CREBA v.

Romulo

Facts: Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented
by RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain. Petitioner also seeks to nullify Sections 2.57.2(J)
(as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-
2003, all of which prescribe the rules and procedures for the collection of CWT on the sale
of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by
RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance
has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets. Petitioner also asserts that
the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has
not yet been determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business enterprises,
more particularly those in the manufacturing sector.

Issue: Is the imposition of MCIT valid?

Ruling: Yes. Petitioner is correct in saying that income is distinct from capital. Income
means all the wealth which flows into the taxpayer other than a mere return on capital.
Capital is a fund or property existing at one distinct point in time while income denotes a
flow of wealth during a definite period of time. Income is gain derived and severed from
capital. For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not
income. In other words, it is income, not capital, which is subject to income tax. However,
the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods
and other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the
normal net income tax, and only if the normal income tax is suspiciously low. The MCIT
merely approximates the amount of net income tax due from a corporation, pegging the rate
at a very much reduced 2% and uses as the base the corporations gross income. Besides,
there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate.

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or
negative taxable income, merely defines the coverage of Section 27(E). This means that
even if a corporation incurs a net loss in its business operations or reports zero income
after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is
consistent with the law which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may well be the case that the MCIT would
be less than the net income of the corporation which posts a zero or negative taxable
income.

Issue: IS the imposition of CWT valid?

Ruling: Yes. Under RR 2-98, the tax base of the income tax from the sale of real property
classified as ordinary assets remains to be the entitys net income imposed under Section 24
(resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net
income tax payable by the taxpayer at the end of the taxable year.[71] Precisely, Section
4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property
classified as ordinary assets remains to be the net taxable income. Accordingly, at the end of
the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld
(by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less
than the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly,
the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agents knowledge and privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be the GSP or FMV as these are the only
factors reasonably known or knowable by him in connection with the performance of his
duties as a withholding agent.

FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale
of ordinary assets. The inherent and substantial differences between FWT and CWT
disprove petitioners contention that ordinary assets are being lumped together with, and
treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.
South African Airways vs CIR, February 16, 2010
Facts: South African Airways is a foreign corporation organized and existing under and by
virtue of the laws of the Republic of South Africa. Its principal office is located at
Johannesburg International Airport, South Africa. In the Philippines, it is an internal air
carrier having no landing rights in the country. South African Airways, however, has a
general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells
passage documents for compensation or commission for South African Airways’ off-line
flights for the carriage of passengers and cargo between ports or points outside the
territorial jurisdiction of the Philippines. South African Airways is not registered with the
SEC as a corporation, branch office, or partnership. It is not licensed to do business in the
Philippines. For the taxable year 2000, South African Airways filed separate quarterly and
annual income tax returns for its off-line flights. It paid a corporate tax in the rate of 32% of
its gross billings. On February 5, 2003, South African Airways filed with the BIR a claim for
the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine
Billings (GPB) for the taxable year 2000. This claim is based on their contention that its
income should be taxed at the rate of 2 ½% of its gross billings. This claim was unheeded
and South African Airways filed a Petition for Review with the CTA for the refund of the said
amount.
Issues:
1. Whether South African Airway’s income is sourced within the Philippines and is to
be taxed at 32% of the gross billings?
2. Whether South African Airways is entitled to a refund or a tax credit of erroneously
paid tax on Gross Philippine Billings for the taxable year 2000 in the amount of
P1,727,766.38?
Ruling:
1. Yes. In the instant case, the general rule is that resident foreign corporations shall be
liable for a 32% income tax on their income from within the Philippines, except for
resident foreign corporations that are international carriers that derive income
“from carriage of persons, excess baggage, cargo and mail originating from the
Philippines” which shall be taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, petitioner must fall under the
general rule. This principle is embodied in the Latin maxim, exception firmat
regulam in casibus non exceptis, which means, a thing not being excepted must be
regarded as coming within the purview of the general rule.
2. Taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other.

Exception: CIR v. CA, CityTrust (234 SCRA 348)SC, however, granted the offsetting of a
tax refund with a tax deficiency on the ground that such deficiency assessment is
intimately related to and inextricably intertwined with the right of CityTrust to
claim for a tax refund for the same year.
a) To award such refund despite the existence of that deficiency assessment is
an absurdity and a polarity in conceptual effects. CityTrust cannot be
entitled to refund and at the same time be liable for a tax deficiency
assessment for the same year.
b) The grant of a refund is founded on the assumption that the tax return is
valid - the facts stated therein are true and correct.
 c) The deficiency assessment, although not yet final, created a doubt as to and
constitutes a challenge against the truth and accuracy of the facts stated in
said return which, by itself and without unquestionable evidence, cannot be
the basis for the grant of the refund.
d) To avoid multiplicity of suits and unnecessary difficulties or expenses, it is
both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim
for tax refund, to determine once and for all in a single proceeding the true
and correct amount of tax due or refundable.

In determining whether South African Airways is entitled to the refund of the

amount paid, it would be necessary to determine how much the Government is entitled to
collect as taxes. This would necessarily include the determination of the correct liability of
the taxpayer and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved therein. Given the
finding of the CTA that South African Airways, although not liable for GPB, is liable for
income tax → the correctness of the return filed by South African Airways is now put in
doubt. Hence, SC cannot grant the prayer for a refund.
Supreme Court is unable to affirm CTA En Banc’s decision on the outright denial of
petitioner’s claim for a refund. Even though petitioner is not entitled to a refund due to the
question on the propriety of petitioner’s tax return subject of the instant controversy, it
would not be proper to deny such claim without making a determination of South African
Airways’ liability under Sec. 28(A)(1).
 Tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on
taxable income, that is, gross income less deductions and exemptions, if any.
 It cannot be assumed that South African Airways’ liabilities under the two
provisions would be the same.
 There is a need to make a determination of South African Airways’ liability
under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that
a tax deficiency exists.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an
exception to this general rule.
 South African Airways, being an international carrier with no flights originating from
the Philippines, does not fall under the exception. As such, petitioner must fall under
the general rule.

If an international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2 ½%of its Gross Philippine Billings, while international air carriers
that do not have flights to and from the Philippines but nonetheless earn income from other
activities in the country will be taxed at the regular rate of 32% (now 30%) of such income.
CIR v. CA & Soriano Corp. 301 SCRA 152

Facts: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which
were of original issue when the corporation was founded and 134,659 shares as stock
dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his
wife as her conjugal share (wife’s “legitime”) and the other half (92,577 shares, which is
further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares)
went to the estate. For some time after his death, his estate still continued to receive stock
dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption of shares from
Soriano’s estate purportedly for the planned “Filipinization” of ASC. Eventually, 108,000
shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC
for deficiency withholding tax-at-source. The CIR explained that when the redemption was
made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC
would have withheld tax payments from the Soriano Estate yet it remitted no such withheld
tax to the government.

ASC averred that it is not duty bound to withhold tax from the estate because it redeemed
the said shares for purposes of “Filipinization” of ASC and also to reduce its remittance
abroad.

ISSUE: Whether or not ASC’s arguments are tenable?

HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano
Estate definitely profited from the redemption and such profit is taxable, and again, ASC had
the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate.
25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares
are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is
also to be noted that in the absence of evidence to the contrary, the Tax Code presumes that
every distribution of corporate property, in whole or in part, is made out of corporate
profits such as stock dividends.

It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and
that the latter is merely redeeming them as such. The capital cannot be distributed in the
form of redemption of stock dividends without violating the trust fund doctrine — wherein
the capital stock, property and other assets of the corporation are regarded as equity in
trust for the payment of the corporate creditors. Once capital, it is always capital. That
doctrine was intended for the protection of corporate creditors.
CIR v. ST. LUKE'S MEDICAL CENTER, GR No. 203514, 2017-02-13

Facts: St. Luke's Medical Center, Inc.received from the BIR an Audit Results/Assessment
Notice assessing respondent SLMC deficiency income tax under Section 27(B) of the NIRC.
SLMC filed with petitioner CIR an administrative protest assailing the assessments. SLMC
claimed that as a non-stock, non-profit charitable and social welfare organization under
Section 30(E) and (G) of the 1997 NIRC, it is exempt from paying income tax. CIR argues
that under the doctrine of stare decisis SLMC is subject to 10% income tax under Section
27(B) of the 1997 NIRC. SLMC, on the other hand argues that earning a profit by a
charitable, benevolent hospital or educational institution does not result in the withdrawal
of its tax exempt privilege.

SLMC further claims that the income it derives from operating a hospital is not income from
"activities conducted for profit."

Issue: Whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are concerned

Ruling: SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its
revenues from paying patients are concerned.

Sec. 27(B) of the NIRC 10% preferential tax rate on the income of (1) proprietary non-profit
educational institutions and (2) proprietary non-profit hospitals. There is no dispute that St.
Luke's is organized as a non-stock and non profit charitable institution. However, this does
not automatically exempt St Luke's from paying taxes.

Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax
exempt To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and exclusively' for
charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires
that a charitable institution must be 'organized and operated exclusively' for charitable
purposes. However, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as its not-
for-profit activities remain tax exempt.

Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit'
without losing its tax exempt status for its nonprofit activities. The only consequence is that
the 'income of whatever kind and character' of a charitable institution 'from any of its
activities conducted for profit, regardless of the disposition made of such income, shall be
subject to tax.'

It cannot be disputed that a hospital which receives approximately P1.73 billion from
paying patients is not an institution 'operated exclusively' for charitable purposes. Clearly,
revenues from paying patients are income received from 'activities conducted for profit.'
To be clear, for an institution to be completely exempt from income tax, Section 30(E) and
(G) of the 1997 NIRC requires said institution to operate exclusively for charitable or social
welfare purpose. But in case an exempt institution under Section 30(E) or (G) of the said
Code earns income from its for-profit activities, it will not lose its tax exemption. However,
its income from for profit activities will be subject to income tax at the preferential 10%
rate pursuant to Section 27(B) thereof.

Republic of the Phil. vs. Soriano

FACTS:
On October 20, 2010, petitioner Republic of the Philippines, represented by the
Department of Public Works and Highways (DPWH), filed a Complaint for expropriation
against respondent Arlene R. Soriano, the registered owner of a parcel of land consisting
of an area of 200 square meters. 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. 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 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. Furthermore, RTC ordered the Plaintiff 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.
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 seller and not petitioner.

ISSUE:
In Expropriation proceedings, who should pay the transfer taxes in the nature of Capital
Gains Tax and Documentary Stamp Tax?

RULING:
CGT-Seller (respondent)
Documentary stamp Tax- Buyer (Republic represented by DPWH)
Capital gains is a tax on passive income, it is the seller, not the buyer, who generally
would shoulder the tax. 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, with respect to the
capital gains tax, there is 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.
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 DPWH rejects any liability for the same, the
Court takes note of petitioner’s Citizen’s Charter, 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 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.

CIR vs Aquafresh Seafoods

Facts:

On June 7, 1999, respondent Aquafresh Seafoods Inc. sold to Philips Seafoods, Inc. two parcels
of land, including improvements thereon, located at Barrio Banica, Roxas City, for the
consideration of Three Million One Hundred Thousand Pesos (Php 3,100, 000.00).

The Bureau of Internal Revenue (BIR) received a report that the lots sold were undervalued for
taxation purposes. After an investigation, BIR concluded that the subject properties were
commercial with a zonal value of Php 2,000.00 per square meter. BIR assessed Aquafresh of
Capital Gains Tax (CGT) and Documentary Stamp Tax (DST) deficiencies in the sum of Php
1,372,171.46 and Php 356,267.62,respectively. Aquafresh protested the assessments.
Aquafresh's argued that the subject properties were located in Barrio Banica, Roxas, where the
pre-defined zonal value was Php 650.00 per square meter based on the “Revised Zonal Values of
Real Properties in the City of Roxas”. Aquafresh argued that since there was already a pre-
defined zonal value for properties located in Barrio Banica, the BIR officials had no business re-
classifying the subject properties to commercial.

Issue: Is Aquafresh correct in asserting that it should only pay CGT and DST for the properties
based on its current classification as residential zone?

Ruling: Yes.

Under Section 27(D)(5) of the NIRC of 1997, a CGT of six (6%) percent is imposed on the gains
presumed to have been realized in the sale, exchange or disposition of lands and/or buildings
which are not actively used in the business of a corporation and which are treated as capital
assets based on the gross selling price or fair market value as determined in accordance with
Section 6(E) of the NIRC, whichever is higher.

On the other hand, under Section 196 of the NIRC, DST is based on the consideration contracted
to be paid or on its fair market value determined in accordance with Section 6(E) of the NIRC,
whichever is higher.

Section 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. -

xxxx
(E) Authority of the Commissioner to Prescribe Real Property Values The Commissioner is
hereby authorized to divide the Philippines into different zones or area and shall, upon
consultation with competent appraisers both from the private and public sectors, determine the
fair market value of real properties located in each zone or area. For purposes of computing
internal revenue tax, the value of the property shall be, whichever is higher of:

(1) the fair market value as determined by the Commissioner; or

(2) the fair market value as shown in the schedule of values of the Provincial and City
Assessors.

The CIR has the authority to prescribe real property values and divide the Philippines into zones.
But it has to be done upon consultation with competent appraisers for both public and private
sectors.

Clearly, at the time of the sale of the properties, they were already classified as residential
based on the 1995 Revised Zonal Value of Real Properties. Thus, CIR cannot unilaterally change
the zonal valuation from residential to commercial without a re-evaluation as provided by
Section 6(E).

Regardless if the properties were actually used as commercial and not residential, the same
remains to be residential for zonal value purposes. It appears that actual use is not considered
for zonal valuation, but the predominant use of other classification of properties located in the
zone. To note, the entire Barrio Banica has been classified as residential.

FAR EAST BANK AND TRUST COMPANY v. CIR

Income from employees’ trust is tax exempt

Facts: Far East Bank is the trustee of various retirement plans established by several
companies for its employees. As trustee of the retirement plans, Far East Bank was
authorized to hold, manage, invest and reinvest the assets of these plans. Far East Bank
utilized such authority to invest these retirement funds in various money market
placements, bank deposits, deposit substitute instruments and government securities.
These investments necessarily earned interest income. Far East Bank’s claim for refund
centers on the tax withheld by the various withholding agents, and paid to the CIR for the
four (4) quarters of 1993, on the aforementioned interest income.

Issue: Whether or not Far East Bank is entitled to the refund claimed.

Ruling: FEBTC is not entitled to the refund.

The same exemption was provided in Republic Act No. 8424, the Tax Reform Act of 1997,
and may now be found under Section 60(B) of the present National Internal Revenue Code.
Such interest income of Far East Bank for 1993 was not subject to income tax. Still, Far East
Bank did pay the income tax it was not liable for when it withheld such tax on interest
income for the year 1993. Such taxes were erroneously assessed or collected, and thus,
Section 230 of the National Internal Revenue Code then in effect comes into full application.
The tax exemption enjoyed by employees’ trusts was absolute, irrespective of the nature of
the tax. There was no need for Far East Bank to particularly show that the tax withheld was
derived from interest income from money market placements, bank deposits, other deposit
substitute instruments and government securities, since the source of the interest income
does not have any effect on the exemption enjoyed by employees’ trusts. What has to be
established is that the amount sought to be refunded to Far East Bank actually corresponds
to the tax withheld on the interest income earned from the exempt employees’ trusts. The
need to be determinate on this point especially militates, considering that Far East Bank, in
the ordinary course of its banking business, earns interest income not only from its
investments of employees trusts, but on a whole range of accounts which do not enjoy the
same broad exemption as employees trusts.

The submitted certifications from Citibank, the BSP, and Far East Bank’s own Accounting
Department attest only to the total amount of final withholding taxes remitted to the BIR.
Evidently, the sum includes not only such taxes withheld from the interest income of the
exempt employees trusts, but also from other transactions between Far East Bank and the
BSP or Citibank which are not similarly exempt from taxation. For these certifications to
hold value, there is particular need for them to segregate such taxes withheld from the
interest income of employees’ trusts, and those withheld from other income sources.
Otherwise, these certifications are ineffectual to establish the present claim for refund.

Miguel J. Osorio Pension Foundation, Inc.(MJOPFI) vs. CA and CIR GR No 162175

Facts: Petitioner, a non-stock and non-profit corporation, was organized for the purpose of
holding title to and administering the employees’ trust or retirement funds (Employees’
Trust Fund) established for the benefit of the employees of Victorias Milling Company, Inc.
(VMC).

 Petitioner, as trustee, claims that the income earned by the Employees’ Trust Fund
is tax exempt under Section 53(b) of the National Internal Revenue Code (Tax Code).

Petitioner bought the MBP lot through VMC. Petitioner claims that its share in the MBP lot is
49.59%. Petitioner’s investment manager, the Citytrust Banking Corporation (Citytrust), in
submitting its Portfolio Mix Analysis, regularly reported the Employees’ Trust Fund’s share
in the MBP lot.

On 26 March 1997, VMC eventually sold the MBP lot to Metrobank.

 Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees’
Trust Fund, based on the notarized Memorandum of Agreement. Petitioner
maintains that its ownership of the MBP lot is supported by the excerpts of the
minutes and the resolutions of petitioner’s Board Meetings.

 Petitioner further contends that there is no dispute that the Employees’ Trust Fund
is exempt from income tax. Since petitioner, as trustee, purchased 49.59% of the
 MBP lot using funds of the Employees’ Trust Fund, petitioner asserts that the
Employees’ Trust Fund's 49.59% share in the income tax paid (or P3,037,697.40
rounded off to P3,037,500) should be refunded.

The CTA denied petitioner's claim for refund of withheld creditable tax of
P3,037,500 arising from the sale of real property of which petitioner claims to be a co-
owner as trustee of the employees' trust or retirement funds.

CA agreed with the CTA that pieces of documentary evidence submitted by

petitioner are largely self-serving and can be contrived easily. The CA ruled that these
documents failed to show that the funds used to purchase the MBP lot came from the
Employees’ Trust Fund.

Issues: 1. Whether petitioner or the Employees’ Trust Fund is estopped from claiming that
the Employees’ Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC
merely held 49.59% of the MBP lot in trust for the Employees’ Trust Fund? [Not estopped.]

2. If petitioner or the Employees’ Trust Fund is not estopped, whether they have sufficiently
established that the Employees’ Trust Fund is the beneficial owner of 49.59% of the MBP
lot, and thus entitled to tax exemption for its share in the proceeds from the sale of the MBP
lot. [Yes]

Ruling: 1. No, petitioner is not stooped from claiming that that the Employees’ Trust Fund is
the beneficial owner of 49.59% of the MBP lot and that VMC merely held 49.59% of the MBP
lot in trust for the Employees’ Trust Fund .

Article 1452 of the Civil Code provides:

Art. 1452. If two or more persons agree to purchase a property and by common consent the
legal title is taken in the name of one of them for the benefit of all, a trust is created by
force of law in favor of the others in proportion to the interest of each. (Emphasis
supplied)

For Article 1452 to apply, all that a co-owner needs to show is that there is
“common consent” among the purchasing co-owners to put the legal title to the purchased
property in the name of one co-owner for the benefit of all. Once this “common consent” is
shown, “a trust is created by force of law.” The BIR has no option but to recognize such
legal trust as well as the beneficial ownership of the real owners because the trust is created
by force of law. The fact that the title is registered solely in the name of one person is not
conclusive that he alone owns the property.

Thus, this case turns on whether petitioner can sufficiently establish that petitioner,
as trustee of the Employees’ Trust Fund, has a common agreement with VMC and VFC that
petitioner, VMC and VFC shall jointly purchase the MBP lot and put the title to the MBP lot in
the name of VMC for the benefit petitioner, VMC and VFC.
 The CTA ruled that the documents presented by petitioner cannot prove its co-
ownership over the MBP lot especially that the TCT, Deed of Absolute Sale and the
Remittance Return disclosed that VMC is the sole owner and taxpayer. However, the
appellate courts failed to consider the genuineness and due execution of the notarized
Memorandum of Agreement acknowledging petitioner’s ownership of the MBP lot. The BIR
failed to present any clear and convincing evidence to prove that the notarized
Memorandum of Agreement is fictitious or has no legal effect. Likewise, VMC, the registered
owner, did not repudiate petitioner’s share in the MBP lot. Further, Citytrust, a reputable
banking institution, has prepared a Portfolio Mix Analysis for the years 1994 to 1997
showing that petitioner invested P5,504,748.25 in the MBP lot. Absent any proof that the
Citytrust bank records have been tampered or falsified, and the BIR has presented none, the
Portfolio Mix Analysis should be given probative value.

2. Income from Employees’ Trust Fund is Exempt from Income Tax

Tax exemption cannot arise by implication and any doubt whether the exemption
exists is strictly construed against the taxpayer. Further, the findings of the CTA, which were
affirmed by the CA, should be given respect and weight in the absence of abuse or
improvident exercise of authority.

Section 53(b) and now Section 60(b) of the Tax Code provides:

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - x x x

(B) Exception. - The tax imposed by this Title shall not apply to employee’s trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees (1) if contributions are made to the trust
by such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under the
trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of
his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.

Petitioner’s Articles of Incorporation state that its purpose is to hold legal title to,
control, invest and administer in the manner provided, pursuant to applicable rules and
conditions as established, and in the interest and for the benefit of its beneficiaries and/or
participants,the private pension plan as established for certain employees of Victorias
Milling Company, Inc., and other pension plans of Victorias Milling Company affiliates
and/or subsidiaries; and The SC has long been settled the tax-exemption privilege of
income derived from employee's trusts.
 The tax-exempt character of the Employees' Trust Fund has long been settled.
It is also settled that petitioner exists for the purpose of holding title to, and
administering, the tax-exempt Employees’ Trust Fund established for the benefit of
VMC’s employees. As such, petitioner has the personality to claim tax refunds due the
Employees' Trust Fund.

In Citytrust Banking Corporation as Trustee and Investment Manager of Various

Retirement Funds v. Commissioner of Internal Revenue, the CTA granted Citytrust’s claim for
refund on withholding taxes paid on the investments made by Citytrust in behalf of the trust
funds it manages, including petitioner.

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling
exempting it from the payment of withholding tax on the sale of the land by various BIR-
approved trustees and tax-exempt private employees' retirement benefit trust funds
represented by Citytrust. The BIR ruled that the private employees benefit trust
funds, which included petitioner, have met the requirements of the law and the
regulations and therefore qualify as reasonable retirement benefit plans within the
contemplation of Republic Act No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The income from
the trust fund investments is therefore exempt from the payment of income tax and
consequently from the payment of the creditable withholding tax on the sale of their real
property.

Thus, the documents issued and certified by Citytrust showing that money from the
Employees’ Trust Fund was invested in the MBP lot cannot simply be brushed aside by the
BIR as self-serving, in the light of previous cases holding that Citytrust was indeed handling
the money of the Employees’ Trust Fund. These documents, together with the notarized
Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees’
Trust Fund, indeed invested in the purchase of the MBP lot. Thus, the Employees' Trust
Fund owns 49.59% of the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came from an
investment by the Employees' Trust Fund, petitioner, as trustee of the Employees’ Trust
Fund, is entitled to claim the tax refund of P3,037,500 which was erroneously paid in the
sale of the MBP lot.

HSBC vs. CIR, G.R. No. 166018, June 4, 2014

FACTS: HSBC performs custodial services on behalf of its investor-clients, corporate

and individual, resident or non-resident of the Philippines, with respect to their passive
investments in the Philippines, particularly investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the collection/payment agent with
respect to dividends and other income derived from its investor-clients’ passive
investments. HSBC’s investor-clients maintain Philippine peso and/or foreign currency
accounts, which are managed by HSBC through instructions given through electronic
messages. The said instructions are standard forms known in the banking industry as
SWIFT, or "Society for Worldwide Interbank Financial Telecommunication." In
purchasing shares of stock and other investment in securities, the investor-clients would
send electronic messages from abroad instructing HSBC to debit their local or foreign
currency accounts and to pay the purchase price therefor upon receipt of the securities.
Pursuant to the electronic messages of its investor-clients, HSBC paid Documentary
Stamp Tax (DST) from September to December 1997 and also from January to
December 1998.

On August 23, 1999, the BIR Commissioner issued BIR Ruling No. 132-99 to the effect
that instructions or advises from abroad on the management of funds located in the
Philippines which do not involve transfer of funds from abroad are not subject to DST.

With the BIR Ruling as its basis, HSBC filed an administrative claim for the refund for
the period covering September to December 1997 and January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the
matter to the CTA.The CTA ruled that HSBC is entitled to a tax refund or tax credit
because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message
instructions transmitted by HSBC’s non-resident investor-clients. However, the CA
reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s
investor-clients are subject to DST

ISSUE: WON electronic message are considered transactions pertaining to negotiable

instruments that is subject to DST?

RULING: No. The electronic messages of HSBC’s investor-clients containing

instructions to debit their respective local or foreign currency accounts in the Philippines
and pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions are "parallel to an
automatic bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank." Electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the ability to be
transferred" and that the said electronic messages are "mere memoranda" of the
transaction consisting of the "actual debiting of the [investor-client-payor’s] local or
foreign currency account in the Philippines" and "entered as such in the books of account
of the local bank," HSBC.

DST is levied as an excise tax on the privilege of the drawee to accept or pay a bill of
exchange or order for the payment of money, which has been drawn abroad but payable
in the Philippines, and on the corresponding privilege of the drawer to have acceptance of
or payment for the bill of exchange or order for the payment of money which it has
drawn abroad but payable in the Philippines.

In this case, there had been no acceptance of a bill of exchange or order for the payment
of money on the part of HSBC. There was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines. Thus, there was no acceptance as
the electronic messages did not constitute the written and signed manifestation of HSBC
to a drawer's order to pay money. As HSBC could not have been an acceptor, then it
could not have made any payment of a bill of exchange or order for the payment of
money drawn abroad but payable here in the Philippines. Hence, HSBC could not have
been held liable for DST as it is not "a person making, signing, issuing, accepting, or,
transferring" the taxable instruments under the said provision.

CIR. v La Tondeña Distillers Inc (Now Ginebra San Miguel)

G.R. No. 175188
July 15, 2015

Facts:
In 2001, respondent La Tondena entered into a Plan of Merger with Sugarland Beverage Corp., SMC
Juice Inc., and Metro Bottled Water Corp of which assets and liabilities of these three were absorbed
by respondent, newly name Ginebra San Miguel. Respondent requested from BIR a confirmation of
the tax-free nature of the merger. BIR ruled there shall be no gain or loss recognized by the absorbed
corps., but the transfer of assets shall be subject to Documentary Stamp Tax (DST) under Sec. 196 of
NIRC. In 2004, Respondent filed an administrative complaint for tax refund or tax credit for
P14,140,980 for the paid DST for 2001. CTA found respondent entitle to such. CTA en banc found no
reversible error. Petitioner argued that DST is imposed on all conveyances of realty, including realty
transfer during a corporate merger. CIR also claimed that respondent cannot benefit from the
subsequent enactment of RA 9243 as laws apply prospectively.

ISSUES:
1. Is the conveyance of real properties in a merger exempt from DST?
2. Is La Tondeña entitled to a claim for tax refund or tax credit?

HELD:
1. Yes. It is already ruled in CIR v. Pilipinas Shell Petroleum Corp. that Section 196 of the NIRC does
not include the transfer of real property from one corporation to another pursuant to a merger. The
provision would clearly show it pertains only to sale transactions where real property is conveyed to a
purchaser for a consideration. The phrase "granted, assigned, transferred or otherwise conveyed" is
qualified by the word "sold".

In a merger:
- the real properties are not deemed "sold" to the surviving corporation and;
- the latter could not be considered as "purchaser" of realty since the real properties subject of the
merger were merely absorbed by the surviving corporation by operation of law and;
- these properties are deemed automatically transferred to and vested in the surviving corporation
without further act or deed.
Thus, the transfer of real properties to the surviving corporation in pursuance of a merger is not
subject to documentary stamp tax which is imposed only on all conveyances, deeds, instruments or
writing where realty sold shall be conveyed to a purchaser or purchasers.

Respondent did not file its claim for tax refund or tax credit based on the exemption found in RA
9243, rather on the ground that Section 196 of the MRC does not include the transfer of real property
pursuant to a merger. RA 9243 was mentioned only to emphasize that "the enactment of the said law
now removes any doubt and had made clear that the transfer of real properties as a consequence of
merger or consolidation is not subject to [DST]."
Taxes must not be imposed beyond what the law expressly and clearly declares, as tax laws must be
construed strictly against the State and liberally in favor of the taxpayer.

2. Yes. CIR's Petition is denied.

Agra v COA

FACTS:

On July 1, 1989, RA 6758 or the Compensation and Position Classification Act of

1989 took effect. Section 12 of which states that:

“Section 12. Consolidation of allowances and compensation – All allowances, except for
representation and transportation allowances; including clothing and laundry allowances;
subsistence allowance of marine officers and crew on board government vessels and
hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad;
and such other additional compensation not otherwise specified herein as may be
determined by the DBM, shall be deemed included in the standardized salary rates herein
prescribed. Such other additional compensation, whether in cash or in kind, being
received by the incumbents only as of July 1, 1989 not integrated into the standardized
salary rates shall continue to be authorized.

Thereafter, the DBM, pursuant to its authority to implement RA 6758, issued DBM-
CCC No. 10 otherwise known as the IRR of the said law. Pertinent provision of the IRR is its
Section 5.5 which states that:

“…5.5. The following allowances/fringe benefits authorized to GOCCs/GFIa pursuant to the

aforementioned issuances ARE NOT likewise integrated in the basic salary and allowed to
be continued only for incumbents of positions as of June 30, 1989 who are authorized
and actually receiving said allowances/benefits as of said date, at the same terms and
conditions prescribed in said issuances:

5.5.1 Rice subsidy…”

A group of NEA employees who were hired after October 31, 1989 claimed that they
did not receive rice allowances which prompted their filing of a special civil action for
mandamus against NEA before the Regional Trial Court. The RTC rendered a decision in
favor of the NEA Employees on December 15, 1999. The branch clerk of court issued a
certification stating that such judgement has become final and executory.

NEA filed an appeal to the CA, however the CA ordered the extinguishment of the
funds of NEA. Thus, NEA filed an appeal before the Supreme Court. Meanwhile the RTC held
in abeyance the execution of the December 15, 199 decision.

The SC reversed and set aside the CA decision and reinstated the RTC decision
stating, among other things:

“…Under Commonwealth Act No. 327, as amended, by Section 26 of P.D. No. 1445, it is the
COA which has primary jurisdiction to examine, audit and settle “all debts and claims
of any sort” due from or owing the Government or any of its subdivisions, agencies
and instrumentalities, including government-owned or control corporations and
their subsidiaries. With respect to money claims arising from the implementation of RA
No 6758, their allowance or disallowance is for the COA to decide, subject only to the
remedy of appeal by petition for certiorari to this Court…”

Thereafter in 2001 the Office of the Government Corporate Counsel (OGCC) in

response to the request of the then NEA Administrator stated that since there was no appeal
made in the December 15, 1999 decision by the RTC, such had become the law of the case
which must now be applied. Pursuant to such opinion, the NEA issued Resolution No. 29
approving the entitlement of rice allowances to NEA employees hired after October 31,
1989. However, the resident auditor of COA did not allow the payment of the rice allowance
for those who are not incumbent as of June 30, 1989.

Motion for reconsideration was filed before the COA but the same was denied, and
hence this petition.

Issue: Whether or not the NEA employees hired after June 30, 1989 are entitled to rice
allowance?

Ruling: No. Section 5.5 of DBM-CCC No. 10 [SEE PROVISON IN FACTS] is clear that rice
subsidy is one of the benefits that will be granted to employees of GOCCs or GFIs only if they
are incumbents as of July 1, 1989.

The Court has defined an incumbent as a person who is in present possession of an

office; one who is legally authorized to discharge the duties of an office.[52] There is no
question that petitioners were not incumbents as of June 30, 1989. The Court has likewise
characterized NEA as a GOCC in National Electrification Administration v. Morales. Thus,
Section 5.5 issued pursuant to the authority given to the DBM under Section 12 of Republic
Act No. 6758, was correctly applied by the COA.

As petitioners were hired after June 30, 1989, the COA was correct in disallowing
the grant of the benefit to them, as they were clearly not entitled to it. The Court has
repeatedly held that under Section 12 of Republic Act No. 6758***, the only requirements
for the continuous grant of allowances and fringe benefits on top of the standardized salary
rates for employees of GOCCs and GFIs are as follows: (1) the employee must be an
incumbent as of July 1, 1989; and (2) the allowance or benefit was not consolidated in the
standardized salary rate as prescribed by Republic Act No. 6758.

*** Section 12. Consolidation of Allowances and Compensation. - All allowances, except
for representation and transportation allowances; clothing and laundry allowances;
subsistence allowance of marine officers and crew on board government vessels and
hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad;
and such other additional compensation not otherwise specified herein as may be
determined by the DBM, shall be deemed included in the standardized salary rates herein
prescribed. Such other additional compensation, whether in cash or in kind, being received
by incumbents only as of July 1, 1989 not integrated into the standardized salary rates shall
continue to be authorized.

Existing additional compensation of any national government official or employee paid

from local funds of a local government unit shall be absorbed into the basic salary of said
official or employee and shall be paid by the National Government.