correct amount of tax, or if he fails to deduct any part of the tax, he is nevertheless liable for
the correct amount of the tax. However, if the employer in violation of the provisions of Chapter XI, Title
II of the Tax Code fails to deduct and withhold and thereafter the employee pays the tax, it shall no longer
be collected from the employer. Such payment does not, however, operate to relieve the employer from
liability for penalties or additions to the tax for failure to deduct and withhold within the time prescribed by
law or regulations. The employer will not be relieved of his liability for payment of the tax required to be
withheld unless he can show that the tax has been paid by the employee.

The amount of any tax withheld/collected by the employer is a special fund in trust for the Government of
the Philippines.

When the employer or other person required to deduct and withhold the tax under this Chapter XI, Title II
of the Tax Code has witliheld and paid such tax to the Commissioner of Internal Revenue or to any
authorized collecting officer, then such employer or person shall be relieved of any liability to any person.
(Emphasis supplied)
Constructive payment of compensation is further defined in Revenue Regulations No. 6-
82:chanRoblesvirtualLawlibrary
Section 25. Applicability; constructive receipt of compensation.

Compensation is constructively paid within the meaning of these regulations when it is credited to the
account of or set apart for an employee so that it may be drawn upon by him at any time although not then
actually reduced to possession. To constitute payment in such a case, the compensation must be credited or
set apart for the employee without any substantial limitation or restriction as to the time or manner of
payment or condition upon which payment is to be made, and must be made available to him so that it may
be drawn upon at any time, and its payment brought within his control and disposition. (Emphasis supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal Revenue Code (then
Section 39 of the 1977 National Internal Revenue Code, as amended), deductions from gross income are
taken for the taxable year in which "paid or accrued" or "paid or incurred" is dependent upon the method of
accounting income and expenses adopted by the taxpayer.

In Commissioner of Internal Revenue v. Isabela Cultural Corporation,94 this court explained the accrual
method of accounting, as against the cash method:chanRoblesvirtualLawlibrary
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot
be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.

The accrual method relies upon the taxpayer's right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income
and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the reasonable accurate determination of such income
or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount of
income or liability be known absolutely only that a taxpayer has at his disposal the information necessary
to compute the amount with reasonable accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term "reasonable
accuracy" implies something less than an exact or completely accurate amount. 95 (Emphasis supplied,
citations omitted)
Thus, if the taxpayer is on cash basis, the expense is deductible in the year it was paid, regardless of the
year it was incurred. If he is on the accrual method, he can deduct the expense upon accrual thereof. An
item that is reasonably ascertained as to amount and acknowledged to be due has "accrued"; actual payment
is not essential to constitute "expense."

Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is
already fixed; (2) the amount can be determined with reasonable accuracy; and, (3) it is already knowable
or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year.

Section 29(j) of the 1977 National Internal Revenue Code 96 (Section 34(K) of the 1997 National Internal
Revenue Code) expressly requires, as a condition for deductibility of an expense, that the tax required to be
withheld on the amount paid or payable is shown to have been remitted to the Bureau of Internal Revenue
by the taxpayer constituted as a withholding agent of the government.

The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the 1997 National
Internal Revenue Code) regarding withholding on wages must be read and construed in harmony with
Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997 National Internal
Revenue Code) on deductions from gross income. This is in accordance with the rule on statutory
construction that an interpretation is to be sought which gives effect to the whole of the statute, such that
every part is made effective, harmonious, and sensible,97 if possible, and not defeated nor rendered
insignificant, meaningless, and nugatory.98 If we go by the theory of petitioner ING Bank, then the
condition imposed by Section 29(j) would have been rendered nugatory, or we would in effect have created
an exception to this mandatory requirement when there was none in the law.

Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and
withhold the related withholding tax arises at the time the income was paid or accrued or recorded as
an expense in the payor's/employer's books, whichever comes first.

Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its
obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at the
time of accrual and not at the time of actual payment.

In Filipinas Synthetic Fiber Corporation v. Court of Appeals,99 the issue was raised on "whether the
liability to withhold tax at source on income payments to non-resident foreign corporations arises upon
remittance of the amounts due to the foreign creditors or upon accrual thereof." 100 In resolving this issue,
this court considered the nature of the accounting method employed by the withholding agent, which was
the accrual method, wherein it was the right to receive income, and not the actual receipt, that determined
when to report the amount as part of the taxpayer's gross income. 101 It upheld the lower court's finding that
there was already a definite liability on the part of petitioner at the maturity of the loan contracts. 102
Moreover, petitioner already deducted as business expense the said amounts as interests due to the foreign
corporation.103 Consequently, the taxpayer could not claim that there was "no duty to withhold and remit
income taxes as yet because the loan contract was not yet due and demandable." 104 Petitioner, "[h]aving
written-off the amounts as business expense in its books, had taken advantage of the benefit provided in the
law allowing for deductions from gross income." 105chanrobleslaw

Here, petitioner ING Bank already recognized a definite liability on its part considering that it had deducted
as business expense from its gross income the accrued bonuses due to its employees. Underlying its accrual
of the bonus expense was a reasonable expectation or probability that the bonus would be achieved. In this
sense, there was already a constructive payment for income tax purposes as these accrued bonuses were
already allotted or made available to its officers and employees.

We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the bonus accruals in
1996 and 1997 were disbursed in the following year of accrual, as reimbursements of representation, travel,
and entertainment expenses incurred by its employees.106 This shows that the accrued bonuses in the
amounts of P400,075.01 (1996) and P1,034,119.43 (1997) on which deficiency withholding taxes of
P167,384.97 (1996) and P397,157.70 (1997) were imposed, respectively, were already set apart or made
available to petitioner ING Bank's officers and employees. To avoid any tax issue, petitioner ING Bank
should likewise have recognized the withholding tax liabilities associated with the bonuses at the time of
accrual.

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to petitioner ING
Bank's liabilities for deficiency documentary stamp taxes on its special savings accounts for the taxable
years 1996 and 1997 and deficiency tax on onshore interest income under the foreign currency deposit
system for taxable year 1996 are hereby SET ASIDE solely in view of petitioner ING Bank's availment of
the tax amnesty program under Republic Act No. 9480. The April 5, 2005 Decision of the Court of Tax
Appeals En Banc, which affirmed the August 9, 2004 Decision and November 12, 2004 Resolution of the
Court of Tax Appeals Second Division holding petitioner ING Bank liable for deficiency withholding tax
on compensation for the taxable years 1996 and 1997 in the total amount of P564,542.67 inclusive of
interest, is AFFIRMED.

SO ORDERED.cralawlawlibrary

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE DEPARTMENT OF PUBLIC

WORKS AND HIGHWAYS, Petitioners, v. ARLENE R. SORIANO, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review under Rule 45 of the Rules of Court assailing the Decision 1 dated
November 15, 2013 and Order2 dated March 10, 2014 of the Regional Trial Court (RTC), Valenzuela City,
Branch 270, in Civil Case No. 140-V-10.

The antecedent facts are as follows:

On October 20, 2010, petitioner Republic of the Philippines, represented by the Department of Public
Works and Highways (DPWH), filed a Complaint3 for expropriation against respondent Arlene R. Soriano,
the registered owner of a parcel of land consisting of an area of 200 square meters, situated at Gen. T. De
Leon, Valenzuela City, and covered by Transfer Certificate of Title (TCT) No. V-13790.4 In its Complaint,
petitioner averred that pursuant to Republic Act (RA) No. 8974, otherwise known as �An Act to Facilitate
the Acquisition of Right-Of-Way, Site or Location for National Government Infrastructure Projects and for
other Purposes,�the property sought to be expropriated shall be used in implementing the construction of
the North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur
Highway, Valenzuela City.5cralawred

Petitioner duly deposited to the Acting Branch Clerk of Court the amount of P420,000.00 representing
100% of the zonal value of the subject property. Consequently, in an Order 6 dated May 27, 2011, the RTC
ordered the issuance of a Writ of Possession and a Writ of Expropriation for failure of respondent, or any of
her representatives, to appear despite notice during the hearing called for the purpose.

In another Order7 dated June 21, 2011, the RTC appointed the following members of the Board of
Commissioners for the determination of just compensation: (1) Ms. Eunice O. Josue, Officer-in-Charge,
RTC, Branch 270, Valenzuela City; (2) Atty. Cecilynne R. Andrade, Acting Valenzuela City Assessor, City
Assessor�s Office, Valenzuela City; and (3) Engr. Restituto Bautista, of Brgy. Bisig, Valenzuela City.
However, the trial court subsequently revoked the appointment of the Board for their failure to submit a
report as to the fair market value of the property to assist the court in the determination of just
compensation and directed the parties to submit their respective position papers. 8�Thereafter, the case was
set for hearing giving the parties the opportunity to present and identify all evidence in support of their
arguments therein.

According to the RTC, the records of the case reveal that petitioner adduced evidence to show that the total
amount deposited is just, fair, and equitable. Specifically, in its Position Paper, petitioner alleged that
pursuant to a Certification issued by the Bureau of Internal Revenue (BIR), Revenue Region No. 5, the
zonal value of the subject property in the amount of P2,100.00 per square meter is reasonable, fair, and just
to compensate the defendant for the taking of her property in the total area of 200 square meters. 9 In fact,
Tax Declaration No. C-018-07994, dated November 13, 2009 submitted by petitioner, shows that the value
of the subject property is at a lower rate of P400.00 per square meter. Moreover, as testified to by Associate
Solicitor III Julie P. Mercurio, and as affirmed by the photographs submitted, the subject property is poorly
maintained, covered by shrubs and weeds, and not concretely-paved.�It is located far from commercial or
industrial developments in an area without a proper drainage system, can only be accessed through a
narrow dirt road, and is surrounded by adjacent dwellings of sub-standard materials.

Accordingly, the RTC considered respondent to have waived her right to adduce evidence and to object to
the evidence submitted by petitioner for her continued absence despite being given several notices to do so.

On November 15, 2013, the RTC rendered its Decision, the dispositive portion of which
reads:chanRoblesvirtualLawlibrary

WHEREFORE, with the foregoing determination of just compensation, judgment is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of and title to 200 square meters of
defendant Arlene R. Soriano�s parcel of land covered by TCT V-13790 necessary for the
construction of the NLEX � Harbor Link Project (Segment 9) from NLEX to MacArthur Highway
Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the above-described parcel of land
including improvements thereon, if there be any, free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per square meter or the sum of
Four Hundred Twenty Thousand Pesos (Php420,000.00) for the 200 square meters as fair, equitable,
and just compensation with legal interest at 12% per annum from the taking of the possession of the
property, subject to the payment of all unpaid real property taxes and other relevant taxes, if there be
any;
4) Plaintiff is likewise ordered to pay the defendant consequential damages which shall include the value
of the transfer tax necessary for the transfer of the subject property from the name of the defendant to
that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila is directed to annotate this
Decision in Transfer Certificate of Title No. V-13790 registered under the name of Arlene R. Soriano.
cralawlawlibrary
Let a certified true copy of this decision be recorded in the Registry of Deeds of Valenzuela City.

Records of this case show that the Land Bank Manager�s Check Nos. 0000016913 dated January 21, 2011
in the amount of Php400,000.00 and 0000017263 dated April 28, 2011 in the amount of Php20,000.00
issued by the Department of Public Works and Highways (DPWH) are already stale. Thus, the said Office
is hereby directed to issue another Manager�s Check in the total amount Php420,000.00 under the name of
the Office of the Clerk of Court, Regional Trial Court, Valenzuela City earmarked for the instant
case.10cralawlawlibrary

Petitioner filed a Motion for Reconsideration maintaining that pursuant to Bangko Sentral ng Pilipinas
(BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013, the interest rate imposed by the
RTC on just compensation should be lowered to 6% for the instant case falls under a loan or forbearance of
money.11 In its Order12 dated March 10, 2014, the RTC reduced the interest rate to 6% per annum not on
the basis of the aforementioned Circular, but on Article 2209 of the Civil Code,
viz.:chanRoblesvirtualLawlibrary

However, the case of National Power Corporation v. Honorable Zain B. Angas is instructive.

In the aforementioned case law, which is similar to the instant case, the Supreme Court had the occasion to
rule that it is well-settled that the aforequoted provision of Bangko Sentral ng Pilipinas Circular applies
only to a loan or forbearance of money, goods or credits. However, the term �judgments� as used in
Section 1 of the Usury Law and the previous Central Bank Circular No. 416, should be interpreted to mean
only judgments involving loan or forbearance of money, goods or credits, following the principle of
ejusdem generis. And applying said rule on statutory construction, the general term �judgments�can refer
only to judgments in cases involving loans or forbearance of any money, goods, or credits. Thus, the High
Court held that, Art. 2209 of the Civil Code, and not the Central Bank Circular, is the law applicable.

Art. 2009 of the Civil Code reads:

�If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per annum.�cralawlawlibrary

Further in that case, the Supreme Court explained that the transaction involved is clearly not a loan or
forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in
the nature of indemnity for damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of indemnity for damages for the
delay in the payment thereof. It ultimately held that Art. 2209 of the Civil Code shall
apply.13cralawlawlibrary

On May 12, 2014, petitioner filed the instant petition invoking the following
arguments:chanRoblesvirtualLawlibrary

I.

RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6% PER ANNUM ON THE

AMOUNT OF JUST COMPENSATION OF THE SUBJECT PROPERTY AS THERE WAS NO DELAY
ON THE PART OF PETITIONER.chanroblesvirtuallawlibrary

II.

BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997 AND THE LOCAL
GOVERNMENT CODE, IT IS RESPONDENT�S OBLIGATION TO PAY THE TRANSFER
TAXES.cralawlawlibrary
Petitioner maintains that if property is taken for public use before compensation is deposited with the court
having jurisdiction over the case, the final compensation must include interests on its just value computed
from the time the property is taken up to the time when compensation is actually paid or deposited with the
court.14 Thus, legal interest applies only when the property was taken prior to the deposit of payment with
the court and only to the extent that there is delay in payment. In the instant case, petitioner posits that since
it was able to deposit with the court the amount representing the zonal value of the property before its
taking, it cannot be said to be in delay, and thus, there can be no interest due on the payment of just
compensation.15�Moreover, petitioner alleges that since the entire subject property was expropriated and
not merely a portion thereof, it did not suffer an impairment or decrease in value, rendering the award of
consequential damages nugatory. Furthermore, petitioner claims that contrary to the RTC�s instruction,
transfer taxes, in the nature of Capital Gains Tax and Documentary Stamp Tax, necessary for the transfer of
the subject property from the name of the respondent to that of the petitioner are liabilities of respondent
and not petitioner.

The petition is partly meritorious.

At the outset, it must be noted that the RTC�s reliance on National Power Corporation v. Angas is
misplaced for the same has already been overturned by our more recent ruling in Republic v. Court of
Appeals,16 wherein we held that the payment of just compensation for the expropriated property amounts to
an effective forbearance on the part of the State, to wit:chanRoblesvirtualLawlibrary

Aside from this ruling, Republic notably overturned the Court�s previous ruling in National Power
Corporation v. Angas which held that just compensation due for expropriated properties is not a loan
or forbearance of money but indemnity for damages for the delay in payment; since the interest
involved is in the nature of damages rather than earnings from loans, then Art. 2209 of the Civil
Code, which fixes legal interest at 6%, shall apply.

In Republic, the Court recognized that the just compensation due to the landowners for their
expropriated property amounted to an effective forbearance on the part of the State. Applying the
Eastern Shipping Lines ruling, the Court fixed the applicable interest rate at 12% per annum, computed
from the time the property was taken until the full amount of just compensation was paid, in order to
eliminate the issue of the constant fluctuation and inflation of the value of the currency over time. In the
Court�s own words:
The Bulacan trial court, in its 1979 decision, was correct in imposing interest[s] on the zonal value of the
property to be computed from the time petitioner instituted condemnation proceedings and "took" the
property in September 1969. This allowance of interest on the amount found to be the value of the property
as of the time of the taking computed, being an effective forbearance, at 12% per annum should help
eliminate the issue of the constant fluctuation and inflation of the value of the currency over time.
We subsequently upheld Republic�s 12% per annum interest rate on the unpaid expropriation
compensation in the following cases: Reyes v. National Housing Authority, Land Bank of the Philippines v.
Wycoco, Republic v. Court of Appeals, Land Bank of the Philippines v. Imperial, Philippine Ports Authority
v. Rosales-Bondoc, and Curata v. Philippine Ports Authority.17cralawlawlibrary

Effectively, therefore, the debt incurred by the government on account of the taking of the property subject
of an expropriation constitutes a forbearance18 which runs contrary to the trial court�s opinion that the
same is in the nature of indemnity for damages calling for the application of Article 2209 of the Civil Code.
Nevertheless, in line with the recent circular of the Monetary Board of the Bangko Sentral ng Pilipinas
(BSP-MB) No. 799, Series of 2013, effective July 1, 2013, the prevailing rate of interest for loans or
forbearance of money is six percent (6%) per annum, in the absence of an express contract as to such rate
of interest.

Notwithstanding the foregoing, We find that the imposition of interest in this case is unwarranted in view
of the fact that as evidenced by the acknowledgment receipt19 signed by the Branch Clerk of Court,
petitioner was able to deposit with the trial court the amount representing the zonal value of the property
before its taking. As often ruled by this Court, the award of interest is imposed in the nature of damages for
delay in payment which, in effect, makes the obligation on the part of the government one of forbearance to
ensure prompt payment of the value of the land and limit the opportunity loss of the owner. 20�However,
when there is no delay in the payment of just compensation, We have not hesitated in deleting the
imposition of interest thereon for the same is justified only in cases where delay has been sufficiently
established.21cralawred

The records of this case reveal that petitioner did not delay in its payment of just compensation as it had
deposited the pertinent amount in full due to respondent on January 24, 2011, or four (4) months before the
taking thereof, which was when the RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation on May 27, 2011. The amount deposited was deemed by the trial court to be just, fair, and
equitable, taking into account the well-established factors in assessing the value of land, such as its size,
condition, location, tax declaration, and zonal valuation as determined by the BIR. Considering, therefore,
the prompt payment by the petitioner of the full amount of just compensation as determined by the RTC,
We find that the imposition of interest thereon is unjustified and should be deleted.

Similarly, the award of consequential damages should likewise be deleted in view of the fact that the entire
area of the subject property is being expropriated, and not merely a portion thereof, wherein such remaining
portion suffers an impairment or decrease in value, as enunciated in Republic of the Philippines v. Bank of
the Philippine Islands,22 thus:chanRoblesvirtualLawlibrary

x x x�The general rule is that the just compensation to which the owner of the condemned property is
entitled to is the market value. Market value is that sum of money which a person desirous but not
compelled to buy, and an owner willing but not compelled to sell, would agree on as a price to be paid by
the buyer and received by the seller. The general rule, however, is modified where only a part of a
certain property is expropriated. In such a case, the owner is not restricted to compensation for the
portion actually taken, he is also entitled to recover the consequential damage, if any, to the
remaining part of the property.

xxxx

No actual taking of the building is necessary to grant consequential damages. Consequential damages are
awarded if as a result of the expropriation, the remaining property of the owner suffers from an
impairment or decrease in value. The rules on expropriation clearly provide a legal basis for the award of
consequential damages. Section 6 of Rule 67 of the Rules of Court provides:
x x x The commissioners shall assess the consequential damages to the property not taken and deduct
from such consequential damages the consequential benefits to be derived by the owner from the public use
or public purpose of the property taken, the operation of its franchise by the corporation or the carrying on
of the business of the corporation or person taking the property. But in no case shall the consequential
benefits assessed exceed the consequential damages assessed, or the owner be deprived of the actual value
of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first ascertain the market value of the property, to
which should be added the consequential damages after deducting therefrom the consequential benefits
which may arise from the expropriation. If the consequential benefits exceed the consequential damages,
these items should be disregarded altogether as the basic value of the property should be paid in every
case.23cralawred
cralawlawlibrary

Considering that the subject property is being expropriated in its entirety, there is no remaining portion
which may suffer an impairment or decrease in value as a result of the expropriation. Hence, the award of
consequential damages is improper.

Anent petitioner�s contention that it cannot be made to pay the value of the transfer taxes in the nature of
capital gains tax and documentary stamp tax, which are necessary for the transfer of the subject property
from the name of the respondent to that of the petitioner, the same is partly meritorious.
With respect to the capital gains tax, We find merit in petitioner�s posture that pursuant to Sections 24(D)
and 56(A)(3) of the 1997 National Internal Revenue Code (NIRC), capital gains tax due on the sale of real
property is a liability for the account of the seller, to wit:chanRoblesvirtualLawlibrary

Section 24. Income Tax Rates �

xxxx

(D) Capital Gains from Sale of Real Property. �

(1) In General. �The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any, on gains from sales or other disposition of real property to the
government or any of its political subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24(A)or under this Subsection, at the option of the
taxpayer.chanrobleslaw

xxxx
Section 56. Payment and Assessment of Income Tax for Individuals and Corporations. �
(A) Payment of Tax �

xxxx

(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c),
24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed
by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of
the benefit of exemption of capital gains under existing special laws, no such payments shall be required :
Provided, further, That in case of failure to qualify for exemption under such special laws and
implementing rules and regulations, the tax due on the gains realized from the original transaction shall
immediately become due and payable, subject to the penalties prescribed under applicable provisions of
this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six
(6) months from the registration of the document transferring the real property, he shall be entitled to a
refund of such tax upon verification of his compliance with the requirements for such exemption.
cralawlawlibrary

Thus, it has been held that since capital gains is a tax on passive income, it is the seller, not the buyer, who
generally would shoulder the tax.24� Accordingly, the BIR, in its BIR Ruling No. 476-2013, dated
December 18, 2013, constituted the DPWH as a withholding agent to withhold the six percent (6%) final
withholding tax in the expropriation of real property for infrastructure projects.�As far as the government
is concerned, therefore, the capital gains tax remains a liability of the seller since it is a tax on the seller's
gain from the sale of the real estate.25cralawred

As to the documentary stamp tax, however, this Court finds inconsistent petitioner�s denial of liability to
the same. Petitioner cites Section 196 of the 1997 NIRC as its basis in saying that the documentary stamp
tax is the liability of the seller, viz.:chanRoblesvirtualLawlibrary

SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. - On all conveyances,
deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by
the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or
otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such
purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below
prescribed, based on the consideration contracted to be paid for such realty or on its fair market value
determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of
the contracting parties is the Government, the tax herein imposed shall be based on the actual
consideration:
(a) When the consideration, or value received or contracted to be paid for such realty, after making proper
allowance of any encumbrance, does not exceed One thousand pesos (P1,000), Fifteen pesos (P15.00).

(b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand
pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00).
When it appears that the amount of the documentary stamp tax payable hereunder has been reduced by an
incorrect statement of the consideration in any conveyance, deed, instrument or writing subject to such tax
the Commissioner, provincial or city Treasurer, or other revenue officer shall, from the assessment rolls or
other reliable source of information, assess the property of its true market value and collect the proper tax
thereon.cralawlawlibrary

Yet, a perusal of the provision cited above does not explicitly impute the obligation to pay the documentary
stamp tax on the seller. In fact, according to the BIR, all the parties to a transaction are primarily liable for
the documentary stamp tax, as provided by Section 2 of BIR Revenue Regulations No. 9-2000, which
reads:26cralawred

SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. �

(a) In General. - The documentary stamp taxes under Title VII of the Code is a tax on certain
transactions. It is imposed against "the person making, signing, issuing, accepting, or transferring"
the document or facility evidencing the aforesaid transactions. Thus, in general, it may be imposed
on the transaction itself or upon the document underlying such act. Any of the parties thereto shall
be liable for the full amount of the tax due: Provided, however, that as between themselves, the said
parties may agree on who shall be liable or how they may share on the cost of the tax.

(b) Exception. - Whenever one of the parties to the taxable transaction is exempt from the tax imposed
under Title VII of the Code, the other party thereto who is not exempt shall be the one directly liable for the
tax.27cralawlawlibrary

As a general rule, therefore, any of the parties to a transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree among themselves on who shall be liable for the same.

In this case, there is no agreement as to the party liable for the documentary stamp tax due on the sale of the
land to be expropriated.� But while petitioner rejects any liability for the same, this Court must take note
of petitioner�s Citizen�s Charter,28 which functions as a guide for the procedure to be taken by the DPWH
in acquiring real property through expropriation under RA 8974.�The Citizen�s Charter,�issued by
petitioner DPWH itself on December 4, 2013, explicitly provides that the documentary stamp tax,
transfer tax, and registration fee due on the transfer of the title of land in the name of the Republic
shall be shouldered by the implementing agency of the DPWH, while the capital gains tax shall be
paid by the affected property owner.29 Thus, while there is no specific agreement between petitioner and
respondent, petitioner�s issuance of the Citizen�s Charter serves as its notice to the public as to the
procedure it shall generally take in cases of expropriation under RA 8974. Accordingly, it will be rather
unjust for this Court to blindly accede to petitioner�s vague rejection of liability in the face of its issuance
of the Citizen�s Charter, which contains a clear and unequivocal assumption of accountability for the
documentary stamp tax. Had petitioner provided this Court with more convincing basis, apart from a mere
citation of an indefinite provision of the 1997 NIRC, showing that it should be respondent-seller who shall
be liable for the documentary stamp tax due on the sale of the subject property, its rejection of the payment
of the same could have been sustained.

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED.� The Decision
and Order, dated November 15, 2013 and March 10, 2014, respectively, of the Regional Trial Court,
Valenzuela City, Branch 270, in Civil Case No. 140-V-10 are hereby MODIFIED, in that the imposition
of interest on the payment of just compensation as well as the award of consequential damages are deleted.
In addition, respondent Arlene R. Soriano is ORDERED to pay for the capital gains tax due on the transfer
of the expropriated property, while the documentary stamp tax, transfer tax, and registration fee shall be for
the account of petitioner.

SO ORDERED.cralawlawlibrary

G.R. No. 198756, January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,

METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS,
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS
DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION,

Petitioners,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE

PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL
REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL
TREASURER AND BUREAU OF TREASURY, Respondents.

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the P35 billion
worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus of
Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR
Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding
tax.�Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20%
final tax from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus 2 filed by petitioners under Rule 65 of the
Rules of Court seeking to:chanroblesvirtuallawlibrary

a.�ANNUL Respondent BIR�s Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings
issued by BIR of similar tenor and import, for being unconstitutional and for having been issued without
jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction. . .;

b. PROHIBIT Respondents, particularly the BTr, from withholding or collecting the 20% FWT from the
payment of the face value of the Government Bonds upon their maturity;

c.�COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the
Government Bonds upon maturity. . .; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction,
enjoining Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on the
Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well as other
related rulings issued by the BIR of similar tenor and import, pending the resolution by [the court] of the
merits of [the] Petition.3
 Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) �with the
assistance of its financial advisors, Rizal Commercial Banking Corp. (�RCBC�), RCBC Capital Corp.
(�RCBC Capital�), CAPEX Finance and Investment Corp. (�CAPEX�) and SEED Capital Ventures,
Inc. (SEED),�5 requested an approval from the Department of Finance for the issuance by the Bureau of
Treasury of 10-year zero-coupon Treasury Certificates (T-notes).6�The T-notes would initially be
purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to
investors as the PEACe Bonds.7�The net proceeds from the sale of the Bonds �will be used to endow a
permanent fund (Hanapbuhay�Fund) to finance meritorious activities and projects of accredited non-
government organizations (NGOs) throughout the country.�8chanRoblesvirtualLawlibrary

Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-
coupon bonds were also presented by banks and financial institutions, such as First Metro Investment
Corporation (proposal dated March 1, 2001), 9 International Exchange Bank (proposal dated July 27,
2000),10 Security Bank Corporation and SB Capital Investment Corporation (proposal dated July 25,
2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25, 1999). 12��[B]oth the
proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest
income or discount earned on the proposed zero-coupon bonds would be subject to the prevailing
withholding tax.�13chanRoblesvirtualLawlibrary

A zero-coupon bond is a bond bought at a price substantially lower than its face value (or at a deep
discount), with the face value repaid at the time of maturity.14�It does not make periodic interest
payments, or have so-called �coupons,� hence the term zero-coupon bond.15�However, the discount to
face value constitutes the return to the bondholder.16chanRoblesvirtualLawlibrary

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGO�s letters dated May 10, 15,
and 25, 2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds.�
BIR Ruling No. 020-2001, signed by then Commissioner of Internal Revenue Ren�G. Ba�ez confirmed
that the PEACe Bonds would not be classified as deposit substitutes and would not be subject to the
corresponding withholding tax:chanroblesvirtuallawlibrary

Thus, to be classified as �deposit substitutes�, the borrowing of funds must be obtained from twenty (20)
or more individuals or corporate lenders at any one time.� In the light of your representation that the
PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as
�deposit substitutes�falling within the purview of the above definition.�Hence, the withholding tax on
deposit substitutes will not apply.18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated
in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September
29, 2001 (collectively, the 2001 Rulings).�In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the �20 or more
individual or corporate lenders�rule must apply.�Moreover, the determination of the phrase �at any one
time�for purposes of determining the �20 or more lenders�is to be determined at the time of the original
issuance.�Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former
Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle
considering that the latter was not a Government Securities Eligible Dealer (GSED). 22� Former Treasurer
Edeza recommended that the issuance of the Bonds �be done through the ADAPS�23 and that CODE-
NGO �should get a GSED to bid in [sic] its behalf.�24chanRoblesvirtualLawlibrary

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds 25 (Public Offering)
dated October 9, 2001, the Bureau of Treasury announced that �P30.0B worth of 10-year Zero[-] Coupon
Bonds [would] be auctioned on October 16, 2001[.]�26� The notice stated that the Bonds �shall be issued
to not more than 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue.�27�It
also required the GSEDs to submit their bids not later than 12 noon on auction date and to disclose in their
bid submissions the names of the institutions bidding through them to ensure strict compliance with the 19
lender limit.28� Lastly, it stated that �the issue being limited to 19 lenders and while taxable shall not be
subject to the 20% final withholding [tax].�29chanRoblesvirtualLawlibrary

On October 12, 2001, the Bureau of Treasury released a memo 30 on the �Formula for the Zero-Coupon
Bond.��The memo stated in part that the formula (in determining the purchase price and settlement
amount) �is only applicable to the zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit.�31chanRoblesvirtualLawlibrary

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the �Auction
Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001� (Auction
Guidelines).32�The Auction Guidelines reiterated that the Bonds to be auctioned are �[n]ot subject to 20%
withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to
BIR Revenue Regulation No. 020 2001).�33�The Auction Guidelines, for the first time, also stated that
the Bonds are �[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September
2001)[.]�34chanRoblesvirtualLawlibrary

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35� Also
on the same date, the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling
issued by the Bureau of Internal Revenue concerning the Bonds�exemption from 20% final withholding
tax and the opinion of the Monetary Board on reserve eligibility. 37chanRoblesvirtualLawlibrary

During the auction, there were 45 bids from 15 GSEDs. 38� The bidding range was very wide, from as low
as 12.248% to as high as 18.000%.39�Nonetheless, the Bureau of Treasury accepted the auction results. 40�
The cut-off was at 12.75%.41chanRoblesvirtualLawlibrary

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder
having tendered the lowest bids.42� Accordingly, on October 18, 2001, the Bureau of Treasury issued P35
billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion, 43
resulting in a discount of approximately P24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting agreement 44 with CODE-NGO,
whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the
PEACe Bonds.45� RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale
of the P35 billion Bonds at the price of P11,995,513,716.51. 47�In Section 7(r) of the underwriting
agreement, CODE-NGO represented that �[a]ll income derived from the Bonds, inclusive of premium on
redemption and gains on the trading of the same, are exempt from all forms of taxation as confirmed by
Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively.�48chanRoblesvirtualLawlibrary

RCBC Capital sold the Government Bonds in the secondary market for an issue price of
P11,995,513,716.51.�Petitioners purchased the PEACe Bonds on different
dates.49chanRoblesvirtualLawlibrary

BIR rulings

On October 7, 2011, �the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the
Government Bonds and directing the BIR to withhold said final tax at the maturity thereof, [allegedly
without] consultation with Petitioners as bondholders, and without conducting any
hearing.�50chanRoblesvirtualLawlibrary

�It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance
on the proper tax treatment of the discount or interest income derived from the Government Bonds.�51�
The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR
Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and
BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:chanroblesvirtuallawlibrary

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on
interest income from deposit substitutes.�It is now settled that all treasury bonds (including PEACe
Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes.�In the case of zero-coupon bonds, the discount (i.e. difference between face value and
purchase price/discounted value of the bond) is treated as interest income of the purchaser/holder.�Thus,
the Php 24.3 interest income should have been properly subject to the 20% Final Tax as provided in Section
27(D)(1) of the Tax Code of 1997. . . .

....

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able to collect the final
tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings.� Subsequently, the
issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001
Rulings by stating that the [1997] Tax Code is clear that the �term public means borrowing from twenty
(20) or more individual or corporate lenders at any one time.��The word �any�plainly indicates that the
period contemplated is the entire term of the bond, and not merely the point of origination or issuance. . . .
Thus, by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the
20% Final Tax, an exemption in favour of the PEACe Bonds was created when no such exemption is found
in the law.55

On October 11, 2011, a �Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing
System Holdings Corporation and Subsidiaries (�PDS Group�).�The Memo provides that in view of the
pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government Bonds,
no transfer of the same shall be allowed to be recorded in the Registry of Scripless Securities (�ROSS�)
from 12 October 2011 until the redemption payment date on 18 October 2011.�Thus, the bondholders of
record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall be treated by the
BTr as the beneficial owners of such securities for the relevant [tax] payments to be imposed
thereon.�56chanRoblesvirtualLawlibrary

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal
Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the
discount or interest earned on the PEACe Bonds should �be imposed and withheld not only on
RCBC/CODE NGO but also [on] �all subsequent holders of the Bonds.��58chanRoblesvirtualLawlibrary

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent
application for a temporary restraining order and/or writ of preliminary injunction) 59 before this court.

On October 18, 2011, this court issued a temporary restraining order (TRO) 60 �enjoining the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that
the 20% final withholding tax on interest income therefrom shall be withheld by the petitioner banks and
placed in escrow pending resolution of [the] petition.�61chanRoblesvirtualLawlibrary

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit
petition-in-intervention62 dated October 27, 2011, which was granted by this court on November 15,
2011.63chanRoblesvirtualLawlibrary

Meanwhile, on November 9, 2011, petitioners filed their �Manifestation with Urgent Ex Parte Motion to
Direct Respondents to Comply with the TRO.�64�They alleged that on the same day that the temporary
restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts corresponding to the 20% final
withholding tax on interest income, and that the Bureau of Treasury refused to release the amounts
corresponding to the 20% final withholding tax.65chanRoblesvirtualLawlibrary
On November 15, 2011, this court directed respondents to: �(1) SHOW CAUSE why they failed to comply
with the October 18, 2011 resolution; and (2) COMPLY with the Court�s resolution in order that
petitioners may place the corresponding funds in escrow pending resolution of the
petition.�66chanRoblesvirtualLawlibrary

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-
intervention with comment on the petition-in-intervention of RCBC and RCBC Capital).67�The motion
was granted by this court on November 22, 2011. 68chanRoblesvirtualLawlibrary

On December 1, 2011, public respondents filed their compliance. 69�They explained that: 1) �the
implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18, 2011
with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already fait
accompli . . . when the Resolution and TRO were served to and received by respondents BTr and National
Treasurer [on October 19, 2011]�;70 and 2) the withheld amount has ipso facto become public funds and
cannot be disbursed or released to petitioners without congressional appropriation.71�Respondents further
aver that �[i]nasmuch as the . . . TRO has already become moot . . . the condition attached to it, i.e., �that
the 20% final withholding tax on interest income therefrom shall be withheld by the banks and placed in
escrow . . .�has also been rendered moot[.]�72chanRoblesvirtualLawlibrary

On December 6, 2011, this court noted respondents' compliance. 73chanRoblesvirtualLawlibrary

On February 22, 2012, respondents filed their consolidated comment 74 on the petitions-in-intervention filed
by RCBC and RCBC Capital and CODE-NGO.

On November 27, 2012, petitioners filed their �Manifestation with Urgent Reiterative Motion (To Direct
Respondents to Comply with the Temporary Restraining Order).�75chanRoblesvirtualLawlibrary

On December 4, 2012, this court: (a) noted petitioners� manifestation with urgent reiterative motion (to
direct respondents to comply with the temporary restraining order); and (b) required respondents to
comment thereon.76chanRoblesvirtualLawlibrary

Respondents�comment77 was filed on April 15, 2013, and petitioners filed their reply78 on June 5,
2013.cralawred

Issues

The main issues to be resolved are:ChanRoblesVirtualawlibrary

I. Whether the PEACe Bonds are �deposit substitutes�and thus subject to 20% final withholding
tax under the 1997 National Internal Revenue Code.�Related to this question is the interpretation
of the phrase �borrowing from twenty (20) or more individual or corporate lenders at any one
time�under Section 22(Y) of the 1997 National Internal Revenue Code, particularly on whether
the reckoning of the 20 lenders includes trading of the bonds in the secondary market; and

II. If the PEACe Bonds are considered �deposit substitutes,� whether the government or the Bureau
of Internal Revenue is estopped from imposing and/or collecting the 20% final withholding tax
from the face value of these Bonds

a. Will the imposition of the 20% final withholding tax violate the non-impairment clause
of the Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?
 Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO�

Petitioners argue that �[a]s the issuer of the Government Bonds acting through the BTr, the Government is
obligated . . . to pay the face value amount of PhP35 Billion upon maturity without any deduction
whatsoever.�79�They add that �the Government cannot impair the efficacy of the [Bonds] by arbitrarily,
oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven
(11) days before maturity and after several, consistent categorical declarations that such bonds are exempt
from the 20% FWT, without violating due process�80 and the constitutional principle on non-impairment
of contracts.81�Petitioners aver that at the time they purchased the Bonds, they had the right to expect that
they would receive the full face value of the Bonds upon maturity, in view of the 2001 BIR Rulings. 82�
�[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on]
good faith thereon.�83chanRoblesvirtualLawlibrary

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section
22(Y) of the 1997 National Internal Revenue Code because there was only one lender (RCBC) to whom the
Bureau of Treasury issued the Bonds.84�They allege that the 2004, 2005, and 2011 BIR Rulings
�erroneously interpreted that the number of investors that participate in the �secondary market�is the
determining factor in reckoning the existence or non-existence of twenty (20) or more individual or
corporate lenders.�85�Furthermore, they contend that the Bureau of Internal Revenue unduly expanded
the definition of deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in
concluding that �the mere issuance of government debt instruments and securities is deemed as falling
within the coverage of �deposit substitutes[.]��86�Thus, �[t]he 2011 BIR Ruling clearly amount[ed] to
an unauthorized act of administrative legislation[.]�87chanRoblesvirtualLawlibrary

Petitioners further argue that their income from the Bonds is a �trading gain,� which is exempt from
income tax.88�They insist that �[t]hey are not lenders whose income is considered as �interest income or
yield�subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]�89
because they �acquired the Government Bonds in the secondary or tertiary
market.�90chanRoblesvirtualLawlibrary

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that
the collection of the final tax was barred by prescription. 91�They point out that under Section 7 of DOF
Department Order No. 141-95,92 the final withholding tax �should have been withheld at the time of their
issuance[.]�93� Also, under Section 203 of the 1997 National Internal Revenue Code, �internal revenue
taxes, such as the final tax, [should] be assessed within three (3) years after the last day prescribed by law
for the filing of the return.�94chanRoblesvirtualLawlibrary

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice
to them was in violation of their property rights,95 their constitutional right to due process96 as well as
Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97� Allegedly, it
would also have �an adverse effect of colossal magnitude on the investors, both local and foreign, the
Philippine capital market, and most importantly, the country�s standing in the international commercial
community.�98�Petitioners explained that �unless enjoined, the government�s threatened refusal to pay
the full value of the Government Bonds will negatively impact on the image of the country in terms of
protection for property rights (including financial assets), degree of legal protection for lender�s rights, and
strength of investor protection.�99�They cited the country�s ranking in the World Economic Forum: 75 th
in the world in its 2011�2012 Global Competitiveness Index, 111th out of 142 countries worldwide and
2nd to the last among ASEAN countries in terms of Strength of Investor Protection, and 105 th worldwide
and last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100�It would
also allegedly �send a reverberating message to the whole world that there is no certainty, predictability,
and stability of financial transactions in the capital markets[.]�101��[T]he integrity of Government-issued
bonds and notes will be greatly shattered and the credit of the Philippine Government will suffer�102 if the
sudden turnaround of the government will be allowed, 103 and it will reinforce �investors� perception that
the level of regulatory risk for contracts entered into by the Philippine Government is high,�104 thus
resulting in higher interest rate for government-issued debt instruments and lowered credit
rating.105chanRoblesvirtualLawlibrary

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal
Revenue �gravely and seriously abused her discretion in the exercise of her rule-making power�106 when
she issued the assailed 2011 BIR Ruling which ruled that �all treasury bonds are �deposit substitutes�
regardless of the number of lenders, in clear disregard of the requirement of twenty (20) or more lenders
mandated under the NIRC.�107�They argue that �[b]y her blanket and arbitrary classification of treasury
bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds.�108� Petitioners-intervenors RCBC and RCBC
Capital further argue that the 2011 BIR Ruling will cause substantial impairment of their vested rights109
under the Bonds since the ruling imposes new conditions by �subjecting the PEACe Bonds to the twenty
percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof as
previously represented by the Government, through respondents BTr and BIR, expressly state that it is not
subject to final withholding tax upon their maturity.�110� They added that �[t]he exemption from the
twenty percent (20%) final withholding tax [was] the primary inducement and principal consideration for
[their] participat[ion] in the auction and underwriting of the PEACe
Bonds.�111chanRoblesvirtualLawlibrary

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent
Commissioner of Internal Revenue violated their rights to due process when she arbitrarily issued the 2011
BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling deprived them of the
opportunity to challenge the same.112chanRoblesvirtualLawlibrary

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and
RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be held liable �as
[these] parties explicitly represented . . . that the said bonds are exempt from the final withholding
tax.�113chanRoblesvirtualLawlibrary

Finally, petitioners-intervenors RCBC and RCBC Capital argue that �the implementation of the [2011
assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of
existing securities, which is contrary to the State policies of stabilizing the financial system and of
developing capital markets.�114chanRoblesvirtualLawlibrary

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are
�invalid because they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the
applicability of the �20 or more lender�rule to government debt instruments�[;]115 (b) �when [it] sold
the PEACe Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-
term trading gain[s], not interest income, which [are] exempt . . . under Section 32(B)(7)(g) of the 1997
NIRC�[;]116 (c) �the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of
a contractual commitment granted by the Government in exchange for a valid and material consideration
[i.e., the issue price paid and savings in borrowing cost derived by the Government,] thus protected by the
non-impairment clause of the 1987 Constitution�[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings �did
not validly revoke the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and
[RCBC Capital] and petitioners[-bondholders], nor was there any BIR administrative guidance issued and
published[.]�118�CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper
because: (a) it involves determination of a factual question; 119 and (b) it is premature and states no cause of
action as it amounts to an anticipatory third-party claim.120chanRoblesvirtualLawlibrary

Arguments of respondents

Respondents argue that petitioners�direct resort to this court to challenge the 2011 BIR Ruling violates the
doctrines of exhaustion of administrative remedies and hierarchy of courts, resulting in a lack of cause of
action that justifies the dismissal of the petition.121� According to them, �the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative
remedies, pertains to the Court of Tax Appeals.�122�They point out that �a case similar to the present
Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and]
entitled, �Rizal Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of
Internal Revenue, et al.��123chanRoblesvirtualLawlibrary

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124�They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are
indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the
petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to
Rule 65, Section 4.125chanRoblesvirtualLawlibrary

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain
but interest income subject to income tax.126�They explain that �[w]ith the payment of the PhP35 Billion
proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest.�Such interest is clearly an income of the Petitioners considering
that the same is a flow of wealth and not merely a return of capital �the capital initially invested in the
Bonds being approximately PhP10.2 Billion[.]�127chanRoblesvirtualLawlibrary

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute
an impairment of the obligations of contract, respondents aver that: �The BTr has no power to
contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds�[;]128 �[t]here has been no change in the laws governing the
taxability of interest income from deposit substitutes and said laws are read into every contract�[;]129
�[t]he assailed BIR Rulings merely interpret the term �deposit substitute�in accordance with the letter
and spirit of the Tax Code�[;]130 �[t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in full�[;]131 and �[i]f there was a
breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the
succeeding purchasers of the PEACe Bonds.�132chanRoblesvirtualLawlibrary

Similarly, respondents counter that the withholding of �[t]he 20% final withholding tax on the PEACe
Bonds does not amount to a deprivation of property without due process of law.�133�Their imposition of
the 20% final withholding tax is not arbitrary because they were only performing a duty imposed by law; 134
�[t]he 2011 BIR Ruling is an interpretative rule which merely interprets the meaning of deposit substitutes
[and upheld] the earlier construction given to the term by the 2004 and 2005 BIR Rulings.�135�Hence,
respondents argue that �there was no need to observe the requirements of notice, hearing, and
publication[.]�136chanRoblesvirtualLawlibrary

Nonetheless, respondents add that �there is every reason to believe that Petitioners �all major financial
institutions equipped with both internal and external accounting and compliance departments as well as
access to both internal and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development Council; all actively taking
part in the regular and special debt issuances of the BTr and indeed regularly proposing products for issue
by BTr �had actual notice of the 2004 and 2005 BIR Rulings.�137� Allegedly, �the sudden and drastic
drop �including virtually zero trading for extended periods of six months to almost a year �in the trading
volume of the PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate
that market participants, including the Petitioners herein, were aware of the ruling and its consequences for
the PEACe Bonds.�138chanRoblesvirtualLawlibrary

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of
Internal Revenue�s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly
expand the definition of deposit substitutes by creating an unwarranted exception to the requirement of
having 20 or more lenders/purchasers;140 and the word �any�in Section 22(Y) of the National Internal
Revenue Code plainly indicates that the period contemplated is the entire term of the bond and not merely
the point of origination or issuance.141chanRoblesvirtualLawlibrary

Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably
prejudice petitioners.142� �[W]ith or without the 2011 BIR Ruling, Petitioners would be liable to pay a
20% final withholding tax just the same because the PEACe Bonds in their possession are legally in the
nature of deposit substitutes subject to a 20% final withholding tax under the NIRC.�143� Section 7 of
DOF Department Order No. 141-95 also provides that income derived from Treasury bonds is subject to
the 20% final withholding tax.144��[W]hile revenue regulations as a general rule have no retroactive
effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation
shall have retroactive operation as to affect past transactions, because a wrong construction of the law
cannot give rise to a vested right that can be invoked by a taxpayer.�145chanRoblesvirtualLawlibrary

Finally, respondents submit that �there are a number of variables and factors affecting a capital
market.�146� �[C]apital market itself is inherently unstable.�147�Thus, �[p]etitioners� argument that
the 20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere
supposition that is not a justiciable issue.�148chanRoblesvirtualLawlibrary

On the prayer for the temporary restraining order, respondents argue that this order �could no longer be
implemented [because] the acts sought to be enjoined are already fait accompli.�149�They add that �to
disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the
Constitution prohibiting �money being paid out of the Treasury except in pursuance of an appropriation
made by law[.]��150��The remedy of petitioners is to claim a tax refund under Section 204(c) of the Tax
Code should their position be upheld by the Honorable Court.�151chanRoblesvirtualLawlibrary

Respondents also argue that �the implementation of the TRO would violate Section 218 of the Tax Code
in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282)
which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection
of any national internal revenue tax imposed by the Tax Code.�152chanRoblesvirtualLawlibrary

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue
that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue
Code when it declared that all government debt instruments are deposit substitutes regardless of
the 20-lender rule; and

2. The 2011 BIR Ruling cannot�be applied retroactively because:

a) It will violate the contract clause;

o It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds,
represented by the government as an inducement and important consideration for the
purchase of the Bonds;

b) It constitutes deprivation of property without due process because there was no prior notice to
bondholders and hearing and publication;

c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;

d) It violates the constitutional provision on supporting activities of non-government organizations

and development of the capital market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the
challenged 2011 BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of
Internal Revenue�s power to interpret the provisions of the 1997 National Internal Revenue Code
and other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in
previously issued BIR Ruling Nos. 007-2004, DA-491-04, and 008-05, which have already
effectively abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessor�s rulings especially
when the latter�s rulings are not in harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to
a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the
ordinary course of law:

a. Petitioners had the basic remedy of filing a claim for refund of the 20% final withholding tax they
allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of
courts.

Court�s ruling

Procedural Issues

Non-exhaustion of administrative
remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the
Secretary of Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. �- The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)

Thus, it was held that �[i]f superior administrative officers [can] grant the relief prayed for, [then] special
civil actions are generally not entertained.�153�The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the court�s judicial power can be
sought.154chanRoblesvirtualLawlibrary

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative

remedies:chanroblesvirtuallawlibrary

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by
the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded
(1) when there is a violation of due process, (2) when the issue involved is purely a legal question,155 (3)
when the administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there
is estoppel on the part of the administrative agency concerned,(5) when there is irreparable injury, (6) when
the respondent is a department secretary whose acts as an alter ego of the President bears the implied and
assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject matter is a
private land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate
remedy, (11) when there are circumstances indicating the urgency of judicial intervention.156 (Emphasis
supplied, citations omitted)

The exceptions under (2) and (11) are present in this case.� The question involved is purely legal, namely:
(a) the interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under
the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax
on the PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts
and due process.�Judicial intervention is likewise urgent with the impending maturity of the PEACe
Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result
in an exercise in futility.157chanRoblesvirtualLawlibrary

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile
exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued
by the Bureau of Internal Revenue.�It appears that the Secretary of Finance adopted the Commissioner of
Internal Revenue�s opinions as his own.158�This position was in fact confirmed in the letter159 dated
October 10, 2011 where he ordered the Bureau of Treasury to withhold the amount corresponding to the
20% final withholding tax on the interest or discounts allegedly due from the bondholders on the strength
of the 2011 BIR Ruling.

Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals.�The questioned BIR Ruling Nos. 370-2011 and DA 378-
2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on
the taxability of the interest income from zero-coupon bonds issued by the government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act
No. 9282,160 such rulings of the Commissioner of Internal Revenue are appealable to that court,
thus:chanroblesvirtuallawlibrary

SEC. 7. Jurisdiction. - The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision,
ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary
of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days
after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as
referred to in Section 7(a)(2) herein.
....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising
under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code
shall be maintained, except as herein provided, until and unless an appeal has been previously filed with
the CTA and disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the
jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue,
thus:chanroblesvirtuallawlibrary

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be
stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the
Court of Tax Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops. . . .

....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which
states:chanroblesvirtuallawlibrary

�SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. �� The Secretary
of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations
for the effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a
rate of sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without
prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection
with the implementation of the provisions of internal revenue laws, including ruling on the classification of
articles of sales and similar purposes.�(Emphasis in the original)

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:chanroblesvirtuallawlibrary

�Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely
an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and
that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the
collection of taxes and license fees to adhere strictly to the interpretation given by the defendant to the
statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a
decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of
enforcement of the said statute, the administration of which is entrusted by law to the Bureau of Internal
Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7 of which provides that
the Court of Tax Appeals �shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions
of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code or
other law or part of the law administered by the Bureau of Internal Revenue.��163

In exceptional cases, however, this court entertained direct recourse to it when �dictated by public welfare
and the advancement of public policy, or demanded by the broader interest of justice, or the orders
complained of were found to be patent nullities, or the appeal was considered as clearly an inappropriate
remedy.�164chanRoblesvirtualLawlibrary
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of
Interior and Local Government,165 this court noted that the petition for prohibition was filed directly before
it �in disregard of the rule on hierarchy of courts.�However, [this court] opt[ed] to take primary
jurisdiction over the . . . petition and decide the same on its merits in view of the significant constitutional
issues raised by the parties dealing with the tax treatment of cooperatives under existing laws and in the
interest of speedy justice and prompt disposition of the matter.�166chanRoblesvirtualLawlibrary

Here, the nature and importance of the issues raised167 to the investment and banking industry with regard
to a definitive declaration of whether government debt instruments are deposit substitutes under existing
laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this
court in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial
instrument or product that may be issued and traded in the market.�Due to the changing positions of the
Bureau of Internal Revenue on this issue, there is a need for a final ruling from this court to stabilize the
expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts
had been rendered moot by this court�s issuance of the temporary restraining order enjoining the
implementation of the 2011 BIR Ruling.�The temporary restraining order effectively recognized the
urgency and necessity of direct resort to this court.

Substantive issues

Tax treatment of deposit substitutes

Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final
withholding tax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements.�These
provisions read:chanroblesvirtuallawlibrary

SEC. 24. Income Tax Rates.

....

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . Provided,
further, That interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt
from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:chanroblesvirtuallawlibrary

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

....

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income. (Emphasis supplied)

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

(A) Tax on Resident Foreign Corporations. -

....

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties
derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty
percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in
the 1977 National Internal Revenue Code through Presidential Decree No. 1739 168 issued in 1980. Later,
Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:chanroblesvirtuallawlibrary

(y) �Deposit substitutes� shall mean an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These promissory notes, repurchase agreements,
certificates of assignment or participation and similar instrument with recourse as may be authorized by the
Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and
Exchange Commission of the Philippines for commercial, industrial, finance companies and either non-
financial companies: Provided, however, that only debt instruments issued for inter-bank call loans to cover
deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks
shall not be considered as deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the
same definition and specifically identified the following borrowings as �deposit
substitutes�:chanroblesvirtuallawlibrary

SECTION 2. Definitions of Terms. . . .

(h) �Deposit substitutes� shall mean �

....

(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in
quasi-banking functions evidenced by deposit substitutes instruments, except interbank call loans to cover
deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or repayment
transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including the Central
Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates
of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies,
trust companies, including the trust department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the
addition of the qualifying phrase for public �borrowing from 20 or more individual or corporate lenders
at any one time. Under Section 22(Y), deposit substitute is defined thus:chanroblesvirtuallawlibrary

SEC. 22. Definitions - When used in this Title:

....

(Y) The term �deposit substitutes�shall mean an alternative form of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time)
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower�s own account, for the purpose of relending or purchasing of receivables and other obligations,
or financing their own needs or the needs of their agent or dealer. These instruments may include, but need
not be limited to, bankers�acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments with recourse:
Provided, however, That debt instruments issued for interbank call loans with maturity of not more than
five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined �public� to mean �twenty
(20) or more individual or corporate lenders at any one time.��Hence, the number of lenders is
determinative of whether a debt instrument should be considered a deposit substitute and consequently
subject to the 20% final withholding tax.

20-lender rule

Petitioners contend that �there [is] only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds.�169� On the other hand, respondents theorize that the word �any� �indicates that
the period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]�170 such that if the debt instruments �were subsequently sold in secondary markets and so on,
in such a way that twenty (20) or more buyers eventually own the instruments, then it becomes indubitable
that funds would be obtained from the �public�as defined in Section 22(Y) of the NIRC.�171�Indeed, in
the context of the financial market, the words �at any one time�create an ambiguity.

Financial markets

Financial markets provide the channel through which funds from the surplus units (households and
business firms that have savings or excess funds) flow to the deficit units (mainly business firms and
government that need funds to finance their operations or growth).�They bring suppliers and users of
funds together and provide the means by which the lenders transform their funds into financial assets, and
the borrowers receive these funds now considered as their financial liabilities.�The transfer of funds is
represented by a security, such as stocks and bonds.�Fund suppliers earn a return on their investment; the
return is necessary to ensure that funds are supplied to the financial
markets.172chanRoblesvirtualLawlibrary

�The financial markets that facilitate the transfer of debt securities are commonly classified by the
maturity of the securities[,]�173 namely:�(1) the money market, which facilitates the flow of short-term
funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of long-
term funds (with maturities of more than one year). 174chanRoblesvirtualLawlibrary

Whether referring to money market securities or capital market securities, transactions occur either in the
primary market or in the secondary market.175��Primary markets facilitate the issuance of new
securities.�Secondary markets facilitate the trading of existing securities, which allows for a change in
the ownership of the securities.�176�The transactions in primary markets exist between issuers and
investors, while secondary market transactions exist among investors. 177chanRoblesvirtualLawlibrary

�Over time, the system of financial markets has evolved from simple to more complex ways of carrying
out financial transactions.�178�Still, all systems perform one basic function: the quick mobilization of
money from the lenders/investors to the borrowers.179chanRoblesvirtualLawlibrary

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect
finance.180chanRoblesvirtualLawlibrary

With direct financing, the �borrower and lender meet each other and exchange funds in return for
financial assets�181 (e.g., purchasing bonds directly from the company issuing them).�This method
provides certain limitations such as: (a) �both borrower and lender must desire to exchange the same
amount of funds at the same time�[;]182 and (b) �both lender and borrower must frequently incur
substantial information costs simply to find each other.�183chanRoblesvirtualLawlibrary

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby
reducing information costs.184� A broker185 is �an individual or financial institution who provides
information concerning possible purchases and sales of securities.�Either a buyer or a seller of securities
may contact a broker, whose job is simply to bring buyers and sellers together.�186� A dealer187 �also
serves as a middleman between buyers and sellers, but the dealer actually acquires the seller�s securities in
the hope of selling them at a later time at a more favorable price.�188�Frequently, �a dealer will split up a
large issue of primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow
of savings into investment.�189�In semidirect financing, �[t]he ultimate lender still winds up holding the
borrower�s securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity
characteristics of the borrower�s [debt security].�There still must be a fundamental coincidence of wants
and needs between [lenders and borrowers] for semidirect financial transactions to take
place.�190chanRoblesvirtualLawlibrary

�The limitations of both direct and semidirect finance stimulated the development of indirect financial
transactions, carried out with the help of financial intermediaries�191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and mutual funds.192�Financial intermediaries
accept funds from surplus units and channel the funds to deficit units. 193��Depository institutions [such as
banks] accept deposits from surplus units and provide credit to deficit units through loans and purchase of
[debt] securities.�194�Nondepository institutions, like mutual funds, issue securities of their own (usually
in smaller and affordable denominations) to surplus units and at the same time purchase debt securities of
deficit units.195� �By pooling the resources of [small savers, a financial intermediary] can service the
credit needs of large firms simultaneously.�196chanRoblesvirtualLawlibrary

The financial market, therefore, is an agglomeration of financial transactions in securities performed by

market participants that works to transfer the funds from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers).

Meaning of �at any one time�

Thus, from the point of view of the financial market, the phrase �at any one time�for purposes of
determining the �20 or more lenders�would mean every transaction executed in the primary or
secondary market in connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning of
�20 or more lenders/investors� is made at any transaction in connection with the purchase or sale of the
Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market

usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual

or corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed
deposit substitutes.�Consequently, the seller is required to withhold the 20% final withholding tax on the
imputed interest income from the bonds.

For debt instruments that are

not deposit substitutes, regular
income tax applies�

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the
1997 National Internal Revenue Code are subject to the regular income tax.

The phrase �all income derived from whatever source�in Chapter VI, Computation of Gross Income,
Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative policy to include all
income not expressly exempted as within the class of taxable income under our laws.

�The definition of gross income is broad enough to include all passive incomes subject to specific tax rates
or final taxes.�197�Hence, interest income from deposit substitutes are necessarily part of taxable
income.��However, since these passive incomes are already subject to different rates and taxed finally at
source, they are no longer included in the computation of gross income, which determines taxable
income.�198� �Stated otherwise . . . if there were no withholding tax system in place in this country, this
20 percent portion of the �passive�income of [creditors/lenders] would actually be paid to the
[creditors/lenders] and then remitted by them to the government in payment of their income
tax.�199chanRoblesvirtualLawlibrary

This court, in Chamber of Real Estate and Builders�Associations, Inc. v. Romulo,200 explained the
rationale behind the withholding tax system:chanroblesvirtuallawlibrary

The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and
third, to improve the government�s cash flow. This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes
through more complicated means and remedies.201 (Citations omitted)

�The application of the withholdings system to interest on bank deposits or yield from deposit substitutes
is essentially to maximize and expedite the collection of income taxes by requiring its payment at the
source.�202chanRoblesvirtualLawlibrary

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller is
required to withhold the 20% final income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the �gains�contemplated under Section
32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived from trading,
redemption, or retirement of long-term securities from ordinary income tax.

The term �gain�as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for
the use of money.�Gains from sale or exchange or retirement of bonds or other certificate of indebtedness
fall within the general category of �gains derived from dealings in property� under Section 32(A)(3),
while interest from bonds or other certificate of indebtedness falls within the category of �interests�under
Section 32(A)(4).204�The use of the term �gains from sale�in Section 32(B)(7)(g) shows the intent of
Congress not to include interest as referred under Sections 24, 25, 27, and 28 in the
exemption.205chanRoblesvirtualLawlibrary

Hence, the �gains�contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the
bonds before their maturity date, which is the difference between the selling price of the bonds in the
secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by
the last holder of the bonds when the bonds are redeemed at maturity, which is the difference between the
proceeds from the retirement of the bonds and the price at which such last holder acquired the bonds.�For
discounted instruments, like the zero-coupon bonds, the trading gain shall be the excess of the selling price
over the book value or accreted value (original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.206chanRoblesvirtualLawlibrary

The Bureau of Internal

Revenue rulings

The Bureau of Internal Revenue�s interpretation as expressed in the three 2001 BIR Rulings is not
consistent with law.207�Its interpretation of �at any one time�to mean at the point of origination alone is
unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR
Rulings) that �all treasury bonds . . . regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes.�208�Being the subject of this petition, it is, thus,
declared void because it completely disregarded the 20 or more lender rule added by Congress in the 1997
National Internal Revenue Code.�It also created a distinction for government debt instruments as against
those issued by private corporations when there was none in the law.

Tax statutes must be reasonably construed as to give effect to the whole act.�Their constituent provisions
must be read together, endeavoring to make every part effective, harmonious, and sensible.209�That
construction which will leave every word operative will be favored over one that leaves some word, clause,
or sentence meaningless and insignificant.210chanRoblesvirtualLawlibrary

It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing
the 1997 National Internal Revenue Code is an authoritative construction of great weight, but the principle
is not absolute and may be overcome by strong reasons to the contrary.�If through a misapprehension of
law an officer has issued an erroneous interpretation, the error must be corrected when the true construction
is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the
nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of
Internal Revenue because it was contrary to the express provision of Section 230 of the 1977 National
Internal Revenue Code and, hence, �[cannot] be given weight for to do so would, in effect, amend the
statute.�212�Thus:chanroblesvirtuallawlibrary
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of
two years to ten years on claims of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC.�In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense
of more specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue.�It is widely accepted that the interpretation placed upon a statute by
the executive officers, whose duty is to enforce it, is entitled to great respect by the courts.�Nevertheless,
such interpretation is not conclusive and will be ignored if judicially found to be erroneous.�Thus, courts
will not countenance administrative issuances that override, instead of remaining consistent and in harmony
with, the law they seek to apply and implement.213 (Citations omitted)

This court further held that �[a] memorandum-circular of a bureau head could not operate to vest a
taxpayer with a shield against judicial action [because] there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the same.�214chanRoblesvirtualLawlibrary

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this court nullified Revenue
Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on
pawnshops.216�It was held that �the [Commissioner] cannot, in the exercise of [its interpretative] power,
issue administrative rulings or circulars not consistent with the law sought to be applied.�Indeed,
administrative issuances must not override, supplant or modify the law, but must remain consistent with the
law they intend to carry out.� Only Congress can repeal or amend the
law.�217chanRoblesvirtualLawlibrary

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court
stated that the Commissioner of Internal Revenue is not bound by the ruling of his predecessors, 219 but, to
the contrary, the overruling of decisions is inherent in the interpretation of laws:chanroblesvirtuallawlibrary

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the
delegated authority of the administrative agency; (ii) whether it is reasonable; and (iii) whether it was
issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the desirability
or wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed
those questions to administrative judgments and not to judicial judgments. In the case of an interpretative
rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a matter of
power a court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule;
(ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of
authoritative weight to the interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering
copra as an �agricultural food product� within the meaning of �103(b) of the NIRC. As the Solicitor
General contends, �copra per se is not food, that is, it is not intended for human consumption. Simply
stated, nobody eats copra for food.�That previous Commissioners considered it so, is not reason for
holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by the
ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of
laws.220 (Emphasis supplied, citations omitted)

Tax treatment of income derived

from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at P10.2
billion; and
 2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe
Bonds to undisclosed investors at P11.996 billion.

It may seem that there was only one lender � RCBC on behalf of CODE-NGO �to whom the PEACe
Bonds were issued at the time of origination.�However, a reading of the underwriting agreement221 and
RCBC term sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of
approximately P11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were
supposedly issued to CODE-NGO/RCBC.�In reality, therefore, the entire P10.2 billion borrowing
received by the Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced
directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the
PEACe Bonds �all at the time of origination or issuance.�At this point, however, we do not know as to
how many investors the PEACe Bonds were sold to by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed
deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and
RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest
or discount from the PEACe Bonds.�Further, the obligation to withhold the 20% final tax on the
corresponding interest from the PEACe Bonds would likewise be required of any lender/investor had the
latter turned around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more
lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income
received by individuals from long-term deposits or investments with a holding period of not less than five
(5) years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper
procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders
and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case, as the withholding agents.

The collection of tax is not

barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to
assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false
returns with intent to evade tax; and (3) failure to file a return, to be computed from the time of discovery
of the falsity, fraud, or omission.�Section 203 states:chanroblesvirtuallawlibrary

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222,
internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes
of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day. (Emphasis supplied)

....

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.���

(a)�In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at
any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of
in the civil or criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-
intervenors.

Reiterative motion on the temporary restraining order

Respondents�withholding of the
20% final withholding tax on
October 18, 2011 was justified�

Under the Rules of Court, court orders are required to be �served upon the parties affected.�224�
Moreover, service may be made personally or by mail.225� And, �[p]ersonal service is complete upon
actual delivery [of the order.]�226�This court�s temporary restraining order was received only on October
19, 2011, or a day after the PEACe Bonds had matured and the 20% final withholding tax on the interest
income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized
mode of service of pleadings, court orders, or processes.� Moreover, the news reports227 cited by
petitioners were posted minutes before the close of office hours or late in the evening of October 18, 2011,
and they did not give the exact contents of the temporary restraining order.

�[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that
such injunction or order was served on him personally or that he had notice of the issuance or making of
such injunction or order.�228chanRoblesvirtualLawlibrary

At any rate, �[i]n case of doubt, a withholding agent may always protect himself or herself by withholding
the tax due�229 and return the amount of the tax withheld should it be finally determined that the income
paid is not subject to withholding.230�Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it
received this court�s temporary restraining order only on October 19, 2011, or the day after this tax had
been withheld.

Respondents�retention of the
amounts withheld is a defiance of
the temporary restraining order

Nonetheless, respondents�continued failure to release to petitioners the amount corresponding to the 20%
final withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance
of this court�s temporary restraining order.231chanRoblesvirtualLawlibrary

The temporary restraining order is not moot.�The acts sought to be enjoined are not fait accompli.�For
an act to be considered fait accompli, the act must have already been fully accomplished and
consummated.232�It must be irreversible, e.g., demolition of properties, 233 service of the penalty of
imprisonment,234 and hearings on cases.235�When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait accompli cannot prosper.

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes
both the withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue.�
Even though the Bureau of Treasury had already withheld the 20% final withholding tax 237 when it
received the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal
Revenue, a remittance which was due only on November 10, 2011. 238�The act enjoined by the temporary
restraining order had not yet been fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national
government agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it
withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal
Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day
of the following month after the said taxes had been withheld. 240�The Bureau of Internal Revenue shall
transmit an original copy of the TRA to the Bureau of Treasury,241 which shall be the basis for recording
the remittance of the tax collection.242�The Bureau of Internal Revenue will then record the amount of
taxes reflected in the TRA as tax collection in the Journal of Tax Remittance by government agencies based
on its copies of the TRA.243� Respondents did not submit any withholding tax return or TRA to prove that
the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal
Revenue on October 18, 2011.

Respondent Bureau of Treasury�s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011
submitted to this court shows:chanroblesvirtuallawlibrary

Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) �10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002� 4,966,207,796.41
To record redemption of 10yr Zero�
coupon (Peace Bond) net of the 20%
final� withholding tax pursuant to BIR
Ruling No. 378-2011, value date,
October 18, 2011 per BTr letter
authority and BSP Bank Statements.

The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing
the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of
Internal Revenue on October 18, 2011.�The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of Internal Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to �show cause
why they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may
place the corresponding funds in escrow pending resolution of the petition.�245�The 20% final
withholding tax was effectively placed in custodia legis when this court ordered the deposit of the amount
in escrow.�The Bureau of Treasury could still release the money withheld to petitioners for the latter to
place in escrow pursuant to this court�s directive.�There was no legal obstacle to the release of the 20%
final withholding tax to petitioners.

Congressional appropriation is not required for the servicing of public debts in view of the automatic
appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary

Section 31. Automatic Appropriations.� All expenditures for (a) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (b) principal and interest on public
debt, (c) national government guarantees of obligations which are drawn upon, are automatically
appropriated: provided, that no obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise
appropriated, such amounts as may be necessary to effect payments on foreign or domestic loans, or
foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of the
Republic of the Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled
corporations and/or government financial institutions;

b. government-owned or controlled corporations and/or government financial institutions the proceeds of

which were relent to public or private institutions;

c. government-owned or controlled corporations and/or financial institutions and guaranteed by the

Republic of the Philippines;

d. other public or private institutions and guaranteed by government-owned or controlled corporations

and/or government financial institutions.

The amount of P35 billion that includes the monies corresponding to 20% final withholding tax is a lawful
and valid obligation of the Republic under the Government Bonds.�Since said obligation represents a
public debt, the release of the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the
National Treasury and is not required to be the subject of another appropriation
legislation:chanroblesvirtuallawlibrary

SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not
otherwise appropriated, or from any sinking funds provided for the purpose by law, any interest falling
due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of
any such money, or from any such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which redemption has been demanded in
accordance with terms prescribed by him prior to date of issue . . . In the case of interest-bearing
obligations, he shall pay not less than their face value; in the case of obligations issued at a discount he
shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations were originally issued. There are
hereby appropriated as a continuing appropriation out of any moneys in the National Treasury not
otherwise appropriated, such sums as may be necessary from time to time to carry out the provisions of this
section. The Secretary of Finance shall transmit to Congress during the first month of each regular session a
detailed statement of all expenditures made under this section during the calendar year immediately
preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds
shall be made through the National Treasury�s account with the Bangko Sentral ng Pilipinas, to
wit:chanroblesvirtuallawlibrary

Section 38. Demand Deposit Account. �The Treasurer of the Philippines maintains a Demand Deposit
Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and
Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury
Bills and Bonds shall be charged.

Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing,
this court has held:chanroblesvirtuallawlibrary
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of
its own judgment and wisdom formulates an appropriation act precisely following the process established
by the Constitution, which specifies that no money may be paid from the Treasury except in accordance
with an appropriation made by law.

Debt service is not included in the General Appropriation Act, since authorization therefor already exists
under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting
authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself
with details for implementation by the Executive, but largely with annual levels and approval thereof upon
due deliberations as part of the whole obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to have delegated its wisdom to the Executive, on whose part lies the
implementation or execution of the legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court,
which remained in full force and effect, until set aside, vacated, or modified.�Its conduct finds no
justification and is reprehensible.247chanRoblesvirtualLawlibrarychanrobleslaw

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED.�BIR Ruling Nos.
370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount
corresponding to the 20% final withholding tax despite this court�s directive in the temporary restraining
order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in
escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders
the amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011

G.R. No. L-17518 October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Fisher and De Witt and Antonio M. Opisso for appellants.

Acting Attorney-General Tuason for appellee.

JOHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present case "income" and
taxable as such under the provisions of section 25 of Act No. 2833? While the appellant presents other
important questions, under the view which we have taken of the facts and the law applicable to the present
case, we deem it unnecessary to discuss them now.

The defendant demurred to the petition in the lower court. The facts are therefore admitted. They are simple
and may be stated as follows:

That during the year 1919 the Philippine American Drug Company was a corporation duly organized and
existing under the laws of the Philippine Islands, doing business in the City of Manila; that he appellant
was a stockholder in said corporation; that said corporation, as result of the business for that year, declared
a "stock dividend"; that the proportionate share of said stock divided of the appellant was P24,800; that the
stock dividend for that amount was issued to the appellant; that thereafter, in the month of March, 1920, the
appellant, upon demand of the appellee, paid under protest, and voluntarily, unto the appellee the sum of
P889.91 as income tax on said stock dividend. For the recovery of that sum (P889.91) the present action
was instituted. The defendant demurred to the petition upon the ground that it did not state facts sufficient
to constitute cause of action. The demurrer was sustained and the plaintiff appealed.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United
States as will as the decisions of the supreme court of some of the states of the Union, in which the
questions before us, based upon similar statutes, was discussed. Among the most important decisions may
be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179;
Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs.
Charlottesville Woolen Mills, 93 Va., 673.

In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case
it was held that "stock dividends" were capital and not an "income" and therefore not subject to the "income
tax" law.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a
"stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock
dividend, does not violate the provisions of the Jones Law. The appellee further argues that the statute of
the United States providing for tax upon stock dividends is different from the statute of the Philippine
Islands, and therefore the decision of the Supreme Court of the United States should not be followed in
interpreting the statute in force here.

For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine Islands),
providing for an income tax in the United States as well as that in the Philippine Islands, the two statutes
are here quoted for the purpose of determining the difference, if any, in the language of the two statutes.

Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection of an
"income tax." Section 2 of said Act attempts to define what is an income. The definition follows:

That the term "dividends" as used in this title shall be held to mean any distribution made or
ordered to made by a corporation, . . . which stock dividend shall be considered income, to the
amount of its cash value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said Act
attempts to define the application of the income tax. The definition follows:

The term "dividends" as used in this Law shall be held to mean any distribution made or ordered
to be made by a corporation, . . . out of its earnings or profits accrued since March first, nineteen
hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the
corporation, . . . . Stock dividend shall be considered income, to the amount of the earnings or
profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of
the Philippine Islands must have had before him the statute of the United States. No important argument
can be based upon the slight different in the wording of the two sections.

It is further argued by the appellee that there are no constitutional limitations upon the power of the
Philippine Legislature such as exist in the United States, and in support of that contention, he cites a
number of decisions. There is no question that the Philippine Legislature may provide for the payment of
an income tax, but it cannot, under the guise of an income tax, collect a tax on property which is not an
"income." The Philippine Legislature can not impose a tax upon "property" under a law which provides for
a tax upon "income" only. The Philippine Legislature has no power to provide a tax upon "automobiles"
only, and under that law collect a tax upon a carreton or bull cart. Constitutional limitations, that is to say,
a statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose
which is entirely distinct and different. A statute providing for an income tax cannot be construed to cover
property which is not, in fact income. The Legislature cannot, by a statutory declaration, change the real
nature of a tax which it imposes. A law which imposes an important tax on rice only cannot be construed to
an impose an importation tax on corn.

It is true that the statute in question provides for an income tax and contains a further provision that "stock
dividends" shall be considered income and are therefore subject to income tax provided for in said law. If
"stock dividends" are not "income" then the law permits a tax upon something not within the purpose and
intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that we may be able to
determine whether "stock dividends" are "income" in the sense that the word is used in the statute. Perhaps
it would be more logical to determine first what are "stock dividends" in order that we may more clearly
understand their relation to "income." Generally speaking, stock dividends represent undistributed increase
in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period. They are
used to show the increased interest or proportional shares in the capital of each stockholder. In other words,
the inventory of the property of the corporation, etc., for particular period shows an increase in its capital,
so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional
stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of opening
and conducting a drug store, with assets of the value of P2,000, and each contributes P1,000. Their entire
assets are invested in drugs and put upon the shelves in their place of business. They commence business
without a cent in the treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000
are issued to each of the incorporators, which represent the actual investment and entire assets of the
corporation. Business for the first year is good. Merchandise is sold, and purchased, to meet the demands of
the growing trade. At the end of the first year an inventory of the assets of the corporation is made, and it is
then ascertained that the assets or capital of the corporation on hand amount to P4,000, with no debts, and
still not a cent in the treasury. All of the receipts during the year have been reinvested in the business.
Neither of the stockholders have withdrawn a penny from the business during the year. Every peso received
for the sale of merchandise was immediately used in the purchase of new stock — new supplies. At the
close of the year there is not a centavo in the treasury, with which either A or B could buy a cup of coffee
or a pair of shoes for his family. At the beginning of the year they were P2,000, and at the end of the year
they were P4,000, and neither of the stockholders have received a centavo from the business during the
year. At the close of the year, when it is discovered that the assets are P4,000 and not P2,000, instead of
selling the extra merchandise on hand and thereby reducing the business to its original capital, they agree
among themselves to increase the capital they agree among themselves to increase the capital issued and
for that purpose issue additional stock in the form of "stock dividends" or additional stock of P1,000 each,
which represents the actual increase of the shares of interest in the business. At the beginning of the year
each stockholder held one-half interest in the capital. At the close of the year, and after the issue of the said
stock dividends, they each still have one-half interest in the business. The capital of the corporation
increased during the year, but has either of them received an income? It is not denied, for the purpose of
ordinary taxation, that the taxable property of the corporation at the beginning of the year was P2,000, that
at the close of the year it was P4,000, and that the tax rolls should be changed in accordance with the
changed conditions in the business. In other words, the ordinary tax should be increased by P2,000.

Another illustration: C and D organized a corporation for agricultural purposes with an authorized capital
stock of P20,000 each contributing P5,000. With that capital they purchased a farm and, with it, one
hundred head of cattle. Every peso contributed is invested. There is no money in the treasury. Much time
and labor was expanded during the year by the stockholders on the farm in the way of improvements.
Neither received a centavo during the year from the farm or the cattle. At the beginning of the year the
assets of the corporation, including the farm and the cattle, were P10,000, and at the close of the year and
inventory of the property of the corporation is made and it is then found that they have the same farm with
its improvements and two hundred head of cattle by natural increase. At the end of the year it is also
discovered that, by reason of business changes, the farm and the cattle both have increased in value, and
that the value of the corporate property is now P20,000 instead of P10,000 as it was at the beginning of the
year. The incorporators instead of reducing the property to its original capital, by selling off a part of its,
issue to themselves "stock dividends" to represent the proportional value or interest of each of the
stockholders in the increased capital at the close of the year. There is still not a centavo in the treasury and
neither has withdrawn a peso from the business during the year. No part of the farm or cattle has been sold
and not a single peso was received out of the rents or profits of the capital of the corporation by the
stockholders.

Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the sum of
P10,000. At the end of the first year, by reason of business conditions and the increase of the value of both
real estate and personal property, it is discovered that the value of the farm and the cattle is P20,000. A,
during the year, has received nothing from the farm or the cattle. His books at the beginning of the year
show that he had property of the value of P10,000. His books at the close of the year show that he has
property of the value of P20,000. A is not a corporation. The assets of his business are not shown therefore
by certificates of stock. His books, however, show that the value of his property has increased during the
year by P10,000, under any theory of business or law, be regarded as an "income" upon which the farmer
can be required to pay an income tax? Is there any difference in law in the condition of A in this illustration
and the condition of A and B in the immediately preceding illustration? Can the increase of the value of the
property in either case be regarded as an "income" and be subjected to the payment of the income tax under
the law?

Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of that fact,
let us ascertain how lexicographers and the courts have defined an "income." The New Standard
Dictionary, edition of 1915, defines an income as "the amount of money coming to a person or corporation
within a specified time whether as payment or corporation within a specified time whether as payment for
services, interest, or profit from investment." Webster's International Dictionary defines an income as "the
receipt, salary; especially, the annual receipts of a private person or a corporation from property." Bouvier,
in his law dictionary, says that an "income" in the federal constitution and income tax act, is used in its
common or ordinary meaning and not in its technical, or economic sense. (146 Northwestern Reporter,
812) Mr. Black, in his law dictionary, says "An income is the return in money from one's business, labor, or
capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly profits arising from
property , professions, trades, and offices."

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in speaking
of income that mere advance in value in no sense constitutes the "income" specified in the revenue law as
"income" of the owner for the year in which the sale of the property was made. Such advance constitutes
and can be treated merely as an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun,
105 Pa., 414.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now Secretary of
State of the United States, in his argument before the Supreme Court of the United States in the case of
Towne vs. Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to
mean cash or its equivalent. It does not mean choses in action or unrealized increments in the value of the
property, and cites in support of the definition, the definition given by the Supreme Court in the case of
Gray vs. Darlington, supra.

In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said: "Notwithstanding
the thoughtful discussion that the case received below, we cannot doubt that the dividend was capital as
well for the purposes of the Income Tax Law. . . . 'A stock dividend really takes nothing from the property
of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and
their interest are not increased. . . . The proportional interest of each shareholder remains the same. . . .' In
short, the corporation is no poorer and the stockholder is no richer then they were before." (Gibbons vs.
Mahon, 136 U.S., 549, 559, 560; Logan County vs. U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the court, said
that the act employs the term "income" in its natural and obvious sense, as importing something distinct
from principal or capital and conveying the idea of gain or increase arising from corporate activity.

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court said:
"An income may be defined as the gain derived from capital, from labor, or from both combined, provided
it be understood to include profit gained through a sale or conversion of capital assets."

For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a
liability, in form, to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a
"capital stock account." If profits have been made by the corporation during a particular period and not
divided, they create additional bookkeeping liabilities under the head of "profit and loss," "undivided
profits," "surplus account," etc., or the like. None of these, however, gives to the stockholders as a body,
much less to any one of them, either a claim against the going concern or corporation, for any particular
sum of money, or a right to any particular portion of the asset, or any shares sells or until the directors
conclude that dividends shall be made a part of the company's assets segregated from the common fund for
that purpose. The dividend normally is payable in money and when so paid, then only does the stockholder
realize a profit or gain, which becomes his separate property, and thus derive an income from the capital
that he has invested. Until that, is done the increased assets belong to the corporation and not to the
individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's accumulated profits
have been capitalized, instead of distributed to the stockholders or retained as surplus available for
distribution, in money or in kind, should opportunity offer. Far from being a realization of profits of the
stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has
been transferred from surplus to assets, and no longer is available for actual distribution. The essential and
controlling fact is that the stockholder has received nothing out of the company's assets for his separate use
and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and
accumulations resulting from employment of his money and that of the other stockholders in the business
of the company, still remains the property of the company, and subject to business risks which may result
in wiping out of the entire investment. Having regard to the very truth of the matter, to substance and not to
form, the stockholder by virtue of the stock dividend has in fact received nothing that answers the
definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation of his increased
interest in the capital of the corporation. There has been no separation or segregation of his interest. All the
property or capital of the corporation still belongs to the corporation. There has been no separation of the
interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the
stock dividend, has no separate or individual control over the interest represented thereby, further than he
had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the
corporation and not the property of the individual holder of stock dividend. A certificate of stock
represented by the stock dividend is simply a statement of his proportional interest or participation in the
capital of the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend,
acknowledges a liability in form to the stockholders, evidenced by a capital stock account. The receipt of a
stock dividend in no way increases the money received of a stockholder nor his cash account at the close of
the year. It simply shows that there has been an increase in the amount of the capital of the corporation
during the particular period, which may be due to an increased business or to a natural increase of the value
of the capital due to business, economic, or other reasons. We believe that the Legislature, when it provided
for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is
generally used in its common acceptation; that is that the income means money received, coming to a
person or corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or
individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference between
"capital" and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by
economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former
depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow
during a period of time." It may be argued that a stockholder might sell the stock dividend which he had
acquired. If he does, then he has received, in fact, an income and such income, like any other profit which
he realizes from the business, is an income and he may be taxed thereon.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock
dividends declared, as in the present case. The one is a disbursement to the stockholder of accumulated
earnings, and the corporation at once parts irrevocably with all interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in the entire capital, including such as
by investment of accumulated profits has been added to the original capital. They are not income to him,
but represent additions to the source of his income, namely, his invested capital. (DeKoven vs. Alsop, 205,
Ill., 309; 63 L.R.A. 587). Such a person is in the same position, so far as his income is concerned, as the
owner of young domestic animal, one year old at the beginning of the year, which is worth P50 and, which,
at the end of the year, and by reason of its growth, is worth P100. The value of his property has increased,
but has had an income during the year? It is true that he had taxable property at the beginning of the year of
the value of P50, and the same taxable property at another period, of the value of P100, but he has had no
income in the common acceptation of that word. The increase in the value of the property should be taken
account of on the tax duplicate for the purposes of ordinary taxation, but not as income for he has had none.

The question whether stock dividends are income, or capital, or assets has frequently come before the
courts in another form — in cases of inheritance. A is a stockholder in a large corporation. He dies leaving
a will by the terms of which he give to B during his lifetime the "income" from said stock, with a further
provision that C shall, at B's death, become the owner of his share in the corporation. During B's life the
corporation issues a stock dividend. Does the stock dividend belong to B as an income, or does it finally
belong to C as a part of his share in the capital or assets of the corporation, which had been left to him as a
remainder by A? While there has been some difference of opinion on that question, we believe that a great
weight of authorities hold that the stock dividend is capital or assets belonging to C and not an income
belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in
such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S., 549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a
corporation, and the interest of its members or stockholders in the property of the corporation, is familiar
and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its
stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever
dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of
the property remaining, upon the termination or dissolution of the corporation, after payment of its debts."
(Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of
Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a
corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand
or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, not to
the stockholders, and are liable for corporate indebtedness.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock
dividends declared. The one is a disbursement to the stockholders of accumulated earning, and the
corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholders. The latter receives, not an actual dividend, but
certificates of stock which evidence in a new proportion his interest in the entire capital. When a cash
becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation
in the absence of fraud. A stock dividend however, still being the property of the corporation and not the
stockholder, it may be reached by an execution against the corporation, and sold as a part of the property of
the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly
could not be charged with having received an income by virtue of the issuance of the stock dividend. Until
the dividend is declared and paid, the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend,
whether large or small, are regarded as "income" and all stock dividends, as capital or assets (Cook on
Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5
Am., and Eng. Encycl. of Law, 2d ed., p. 738.)

If the ownership of the property represented by a stock dividend is still in the corporation and to in the
holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder
and not as a part of the capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the stockholder
has received nothing but a representation of an interest in the property of the corporation and, as a matter of
fact, he may never receive anything, depending upon the final outcome of the business of the corporation.
The entire assets of the corporation may be consumed by mismanagement, or eaten up by debts and
obligations, in which case the holder of the stock dividend will never have received an income from his
investment in the corporation. A corporation may be solvent and prosperous today and issue stock
dividends in representation of its increased assets, and tomorrow be absolutely insolvent by reason of
changes in business conditions, and in such a case the stockholder would have received nothing from his
investment. In such a case, if the holder of the stock dividend is required to pay an income tax on the same,
the result would be that he has paid a tax upon an income which he never received. Such a conclusion is
absolutely contradictory to the idea of an income. An income subject to taxation under the law must be an
actual income and not a promised or prospective income.

The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of
the Jones Law. That may be admitted. He further argues that the Act of Congress (U.S. Revenue Act of
1918) expressly authorized the Philippine Legislatures to provide for an income tax. That fact may also be
admitted. But a careful reading of that Act will show that, while it permitted a tax upon income, the same
provided that income shall include gains, profits, and income derived from salaries, wages, or
compensation for personal services, as well as from interest, rent, dividends, securities, etc. The appellee
emphasizes the "income from dividends." Of course, income received as dividends is taxable as an income
but an income from "dividends" is a very different thing from receipt of a "stock dividend." One is an
actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of
corporation.

In all of the foregoing argument we have not overlooked the decisions of a few of the courts in different
parts of the world, which have reached a different conclusion from the one which we have arrived at in the
present case. Inasmuch, however, as appeals may be taken from this court to the Supreme Court of the
United States, we feel bound to follow the same doctrine announced by that court.

Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are
not "income," the same cannot be taxes under that provision of Act No. 2833 which provides for a tax upon
income. Under the guise of an income tax, property which is not an income cannot be taxed. When the
assets of a corporation have increased so as to justify the issuance of a stock dividend, the increase of the
assets should be taken account of the Government in the ordinary tax duplicates for the purposes of
assessment and collection of an additional tax. For all of the foregoing reasons, we are of the opinion, and
so decide, that the judgment of the lower court should be revoked, and without any finding as to costs, it is
so orde

[ GR Nos. 206079-80, Jan 17, 2018 ]

PHILIPPINE AIRLINES v. PHILIPPINE AIRLINES +

DECISION

LEONEN, J.:
Before this Court are two (2) consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of
Court assailing the August 14, 2012 Decision[1] and February 25, 2013 Resolution[2] of the Court of Tax
Appeals En Banc in CTA EB Nos. 749 and 757 (CTA Case No. 6877).

These consolidated cases stem from a refund claim by Philippine Airlines, Inc. (PAL) for final taxes
withheld on its interest income from its peso and dollar deposits with China Banking Corporation
(Chinabank), JP Morgan Chase Bank (JPMorgan), Philippine Bank of Communications (PBCom), and
Standard Chartered Bank (Standard Chartered) (collectively, Agent Banks). [3]

G.R. Nos. 206079-80 involves the Petition filed by PAL questioning the denial of its claim for refund of
P510,233.16 and US$65,877.07, representing the final income tax withheld by Chinabank, PBCom, and
Standard Chartered.[4]

Meanwhile, G.R. No. 206309 involves the Petition filed by the Commissioner of Internal Revenue
(Commissioner) assailing the grant to PAL of the tax refund of P1,237,646.43, representing the final
income tax withheld and remitted by JPMorgan.[5]

PAL asserts that it is entitled to a refund of the withheld taxes because it is exempted from paying the tax
on interest income under its franchise, Presidential Decree No. 1590. [6] However, the Commissioner
refused to grant the claim, arguing that PAL failed to prove the remittance of the withheld taxes to the
Bureau of Internal Revenue.[7]

Thus, the issue involves whether or not PAL is required to prove the remittance to the Bureau of Internal
Revenue of the final withholding tax on its interest from currency bank deposits to be entitled to tax refund.

The Court of Tax Appeals Special First Division ordered the refund to PAL of P1,237,646.43 representing
the final income tax withheld and remitted by JPMorgan on PAL's interest income. However, it denied the
refund of P510,223.16 and US$65,877.07, representing the final income tax withheld by Chinabank,
PBCom, and Standard Chartered.[8] The Court of Tax Appeals En Banc affirmed the Decision of the Court
of Tax Appeals Special First Division.[9]

The facts are as follows:

Sometime in 2002, PAL made US dollar and Philippine peso deposits and placements in the following
Philippine banks: Chinabank, JPMorgan, PBCom, and Standard Chartered. [10]

PAL earned interest income from these deposits and the Agent Banks deducted final withholding taxes. [11]

From Chinabank, PAL claimed that it earned interest income net of withholding tax in the amount of
US$480,688.76 in its US dollar time deposit for the year 2002. [12] Substantiating this claim was
Chinabank's Certification dated October 24, 2003,[13] which stated that withholding taxes were deducted
from PAL's interest income in the amount of US$38,974.75. These taxes were remitted to the Bureau of
Internal Revenue on different dates from February 11, 2002 to January 10, 2003. [14]

From JPMorgan, PAL alleged that it earned interest income in its peso deposit in the amount of
P6,188,232.17, from September 2002 to December 2002. JPMorgan deducted withholding tax totalling
P1,237,646.43.[15]

From PBCom, PAL maintained that it earned interest income from its various dollar placements for the
year 2002, with the following corresponding final taxes withheld: [16]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD
 1st Quarter US$ 102,648.40 US$ 7,698.63
2nd Quarter US$ 22,653.20 US$ 1,698.00
3rd Quarter US$ 40,123.73 US$ 3,009.28
4thQuarter US$ 107,163.73 US$ 8,037.28
TOTAL US$ 272,589.06 US$ 20,443.19

PAL's peso deposit account with PBCom also allegedly earned interest income for the year 2002, with the
following corresponding final taxes withheld:[17]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD
2nd Quarter P 541,758.42 P 108,351.67
3rd Quarter P 2,009,357.41 P 401,871.46
TOTAL P 2,551,115.83 P 510,223.13

A letter dated April 10, 2003 from PBCom's Branch Manager, Carmencita L. Tan, stated that the taxes
withheld from PAL's interest income had been remitted by PBCom to the Bureau of Internal Revenue. [18]

From Standard Chartered, PAL stated that it earned interest income in its dollar time deposit account from
May 2002 to December 2002, amounting to US$86,107.55. The amount of US$6,458.14 was deducted and
allegedly remitted to the Bureau of Internal Revenue as final withholding tax. [19]

Claiming that it was exempt from final withholding taxes under its franchise, Presidential Decree No. 1590,
PAL filed with the Commissioner on November 3, 2003 a written request for a tax refund [20] of the
withheld amounts of P1,747,869.59 and US$65,877.07. [21]

The Commissioner failed to act on the request. Thus, on February 24, 2004, PAL elevated the case to the
Court of Tax Appeals in Division.[22]

In her Answer, the Commissioner contended that PAL's claim was subject to administrative routinary
investigation or examination by the Bureau of Internal Revenue. She also alleged that PAL's claim was not
properly documented, and that it must show that it complied with the prescriptive period for filing refunds
under Sections 204(C) and 229 of the National Internal Revenue Code. It likewise asserted that claims for
refund are of the same nature as a tax exemption, and thus, are strictly construed against the claimant.[23]

PAL presented evidence to support its claim. The Commissioner then submitted the case for decision based
on the pleadings.[24]

In its November 9, 2010 Decision,[25] the Court of Tax Appeals Special First Division partially granted
PAL's Petition and ordered the Commissioner to refund PAL P1,237,646.43, representing the final income
tax withheld and remitted by JPMorgan. It denied the remaining claim for refund of P510,223.16 and
US$65,877.07 representing the final income tax withheld by Chinabank, PBCom, and Standard
Chartered.[26]

The Court of Tax Appeals Special First Division found that PAL was exempted from final withholding tax
on interest on bank deposits.[27] However, it ruled that PAL failed to adequately substantiate its claim
because it did not prove that the Agent Banks, with the exception of JPMorgan, remitted the withheld
amounts to the Bureau of Internal Revenue.[28] PAL only presented documents[29] which showed the total
amount of final taxes withheld for all branches of the banks.[30] As such, the amount of tax withheld from
and to be refunded to PAL could not be ascertained with particularity. [31] It ruled that the Certificates of
Final Tax Withheld at Source are not sufficient to prove remittance.[32] Thus:
WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND in favor of petitioner the reduced amount of
P1,237,646.43, representing the 20% final income tax withheld and remitted by JP Morgan Chase bank on
petitioner's interest income; while the remaining claim of P510,223.16 and US$65,877.07, representing the
final income tax withheld by China Banking Corporation, Philippine Bank of Communication[s], and
Standard Chartered Bank are hereby DENIED due to insufficiency of evidence.

SO ORDERED.[33]

The Court of Tax Appeals Special First Division denied the separate motions for reconsideration filed by
the parties. Thus, both parties filed separate appeals before the Court of Tax Appeals En Banc, which
consolidated the cases.[34]

In its August 14, 2012 Decision, the Court of Tax Appeals En Banc denied the petitions and affirmed the
decision of the Court of Tax Appeals Special First Division.[35] The Court of Tax Appeals En Banc
sustained that PAL needed to prove the remittance of the withheld taxes because although remittance is the
responsibility of the banks as withholding agents, remittance was put in issue in this case. Thus, the Court
of Tax Appeals Special First Division correctly made a ruling on it.[36]

It found that PAL was able to establish the remittance of the taxes withheld by JPMorgan because the
monthly remittance returns were identified by PAL's witness and were formally offered in the Court of Tax
Appeals Special First Division without objections to their admissibility. It ruled that the monthly remittance
returns may be considered even if they were only presented in the Court of Tax Appeals Special First
Division as it is a court of record and is required to conduct a formal trial.[37]

It sustained that PAL failed to prove the remittance by Chinabank, PBCom, and Standard Chartered
because it did not show that the amounts remitted by these Agent Banks pertained to the taxes withheld
from PAL's interest income.[38]

Thus:

WHEREFORE, all the foregoing considered, the Commissioner's Petition for Review in CTA EB No. 749
and PAL's Petition for Review in CTA EB No. 757 are hereby DENIED for lack of merit. The assailed
Decision dated November 9, 2010 and Resolution dated March 17, 2011 are hereby AFFIRMED.

SO ORDERED.[39] (Emphasis in the original)

The Court of Tax Appeals En Banc denied the motions for reconsideration. [40]

Hence, the present Petitions via Rule 45 have been filed.[41]

In G.R. Nos. 206079-80, PAL questions the denial of its refund claim for the taxes withheld by Chinabank,
PBCom, and Standard Chartered. PAL argues that it adequately established the withholding and remittance
of final taxes through the Certificates of Final Taxes Withheld issued to it by these Agent Banks.[42] It
contends that these Certificates are prima facie evidence of actual remittance, and if they are
uncontroverted, as in this case, they are sufficient proof of remittance. [43] It holds that the rule pertaining to
Creditable Taxes Withheld in CIR v. Asian Transmission Corporation[44] and other Court of Tax Appeals
En Banc cases[45] should apply to Final Taxes Withheld, as these are of the same nature. [46]

PAL also insists that it is unequivocally exempt from final withholding taxes,[47] and consequently, for as
long as it duly establishes that taxes were withheld from its income, it must be refunded. [48] It maintains that
proof of actual remittance is not necessary.[49]
PAL further claims that it need not establish the remittance of income taxes to the Bureau of Internal
Revenue because this function is vested with the Agent Banks as the payors and withholding agents of the
Commissioner.[50]

In G.R. No. 206309, the Commissioner questions the grant of refund to PAL for the final income taxes
withheld by JPMorgan. She argues that PAL is not entitled to the refund as it failed to present its
documentary evidence before the Bureau of Internal Revenue when it filed its administrative claim.[51]

In its June 10, 2013 Resolution, the two (2) cases were consolidated. [52]

The parties thereafter filed their respective Comments,[53] Replies,[54] and Memoranda.[55]

PAL argues that it is entitled to its claim for tax refund or tax credit and insists that it has adequately
established that the final taxes on interest income withheld by the banks were remitted to the Bureau of
Internal Revenue.[56] It contends that the Certificates of Final Taxes Withheld issued by the Agent Banks
are prima facie evidence of actual remittance.[57] As prima facie evidence, they are sufficient proof of the
fact that PAL is establishing, if they are unexplained or uncontradicted. [58]

As such, PAL avers that the Commissioner had the burden to prove that the Agent Banks failed to remit the
withheld taxes.[59] Nonetheless, the Commissioner simply submitted the case for decision based on the
pleadings. It did not contradict or dispute the Certificates of Final Taxes Withheld. [60]

PAL further posits that the failure of the Agent Banks to remit the withheld taxes should not prejudice
PAL, because they are the withholding agents accountable for proving remittance. PAL has no control or
responsibility over the remittance of the taxes withheld.[61]

Moreover, PAL holds that there is no need for proof of actual remittance to be entitled to claim for
refund,[62] and that this Court's rulings on creditable taxes withheld should also apply to final taxes withheld
at source, as they are of the same nature.[63] Since PAL has shown that it is unequivocally exempt from
paying final withholding taxes, its taxes were erroneously paid and must be refunded. [64]

PAL further asserts that the Court of Tax Appeals is a court of record, required to conduct a trial de novo.
Thus, it should not be barred from considering new evidence not submitted in the administrative claim for
refund.[65]

Assuming PAL is limited by the documents it submitted in the administrative level, the Commissioner had
the burden to prove that PAL did not submit complete supporting documents. However, it neither showed
what documents PAL presented nor established that PAL submitted incomplete supporting documents. [66]

PAL further submits that assuming it failed to present the remittance returns on final income tax withheld,
the Commissioner could have retrieved these files from the records, as these are monthly returns filed with
the Bureau of Internal Revenue.[67] As the Chief of the Bureau of Internal Revenue, the Commissioner has
access to all tax returns including those of final income tax withheld at source, and thus, is in bad faith in
not checking the records to determine whether or not the withheld taxes were remitted. [68] PAL maintains
that the Commissioner's denial of the withholding of the taxes is not a specific denial, and thus, should be
deemed as an admission of this fact.[69]

Finally, PAL holds that the denial of its refund because of its failure to submit monthly remittance returns
is contrary to substantial justice, equity, and fair play.[70]

On the other hand, the Commissioner argues in her Memorandum[71] that PAL needed to prove, but did not
prove, that the withheld taxes were remitted to the Bureau of Internal Revenue. [72]
She points out that PAL only showed the withheld amounts remitted by branches of Chinabank, PBCom,
and Standard Chartered, but there is no indication that the remitted amounts are the taxes withheld from
PAL's interest income. She argues that PAL must first prove that the money remitted to the Bureau of
Internal Revenue is attributable to it because tax refunds are strictly construed against the taxpayer. [73]

She further insists that PAL's claim must fail for insufficiency of evidence because it failed to present
several of its documentary evidence before the Bureau of Internal Revenue during the administrative
level.[74] She argues that even if the evidence was presented in the Court of Tax Appeals, it should not be
considered because trial de novo in the Court of Tax Appeals must be limited to the evidence shown in the
administrative claim for refund.[75] The Court of Tax Appeals' judicial review is allegedly limited to
whether the Commissioner rightfully ruled on the claim on the basis of the evidence presented in the
administrative claim, and the ruling may only be set aside where there is gross abuse of discretion, fraud, or
error of law.[76] Thus, she claims that the Court of Tax Appeals erred in considering the new evidence
presented to it.[77] In allowing the presentation of new evidence, the Court of Tax Appeals did not conduct a
judicial review. Rather, it adopted an entirely new proceeding. [78]

This Court resolves the following issues:

First, whether or not evidence not presented in the administrative claim for refund in the Bureau of Internal
Revenue can be presented in the Court of Tax Appeals;

Second, whether or not Philippine Airlines, Inc. was able to prove remittance of its final taxes withheld to
the Bureau of Internal Revenue; and

Finally, whether or not proof of remittance is necessary for Philippine Airlines, Inc. to claim a refund under
its charter, Presidential Decree No. 1590.

This Court sustains the factual findings of the Court of Tax Appeals that Philippine Airlines, Inc. failed to
prove remittance of the withheld taxes.

Nonetheless, this Court grants the Petition of Philippine Airlines, Inc.

The Commissioner contends that PAL failed to present several of its documentary evidence before the
Bureau of Internal Revenue during the administrative level. [79] Thus, she claims that the new evidence that
petitioner presented in the Court of Tax Appeals should not have been considered because trial de novo in
the Court of Tax Appeals must be limited to the evidence shown in the administrative claim. [80]

This Court rules that the Court of Tax Appeals is not limited by the evidence presented in the
administrative claim in the Bureau of Internal Revenue. The claimant may present new and additional
evidence to the Court of Tax Appeals to support its case for tax refund.

Section 4 of the National Internal Revenue Code[81] states that the Commissioner has the power to decide
on tax refunds, but his or her decision is subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. — The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction
of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

Republic Act No. 9282,[82] amending Republic Act No. 1125,[83] is the governing law on the jurisdiction of
the Court of Tax Appeals. Section 7 provides that the Court of Tax Appeals has exclusive appellate
jurisdiction over tax refund claims in case the Commissioner fails to act on them:

Section 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial;

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction[.] (Emphasis supplied)

This means that while the Commissioner has the right to hear a refund claim first, if he or she fails to act on
it, it will be treated as a denial of the refund, and the Court of Tax Appeals is the only entity that may
review this ruling.

The power of the Court of Tax Appeals to exercise its appellate jurisdiction does not preclude it from
considering evidence that was not presented in the administrative claim in the Bureau of Internal Revenue.
Republic Act No. 1125 states that the Court of Tax Appeals is a court of record:

Section 8. Court of record; seal; proceedings. — The Court of Tax Appeals shall be a court of record and
shall have a seal which shall be judicially noticed. It shall prescribe the form of its writs and other
processes. It shall have the power to promulgate rules and regulations for the conduct of the business of the
Court, and as may be needful for the uniformity of decisions within its jurisdiction as conferred by law, but
such proceedings shall not be governed strictly by technical rules of evidence. [84]

As such, parties are expected to litigate and prove every aspect of their case anew and formally offer all
their evidence.[85] No value is given to documentary evidence submitted in the Bureau of Internal Revenue
unless it is formally offered in the Court of Tax Appeals.[86] Thus, the review of the Court of Tax Appeals is
not limited to whether or not the Commissioner committed gross abuse of discretion, fraud, or error of law,
as contended by the Commissioner.[87] As evidence is considered and evaluated again, the scope of the
Court of Tax Appeals' review covers factual findings.

In Commissioner of Internal Revenue v. Philippine National Bank:[88]

Finally, petitioner's allegation that the submission of the certificates of withholding taxes before the Court
of Tax Appeals was late is untenable. The samples of the withholding tax certificates attached to
respondent's comment bore the receiving stamp of the Bureau of Internal Revenue's Large Taxpayers
Document Processing and Quality Assurance Division. As observed by the Court of Tax Appeals En Banc,
"[t]he Commissioner is in no position to assail the authenticity of the CWT certificates due to PNB's
alleged failure to submit the same before the administrative level since he could have easily directed the
claimant to furnish copies of these documents, if the refund applied for casts him any doubt." Indeed,
petitioner's inaction prompted respondent to elevate its claim for refund to the tax court.

More importantly, the Court of Tax Appeals is not precluded from accepting respondent's evidence
assuming these were not presented at the administrative level. Cases filed in the Court of Tax Appeals are
litigated de novo. Thus, respondent "should prove every minute aspect of its case by presenting, formally
offering and submitting . . . to the Court of Tax Appeals [all evidence] . . . required for the successful
prosecution of [its] administrative claim."[89] (Emphasis supplied, citations omitted)

In the case at bar, the Commissioner failed to act on PAL's administrative claim. [90] If she had acted on the
refund claim, she could have directed PAL to submit the necessary documents to prove its case.

Furthermore, considering that the refund claim will be litigated anew in the Court of Tax Appeals, the latter
may consider all pieces of evidence formally offered by PAL, whether or not they were submitted in the
administrative level.

Thus, the Commissioner's contention must fail.

II

Both PAL and the Commissioner are contesting whether or not PAL has proven the Agent Banks'
remittance of the withheld taxes on its interest income.[91]

The Court of Tax Appeals Special First Division and En Banc ruled that PAL was able to prove
JPMorgan's remittance of the withheld taxes but that it failed to prove those of Chinabank, PBCom, and
Standard Chartered.[92]

This Court maintains the factual findings of the Court of Tax Appeals Special First Division and En Banc.

Firstly, in bringing forth the issue of remittance, the parties are raising a question of fact which is not within
the scope of review on certiorari under a Rule 45 Petition.[93] An appeal under Rule 45 must raise only
questions of law.[94]

The Rules of Court states that a review of appeals filed before this Court is "not a matter of right, but of
sound judicial discretion." The Rules of Court further requires that only questions of law should be raised
in petitions filed under Rule 45 since factual questions are not the proper subject of an appeal by certiorari.
It is not this Court's function to once again analyze or weigh evidence that has already been considered in
the lower courts.[95] (Citations omitted)

There is a question of law when it seeks to determine whether or not the legal conclusions of the lower
courts from a given set of facts are correct, i.e. what is the law, given a particular set of circumstances? On
the other hand, there is a question of fact when the issue involves the truth or falsity of the parties'
allegations. The test in determining if an issue is a question of law or fact is whether or not there is a need
to evaluate evidence to resolve the issue. If there is a need to review the evidence or witnesses, it is a
question of fact. If there is no need, it is a question of law. [96]

As stated, this Court will no longer entertain questions of fact in appeals under Rule 45. The factual
findings of the lower courts are accorded respect and are beyond this Court's review. [97] However, the rule
admits of exceptions, especially if it is shown that the factual findings are not supported by evidence, or the
judgment is based on a misapprehension of facts:

[T]he general rule for petitions filed under Rule 45 admits exceptions. Medina v. Mayor Asistio, Jr. lists
down the recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) When
the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave abuse of
discretion; (4) When the judgment is based on a misapprehension of facts; (5) When the findings of fact are
conflicting; (6) When the Court of Appeals, in making its findings, went beyond the issues of the case and
the same is contrary to the admissions of both appellant and appellee; (7) The findings of the Court of
Appeals are contrary to those of the trial court; (8) When the findings of fact are conclusions without
citation of specific evidence on which they are based; (9) When the facts set forth in the petition as well as
in the petitioner's main and reply briefs are not disputed by the respondents; and (10) The finding of fact of
the Court of Appeals is premised on the supposed absence of evidence and is contradicted by the evidence
on record.

These exceptions similarly apply in petitions for review filed before this Court involving civil, labor, tax, or
criminal cases.[98] (Citations omitted)

A party filing the petition, however, has the burden of showing convincing evidence that the appeal falls
under one of the exceptions. A mere assertion is not sufficient. [99]

Moreover, this Court has consistently held that the findings of fact of the Court of Tax Appeals, as a highly
specialized court, are accorded respect and are deemed final and conclusive. [100]

In Philippine Refining Company v. Court of Appeals:[101]

The Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax
cases ...

Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part. The findings of fact of the CTA are binding on this Court and in
the absence of strong reasons for this Court to delve into facts, only questions of law are open for
determination . . .[102] (Citation omitted)

In Commissioner of Internal Revenue v. Tours Specialists, Inc., and the Court of Tax Appeals:[103]

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court
and absent strong reasons for this Court to delve into facts, only questions of law are open for
determination . . . In the recent case of Sy Po v. Court of Appeals . . . we ruled that the factual findings of
the Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not supported
by substantial evidence.[104]

In the case at bar, both the Court of Tax Appeals Special First Division and En Banc ruled that PAL failed
to sufficiently prove that Chinabank, PBCom, and Standard Chartered had remitted the withheld taxes. [105]
It found that the presented documents[106] only showed the total amount of final taxes withheld for all
branches of these Agent Banks.[107] It did not show that the amounts remitted by these Agent Banks
pertained to the taxes withheld from PAL’s interest income. [108]

However, it found that PAL was able to prove the remittance of the taxes withheld by JPMorgan because
the monthly remittance returns were identified by PAL's witness and were formally offered in the Court of
Tax Appeals Special First Division without objections to their admissibility. [109]

The Court of Tax Appeals Special First Division stated:

To prove that petitioner earned interest income on its bank deposits and that they were remitted to the BIR,
petitioner offered in evidence the following certifications and Certificates of Final Tax Withheld at Source
(BIR Form No. 2306) from various banks:
 AMOUNT OF TAX WITHHELD
BANK PERIOD COVERED
PESO US DOLLAR
China Banking Corp. (Exhibit January 2002 - December
38,974.75
"C") 2002
JP Morgan Chase Bank September 2002 -
1,237,646.43
(Exhibit "D") December 2002
Phil. Bank of
January 2002 - March
Communication[s] (Exhibit 7,698.63
2002
"E")
Phil. Bank of
Communication[s] (Exhibit April 2002 - June 2002 108,351.68 1,698.99
"F")
Phil. Bank of
July 2002 - September
Communication[s] (Exhibit 401,871.48 3,009.28
2002
"G")
Phil. Bank of
October 2002 - December
Communication[s] (Exhibit[s] 8,037.28
2002
"H" and "I")
Standard Chartered [Bank] May 2002 - December
6,458.14
(Exhibit "J") 2002
TOTAL P1,747,869.59 $65,877.07

A careful scrutiny of the evidence presented reveals that only documents pertaining to the amount of taxes
withheld and actually remitted to the BIR by depositary bank JP Morgan Chase, in the amount of
P1,237,646.43, represents petitioner's valid claim . . .

....

This Court cannot give credence to the other certifications and Certificates of Final Tax Withheld at Source
issued by the various depositary banks because proof on the fact of remittance was not aptly complied with;
thus, the amount of taxes to be refunded cannot be ascertained.

The amount of final withholding taxes as reflected on the Summary of Monthly Final Income Taxes
Withheld on Philippine Savings Deposit and Foreign Currency Deposit and the Monthly Remittance Return
of Final Income Taxes (BIR Form No. 1602) provided by withholding agents China Banking Corporation,
Philippine Bank of Communication, and Standard Chartered Bank were based on the total amount of final
withholding taxes per branch of each depositary banks; while the total amount appearing on the documents
of Monthly Remittance Return of Final Income Taxes (BIR Form No. 1602) was based on the total amount
of final withholding taxes for all branches of the depositary banks.

Therefore, the amount of final income tax withheld from petitioner cannot be ascertained with particularity
from the total amount of final withholding taxes that were remitted to the BIR by China Banking
Corporation, Philippine Bank of Communication[s), and Standard Chartered Bank. [110]

These findings were affirmed by the Court of Tax Appeals En Banc:

Without doubt, there were amounts of withheld taxes which have been remitted by [Chinabank] to the BIR.
However, from the supposed Stage 1 up to the last Stage of the paper trail, We fail to see, in the evidence
pointed out by PAL, the inclusion of the final income taxes withheld from its interest income in the total
amounts remitted by [Chinabank] to the BIR. In other words, there is no indication that the specific
withheld amounts which have been remitted to the BIR by [Chinabank] referred to the taxes withheld on
PAL's interest income. In fact, PAL's documentary evidence are merely to the effect that certain amounts
have been remitted to the BIR by [Chinabank], and such amounts may be broken down as to which
[Chinabank] branch offices the same are attributable.

The same holds true as regards the taxes withheld by [PBCom] and [Standard Chartered]. The documentary
evidence of PAL relating to the supposed remittances of the said depositary banks are also wanting of any
sign that portion of the remitted taxes pertain to the withheld taxes from PAL's interest income. Simply put,
We cannot perceive, from such evidence, that pertinent items of the withheld taxes are attributable to
PAL.[111]

In questioning these findings of the Court of Tax Appeals regarding the remittance of the taxes, the parties
are raising questions of fact. To determine whether or not the taxes have been remitted to the Bureau of
Internal Revenue requires an evaluation of the documents and other evidence presented by the parties.
Thus, it is incumbent upon them to prove that the above-stated exceptions are present in this case.

However, the parties failed to show that this case falls into any of the exceptions mentioned. [112]

The Court of Tax Appeals Special First Division and En Banc based their findings after an examination of
all pieces of evidence presented by PAL. Both parties failed to show that the Court of Tax Appeals
committed any gross error or abuse in making this factual determination. There is likewise no showing that
the findings are conflicting or based on speculation, conjecture, or misapprehension or mistake of facts.
There is no sign of any grave abuse of discretion.

Thus, this Court finds no reason to disturb the Court of Tax Appeals' factual findings.

III

Nonetheless, this Court rules that PAL is entitled to its claim for refund for taxes withheld by Chinabank,
PBCom, and Standard Chartered.

Remittance need not be proven. PAL needs only to prove that taxes were withheld from its interest
income.

III.A

First, PAL is uncontestedly exempt from paying the income tax on interest earned.

Under its franchise, Presidential Decree No. 1590, [113] petitioner may either pay a franchise tax or the basic
corporate income tax, and is exempt from paying any other tax, including taxes on interest earned from
deposits:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will
result in a lower tax:

(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources,
without distinction as to transport or nontransport operations; provided, that with respect to international
air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be
subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties,
royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed,
levied, established, assessed, or collected by any municipal, city, provincial, or national authority or
government agency, now or in the future, including but not limited to the following:

....

The grantee, shall, however, pay the tax on its real property in conformity with existing law. (Emphasis
supplied)

In Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[114] this Court ruled that Section 13 of
Presidential Decree No. 1590 is clear and unequivocal in exempting PAL from all taxes other than the basic
corporate income tax or the 2% franchise tax:

While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the
taxpayer and in favor of the taxing power, Section 13 of the franchise of respondent leaves no room for
interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either the
"basic corporate income tax" or the two percent gross revenue tax. [115] (Citation omitted)

More recently, PAL's tax privileges were outlined and confirmed in Commissioner of Internal Revenue v.
Philippine Airlines, Inc.[116] when Republic Act No. 9334 took effect, amending Section 131 of the
National Internal Revenue Code.[117] Republic Act No. 9334 increased the rates of excise tax imposed on
alcohol and tobacco products, and removed the exemption from taxes, duties and charges, including excise
taxes, on importations of cigars, cigarettes, distilled spirits, wines and fermented liquor into the
Philippines.[118] This Court ruled that PAL's tax exemptions remain:

In the fairly recent case of Commissioner of Internal Revenue and Commissioner of Customs v. Philippine
Airlines, Inc., the core issue raised was whether or not PAL's importations of alcohol and tobacco products
for its commissary supplies are subject to excise tax. This Court, ruling in favor of PAL, held that:

....

That the Legislature chose not to amend or repeal [PD] 1590 even after PAL was privatized reveals the
intent of the Legislature to let PAL continue to enjoy, as a private corporation, the very same rights and
privileges under the terms and conditions stated in said charter. . . .

To be sure, the manner to effectively repeal or at least modify any specific provision of PAL's franchise
under PD 1590, as decreed in the aforequoted Sec. 24, has not been demonstrated. . . .

....

Any lingering doubt, however, as to the continued entitlement of PAL under Sec. 13 of its franchise to
excise tax exemption on otherwise taxable items contemplated therein, e.g., aviation gas, wine, liquor or
cigarettes, should once and for all be put to rest by the fairly recent pronouncement in Philippine Airlines,
Inc. v. Commissioner of Internal Revenue. In that case, the Court, on the premise that the "propriety of a tax
refund is hinged on the kind of exemption which forms its basis," declared in no uncertain terms that PAL
has "sufficiently prove[d]" its entitlement to a tax refund of the excise taxes and that PAL's payment of
either the franchise tax or basic corporate income tax in the amount fixed thereat shall be in lieu of all other
taxes or duties, and inclusive of all taxes on all importations of commissary and catering supplies, subject
to the condition of their availability and eventual use....
In the more recent consolidated cases of Republic of the Philippines v. Philippine Airlines, Inc. (PAL) and
Commissioner of Internal Revenue v. Philippine Airlines, Inc. (PAL), this Court, echoing the ruling in the
abovecited case of CIR v. PAL, held that:

In other words, the franchise of PAL remains the governing law on its exemption from taxes. Its payment
of either basic corporate income tax or franchise tax — whichever is lower — shall be in lieu of all other
taxes, duties, royalties, registrations, licenses, and other fees and charges, except only real property tax. The
phrase "in lieu of all other taxes" includes but is not limited to taxes, duties, charges, royalties, or fees due
on all importations by the grantee of the commissary and catering supplies, provided that such articles or
supplies or materials are imported for the use of the grantee in its transport and nontransport operations and
other activities incidental thereto and are not locally available in reasonable quantity, quality, or price. [119]
(Citations omitted)

PAL's tax liability was also modified on July 1, 2005, when Republic Act No. 9337 [120] further amended the
National Internal Revenue Code. Section 22 of Republic Act No. 9337 abolished the franchise tax and
subjected PAL to corporate income tax and to value-added tax. Nonetheless, it maintained PAL's
exemption from "any taxes, duties, royalties, registration, license, and other fees and charges, as may be
provided by their respective franchise agreement." [121]

Section 22. Franchises of Domestic Airlines. — The provisions of P.D. No. 1590 on the franchise tax of
Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu Air, Inc., R.A. No. 7583 on the
franchise tax of Aboitiz Air Transport Corporation, R.A. No. 7909 on the franchise tax of Pacific Airways
Corporation, R.A. No. 8339 on the franchise tax of Air Philippines, or any other franchise agreement or law
pertaining to a domestic airline to the contrary notwithstanding:

(A) The franchise tax is abolished;

(B) The franchisee shall be liable to the corporate income tax;

(C) The franchisee shall register for value-added tax under Section 236, and to account under Title IV of
the National Internal Revenue Code of 1997, as amended, for value-added tax on its sale of goods, property
or services and its lease of property; and

(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties, registration, license,
and other fees and charges, as may be provided by their respective franchise agreement.

Again, in Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[122] this Court maintained that
despite these amendments to the National Internal Revenue Code, PAL remains exempt from all other
taxes, duties, royalties, registrations, licenses, and other fees and charges, provided it pays the corporate
income tax as granted in its franchise agreement. It further emphasized that no explicit repeals were made
on Presidential Decree No. 1590.[123]

Thus, Presidential Decree No. 1590 and PAL's tax exemptions subsist. Necessarily, PAL remains exempt
from tax on interest income earned from bank deposits.

Moreover, Presidential Decree No. 1590 provides that any excess payment over taxes due from PAL's shall
either be refunded or credited against its tax liability for the succeeding taxable year, thus:

Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly
basis to the Commissioner of Internal Revenue. . . .

....
Any excess of the total quarterly payments over the actual annual franchise of income tax due as shown in
the final or adjustment franchise or income-tax return shall either be refunded to the grantee or credited
against the grantee's quarterly franchise or income-tax liability for the succeeding taxable year or years at
the option of the grantee.

The term "gross revenues" is herein defined as the total gross income earned by the grantee from; (a)
transport, nontransport, and other services; (b) earnings realized from investments in money-market
placements, bank deposits, investments in shares of stock and other securities, and other investments; (c)
total gains net of total losses realized from the disposition of assets and foreign-exchange transactions; and
(d) gross income from other sources.[124] (Emphasis supplied)

Thus, PAL is entitled to a tax refund or tax credit if excess payments are made on top of the taxes due from
it.

Considering that PAL is not liable to pay the tax on interest income from bank deposits, any payments
made for that purpose are in excess of what is due from it. Thus, if PAL erroneously paid for this tax, it is
entitled to a refund.

III.B

PAL is likewise entitled to a refund because it is not responsible for the remittance of tax to the Bureau of
Internal Revenue. The taxes on interest income from bank deposits are in the nature of a withholding tax.
Thus, the party liable for remitting the amounts withheld is the withholding agent of the Bureau of Internal
Revenue.

Interest income from bank deposits is taxed under the National Internal Revenue Code:

Section 27. Rates of Income Tax on Domestic Corporations.

....

(D) Rates of Tax on Certain Passive Incomes. —

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust
Funds and Similar Arrangements, and Royalties. — A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income.[125] (Emphasis supplied)

The tax due on this income is a final withholding tax:

Section 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax imposed or prescribed by Sections ... 27(D)(1), ... 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. [126]
Final withholding taxes imposed on interest income are likewise provided for under Revenue Regulations
No. 02-98, Section 2.57.1(G):[127]

(G) Income Payment to a Domestic Corporation. — The following items of income shall be subject to a
final withholding tax in the hands of a domestic corporation, based on the gross amount thereof and at the
rate of tax prescribed therefor:

(1) Interest from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements derived from sources within the Philippines —
Twenty Percent (20%).

....

(3) Interest income derived from a depository bank under the Expanded Foreign Currency Deposit System,
otherwise known as a Foreign Currency Deposit Unit (FCDU) — Seven and one-half percent (7.5%).

When a particular income is subject to a final withholding tax, it means that a withholding agent will
withhold the tax due from the income earned to remit it to the Bureau of Internal Revenue. Thus, the
liability for remitting the tax is on the withholding agent:[128]

Under Revenue Regulations No. 02-98, Section 2.57:

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and final payment of the income tax due from the payee on
the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent.
Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The payee is not required to file an income tax return for the
particular income. (Emphasis supplied)

Clearly, the withholding agent is the payor liable for the tax, and any deficiency in its amount shall be
collected from it.[129] Should the Bureau of Internal Revenue find that the taxes were not properly remitted,
its action is against the withholding agent, and not against the taxpayer.

The responsibility of the withholding agent is further underscored by Republic Act No. 8424, Section 58:

Section 58. Returns and Payment of Taxes Withheld at Source. —

(B) Statement of Income Payments Made and Taxes Withheld. — Every withholding agent required to
deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts
during the calendar quarter or year, a written statement showing the income or other payments made by
the withholding agent during such quarter or year, and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the request of the payee, but not later than the twentieth (20th)
day following the close of the quarter in the case of corporate payee, or not later than March 1 of the
following year in the case of individual payee for creditable withholding taxes. For final withholding taxes,
the statement should be given to the payee on or before January 31 of the succeeding year.

(C) Annual Information Return. — Every withholding agent required to deduct and withhold taxes under
Section 57 shall submit to the Commissioner an annual information return containing the list of payees and
income payments, amount of taxes withheld from each payee and such other pertinent information as may
be required by the Commissioner . . .[130] (Emphasis supplied)
Revenue Regulations 09-28 further provides:

Section 2.57.4. Time of Withholding. — The obligation of the payor to deduct and withhold the tax under
Section 2.57 of these regulations arises at the time an income is paid or payable, whichever comes first, the
term "payable" refers to the date the obligation become due, demandable or legally enforceable.[131]

....

Section 2.58. Returns and Payment of Taxes Withheld at Source. —

....

(B) Withholding tax statement for taxes withheld — Every payor required to deduct and withhold taxes
under these regulations shall furnish each payee, whether individual or corporate, with a withholding tax
statement, using the prescribed form (BIR Form 2307) showing the income payments made and the amount
of taxes withheld therefrom, for every month of the quarter within twenty (20) days following the close of
the taxable quarter employed by the payee in filing his/its quarterly income tax return. Upon request of the
payee, however, the payor must furnish such statement to the payee simultaneously with the income
payment. For final withholding taxes, the statement should be given to the payee on or before January 31 of
the succeeding year.

(C) Annual information return for income tax withheld at source. — The payor is required to file with the
Commissioner, Revenue Regional Director, Revenue District Officer, Collection Agent in the city or
municipality where the payor has his legal residence or principal place of business, where the government
office is located in the case of a government agency, on or before January 31 of the following year in which
payments were made, an Annual Information Return of Income Tax Withheld at Source (Form No. 1604),
showing among others the following information:

(1) Name, address and taxpayer's identification number (TIN); and

(2) Nature of income payments, gross amount and amount of tax withheld from each payee and such other
information as may be required by the Commissioner.[132] (Emphasis supplied)

These provisions state that the withholding agent must file the annual information return and furnish the
payee written statements of the payments it made and of the amounts it deducted and withheld. They
confirm that the remittance of the tax is not the responsibility of the payee, but that of the payor, the
withholding agent.

Moreover, in Commissioner of Internal Revenue v. Philippine National Bank:[133]

Petitioner's posture that respondent is required to establish actual remittance to the Bureau of Internal
Revenue deserves scant consideration. Proof of actual remittance is not a condition to claim for a refund of
unutilized tax credits. Under Sections 57 and 58 of the 1997 National Internal Revenue Code, as amended,
it is the payor-withholding agent, and not the payee-refund claimant such as respondent, who is vested with
the responsibility of withholding and remitting income taxes.

This court's ruling in Commissioner of Internal Revenue v. Asian Transmission Corporation, citing the
Court of Tax Appeals' explanation, is instructive:

. . . proof of actual remittance by the respondent is not needed in order to prove withholding and remittance
of taxes to petitioner. Section 2.58.3 (B) of Revenue Regulation No. 2-98 clearly provides that proof of
remittance is the responsibility of the withholding agent and not of the taxpayer-refund claimant. It should
be borne in mind by the petitioner that payors of withholding taxes are by themselves constituted as
withholding agents of the BIR. The taxes they withhold are held in trust for the government. In the event
that the withholding agents commit fraud against the government by not remitting the taxes so withheld,
such act should not prejudice herein respondent who has been duly withheld taxes by the withholding
agents acting under government authority. Moreover, pursuant to Sections 57 and 58 of the NIRC of 1997,
as amended, the withholding of income tax and the remittance thereof to the BIR is the responsibility of the
payor and not the payee. Therefore, respondent . . . has no control over the remittance of the taxes withheld
from its income by the withholding agent or payor who is the agent of the petitioner. The Certificates of
Creditable Tax Withheld at Source issued by the withholding agents of the government are prima facie
proof of actual payment by herein respondent-payee to the government itself through said agents.[134]
(Emphasis supplied, citations omitted)

In the case at bar, PAL is the income earner and the payee of the final withholding tax, and the Agent
Banks are the withholding agents who are the payors responsible for the deduction and remittance of the
tax.

Given the above provisions, the failure of the Agent Banks to remit the amounts does not affect and should
not prejudice PAL. In case of failure of remittance of taxes, the Bureau of Internal Revenue's cause of
action is against the Agent Banks.

Thus, PAL is not obliged to remit, let alone prove the remittance of, the taxes withheld.

III.C

To claim a refund, this Court rules that PAL needs only to prove that taxes were withheld.

Taxes withheld by the withholding agent are deemed to be the full and final payment of the income tax due
from the income earner or payee.[135]

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld by
the withholding agent is constituted as a full and final payment of the income tax due from the payee on
the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent.
Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The payee is not required to file an income tax return for the
particular income.

The finality of the withholding tax is limited only to the payee's income tax liability on the particular
income. It does not extend to the payee's other tax liability on said income, such as when the said income is
further subject to a percentage tax. For example, if a bank receives income subject to final withholding tax,
the same shall be subject to a percentage tax.[136] (Emphasis supplied)

Certificates of Final Taxes Withheld issued by the Agent Banks are sufficient evidence to establish the
withholding of the taxes.[137]

In Commissioner of internal Revenue v. Philippine National Bank: [138]

The certificate of creditable tax withheld at source is the competent proof to establish the fact that taxes are
withheld. It is not necessary for the person who executed and prepared the certificate of creditable tax
withheld at source to be presented and to testify personally to prove the authenticity of the certificates.
In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this court declared that a certificate is
complete in the relevant details that would aid the courts in the evaluation of any claim for refund of excess
creditable withholding taxes:

In fine, the document which may be accepted as evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the
name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and the
nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes from the sale of
acquired assets can be found in BIR Form No. 1743.1. As described in Section 6 of Revenue Regulations
No. 6-85, BIR Form No. 1743.1 is a written statement issued by the payor as withholding agent showing
the income or other payments made by the said withholding agent during a quarter or year and the amount
of the tax deducted and withheld therefrom. It readily identifies the payor, the income payment and the tax
withheld. It is complete in the relevant details which would aid the courts in the evaluation of any claim for
refund of creditable withholding taxes.[139] (Emphasis supplied, citations omitted)

In the case at bar, the Court of Tax Appeals Special First Division noted that PAL offered in evidence the
following Certificates of Final Tax Withheld at Source from the Agent Banks to prove the earned interest
income on its bank deposits and the taxes withheld:[140]

AMOUNT OF TAX WITHHELD

BANK PERIOD COVERED
PESO US DOLLAR
China Banking Corp. (Exhibit January 2002 - December
38,974.75
"C") 2002
JP Morgan Chase Bank September 2002 -
1,237,646.43
(Exhibit "D") December 2002
Phil. Bank of
January 2002 - March
Communication[s] (Exhibit 7,698.63
2002
"E")
Phil. Bank of
Communication[s] (Exhibit April 2002 - June 2002 108,351.68 1,698.99
"F")
Phil. Bank of
July 2002 - September
Communication[s] (Exhibit 401,871.48 3,009.28
2002
"G")
Phil. Bank of
October 2002 - December
Communication[s] (Exhibit[s] 8,037.28
2002
"H" and "I")
Standard Chartered [Bank] May 2002 - December
6,458.14
(Exhibit "J") 2002
TOTAL P1,747,869.59 $65,877.07

PAL also presented bank-issued Certificates of Final Tax Withheld at Source showing that the amounts it is
seeking to refund were withheld.

For JPMorgan, PAL presented a Certificate of Income Tax Withheld for the Year 2002, which stated that
its interest earned was P6,188,232.17 and that JPMorgan's withheld taxes were P1,237,646.43. This
Certificate was signed by JPMorgan's Vice President and Operations Manager, Mamerto R. Natividad. [141]
For Chinabank, PAL presented a Bank Certification dated October 24, 2003, signed by Wilfredo A.
Quijencio, Chinabank's International Banking Group Senior Manager. [142] It showed that Chinabank
withheld final taxes amounting to US$38,974.75 from PAL's interest income from its dollar time deposit
with Chinabank for the year 2002:

This is to certify the amount[s] of tax withheld from US DOLLAR Time Deposit account of PHILIPPINE
AIRLINES the year 2002 are as follows:

INTEREST
WITHHOLDING DATE
PRINCIPAL PERIOD MATURITY
INCOMETAX REMITTED
AMOUNT COVERED VALUE
(NET)
DEDUCTED TO BIR
02/11/02,
01/01/02 to 03/11/02,
USD17,098,253.14 USD17,315,721.55 USD111,150.52 USD9,012.20
04/02/02 04/10/02,
05/10/02
05/10/02,
06/10/02,
04/02/02 to 07/10/02,
USD17,315,721.55 USD17,617,709.54 USD301,987.99 USD24,485.51
09/30/02 08/10/02,
09/10/02,
10/10/02
10/10/02,
9/30/02 to 11/11/02,
USD17,617,709.54 USD17,669,993.76 USD52,284.22 USD4,239.26
12/16/02 12/10/02,
01/10/03
12/16/02 to
USD10,669,993.76 USD10,807,210.62 USD11,309.08 USD916.95 01/10/03
12/31/02
12/23/02 to
USD7,000,000.00 USD7,086,558.17 USD3,956.95 USD320.83 01/10/03
12/31/02

This is to certify further that the said withholding tax deducted was duly remitted in accordance with
existing rules and regulations of the Bureau of Internal Revenue.

This certification is being issued upon the request of the above client for whatever purpose/s it may
serve.[143]

For PBCom, PAL presented Certificates of Income Tax Withheld for the four (4) quarters of Year 2002, all
of which were signed by PBCom's Assistant Vice President, Carmencita L. Tan. [144]

These Certificates stated the amounts of interest income PAL earned and the taxes withheld from its US
dollar time deposits:[145]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD
1st Quarter[146] US$102,648.40 US$7,698.63
2nd Quarter[147] US$22,653.20 US$1,698.00
3rd Quarter[148] US$40,123.73 US$3,009.28
4th Quarter[149] US$107,163.73 US$8,037.28
TOTAL[150] US$ 272,589.06 US$ 20,443.19
These Certificates also showed the amounts of interest income PAL earned and the taxes withheld from its
peso deposit accounts:[151]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD
2nd Quarter[152] P 541,758.42 P 108,351.67
3rd Quarter[153] P 2,009,357.41 P 401,871.46
TOTAL P 2,551,115.83 P 510,223.13

Moreover, PBCom's letter[154] dated April 10, 2003 stated:

Dear Sir,

This is to certify that Philippine Airlines had various dollar & [peso savings accounts] placement[s] with
our branch for the year 2002. The taxes withheld of which had been remitted to the BIR [are] as follows:

MAY JUNE JULY AUGUST SEPTEMBER

PSA
Principal
186,000,000.03 192,490,557.00 244,661,600.04 104,420,160.01 104,842,017.46
Amount
Interest Paid 325,500.00 216,258.42 1,259,246.32 527,321.80 222,789.29
Withholding
65,100.00 43,251.67 251,849.25 105,464.35 44,557.86
Tax
1ST QRTR. 2ND QRTR. 3RD QRTR. 4TH QRTR.
Dollar
Time
Deposit
Interest Paid 102,648.40 22,653.20 40,123.73 107,163.73
Withholding
7,698.63 1,698.99 3,009.28 8,037.28
Tax

This certification is hereby issued for whatever legal purpose it may serve.

Very truly yours,

(SGD) Ms. Carmencita
L. Tan, AVP
Branch Manager[155]

For Standard Chartered, PAL presented a letter dated September 19, 2003, signed by Standard Chartered's
Treasury Operations Officer, Bienvenido Nieto, listing PAL's interest income and withholding tax for its
US dollar time deposit account from May 2002 to December 2002. [156]

This letter stated:

We confirm the above interest income and the 7.5% withholding tax for your Time Deposit Account and
remitted to the Bureau of Internal Revenue.[157]
These bank-issued Certificates of Income Tax Withheld and BIR Forms were neither disputed nor alleged
to be false or fraudulent. There was not even any denial from the Commissioner or the Agent Banks that
the amounts were not withheld as final taxes from PAL's interest income from its money deposits.

Moreover, these Certificates of Final Tax Withheld, complete in relevant details, were declared under the
penalty of perjury. As such, they may be taken at face value.[158]

Section 267 of the National Internal Revenue Code, as amended, provides:

Section 267. Declaration under Penalties of Perjury. — Any declaration, return and other statements
required under this Code, shall, in lieu of an oath, contain a written statement that they are made under the
penalties of perjury. Any person who willfully files a declaration, return or statement containing
information which is not true and correct as to every material matter shall, upon conviction, be subject to
the penalties prescribed for perjury under the Revised Penal Code. [159]

Considering that these Certificates were presented, the burden of proof shifts to the Commissioner, who
needs to establish that they were incomplete, false, or issued irregularly.[160]

However, the Commissioner did no such thing.

Thus, these Certificates are sufficient evidence to establish the withholding of the taxes.

The taxes withheld from PAL are considered its full and final payment of taxes. Necessarily, when taxes
were withheld and deducted from its income, PAL is deemed to have paid them.

Considering that PAL is exempted from paying the withholding tax, it is rightfully entitled to a refund.

III.D

This Court notes that the case of Commissioner of Internal Revenue v. Philippine National Bank [161]
involves a refund of creditable withholding tax and not of final withholding tax. However, its ruling that
proof of remittance is not necessary to claim a tax refund applies to final withholding taxes. The same
principles used to rationalize the ruling apply to final withholding taxes: (i) the payor-withholding agent is
responsible for the withholding and remitting of the income taxes; (ii) the payee-refund claimant has no
control over the remittance of the taxes withheld from its income; (iii) the Certificates of Final Tax
Withheld at Source issued by the withholding agents of the government are prima facie proof of actual
payment by payee-refund claimant to the government itself and are declared under perjury.[162]

Thus, this Court sees no reason why it should not rule the same way.

III.E

Lastly, while tax exemptions are strictly construed against the taxpayer, the government should not misuse
technicalities to keep money it is not entitled to.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however
exalted, should not be misused by the government to keep money not belonging to it, thereby enriching
itself at the expense of its law-abiding citizens. Under the principle of solutio indebiti provided in Art.
2154, Civil Code, the BIR received something "when there [was] no right to demand it," and thus, it has the
obligation to return it. Heavily militating against respondent Commissioner is the ancient principle that no
one, not even the state, shall enrich oneself at the expense of another. Indeed, simple justice requires the
speedy refund of the wrongly held taxes.[163] (Citations omitted)
Considering that PAL presented sufficient proof that: (i) it is exempted from paying withholding taxes; (ii)
amounts were withheld and deducted from its accounts; (iii) and the Commissioner did not contest the
withholding of these amounts and only raises that they were not proven to be remitted, this Court finds that
PAL sufficiently proved that it is entitled to its claim for refund.

Finally, both the Commissioner and the Court of Tax Appeals should have appreciated the unreasonable
difficulty that it would have put the taxpayer—in this case PAL—to claim a statutory exemption granted to
it. In requiring that it prove actual remittance, the court a quo and the Commissioner effectively put the
burden on the payee to prove that both government and the banks complied with their legal obligation. It
would have been near impossible for the taxpayer to demand to see the records of the payor bank or the
ledgers of the government. The legislative policy was to provide incentives to the taxpayer by unburdening
it of taxes. By administrative and judicial interpretation, such policy would have been unreasonably
reversed. This is not this Court's view of equity. Clearly, the taxpayer in this case is entitled to relief.

WHEREFORE, premises considered, the Petition of Philippine Airlines, Inc. in G.R. Nos. 206079-80 is
GRANTED. The Petition of the Commissioner of Internal Revenue in G.R. No. 206309 is DENIED. The
August 14, 2012 Decision and February 25, 2013 Resolution of the Court of Tax Appeals En Banc in CTA
CASE No. 6877 are PARTIALLY REVERSED. Philippine Airlines, Inc. is entitled to its claim for refund
of P510,223.16 and US$65,877.07, representing the final income taxes withheld by China Banking
Corporation, Philippine Bank of Communications, and Standard Chartered Bank.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersa