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MACARAIG tax exemption for real estate

FACTS:  R.A. No. 1397 was enacted. The
tax exemption provision related to
the payment of this total
 Commonwealth Act No. 120 was
indebtedness was not amended nor
enacted creating the National
Power Corporation, a public
 R.A. No. 2055 was enacted
corporation, which shall be exempt
increasing the total amount of
from the payment of all taxes.
foreign loans NPC was authorized
 C.A. No. 344 was enacted. The
to incur to US$100,000,000.00
provision on tax exemption in
from the US$50,000,000.00 ceiling
relation to the issuance of the NPC
in R.A. No. 357. The tax provision
bonds was neither amended nor
related to the repayment of these
loans was not amended nor
 C.A. No. 495 was enacted and the
provision on tax exemption in
 R.A. No. 2058 was enacting fixing
relation to the issuance of the NPC
the corporate life of NPC to
bonds was neither amended nor
December 31, 2000. All laws or
provisions of laws and executive
 Republic Act No. 357 was enacted
orders contrary to said R.A. No.
authorizing the President of the
2058 were expressly repealed.
Philippines to guarantee, absolutely
 R.A. No 2641 was enacted
and unconditionally, as primary
converting the NPC from a
obligor, the payment of any and all
public corporation into a stock
NPC loans. Any such loan or loans
corporation. No tax exemption
shall be exempt from taxes, duties,
was incorporated in said Act.
fees, imposts, charges,
 R.A. No. 3043: No tax provision
contributions and restrictions of the
was incorporated in said Act.
Republic of the Philippines, its
 R.A. No 4897 was enacted. No tax
provinces, cities and
provision was incorporated in said
Act. 22
 R.A. No. 358: The National Power
 R.A. No. 6395: The bonds issued
Corporation shall be exempt from
under the authority of this
all taxes, duties, fees, imposts,
subsection shall be exempt from
charges, and restrictions of the
the payment of all taxes by the
Republic of the Philippines, its
Republic of the Philippines, or by
provinces, cities and
any authority, branch, division or
political subdivision thereof which
 R.A. No. 813 was enacted
facts shall be stated upon the face
amending R.A. No. 357 in that,
of said bonds.
aside from the IBRD, the President
 R.A. No. 6395, which declares the
of the Philippines was authorized to
non-profit character and tax
negotiate, contract and guarantee
exemptions of NPC
loans with the Export-Import Bank
 P.D. No. 395 was issued removing
of of Washigton, D.C., U.S.A., or
certain restrictions in the NPC's
any other international financial
sale of electricity to its different
institution. The tax provision for
customers. No tax exemption
repayment of these loans, as
provision was amended, deleted or
stated in R.A. No. 357, was not
 Section 13 of R.A. No. 6395:
 R.A. No. 987 was enacted
Corporation shall be declared
specifically to withdraw NPC's
exempt from the payment of all
forms of taxes, duties, fees, virtue of C.A. No. 120.When the NPC was
imposts as well as costs and authorized to contract with the IBRD for
service fees including filing fees, foreign financing, any loans obtained
appeal bonds, supersedeas bonds, were to be completely tax exempt.
in any court or administrative After the NPC was authorized to borrow
proceedings. from other sources of funds — aside
 P.D. No. 882 was issued issuance of bonds — it was again
withdrawing the tax exemption specifically exempted from all types
of NPC of taxes "to facilitate payment of its
 PD No. 1177 has already indebtedness." Even when the ceilings
expressly repealed the grant of tax for domestic and foreign borrowings were
privileges to any government- periodically increased, the tax
owned or controlled corporation exemption privileges of the NPC were
and all other units of government; maintained. NPC's tax exemption from
and since there was a need for real estate taxes was, however,
government-owned or controlled specifically withdrawn by Rep. Act No.
corporations and all other units of 987, as above stated. The exemption
government enjoying tax privileges was, however, restored by R.A. No.
to share in the requirements of 6395.
development, fiscal or otherwise,
by paying the duties, taxes and P.D. No. 380 added phrase "directly or
other charges due from them. indirectly. Then came P.D. No. 938 which
 E.O. No. 93 (S'86) was issued with amended Sec. 13(a), (b), (c) and (d) into
a view to correct presidential one very simple paragraph as follows: The
restoration or grant of tax Corporation shall be non-profit and shall
exemption to other government devote all its returns from its capital
and private entities without investment as well as excess revenues
benefit of review by the Fiscal from its operation, for expansion. To
Incentives Review Board. enable the Corporation to pay its
 E.O. No. 93 (S'86) was decreed to indebtedness and obligations and in
be effective upon the promulgation furtherance and effective implementation
of the rules and regulations, to be of the policy enunciated in Section one of
issued by the Ministry of Finance. this Act, the Corporation, including its
subsidiaries, is hereby declared exempt
ISSUES: from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well
(1) What kind of tax exemption privileges as costs and service fees including filing
did NPC have? fees, appeal bonds, supersedeas bonds, in
(2) For what periods in time were these any court or administrative proceedings. It
privileges being enjoyed? must be borne in mind that Presidential
(3) If there are taxes to be paid, who shall Decree Nos. 380 and 938 were issued by
pay for these taxes? one man, acting as such the Executive
and Legislative. Since both presidential
RULING: A chronological review of the decrees were made by the same person, it
NPC laws will show that it has been the would have been very easy for him to
lawmaker's intention that the NPC was to retain the same or similar language used
be completely tax exempt from all forms in P.D. No. 380 P.D. No. 938 if his
of taxes — direct and indirect. intention were to preserve the indirect tax
exemption of NPC. 54
NPC's tax exemptions at first applied to
the bonds it was authorized to float to Actually, P.D. No. 938 attests to the
finance its operations upon its creation by ingenuousness of then President Marcos
no matter what his fault were. P.D. No.
938 lumped up 13(b), 13(c), and 13(d) restrictions, including import
into the phrase "ALL FORMS OF TAXES, restrictions previously and presently
ETC.” included 13(a) under the "as well imposed, and to be imposed by the
as" clause and added PNOC subsidiaries Republic of the Philippines, or any of its
as qualified for tax exemptions. One agencies and political subdivisions.
common theme in all these laws is
that the NPC must be enable to pay Since the subject matter of this particular
its indebtedness which, as of P.D. No. Section 8 (b) had to do only with loans
938, was P12 Billion in total domestic and machinery imported, paid for from the
indebtedness, at any one time, and U$4 proceeds of these foreign loans, THERE
Billion in total foreign loans at any one WAS NO OTHER SUBJECT MATTER TO
time. The NPC must be and has to be LUMP IT UP WITH, and so, the tax
exempt from all forms of taxes if this goal exemption stood as is — with the
is to be achieved. express mention of "direct and
indirect" tax exemptions.
The above conclusion that then President
Marcos lumped up Sections 13 (b), 13 (c) And this "direct and indirect" tax
and (d) into the phrase "All FORMS OF" exemption privilege extended to "taxes,
is supported by the fact that he did fees, imposts, other charges . . . to be
not do the same for the tax imposed" in the future” surely, an
exemption provision for the foreign indication that the lawmakers wanted
loans to be incurred. the NPC to be exempt from ALL
FORMS of taxes — direct and indirect.
The tax exemption on foreign loans found
in Section 8(b), R.A. No. 6395, reads as It is crystal clear, therefore, that NPC
follows: The loans, credits and had been granted tax exemption
indebtedness contracted under this privileges for both direct and indirect
subsection and the payment of the taxes under P.D. No. 938.
principal, interest and other charges
thereon, as well as the importation of There is reason to believe that NPC
machinery, equipment, materials and availed of subsidy granted to exempt
supplies by the Corporation, paid from the GOCC's that suddenly found themselves
proceeds of any loan, credit or having to pay taxes. It will be noted that
indebtedness incurred under this Act, shall Section 23, P.D. No. 1177, mandated that
also be exempt from all taxes, fees, the Secretary of Finance and the
imposts, other charges and restrictions, Commissioner of the Budget had to
including import restrictions, by the establish the necessary procedure to
Republic of the Philippines, or any of its accomplish the tax payment/tax subsidy
agencies and political subdivisions. scheme of the Government. In effect,
NPC, did not put any cash to pay any tax
The same was amended by P.D. No. 380 as it got from the General Fund the
as follows: The loans, credits and amounts necessary to pay different
indebtedness contracted this subsection revenue collectors for the taxes it had to
and the payment of the principal, interest pay.
and other charges thereon, as well as the
importation of machinery, equipment, The NPC tax privileges withdrawn by
materials, supplies and services, by the Section 1. P.D. No. 1931, were, therefore,
Corporation, paid from the proceeds of the same NPC tax exemption privileges
any loan, credit or indebtedness incurred withdrawn by Section 23, P.D. No. 1177.
under this Act, shall also be exempt from NPC could no longer obtain a subsidy for
all direct and indirect taxes, fees, the taxes it had to pay.
imposts, other charges and
FIRB did not create NPC's tax exemption however, the NPC has been exempted
status but merely restored it. The rule from both direct and indirect taxation, the
that under the 1973 Constitution "no law NPC must beheld exempted from
granting a tax exemption shall be passed absorbing the economic burden of indirect
without the concurrence of a majority of taxation. This means, on the one hand,
all the members of the Batasang that the oil companies which wish to
Pambansa" does not apply as said P.D. sell to NPC absorb all or part of the
No. 1931 was not passed by the Interim economic burden of the taxes
Batasang Pambansa but by then previously paid to BIR, which could
President Marcos under His they shift to NPC if NPC did not enjoy
Amendment No. 6 power. P.D. No. exemption from indirect taxes. This means
1931 was, therefore, validly issued by also, on the other hand, that the NPC may
then President Marcos under his refuse to pay the part of the "normal"
Amendment No. 6 authority. purchase price of bunker fuel oil which
represents all or part of the taxes
Under E.O No. 93 (S'86) NPC's tax previously paid by the oil companies to
exemption privileges were again clipped BIR. If NPC nonetheless purchases such
by, this time, President Aquino. oil from the oil companies — because to
do so may be more convenient and
FIRB Resolution No. 17-87 was approved ultimately less costly for NPC than NPC
by the President. There is no indication, itself importing and hauling and storing
however, from the records of the case the oil from overseas — NPC is entitled to
whether or not similar approvals were be reimbursed by the BIR for that part of
given by then President Marcos for FIRB the buying price of NPC which verifiably
Resolutions Nos. 10-85 and 1- 86. . represents the tax already paid by the oil
company-vendor to the BIR.
In the case of the tax exemption
restoration of NPC, there is no other CIR vs. GOTAMCO
comparable entity — not even a single
public or private corporation — whose FACTS: The World Health Organization
rights would be violated if NPC's tax (WHO for short) is an international
exemption privileges were to be restored. organization that enjoys privileges and
Thus, after all has been said, it is clear immunities which are defined more
that the NPC had its tax exemption specifically in the Host Agreement entered
privileges restored from June 11, 1984 up into between the Republic of the
to the present. Philippines and the said Organization. The
Agreement provides that the Organization,
Who pays the tax? its assets, income and other properties
shall be: (a) exempt from all direct and
Private respondents-oil companies have to indirect taxes. It is understood, however,
absorb the taxes they add to the bunker that the Organization will not claim
fuel oil they sell to NPC. exemption from taxes which are, in fact,
no more than charges for public utility
The Court rules and declares that the oil services. When the WHO decided to
companies which supply bunker fuel oil to construct a building to house its own
NPC have to pay the taxes imposed upon offices, it entered into a further
said bunker fuel oil sold to NPC. By the agreement with the Government of the
very nature of indirect taxation, the Republic of the Philippines: The
economic burden of such taxation is Organization may import into the country
expected to be passed on through the materials and fixtures required for the
channels of commerce to the user or construction free from all duties and taxes
consumer of the goods sold. Because, and agrees not to utilize any portion of
the international reserves of the without the concurrence of the Philippine
Government. Senate. The privileges and immunities
granted to the WHO under the Host
The construction contract was awarded to Agreement have been recognized by this
respondent John Gotamco & Sons, Inc. for Court as legally binding on Philippine
the stipulated price of P370,000.00, but authorities.
when the building was completed the price
reached a total of P452,544.00. Direct taxes are those that are demanded
from the very person who, it is intended
WHO received an opinion from the or desired, should pay them; while
Commissioner of the Bureau of Internal indirect taxes are those that are
Revenue stating that "as the 3% demanded in the first instance from one
contractor's tax is an indirect tax on the person in the expectation and intention
assets and income of the Organization, that he can shift the burden to someone
the gross receipts derived by contractors else. The contractor's tax is of course
from their contracts with the WHO for the payable by the contractor but in the last
construction of its new building, are analysis it is the owner of the building that
exempt from tax in accordance with the shoulders the burden of the tax because
Host Agreement. However, the the same is shifted by the contractor to
Commissioner of Internal Revenue the owner as a matter of self-
reversed his opinion and stated that "as preservation. Thus, it is an indirect tax.
the 3% contractor's tax is not a direct nor And it is an indirect tax on the WHO
an indirect tax on the WHO, but a tax that because, although it is payable by the
is primarily due from the contractor, the petitioner, the latter can shift its burden
same is not covered by the Host on the WHO. In the last analysis it is the
Agreement. WHO that will pay the tax indirectly
through the contractor and it certainly
WHO issued a certification which certifies cannot be said that 'this tax has no
that the bid of John Gotamco & Sons, bearing upon the World Health
made under the condition stated above, Organization.
should be exempted from any taxes in
connection with the construction of the Since the Host Agreement specifically
World Health Organization office building. exempts the WHO from "indirect taxes."
The Host Agreement, in specifically
Court of Tax Appeals rendered a exempting the WHO from "indirect taxes,"
decision in favor of Gotamco and reversed contemplates taxes which, although not
the Commissioner's decision. imposed upon or paid by the Organization
directly, form part of the price paid or to
be paid by it. The 3% contractor's tax
ISSUE: whether respondent John
would be within this category and should
Gotamco & Sons, Inc. should pay the 3%
be viewed as a form of an "indirect tax"
contractor's tax.
On the Organization, as the payment
thereof or its inclusion in the bid price
RULING: NO. would have meant an increase in the
construction cost of the building.
While treaties are required to be ratified
by the Senate under the Constitution,
less formal types of international
agreements may be entered into by
the Chief Executive and become
binding without the concurrence of FACTS: The petitioner is a corporation
the legislative body. It is a valid and engaged in the manufacture and sale of
binding international agreement even oxygen and acetylene gases. It made
various sales of its products to the or its gross monthly sales, receipts or
National Power Corporation, an agency of earnings or gross value of output actually
the Philippine Government, and to the removed from the factory or mill
Voice of America an agency of the United warehouse and within twenty days after
States Government. The sales to the NPC the end of each month, pay the tax due
amounted to P145,866.70, while those to thereon."
the VOA amounted to P1,683.00 on
account of which the respondent But it is argued that a sales tax is
Commission of Internal Revenue assessed ultimately passed on to the
against, and demanded from, the purchaser, and that, so far as the
petitioner the payment of P12,910.60 as purchaser is an entity like the NPC which
deficiency sales tax and surcharge. is exempt from the payment of "all taxes,
except real property tax," the tax cannot
The petitioner denied liability for the be collected from sales.
payment of the tax on the ground that
both the NPC and the VOA are exempt The incidence of the tax ultimately settles
from taxation. It asked for a on the purchaser, but it is not for that
reconsideration of the assessment and, reason alone that one may validly argue
failing to secure one, appealed to the that it is a tax on the purchaser. The
Court of Tax Appeals. exemption granted to the NPC may be
likened to the immunity of the Federal
ISSUE: WON petitioner is liable for the Government from state taxation and vice
payment of tax on the sales it made to the versa in the federal system of government
NPC and the VOA because both entities of the United States. In the early case
are exempt from taxation. of Panhandle Oil Co. v. Mississippi the
doctrine of intergovernment mental tax
RULING: Yes. Petitioner is liable. immunity was held as prohibiting the
imposition of a tax on sales of gasoline
First, The NPC enjoys tax exemption by made to the Federal Government.
virtue of an act of Congress which
provides as follows: Soon it became obvious that to test the
constitutionality of a statute by
Sec. 2. To facilitate the payment of determining the party on which the legal
its indebtedness, the National incidence of the tax fell was an
Power Corporation shall be exempt unsatisfactory way of doing things.
from all taxes, except real property
tax, and from all duties, fees, In 1941, Alabama v. King & Boozer held
imposts, charges, and restrictions that the constitutional immunity of the
of the Republic of the Philippines, United States from state taxation was not
its provinces, cities and infringed by the imposition of a state sales
municipalities. tax with which the seller was chargeable
but which he was required to collect from
It is contended that the immunity thus the buyer, in respect of materials
given to the NPC would be impaired by purchased by a contractor with the United
the imposition of a tax on sales made to it States on a cost-plus basis for use in
because while the tax is paid by the carrying out its contract, despite the fact
manufacturer or producer, the tax is that the economic burden of the tax was
ultimately shifted by the latter to the borne by the United States.
former. The Code states that the sales tax
"shall be paid by the manufacturer or Further inroads into the doctrine
producer," who must "make a true and of Panhandle were made in 1943 when the
complete return of the amount of his, her U.S. Supreme Court held that immunity
from state regulation in the performance We therefore hold that the tax
of governmental functions by Federal imposed by section 186 of the
officers and agencies did not extend to National Internal Revenue Code is a
those who merely contracted to furnish tax on the manufacturer or producer
supplies or render services to the and not a tax on the purchaser except
government even though as a result of an probably in a very remote and
increase in the price of such supplies or inconsequential sense. Accordingly its levy
services attributable to the state on the sales made to tax-exempt entities
regulation, its ultimate effect may be to like the NPC is permissible.
impose an additional economic burden on
the Government. Second, only sales made "for exclusive
use in the construction, maintenance,
But if a complete turnabout from the rule operation or defense of the bases," in
announced in Panhandle was yet to be a word, only sales to the quartermaster,
made, it was so made in 1952 in Esso are exempt under article V from
Standard Oil v. Evans11 which held that a taxation. Sales of goods to any other
contractor is not exempt from the party even if it be an agency of the
payment of a state privilege tax on the United States, such as the VOA, or
business of storing gasoline simply even to the quartermaster but for a
because the Federal Government with different purpose, are not free from
which it has a contract for the storage of the payment of the tax. On the other
gasoline is immune from state taxation. hand, article XVIII exempts from the
payment of the tax sales made within the
We have determined the current status of base by (not sales to) commissaries and
the doctrine of intergovernmental tax the like in recognition of the principle that
immunity in the United States, by a sales tax is a tax on the seller and not
showing the drift of the decisions following on the purchaser.
announcement of the original rule, to
point up the that fact that even in those It is a familiar learning in the American
cases where exemption from tax was law of taxation that tax exemption must
sought on the ground of state immunity, be strictly construed and that the
the attempt has not met with success. exemption will not be held to be conferred
unless the terms under which it is granted
It may indeed be that the economic clearly and distinctly show that such was
burden of the tax finally falls on the the intention of the parties. Hence, in so
purchaser; when it does the tax far as the circular of the Bureau of
becomes a part of the price which the Internal Revenue would give the tax
purchaser must pay. It does not matter exemptions in the Agreement an
that an additional amount is billed as tax expansive construction it is void.
to the purchaser. The method of listing
the price and the tax separately and We hold, therefore, that sales to the VOA
defining taxable gross receipts as the are subject to the payment of percentage
amount received less the amount of the taxes under section 186 of the Code. The
tax added, merely avoids payment by the petitioner is thus liable for P12,910.60.
seller of a tax on the amount of the tax. Accordingly, the decision a quo is modified
by ordering the petitioner to pay to the
But the tax burden may not even be respondent Commission the amount of
shifted to the purchaser at all. A P12,910.60 as sales tax and surcharge,
decision to absorb the burden of the tax is with costs against the petitioner.
largely a matter of economics. Then it can
no longer be contended that a sales tax is
a tax on the purchaser.
TAN TIONG BIO, ET AL VS which met an opposition on the part of the
Court of Tax Appeals dismissed the
FACTS: Central Syndicate, a corporation appeal on the ground that the Central
organized under the laws of the Syndicate has no personality to maintain
Philippines purchased from Dee Hong Lue the action then pending before it.
the entire stock of surplus properties
which the said Dee Hong Lue had bought From this order the syndicate appealed to
from the Foreign Liquidation Commission. the Supreme Court wherein it intimated
that the appeal should not be dismissed
Central Syndicate assumed Dee Hong because it could be substituted by its
Lue's obligation to pay the 3-1/2% sales successors-in-interest.
tax on said surplus goods. It remitted
P43,750.00 in his behalf as deposit to After trial, the Court of Tax Appeals
answer for the payment of said sales tax affirmed the decision of the Collector of
with the understanding that it would later Internal Revenue except with regard to
be adjusted after the determination of the the imposition of the compromise penalty
exact consideration of the sale. of P300.00 the collection of which is
unauthorized and illegal in the absence of
The syndicate again requested the a compromise agreement between the
Collector the refund of P1,103.28 parties. Petitioners interposed the present
representing alleged excess payment of appeal.
sales tax due to the adjustment and
reduction of the purchase price in the
amount of P31,522.18.
ISSUES:(1) whether the importer of the
The collector decided that the Central surplus goods in question the sale of
Syndicate was the importer and original which is subject to the present tax liability
seller of the surplus goods in question is Dee Hong Lue or the Central Syndicate
and, therefore, the one liable to pay the who has been substituted by the present
sales tax. Collector assessed against the petitioners;
syndicate the amount of P33,797.88 and
P300.00 as deficiency sales tax, inclusive (2) whether the deficiency sales tax which
of the 25% surcharge and compromise is now sought to be collected has already
penalty, respectively. The collector denied prescribed; and
the request of the syndicate for the refund
of the sum of P1,103.28. (3) whether the Central Syndicate having
already been dissolved because of the
The Central Syndicate elevated the case expiration of its corporate existence,
to the Court of Tax Appeals questioning whether the sales tax in question can be
the ruling of the Collector. The syndicate enforced against its successors-in-interest
filed a motion requesting that the issue of who are the present petitioners.
prescription it has raised against the
collection of the tax be first determined as RULING:
a preliminary question, but action thereon
was deferred by the Court of Tax Appeals 1.Dee Hong Lue purchased the surplus
until after the trial of the case on the goods in question not for himself but for
merits. The Collector filed a motion to the Central Syndicate which was then in
dismiss the appeal on the ground of lack the process of incorporation such that the
of personality on the part of the syndicate, deed of sale. Dee Hong Lue sold said
goods to the syndicate for a consideration but, as the record shows, the Central
of P1,250,000.00 (the same amount paid Syndicate failed to file any return of its
by Dee Hong Lue to the Foreign quarterly sales on the pretext that it was
Liquidation Commission) "is but a ruse to Dee Hong Lue who imported the surplus
evade payment of a greater amount of goods and it merely purchased them from
percentage tax." said importer.

It cannot be denied that Dee Hong Lue The syndicate failed to file its quarterly
purchased the goods on behalf of those returns as required by Section 183 of the
who advanced the money for the purchase Tax Code. Since it appears that the
thereof who later became the Collector discovered the failure of the
incorporators and only stockholders of the syndicate to file the return only on
syndicate with the understanding that the September 12, 1951 he has therefore up
amounts they had respectively advanced to September 18, 1961 (10 years) within
would be their investment and would which to assess or collect the deficiency
represent their interest in the corporation. tax in question. Consequently the
And this is further evidenced by the fact assessment made on January 4, 1952 was
that this purchase made by Dee Hong Lue made within the prescribed period.
was later approved and adopted as the act
of the Central Syndicate itself. 3. It should be stated at the outset that it
was petitioners themselves who
The general manager of said syndicate caused their substitution as parties in
emphasized that the persons named the present case, being the successors-
therein (from whom Dee Hong Lue in-interest of the defunct syndicate,
obtained the money) merely acted on when they appealed this case to the
behalf of the syndicate and in fact were Supreme Court for which reason the latter
the ones who went to Leyte to take over Court declared that "the respondent Court
the aforesaid surplus goods. In any event, of Tax Appeals should have allowed the
even if Dee Hong Lue may be deemed as substitution of its former officers and
the purchaser of the surplus goods in his directors is parties-appellants, since they
own right, nevertheless, the corporation are proper parties in interest insofar as
still may be regarded as the importer they may be (and in fact are) held
of the same goods for the reason that personally liable for the unpaid deficiency
Dee Hong Lue transferred to it all his assessments made by the Collector of
rights and interests in the contract Internal Revenue against the defunct
with the Foreign Liquidation Syndicate."
Commission, and it was said corporation
that took delivery thereof from the place In fact, because of this directive their
where they were stored in Leyte. Under substitution was effected. They cannot,
these facts, it is clear that the Central therefore, be now heard to complain if
Syndicate is the importer of the they are made responsible for the tax
surplus goods. liability of the defunct syndicate whose
representation they assumed and whose
2. Since the Central Syndicate, as we assets were distributed among them.
have already pointed out, was the
importer of the surplus goods in question, In the second place, there is good
it was its duty under Section 183 of the authority to the effect that the creditor
Internal Revenue Code to file a return of of a dissolved corporation may follow
its gross sales within 20 days after the its assets once they passed into the
end of each quarter in order that the hands of the stockholders. An
office of the internal revenue may assess indebtedness of a corporation to the
the sales tax that may be due thereon, federal government for income and
excess profit taxes is not Return. CIR informed MEDICARD and
extinguished by the dissolution of the issued a Letter Notice and also issued a
corporation. Preliminary Assessment Notice (PAN)
against MEDICARD for deficiency VAT.
Bearing in mind that our corporation law
is of American origin, the foregoing MEDICARD received CIR's FAN for alleged
authorities have persuasive effect in deficiency VAT for taxable year 2006 in
considering similar cases in this the total amount of Pl 96,614,476.69,10
jurisdiction. This must have been taken inclusive of penalties. According to the
into account when in G.R. No. L-8800 this CIR, the taxable base of HMOs for VAT
Court said that petitioners could be held purposes is its gross receipts without any
personally liable for the taxes in question deduction. CIR argued that since
as successors-in-interest of the defunct MEDICARD does not actually provide
corporation. medical and/or hospital services, but
merely arranges for the same, its services
Considering that the Central Syndicate are not VAT exempt.
realized from the sale of the surplus goods
and that the sale of said goods was the CIR's denied MEDICARD's protest.
only transaction undertaken by said
syndicate, there being no evidence to the MEDICARD filed a petition for review
contrary, the conclusion is that said net before the CTA.
profit remained intact and was
distributed among the stockholders CTA Division affirmed with modifications
when the corporation liquidated and the CIR's deficiency VAT assessment
distributed its assets covering taxable year 2006. MEDICARD
now seeks recourse to this Court via a
Petitioners are therefore the petition for review on certiorari.
beneficiaries of the defunct
corporation and as such should be ISSUES:
held liable to pay the taxes in
question. However, there being no
1. Whether the absence of the LOA is
express provision requiring the
fatal; and
stockholders of the corporation to be
2. Whether the amounts that
solidarily liable for its debts which liability
medicard earmarked and
must be express and cannot be presumed,
eventually paid to the medical
petitioners should be held to be liable
service providers should still form
for the tax in question only in
part of its gross receipts for vat
proportion to their shares in the
distribution of the assets of the
defunct corporation. The decision of the
trial court should be modified accordingly. RULING: The petition is meritorious.


The absence of an LOA violated

FACTS: MEDICARD is a Health MEDICARD's right to due process
Maintenance Organization (HMO) that
provides prepaid health and medical
An LOA is the authority given to the
insurance coverage to its clients.
appropriate revenue officer assigned to
MEDICARD filed its First, Second, and
perform assessment functions. It
Third Quarterly VAT Returns through
empowers or enables said revenue officer
Electronic Filing and Payment System
to examine the books of account and
(EFPS) and its Fourth Quarterly VAT
other accounting records of a taxpayer for The LN is merely similar to a Notice for
the purpose of collecting the correct Informal Conference. However, the same
amount of tax. An LOA is premised on the presupposes that the revenue officer who
fact that the examination of a taxpayer issued the same is properly authorized in
who has already filed his tax returns is a the first place.
power that statutorily belongs only to the
CIR himself or his duly authorized IV. POLICIES AND GUIDELINES
representatives. It is clear that unless
authorized by the CIR himself or by his o In the event a taxpayer who has
duly authorized representative, through been issued an LN refutes the
an LOA, an examination of the taxpayer discrepancy shown in the LN, the
cannot ordinarily be undertaken. Hence, concerned taxpayer will be given
unless undertaken by the CIR himself or an opportunity to reconcile its
his duly authorized representatives, other records with those of the BIR
tax agents may not validly conduct any of within One Hundred and
these kinds of examinations without prior Twenty (120) days from the
authority. date of the issuance of the LN.
However, the subject taxpayer
"no-contact-audit approach" - Under shall no longer be entitled to the
this policy, even without conducting a abatement of interest and penalties
detailed examination of taxpayer's after the lapse of the sixty (60)-
books and records, if the day period from the LN issuance.
computerized/manual matching of o In case the above discrepancies
sales and purchases/expenses remained unresolved at the end
appears to reveal discrepancies, the of the One Hundred and Twenty
same shall be communicated to the (120)-day period, the revenue
concerned taxpayer through the officer (RO) assigned to handle the
issuance of LN. The LN shall serve as LN shall recommend the
a discrepancy notice to taxpayer similar issuance of [LOA) to replace
to a Notice for Informal Conference to the the LN.
concerned taxpayer.
In this case, there is no dispute that no
RELIEF System LOA was issued prior to the issuance
of a PAN and FAN against MEDICARD.
- a revenue officer may begin an Therefore no LOA was also served on
examination of the taxpayer even MEDICARD. The LN that was issued
prior to the issuance of an LN or earlier was also not converted into an
even in the absence of an LOA with LOA contrary to the above quoted
the aid of a provision. Clearly, there must be a grant
computerized/manual of authority before any revenue officer
matching of taxpayers' can conduct an examination or
documents/records. assessment. Equally important is that the
- the presumption that the tax revenue officer so authorized must not go
returns are in accordance with law beyond the authority given. In the
and are presumed correct since absence of such an authority, the
these are filed under the penalty of assessment or examination is a nullity.
perjury are easily rebutted and the
taxpayer becomes instantly The Court cannot convert the LN into the
burdened to explain a purported LOA required under the law even if the
discrepancy. same was issued by the CIR himself.
LN is issued to a person found to have BIR' s revenue officers is properly
underreported sales/receipts per data authorized in the first place by those to
generated under the RELIEF system. whom the discretion to exercise the power
Upon receipt of the LN, a taxpayer may of examination is given by the statute. At
avail of the BIR's Voluntary Assessment any rate, even if it is assumed that the
and Abatement Program. If a taxpayer absence of an LOA is not fatal, the Court
fails or refuses to avail of the said still partially finds merit in MEDICARD's
program, the BIR may avail of substantive arguments.
administrative and criminal .remedies,
particularly closure, criminal action, or MEDICARD is principally engaged in
audit and investigation. Since the law the sale of services. The compensation
specifically requires an LOA and for their services representing their
requires the conversion of the service fee, is presumed to be the total
previously issued LN to an LOA, the amount received as enrollment fee from
absence thereof cannot be simply their members plus other charges
swept under the rug, as the CIR received.
would have it.
"Gross receipts" refers to the total
LN is entirely different and serves a amount of money or its equivalent
different purpose than an LOA. Due representing the contract price,
process demands, as recognized under compensation, service fee, rental or
RMO No. 32-2005, that after an LN has royalty, including the amount charged for
serve its purpose, the revenue officer materials supplied with the services and
should have properly secured an LOA deposits applied as payments for services
before proceeding with the further rendered, and advance payments actually
examination and assessment of the or constructively received during the
petitioner. Unfortunately, this was not taxable period for the services performed
done in this case. or to be performed for another person,
excluding the VAT.
In fact, apart from being a statutory
requirement, an LOA is equally needed According to the CTA en banc, the entire
even under the BIR's RELIEF System amount of membership fees should form
because the rationale of requirement is part of MEDICARD's gross receipts
the same whether or not the CIR conducts because the exclusions to the gross
a physical examination of the taxpayer's receipts does not apply to MEDICARD. The
records: CTA en banc overlooked that the definition
of gross receipts. RR No. 16-2005 merely
1. to prevent undue harassment presumed that the amount received by an
of a taxpayer HMO as membership fee is the HMO's
2. level the playing field between compensation for their services. As a
the government's vast mere presumption, an HMO is, thus,
resources for tax assessment, allowed to establish that a portion of the
collection and enforcement, amount it received as membership fee
and the solitary taxpayer's dual does NOT actually compensate it but some
need to prosecute its business other person, which in this case are the
while at the same time medical service providers themselves.
responding to the BIR exercise
of its statutory powers. It is notable in this regard that the term
gross receipts as elsewhere mentioned as
The balance between these is the tax base under the NIRC does not
achieved by ensuring that any contain any specific definition. Therefore,
examination of the taxpayer by the absent a statutory definition, this
Court has construed the term gross exacted nor assumed beyond the plain
receipts in its plain and ordinary meaning of the tax laws
meaning, that is, gross receipts is
understood as comprising the entire For this Court to subject the entire
receipts without any deduction. The amount of MEDICARD's gross receipts
bringing of physician and patient together, without exclusion, the authority should
the preventive features, the regularization have been reasonably founded from the
of service as well as payment, the language of the statute. That language is
substantial reduction in cost by quantity wanting in this case. In the scheme of
purchasing in short, getting the medical judicial tax administration, the need for
job done and paid for; not, except certainty and predictability in the
incidentally to these features, the implementation of tax laws is crucial. Our
indemnification for cost after .the services tax authorities fill in the details that
is rendered. Except the last, these are not Congress may not have the opportunity or
distinctive or generally characteristic of competence to provide. The regulations
the insurance arrangement. these authorities issue are relied upon by
taxpayers, who are certain that these will
The VAT is a tax on the value added by be followed by the courts. Courts,
the performance of the service by the however, will not uphold these authorities'
taxpayer. It is, thus, this service and interpretations when dearly absurd,
the value charged thereof by the erroneous or improper. The CIR's
taxpayer that is taxable under the interpretation of gross receipts in the
NIRC. present case is patently erroneous for lack
of both textual and non-textual support.
The Court's task however is not to weigh
these policy considerations but to As to the CIR's argument that the act of
determine if these considerations in favor earmarking or allocation is by itself an act
of taxation can even be implied from the of ownership and management over the
statute where the CIR purports to derive funds, the Court does not agree. On the
her authority. This Court rules that they contrary, it is MEDICARD's act of
cannot because the language of the NIRC earmarking or allocating 80% of the
is pretty straightforward and clear. As this amount it received as membership fee at
Court previously ruled: the time of payment that weakens the
ownership imputed to it. By earmarking or
A tax cannot be imposed without allocating 80% of the amount,
clear and express words for that MEDICARD unequivocally recognizes
purpose. Accordingly, the general rule that its possession of the funds is not
of requiring adherence to the letter in in the concept of owner but as a mere
construing statutes applies with administrator of the same.
peculiar strictness to tax laws and the
provisions of a taxing act are not to
be extended by implication. 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. As
burdens, taxes should not be unduly