TAXATION LAW – FINALS CASES (1)
Jann Claudine M. Amago 4 – B
1. Commissioner of Internal Revenue vs. St. Luke’s
Medical Center
G.R. no. 195909; G.R. no. 1995960
Facts:
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital
organized as a non-stock and non-profit corporation. St.
Luke’s accepts both paying and non-paying patients.
The BIR assessed St. Luke’s deficiency taxes for 1998
comprised of deficiency income tax, value-added tax, and
withholding tax. The BIR claimed that St. Luke’s should be liable
for income tax at a preferential rate of 10% as provided for by
Section 27(B). Further, the BIR claimed that St. Luke’s was
actually operating for profit in 1998 because only 13% of
its revenues came from charitable purposes. Moreover, the
hospital’s board of trustees, officers and employees directly
benefit from its profits and assets.
On the other hand, St. Luke’s maintained that it is a
non-stock and non-profit institution for charitable and social
welfare purposes exempt from income tax under Section 30(E)
and (G) of the NIRC. It argued that the making of profit per se
does not destroy its income tax exemption.
Issue: The sole issue is whether St. Luke's is liable for
deficiency income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
Ruling: YES.
Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E)
and (G) on the other hand, can be construed together without
the removal of such tax exemption. The effect of the
introduction of Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary
30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and
non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any
private school maintained and administered by private
individuals or groups" with a government permit. "Non-profit"
means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset
devoted to the institution's purposes and all its activities
conducted not for profit.
"Non-profit" does not necessarily mean "charitable."
To be a charitable institution, however, an organization
must meet the substantive test of charity in Lung
Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the
test of charity in our jurisdiction. Charity is essentially a gift to
an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall
on the shoulders of government. Thus, as a matter of efficiency,
the government forgoes taxes which should have been spent to
address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works
which would have been funded by appropriations from the
Treasury. 42
Charitable institutions, however, are not ipso facto
entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it.
As a general principle, a charitable institution does not
lose its character as such and its exemption from taxes
simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the
money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons
managing or operating the institution. (Lung Center
Case)
Section 30(E) of the NIRC provides that a charitable institution
must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific
person.
Thus, both the organization and operations of the charitable
institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. Section 30(E) of the
NIRC specifically requires that the corporation or association be
non-stock, which is defined by the Corporation Code as "one
where no part of its income is distributable as dividends to its
members, trustees, or officers" 49 and that any profit "obtain[ed]
as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized." 50 However, under
Lung Center, any profit by a charitable institution must not only
be plowed back "whenever necessary or proper," but must be
"devoted or used altogether to the charitable object which it is
intended to achieve." 51
The operations of the charitable institution generally refer to its
regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific
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requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and
improvements of the institution is but a part of its operations.
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. This only refers to the organization of St.
Luke's. 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. Likewise, to be
exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be "operated exclusively"
for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies
the words "organized and operated exclusively" by providing
that:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied)
In short, 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. This
paragraph qualifies the requirements in Section 30(E)
that the "[n]on-stock corporation or association [must
be] organized and operated exclusively for x x x
charitable x x x purposes x x x." It likewise qualifies the
requirement in Section 30(G) that the civic organization
must be "operated exclusively" for the promotion of
social welfare.
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 not-for-profit 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." Prior to the introduction of Section 27(B), the tax
rate on such income from for-profit activities was the
ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%.
The Court finds that St. Luke's is a corporation that is
not "operated exclusively" for charitable or social
welfare purposes insofar as its revenues from paying
patients are concerned. This ruling is based not only on a
strict interpretation of a provision granting tax exemption, but
also on the clear and plain text of Section 30(E) and (G). Section
30(E) and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social welfare purposes
to be completely exempt from income tax. An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is merely
subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).
St. Luke's fails to meet the requirements under Section 30(E)
and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, as a proprietary
non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.
2. Commissioner of Internal Revenue vs. St. Luke’s
Medical Center
G.R. no. 203514
Facts:
On December 14, 2007, respondent St. Luke’s Medical
Center, Inc. (SLMC) received from the Large Taxpayers Service-
Documents Processing and Quality Assurance Division of the
Bureau of Internal Revenue (BIR) Audit Results/Assessment
Notice Nos. QA-07-0000965and QA-07-000097, assessing
respondent SLMC deficiency income tax under Section 27(B) of
the 1997 National Internal Revenue Code (NIRC), as amended,
for taxable year 2005 in the amount of ₱78,617,434.54 and for
taxable year 2006 in the amount of ₱57,119,867.33.
On January 14, 2008, SLMC filed with petitioner Commissioner
of Internal Revenue (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, as amended, it is exempt from paying
income tax. Aggrieved, SLMC elevated the matter to the
CTA via a Petition for Review, docketed as CTA Case No. 7789.
Ruling of the Court of Tax Appeals Division
The CTA Division rendered a Decision13 finding
SLMC not liable for deficiency income tax under Section 27(B)
of the 1997 NIRC, as amended, since it is exempt from paying
income tax under Section 30(E) and (G) of the same Code. CIR
moved for reconsideration but the CTA Division denied the same
in its December 28, 2010 Resolution. This prompted CIR to file
a Petition for Review16 before the CTA En Banc. CTA En
Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained
the findings of the CTA Division that SLMC complies with all the
requisites under Section 30(E) and (G) of the 1997 NIRC and
thus, entitled to the tax exemption provided therein.
On September 17, 2012, the CTA En Banc denied CIR's Motion
for Reconsideration.
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CIR 's Arguments: CIR argues that under the doctrine of stare
decisis SLMC is subject to 10% income tax under Section 27(B)
of the 1997 NIRC. It likewise asserts that SLMC is liable to pay
compromise penalty pursuant to Section 248(A) of the 1997
NIRC for failing to file its quarterly income tax returns. As to
the alleged payment of the basic tax, CIR contends that this
does not render the instant case moot as the payment
confirmation submitted by SLMC is not a competent proof of
payment of its tax liabilities
SLMC's Arguments: SLMC, on the other hand, begs the
indulgence of the Court to revisit its ruling in G.R. Nos. 195909
and 195960 (Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.) positing 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." Also, it maintains that in accordance with the ruling of
the Court in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.), it is not
liable for compromise penalties.
Issue: Hence, CIR filed the instant Petition under Rule 45 of the
Rules of Court contending that the CTA erred in exempting SLMC
from the payment of income tax.
Ruling: PETITION DISMISSED.
SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned
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.
SLMC is not liable for Compromise
Penalty.
As to whether SLMC is liable for compromise penalty
under Section 248(A) of the 1997 NIRC for its alleged failure to
file its quarterly income tax returns, this has also been
resolved in G.R Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.),42 where
the imposition of surcharges and interest under Sections
24843 and 24944 of the 1997 NIRC were deleted on the basis of
good faith and honest belief on the part of SLMC that it is not
subject to tax. Thus, following the ruling of the Court in the
said case, SLMC is not liable to pay compromise penalty under
Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the
payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made
by SLMC on April 30, 2013, the instant Petition has become
moot.
While the Court agrees with the CIR that the payment
confirmation from the BIR presented by SLMC is not a
competent proof of payment as it does not indicate the specific
taxable period the said payment covers, the Court finds that the
Certification issued by the Large Taxpayers Service of the BIR
dated May 27, 2013, and the letter from the BIR dated
November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment
especially since CIR never questioned the authenticity of these
documents. In fact, in a related case, G.R. No. 200688,
entitled Commissioner of Internal Revenue v. St. Luke's Medical
Center, lnc.,45 the Court dismissed the petition based on a letter
issued by CIR confirming SLMC's payment of taxes, which is the
same letter submitted by SLMC in the instant case.
3. Manila Banking Corporation vs. Commissioner of
Internal Revenue
G.R. no. 168118
Facts:
The Manila Banking Corporation, petitioner, was incorporated in
1961 and since then had engaged in the commercial banking
industry until 1987. On May 22, 1987, the Monetary Board of
the Bangko Sentral ng Pilipinas (BSP) issued Resolution No.
505, pursuant to Section 29 of Republic Act (R.A.) No. 265 (the
Central Bank Act),[3] prohibiting petitioner from engaging in
business by reason of insolvency.
Meanwhile, R.A. No. 8424,[4] otherwise known as the
Comprehensive Tax Reform Act of 1997, became effective
on January 1, 1998. One of the changes introduced by this law
is the imposition of the minimum corporate income tax on
domestic and resident foreign corporations. Implementing this
law is Revenue Regulations No. 9-98 stating that the law allows
a four (4) year period from the time the corporations were
registered with the Bureau of Internal Revenue (BIR) during
which the minimum corporate income tax should not be
imposed.
On June 23, 1999, after 12 years since petitioner stopped its
business operations, the BSP authorized it to operate as a thrift
bank. The following year, specifically on April 7, 2000, it filed
with the BIR its annual corporate income tax return and
paid P33,816,164.00 for taxable year 1999.
Prior to the filing of its income tax return, or on December 28,
1999, petitioner sent a letter to the BIR requesting a ruling on
whether it is entitled to the four (4)-year grace period reckoned
from 1999. In other words, petitioners position is that since it
resumed operations in 1999, it will pay its minimum corporate
income tax only after four (4) years thereafter.
On February 22, 2001, the BIR issued BIR Ruling No. 007-
2001[5] stating that petitioner is entitled to the four (4)-year
grace period. Since it reopened in 1999, the minimum corporate
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income tax may be imposed not earlier than 2002, i.e. the fourth
taxable year beginning 1999.
Pursuant to the above Ruling, petitioner filed with the BIR a
claim for refund of the sum of P33,816,164.00 erroneously paid
as minimum corporate income tax for taxable year 1999.
Due to the inaction of the BIR on its claim, petitioner filed with
the Court of Tax Appeals (CTA) a petition for review. CTA denied
the petition. The CTA held that petitioner is not entitled to the
four (4)-year grace period because it is not a new corporation. It
has continued to be the same corporation, registered with the
Securities and Exchange Commission (SEC) and the BIR, despite
being placed under receivership.
Court of Appeals a petition for review. On May 11, 2005, the
appellate court rendered a Decision affirming the assailed
judgment of the CTA.
Thus, this petition for review on certiorari.
Issue: Whether petitioner is entitled to a refund of its minimum
corporate income tax paid to the BIR for taxable year 1999.
Ruling: YES, PETITION GRANTED.
The intent of Congress relative to the minimum corporate
income tax is to grant a four (4)-year suspension of tax payment
to newly formed corporations. Corporations still starting their
business operations have to stabilize their venture in order to
obtain a stronghold in the industry. It does not come as a
surprise then when many companies reported losses in their
initial years of operations. Thus, in order to allow new
corporations to grow and develop at the initial stages of their
operations, the lawmaking body saw the need to provide a grace
period of four years from their registration before they pay their
minimum corporate income tax.
As mentioned earlier, petitioner bank was registered with the
BIR in 1961. However, in 1987, it was found insolvent by the
Monetary Board of the BSP and was placed under receivership.
After twelve (12) years, or on June 23, 1999, the BSP issued to
it a Certificate of Authority to Operate as a thrift bank. Earlier,
or on January 21, 1999, it registered with the BIR. Then it filed
with the SEC its Articles of Incorporation which was approved
on June 22, 1999.
It is clear from the above-quoted provision of Revenue
Regulations No. 4-95 that the date of commencement of
operations of a thrift bank is the date it was registered with the
SEC or the date when the Certificate of Authority to Operate was
issued to it by the Monetary Board of the BSP, whichever comes
later.
Let it be stressed that Revenue Regulations No. 9-98,
implementing R.A. No. 8424 imposing the minimum
corporate income tax on corporations, provides that for
purposes of this tax, the date when business operations
commence is the year in which the domestic corporation
registered with the BIR. However, under Revenue
Regulations No. 4-95, the date of commencement of
operations of thrift banks, such as herein petitioner, is
the date the particular thrift bank was registered with
the SEC or the date when the Certificate of Authority to
Operate was issued to it by the Monetary Board of the
BSP, whichever comes later.
Clearly then, Revenue Regulations No. 4-95, not Revenue
Regulations No. 9-98, applies to petitioner, being a thrift
bank. It is, therefore, entitled to a grace period of four (4) years
counted from June 23, 1999 when it was authorized by the BSP
to operate as a thrift bank. Consequently, it should only
pay its minimum corporate income tax after four (4)
years from 1999.
4. Commissioner of Internal Revenue vs. Philippine
Airlines, Inc.
G.R. no. 179259
Facts:
Issue: Whether or not the CTA En Banc erred when it affirmed
the cancellation of Assessment Notice No. INC-FY-99-2000-
000085 and Formal Letter of Demand issued by petitioner
against respondent for the payment of deficiency MCIT in the
amount of ₱326,778,723.35, covering the fiscal year ending 31
March 2000.
Ruling:
Respondent’s exemption from the MCIT is already a
settled matter.
From the foregoing provisions, during the lifetime of the
franchise of respondent, its taxation shall be strictly
governed by two fundamental rules, to wit: (1)
respondent shall pay the Government either the basic
corporate income tax or franchise tax, whichever is
lower; and (2) the tax paid by respondent, under either
of these alternatives, shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees
and charges, except only real property tax.
Parenthetically, the basic corporate income tax of respondent
shall be based on its annual net taxable income, computed in
accordance with the NIRC of 1997, as amended. PD 1590 also
explicitly authorizes respondent, in the computation of its basic
corporate income tax, to: (1) depreciate its assets twice as fast
the normal rate of depreciation;19 and (2) carry over deduction
from taxable income any net loss incurred in any year up to five
years following the year of such loss.20
The franchise tax, on the other hand, shall be 2% of the gross
revenues derived by respondent from all sources, whether
transport or non transport operations. However, with respect to
international air-transport service, the franchise tax shall only be
imposed on the gross passenger, mail, and freight revenues of
respondent from its outgoing flights.
Accordingly, considering the foregoing precepts, this Court had
the opportunity to finally settle this matter and categorically
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enunciated in Commissioner of Internal Revenue v.
Philippine Airlines, Inc.,22 that respondent cannot be
subjected to MCIT for the following reasons:
1. Section 13(a) of [PD] 1590 refers to "basic corporate
income tax." In Commissioner of Internal Revenue v.
Philippine Airlines, Inc., the Court already settled that the
"basic corporate income tax, "under Section 13(a) of [PD]
1590, relates to the general rate of 35%(reduced to 32%
by the year 2000) as stipulated in Section 27(A) of the NIRC
of 1997.
Section 13(a) of [PD] 1590 requires that the basic corporate
income tax be computed in accordance with the NIRC. This
means that PAL shall compute its basic corporate income
tax using the rate and basis prescribed by the NIRC of 1997
for the said tax. There is nothing in Section 13(a) of [PD]
1590 to support the contention of the CIR that PAL is
subject to the entire Title II of the NIRC of 1997, entitled
"Tax on Income."
2. Section 13(a) of Presidential Decree No. 1590 further
provides that the basic corporate income tax of PAL shall
be based on its annual net taxable income. This is
consistent with Section 27(A) of the NIRC of 1997, which
provides that the rate of basic corporate income tax, which
is 32% beginning 1 January 2000, shall be imposed on the
taxable income of the domestic corporation.
In comparison, the 2% MCIT under Section 27 (E) of the
NIRC of 1997 shall be based on the gross income of the
domestic corporation. The Court notes that gross income,
as the basis for MCIT, is given a special definition under
Section 27(E) (4) of the NIRC of 1997, different from the
general one under Section 34 of the same Code.
In light of the foregoing, there is an apparent distinction
under the NIRC of 1997 between taxable income, which is
the basis for basic corporate income tax under Section
27(A); and gross income, which is the basis for the MCIT
under Section 27(E). The two terms have their respective
technical meanings, and cannot be used interchangeably.
The same reasons prevent this Court from declaring that
the basic corporate income tax, for which PAL is liable under
Section 13(a) of [PD] 1590, also covers MCIT under Section
27(E) of the NIRC of 1997, since the basis for the first is
the annual net taxable income, while the basis for the
second is gross income.
3. Even if the basic corporate income tax and the MCIT are
both income taxes under Section 27 of the NIRC of 1997,
and one is paid in place of the other, the two are distinct
and separate taxes.
TThe Court herein treats MCIT in much the same
way. Although both are income taxes, the MCIT is
different from the basic corporate income tax, not
just in the rates, but also in the bases for their
computation. Not being covered by Section 13(a) of
[PD] 1590, which makes PAL liable only for basic
corporate income tax, then MCIT is included in "all
other taxes" from which PAL is exempted.
That, under general circumstances, the MCIT is paid in
place of the basic corporate income tax, when the former
is higher than the latter, does not mean that these two
income taxes are one and the same. The said taxes are
merely paid in the alternative, giving the Government the
opportunity to collect the higher amount between the two.
The situation is not much different from Section 13 of [PD]
1590, which reversely allows PAL to pay, whichever is lower
of the basic corporate income tax or the franchise tax. It
does not make the basic corporate income tax in
distinguishable from the franchise tax.
Given the fundamental differences between the
basic corporate income tax and the MCIT, presented
in the preceding discussion, it is not baseless for this
Court to rule that, pursuant to the franchise of PAL,
said corporation is subject to the first tax, yet
exempted from the second.
4. the evident intent of Section 13 of [PD] 1520 (sic) is to
extend to PAL tax concessions not ordinarily available to
other domestic corporations. Section 13 of [PD] 1520 (sic)
permits PAL to pay whichever is lower of the basic corporate
income tax or the franchise tax; and the tax so paid shall
be in lieu of all other taxes, except only real property tax.
Hence, under its franchise, PAL is to pay the least amount
of tax possible.
The imposition of MCIT on PAL, as the CIR insists, would
result in a situation that contravenes the objective of
Section 13 of [PD] 1590. In effect, PAL would not just have
two, but three tax alternatives, namely, the basic corporate
income tax, MCIT, or franchise tax. More troublesome is the
fact that, as between the basic corporate income tax and
the MCIT, PAL shall be made to pay whichever is higher,
irrefragably, in violation of the avowed intention of Section
13 of [PD] 1590 to make PAL pay for the lower amount of
tax.
5. CIR posits that PAL may not invoke in the instant case the
"in lieu of all other taxes" clause in Section 13 of [PD] No.
1520 if it did not pay anything at all as basic corporate
income tax or franchise tax. As a result, PAL should be
made liable for "other taxes" such as MCIT. This line of
reasoning has been dubbed as the Substitution Theory, and
this is not the first time the CIR raised the same.
Notably, in another case involving the same parties,26 the Court
further expressed that a strict interpretation of the word "pay"
in Section 13of PD 1590 would effectively render nugatory the
other rights categorically conferred upon the respondent by its
franchise. Hence, there being no qualification to the exercise of
its options under Section 13, then respondent is free to choose
basic corporate income tax, even if it would have zero liability
for the same in light of its net loss position for the taxable year.
By way of, reiteration, although it appears that respondent is
not completely exempt from all forms of taxes under PD 1590
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considering that Section 13 thereof requires it to pay, either the
lower amount of the basic corporate income tax or franchise tax
(which are both direct taxes), at its option, mere exercise of
such option already relieves respondent of liability for all other
taxes and/or duties, whether direct or indirect taxes.
5. Commissioner of Internal Revenue vs. Philippine
Airlines, Inc.
G.R. no. 179800
Facts:
Philippine Airlines, Inc. paid the 10% Overseas Communications
Tax (OCT) for overseas telephone calls made through PLDT. It
then later filed with the BIR a claim for refund of the amount
paid as Overseas Communications Tax, claiming that other than
being liable for basic corporate income tax or the franchise tax,
whichever was lower, it was exempted from all other taxes by
virtue of the "in lieu of all taxes" clause in its charter.
Issue: Whether or not respondent is exempt from the payment
of the 10% overseas communications tax under its franchise, pd
1590, and therefore, entitled to the refund prayed for
Ruling: PETITION DENIED.
Deciding in favor of therein respondent PAL, this Court
enunciated:
A franchise is a legislative grant to operate a public
utility. Like those of any other statute, the ambiguous
provisions of a franchise should be construed in
accordance with the intent of the legislature. In the
present case, Presidential Decree 1590 granted
Philippine Airlines an option to pay the lower of two
alternatives: (a) "the basic corporate income tax based
on PALs annual net taxable income computed in
accordance with the provisions of the National Internal
Revenue Code" or (b) "a franchise tax of two percent
of gross revenues." Availment of either of these two
alternatives shall exempt the airline from the payment
of "all other taxes," including the 20 percent final
withholding tax on bank deposits.
A careful reading of Section 13 rebuts the argument of
the CIR that the "in lieu of all other taxes" proviso is a
mere incentive that applies only when PAL actually
pays something. It is clear that PD 1590 intended
to give respondent the option to avail itself of
Subsection (a) or (b) as consideration for its
franchise. Either option excludes the payment of
other taxes and dues imposed or collected by
the national or the local government. PAL has
the option to choose the alternative that results
in lower taxes. It is not the fact of tax payment
that exempts it, but the exercise of its option.
It is clear from the foregoing that this Court had
already settled the issue of whether or not there was a need for
the actual payment of tax, either the basic corporate income tax
or the 2% franchise tax, before therein respondent PAL could
avail itself of the in lieu of all other taxes provision under its
Charter. This Court finds no cogent reason to deviate from the
ruling in the said case.
This Court reiterates the pronouncement of the CTA
that under the first option of Sec. 13 of P.D. No. 1590, the basis
for the tax rate is PALs annual net taxable income. By basing the
tax rate on the annual net taxable income, P.D. No. 1590
necessarily recognized the situation in which taxable income
may result in a negative amount and, thus, translate into a zero
tax liability.[22] In this scenario, respondent PAL operates at a
loss and no taxes are due. Consequently, the first option entails
a lower tax liability than the second option.
Lastly, petitioner contends that since P.D. No. 1590
does not provide for an exemption from the payment of taxes,
any claim of exemption from the payment thereof must be
strictly construed against the taxpayer.[23] Said position is,
however, dispelled by Commissioner of Internal Revenue v.
Philippine Airlines, where this Court ruled:
While the Court recognizes the general rule that the
grant of tax exemptions is strictly construed against the
taxpayer and in favor of the taxing power, Section 13
of the franchise of respondent leaves no room
for interpretation. Its franchise exempts it from
paying any tax other than the option it chooses:
either the "basic corporate income tax" or the
two percent gross revenue tax.
Determining whether this tax exemption is wise or
advantageous is outside the realm of judicial power.
This matter is addressed to the sound discretion of the
lawmaking department of government.[24]
Given the foregoing, and the fact that the 10% OCT
properly falls within the purview of the all other taxes proviso in
P.D. No. 1590, this Court holds that respondent PAL is exempt
from the 10% OCT and, therefore, entitled to the refund
requested.
6. Belle Corporation vs. Commissioner Internal
Revenue
G.R. no. 181289
Facts:
Petitioner Belle, a domestic corporation engaged in the real
estate and property business, filed with the BIR its income tax
return (ITR) for the first quarter of 1997. Subsequently, it filed
with the BIR its second quarter ITR, declaring an overpayment
of taxes. In view of the overpayment, no taxes were paid for the
second and third quarters of 1997. Instead of claiming the
amount as a tax refund, petitioner decided to apply it as a tax
credit to the succeeding taxable year by marking the tax credit
option box in its 1997 ITR. On April 12, 200, petitioner filed with
the BIR an administrative claim for refund its unutilized excess
income tax payments for the taxable year 1997.
Notwithstanding the filing of the administrative claim for refund,
petitioner carried over the excess amount to the taxable year
1999. Due to the inaction of the respondent CIR and in order to
toll the running of the two-year prescriptive period, petitioner
6
appealed its claim for refund of unutilized excess income tax
payments for the taxable year 1997 via petition for review. The
CTA denied the petition.
Issue: Whether petitioner is entitled to a refund of its excess
income tax payments for the taxable year 1997
Ruling: NO.
In case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against
the quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry over and
apply the excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that
taxable period and no application for tax refund or issuance of
tax credit certificate shall be allowed therefor. Under Section
76 of the NIRC, in case of overpayment of income taxes,
the remedies are still the same; and the availment of one
remedy still precludes the other. The carry-over of
excess income tax payments is no longer limited to the
succeeding taxable year. Unutilized excess income tax
payments may now be accrued over to the succeeding
taxable years until fully realized.
In this case, since the petitioner carried over its 1997 excess
income tax payments to the succeeding taxable year 1998, it
may no longer file a claim for refund of unutilized tax credits for
taxable year 1997. Once the option to carry over excess income
tax payments to the succeeding years has been made, it
becomes irrevocable. Thus, applications for refund of the
unutilized excess income tax payments may no longer
be allowed.
To repeat, under the new law, once the option
to carry-over excess income tax payments to the
succeeding years has been made, it becomes
irrevocable. Thus, applications for refund of the
unutilized excess income tax payments may no longer
be allowed.
7. Commissioner of Internal Revenue vs. Mirant
Philippines Operations; Mirant Philippines
Operations vs. CIR
G.R. no. 171742; G.R. no. 176165
Facts:
Petitioner has the duty to act on and approve claims for refund
or tax credit while Respondent is a corporation primarily
engaged in design, construction etc. of gas turbine and other
power generating plants. Mirant filed the following:
a.) ITR for fiscal year ending June 30, 1999: net loss =
235M; unutilized tax credits = 32M
b.) Amended ITR for fiscal year ending June 30, 1999:
net loss = 379M; unutilized tax credits = 32M
Mirant, to synchronize its accounting period filed with the BIR to
change from fiscal year to calendar year effective Dec. 31, 1999,
which the BIR granted. Hence, ITR for interim period July 1,
1999-Dec. 31, 1999 was filed with net loss = 381M; unutilized
tax credits= 48M. Mirant indicated in its Interim ITR that the
excess 48M as “to be carried over as tax credit next
yeat/quarter”.
On April 10, 2001, Mirant filed its ITR for Dec. 31, 2000 with net
loss = 56M; unutilized tax credits= 87M. On Sept. 20, 2001,
Mirant wrote to BIR for refund if the 87M representing unutilized
tax credits filed in its ITR.
Sec. 229 of the NIRC provides for the 2-year prescriptive period
for filing of judicial claim so due to inaction of BIR, before it
lapsed, Mirant filed its case to CTA (pet for review).
CTA 1ST DIV: partially granted; unutilized tax credits for 2000
from claim of 38.7M, granted 38.6M only because duly
substantiated while for 1999, claim of 48M denied; MR denied
CTA-EB: Dismissed; MR denied. Hence, this petition.
Issue: Whether or not Mirant is entitled for tax refund or to the
issuance of a tax credit certificate?
Ruling: NO.
The option to carry-over is irrevocable once it is
exercised.
1. Sec. 76 of NIRC: Final Adjustment Return - Every corporation
liable to tax shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:
a.) pay the balance of the tax still due; or
b.) carry-over the excess credit; or
c.) be credited or refunded with the excess amount paid
In case the corporation is entitled to a tax credit or refund
of the excess estimated quarterly income taxes paid, the excess
amount shown on its final adjustment return may be carried
over and credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and supply the
excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable
for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be
allowed.
Having chosen to carry-over, corporation cannot
thereafter choose to apply for a cash refund or issuance
of a tax credit certificate.
2. In CIR vs PL Management Int’l Phils. Inc.: Congress added in
the predecessor of Sec. 76, which is Sec. 79 of NIRC of 1985
the last sentence to lay down the irrevocability rule.
7
3. In Philam Asset Management Inc vs CIR: two alternative
options of a corporate taxpayer whose total quarterly income
tax payments exceed its tax liability, and how the choice
precludes the other. The first option be refunded provided
the taxpayer properly applies for the refund. The second
option is by applying the refundable amount as shown
on the FAR against estimated quarterly income tax
liabilities. These options are alternative and precludes
one another.
4. In Phil. Bank of Communications vs CIR: corporation must
signify its intention by marking the corresponding option box
provided in the FAR. While required to mark, this requirement is
only for the purpose of facilitating tax collection.
Source (CWT’s) were duly signed and prepared under the pain
of perjury and found by the duly commissioned independent
CPA to be faithful reproductions of the originals. The duly
commissioned independent CPA explained that the discrepancy
was merely brought about by difference in FOREX rates at the
time Mirant recorded it and time the CWT’s were issued by its
customers.
Having complied with all the requirements, Mirant is entitled for
refund or issuance of tax credit certificate for 2000 of 38.6M,
having been substantiated from 38.7M claim.

5. The controlling factor is that the taxpayer chose an

option and once it had already done so, it could no
longer make another one. The intent of the rule is to
keep the taxpayer from flip-flopping on its options and
avoid confusion and complication as regards excess tax
credit.

6. Since Mirant, in its ITR and Interim ITR for 1999 clearly ticked
the box signifying that overpayment was “to be carried over”, it
is now barred from applying for refund or issuance of a tax
credit. Hence, Court denied claim of 48M for 1999. There will be
no unjust enrichment to the State because refund prescribes in
2 years, but carry-over has none.

Mirant is entitled to refund of its unutilized creditable wt

for 2000.

1. CTA findings and conclusions are accorded with

respect by the very nature of its functions and expertise
unless there has been an abusive or improvident
exercise of authority. CTA found Mirant complied with all the
requirements for the refund of its unutilized creditable WT. In
CIR vs. FEBTC, Court enumerated the requisites for claiming
a tax credit or a refund for creditable WT:

a.) Claim must be filed with the CIR w/in the 2-year
period from date of payment of tax.

- Mirant complied with sec. 229 of NIRC that no suit shall

be filed after expiration of 2-years from date of payment of tax
and to file a claim before the CIR. Mirant filed its ITR for 2000
on April 10, 2001 so it had until April 10, 2003 to file claim for
refund or tax credit. Mirant filed its claim on Sept. 10, 2001 to
CIR and case to CTA on Oct. 12, 2001, clearly within 2-year
period.

b.) It must be shown on the return that the income

received was declared part of the gross income.

- Mirant declared that the creditable WT was declared as

part of its gross income. The 38.7M was withheld from the
service fees of 871M it received, the same amount declared in
its annual ITR.

c.) The fact of withholding must be established by a

copy of a statement duly issued by the payor to the
payee showing the amount paid and the amount of tax
withheld.

- Mirant was able to establish the fact of withholding of

the creditable WT because the Creditable Tax Withheld at